4 Dec 2019

Core Investment Companies (CICs)

Source: Monthly Policy Review, PRS

RBI released the report of the Working Group to review the regulatory and supervisory framework for Core Investment Companies (CICs)

What is a Core Investment Company?

  • A Core Investment Company is a non-banking financial company (NBFC) that engages in the business of acquisition of shares and securities. 
  • It should have at least 90% of its net assets in the form of investment in equity shares, bonds, debentures, debts or loans in group companies. 
  • It should also have at least 60% of its assets as investment in equity shares in group companies.

Key observations of the working group

  • The Working Group observed that the structure of group companies becomes complex due to large companies with multiple layers. 
  • It noted that the provision of Companies Act, 2013 which restricts the group structure of companies to two layers does not apply to NBFCs (and therefore, does not apply to CICs). 
  • It also observed that, unlike NBFCs, the exposure (in the form of equity or loan) of CICs in a group company is not deducted from its capital
  • This, along with a lack of restriction on the number of layers, may lead to over-leveraging (high exposure) by CICs. 
  • Further, the group observed that corporate governance guidelines are not explicitly applicable to CICs. 

Key recommendations 

Considering the above, the working group made the following key recommendations:  

  • Capital contribution by a CIC in a step-down CIC (a subsidiary of a subsidiary), above 10% of its owned funds, should be deducted from its adjusted net worth,  The number of layers of CICs in a group should be restricted to two.  
  • A step-down CIC may not be permitted to invest in any other CIC.  
  • Every group having a CIC should have a Group Risk Management Committee.  
  • Two Board level committees (Audit Committee, and Nomination and Remuneration Committee) should be mandatorily constituted.  
  • RBI may conduct a periodic onsite inspection of CICs.