Core Investment Company (CIC):
On August 12, 2010, the Reserve Bank of India (RBI) issued a notification DNBS (PD) CC.No.197/03.10.001/2010-11 prescribing the regulatory framework of a Core Investment Company.
On January 05, 2011, the RBI issued Core Investment Companies (Reserve Bank) Directions, 2011 vide RBI notification number DNBS (PD) CC.No. 206 /03.10.001/2010-11.
What is the necessity for issuance of Core Investment Company Directions?
Before going into the concept of a CIC, firstly we will see the background for emergence of CIC guidelines.
A Company is regarded as an NBFC if it is engaged in the business of making loans or advances or otherwise other than its own activity of financing.
As per the RBI Press Release 1998-99/1269 dated April 08, 1999, “A Company will be treated as a Non Banking Financial Company (NBFC) if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company”.
All the Companies which fall under the definition of NBFC are guided by the Non-Banking Financial (Deposit / Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended) as the case may be.
As per the Prudential Norms, a NBFC is regarded as a Systematically Important NBFC (NBFC-SI) if the total asset size of the NBFC is equal to or more than Rs. 100 Crore as per the last audited Balance Sheet.
As per Para 18, of the Prudential Norms, no NBFC-SI shall:
a. lend to any single borrower exceeding fifteen per cent of its owned fund.
b. lend to any single group of borrowers exceeding twenty five per cent of its owned fund;
c. invest in the shares of another company exceeding fifteen per cent of its owned fund.
d. invest in the shares of a single group of companies exceeding twenty five per cent of its owned fund.
e. lend and invest twenty five per cent of its owned fund to a single party.
f. lend and invest forty per cent of its owned fund to a single group of parties.
In the present Corporate Structure, all the Companies of a group are structured as subsidiaries of a Holding Company and this holding company does not perform any business except holding of investments of group and receiving dividends and interest incomes (financial assets and financial income).
Since, these Holding Companies satisfy the criteria of a NBFC but unable to satisfy the Prudential Norms of the RBI, the RBI invented the concept of a Core Investment Company (CIC) so that the said Companies are not defaulting the RBI Directions.
Emergence of a CIC – What is a CIC?
Criteria – 1:
A Company is regarded as a CIC if it satisfies the following conditions as of the last audited Balance Sheet date:
a. it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.
b. its investments in equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets.
Net assets, for the purpose of this proviso, would mean total assets excluding –
(i) Cash and bank balances;
(ii) Investment in money market instruments and money market mutual funds
(iii) Advance payments of taxes; and
(iv) Deferred tax payment
c. it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment.
d. it does not carry on any other financial activity referred to in Section 45 I (c) and 45 I (f) of the Reserve Bank of India Act, 1934 except.
a) Investment in:
i) Bank deposits,
ii) Money market instruments, including money market mutual funds,
iii) Government securities, and
iv) Bonds or debentures issued by group companies;
b) Granting of loans to group companies; and
c) Issuing guarantees on behalf of group companies.
A CIC is regarded as a Systemically Important Core Investment Company (CIC-ND-SI) if it fulfills both the following conditions:
i. Having total assets of not less than Rs.100 crore, either individually or in aggregate along with other Core Investment Companies in the Group;
ii. Raises or holds public funds.
Criteria – 2:
Adjusted Networth of a CIC-ND-SI shall at no point of time be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet as at the end of the financial year.
Criteria – 3:
Leverage Ratio: The outside liabilities of a CIC-ND-SI shall at no point of time exceed 2.5 times its Adjusted Net Worth as on the date of the last audited balance sheet as at the end of the financial year.
If a NBFC satisfies the criteria 1 (except to qualify as a CIC-ND-SI), then the Prudential Directions shall not apply to such NBFC.
If a NBFC satisfies the aforesaid 3 criterion of a CIC-ND-SI, then the provisions of paragraphs 15, 16 and 18 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended) are not applicable to such NBFCs.
Every CIC-ND-SI shall, within a period of six months from the date of notification, apply to the RBI for grant of Certificate of Registration.
A CIC-ND-SI which applies for grant of Certificate of Registration to the RBI within the said period of six months shall be entitled to continue to carry on its existing businesses as Core Investment Company, till the disposal of its application by RBI.
Status as of today:
As of today, only one Company in India is registered as a CIC (as per information available).