CA Sonakshi Agarwal

CA Sonakshi AgarwalHello to all the readers and wish you all a very happy hale and hearty New Year 2016.

I believe 2016 shall be all exhilarating as I write my very first article here.

Through this article I have tried to set forth in brief that what is a CIC and the regulatory mechanism for the same.

So beginning straight away, the very first question that comes to my mind is that what actually is a CIC?

In laymen’s language, CIC or a Core Investment Company is basically a company that holds the stake in the group companies without actually being involved in its trading.

The next question that would probably come up to our mind is that why CIC?

With the stringent requirements being imposed on the NBFC, the NBFC formed as an investment company has to get itself registered with the RBI under section 45-IA of the RBI Act, 1934. Now, such companies would also be subject to the NBFC regulations even though they were not accepting any public deposits. However, in case of CICs, the requirement of registration has been relaxed and exemption provided to certain CICs.

Coming on to the regulatory framework laid down by the RBI in this regard-

Definition of CIC-

CIC is defined to mean a Non-Banking Financial Company, carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of last audited balance sheet:

  • It holds at least 90 percent of its Net Assets as investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;
  • Its investments in the equity shares (including instruments compulsorily convertible into equity shares within 10 years from issue date) in group companies are at least 60 percent of its Net Assets;
  • It does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for dilution or disinvestment;
  • It does not carry on any other financial activity referred to in Section 45-I(c) and 45-I(f) of the RBI Act, 1934 except investment in
    • bank deposits,
    • money market instruments including money market mutual funds,
    • government securities,
    • bonds or debentures issued by group companies, loans to group companies or
    • Guarantees issued on behalf of group companies.

Note 1: Net Assets here would mean Total assets excluding

(i) Cash and bank balances;

(ii) Investment in money market instruments and money market mutual funds;

Advance payments of taxes; and

Deferred tax payment.

Note 2: Group Companies means an arrangement involving two or more entities related to each other through any of the following relationships,

(i) Subsidiary – parent (defined in terms of AS 21),

(ii) Joint venture (defined in terms of AS 27),

(iii) Associate (defined in terms of AS 23),

(iv) Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies,

(v) a related party (defined in terms of AS 18)

(vi) Common brand name, and

(vii) Investment in equity shares of 20% and above.

Note 3: Block sale would be a long term or strategic sale made for purposes of disinvestment or investment and not for short term trading. Unlike a block deal, there is no minimum number/value defined for the purpose.

2. Types of CIC-

  • CIC-ND-NSI
  • CIC-ND-SI

CIC-ND-NSI

A Non Systematically Important CIC is a non deposit taking CIC with an asset size of less than Rs. 100 crore as per the last audited balance sheet. Such Non Systematically Important CICs are exempted from getting RBI registration and complying with NBFC norms. However, even a CIC having an asset size of less than 100 crore shall be required to get registered in case-

  • It raises or holds public funds, or
  • Its asset size increases the 100 crore threshold limit.

Note 1: The 100 crore limit shall be determined aggregating the total assets of all CICs in the group( irrespective of whether the CICs holds public funds or not).

Note 2:  Companies are required to apply to RBI for registration within three months of achieving a balance sheet size of Rs. 100 crore.

Note 3: Public funds shall include funds raised either directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance but excludes funds raised by issue of instruments compulsorily convertible into equity shares within 10 years from the issue date.

CIC-ND-SI

A Systematically Important CIC means a CIC having total assets of Rs. 100 crore or more either individually or in aggregate along with other CICs in the Group as per the last audited balance sheet and raises or holds public funds. Such Systemically Important CIC will be required to obtain CoR (Certificate of Registration) under Section 45-IA of the RBI Act and be governed by the provisions of the RBI Act, 1934 and the directions issued by the RBI from time to time. However they are exempted from the net owned fund requirements specified in section 45-IA if they meet with the capital requirement and leverage ratio.

Note 1: Registration

Every CIC shall apply to the RBI for grant of Certificate of Registration within a period of three months from the date of becoming a CIC-ND-SI.

Note 2: Capital Requirements

Adjusted Net Worth 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.

Note 3: Leverage Requirements

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.

Note 4: Statutory Auditor Certificate

Every CIC-ND-SI shall submit an annual certificate from its statutory auditors regarding compliance with the requirements of these directions within a period of one month from the date of finalization of the balance-sheet.

So with this article, I have laid down an overview of the regulatory framework for CICs. Thus, the business model of CIC offers a good option for the purpose of holding stake without getting into the rigid regulations of NBFC.

(The author is a Chartered Accountant from Agra and can be contacted at sona_agra23@yahoo.co.in or 8171078022)

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