Core investment companies can have only two layers – RBI
The Reserve Bank of India (RBI), in its revised guidelines for core investment companies (CICs), has said the number of layers of CICs within a group, including the parent, will not be more than two.
This is irrespective of the extent of direct or indirect control a CIC exercises in another.
“If a CIC makes any direct/indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC,” the RBI said.
While the revised regulations will come into effect immediately, the existing entities will have time till March 2023 to reorganise their business structure.
The revised guidelines are broadly in line with what the working group of the RBI had proposed in November last year.
The RBI was uncomfortable about the industry’s high level of pledged shares, and the risks arising out of the systemic interconnectedness of financial players. The banking regulator’s guidelines on governance seek to avoid multiple structures, and the Companies Act of 2013 limits the number of layers to three (including the top layer), but non-banking financial companies (NBFCs) have been exempted from this.
And this, in turn, has facilitated the “proliferation of multiple layers of CICs in a group (with cross-holdings)”.
In addition to this, the RBI has said the parent CIC will constitute a group risk management committee (GRMC), which will report to the board of the CIC that constitutes it and will meet at least once a quarter.
The GRMC will analyse risks to which the group, its businesses, and subsidiaries are exposed.
“It must discuss all risk strategies both at an aggregated level and by type of risk and make recommendations to the board in accordance with the group’s overall risk appetite,” the RBI said. It will also identify, among other things, potential intra-group conflicts of interest.
The guidelines say a CIC with an asset size of more than Rs5,000 crore will appoint a chief risk officer.
“CICs shall submit to the board a quarterly statement of deviation, indicating deviations in the use of proceeds of any funding obtained by the CIC from creditors and investors from the objects/purpose stated in the application, sanction letter or offer document for such funding,” the RBI said.
The revised guidelines say CICs will strive to achieve higher standards of governance and disclosure and they have to put in place a policy for ascertaining the “fit and proper” status of directors not only at the time of appointment but also continuously.
Also, the revised guidelines have allowed CICs to invest in money market instruments, including mutual funds.
Moreover, the RBI has said while computing the adjusted net worth (ANW) of CICs — the amount representing any direct or indirect capital contribution made by one CIC in another — if the amount exceeds 10 per cent of the owned funds of the investing CIC, it has to be deducted from its ANW.