My routine visits to one of the biggest nationalized banks witnessed an interesting interaction between the bank’s Chief Manager and a messenger from a Gurugram court which involved a question to the bank whether it received money from one of the 63 accounts maintained by a defaulter builder with the said bank. It reminded me of one of Core Investment Companies which might have played any role. RBI originally issued instructions on CIC in 2002 hardly expecting massive frauds, diversion of funds or misuse of funds for unknown proportions by its borrowers by the use of CIC accounts.

RBI therefore appointed a working group to review the regulatory and supervisory framework for Core Investment Companies (CIC) and it resulted in submission of the report of the group on November 6 2019.

Let us understand the word “Core Investment Company”. It is explained as a non-banking financial company which carries on the business of acquisition of shares and securities 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. Equity shares to constitute not less than 60% of the net assets.

Expectedly, the group identified certain major issues faced by CICs, analyzed the reasons and has given suggestions to mitigate the risks facing them.

Let us understand the recommendations which will explain how CICs now attract wolves of financial world and the gross misuse emanating from their usage.

Complex Group Structure   

Let us understand the term’ complex’. How can a group of companies become complex? For that inquisitive question, under a notification issued on January 05, 2011, Group as given in Company’s Act 1956 was expanded to include subsidiaries, joint ventures, associate’s, promotor-promotee, related parties, common brand name and investment in equity shares of 20% and above. This was at variance with the definition given by RBI Act Section 451A which too was derived from the same act only.

Let me explain the above with my real visit to Nehru Place, New Delhi to one of its iconic and old building of 9 floors. While searching for my friend’s office, I saw an address with 15 companies’ names written at the same place. Yes, please believe me that it existed. It goes without saying that RBI may find it difficult to define a group of companies. As per our definition of CIC, one of these companies could have been a CIC or there could be more than one CIC.

Therefore, the committee recommended the number of layers of CICs in a group to be limited through regulation.

Multiple Gearing and Excessive Leveraging

To understand the second recommendation of the group, one may understand the situation where a group can have more than one CIC in a group. If one CIC invests in another CIC in a group, common sense says the leveraging projects increase excessively. We are already aware that CIC can invest up to 90% in group companies. The working group recommends that step down CICs may not be permitted to invest in another CIC while allowing them to invest freely in other companies.

Build-up of high leverage and other risks at group level 

How do we control high leverage and other risks in a group? The working group extends its logic to create a Group Risk Management Committee at group level to supervise the risk of the entities in the group as well as the group as a whole. The group feels relieved if RBI takes it upon itself to form policies about the number of independent directors, whether to have a Chairperson as independent director, minimum number of meetings to be held or quorum for the meetings through appropriate regulation.

Corporate governance

Strangely, corporate governance guidelines are not applicable to CICs. To augment the governance standards, the committee delves deeply into formation of audit committee, nomination and remuneration committee and Group risk management committee. Obviously, I am not surprised inclusion of independent directors, conducting internal audit, preparing consolidated financial statement, and ring-fencing boards of CICs by excluding employees/executive directors of group companies from board of CIC as some of the commonsense measures for implementation.

Avoiding same auditors in both CIC and other group companies is a sensible approach though many groups do not follow in reality.

Review of exempt category and registration

Bemusing, as it may be, present CICs with assets below the qualifying threshold (Rs 100 crores asset size) or CICs without public funds do not require RBI registration and hence are as “exempted” CICs. This nomenclature sadly added credibility to such CICs and allowed scope for misinterpretation as if it was correctly obtained from RBI by proper monitoring or review at RBI level. Hence the recommendation flows from the committee for non-usage of similar names by CICs since RBI would prohibit use similar names in future.

It has also been recommended by the group that all CICs with public funds and asset size of Rs 100 crores and above may continue to be registered with RBI.

Enhancing off-site surveillance on-site supervision over CICs

A complete nay in respect of off-site reporting and non-submission of statutory auditors’ certificate has been the order of the day in respect of CICs so far.

The working group diverted from the above view and recommends that off-site returns must capture at the time of issue that details of group structure as well as shareholding pattern in all financial statements of CICs.

The group structure will thus help in developing a database on the structures of the conglomerates of which the CIC/NBFCs is/are a part.

Naturally, the group insists in preparation of the proforma by RBI on the lines of statements for NBFCs which are equally prescribed by RBI only.

CICs will invariably incorporate all information about their subsidiaries.

Interesting statistical data about CICs

As per the statistics given on page 14 of the report, there were 63 CICs registered with RBI. As on 31st March 2019, the total asset size of the CICs aggregated to Rs 2,63,864 crore and have approximately Rs 87,048 Crore of borrowings. The top 5 alone consisted of around 60% of the asset size and 69% of borrowings of all CICs taken together.

This indicates a simple  situation where any bank or banks maintaining the CIC accounts can easily monitor the operations in the accounts for the simple reason that the operations in these group of accounts may not be a conduit for operations of misuse of bank facilities, ways of using so called irregular usage of money, diversion of funds etc.

How effective has been the recommendations of the committee in light of the mandate given to the committee by RBI?

  • To analyze the present regulatory framework for ICICs in terms of effectiveness of the same and suggest changes, if any.
  • Changes needed, if any, in the process of registration of CICs, particularly, in view of multiple CICs in the group of companies.
  • To suggest changes required to strengthen corporate governance and disclosure requirements
  • To assess the adequacy of supervisory returns submitted by CICs and changes needed to strengthen the system
  • Finally, to suggest changes to enhance RBI’s off-site surveillance and on-site supervision over CICs

Conclusion

Whatever suggested by experts committee and the potent effects of the suggestions can only be assessed, if some of the banking frauds amounting to Rs 76000 Crores (approximate figures as per Economic times report dated 22nd November 2019) will be substantially reduced after introduction of new measures for CICs. I would like to ask the following issues which are self-explanatory:

  • While speaking of CICs, one may remember what has happened to Rs lacs of Crores of funds being released by banks to industries, home builders, exporters or self-styled entrepreneurs ably supported by politicians or other vested interests.
  • Banking work in a branch can be explained in a simple way. Banks do not engage specialists to release funds to its borrowers. The simple branch manager, a generalist does all types of banking along -with lending activity. The regional or controlling offices just make enquiries about some splurge in borrower accounts in the evening which may or may not be answered by the branch managers. Sadly, the banking in a public sector has failed to arrest bulging NPAs, mostly due to lack of proper monitoring at required time.
  • I am afraid, introduction of more and more monitoring returns would lead us nowhere. Both the banks as well as RBI need to engage specialists to monitor the situation. Involvement of CAs, CMAs, Company Secretaries, seasoned and actually passioned bankers or anyone with a commitment to serve the banking with social motives is urgently required.
  • The temperament to catch the thief at the most appropriate time is required. Expectedly, usage of AI, advanced computer software or any on-line and off-line computer aided advancements are also immediately required. There could be special departments exclusively dealing with crooks (with whatever name) to help the banks to monitor usage of funds in either deposit or borrower accounts since both of them have resulted in enormous frauds or diversion of funds.

It is my ardent desire that above expert committee’s recommendations, if implemented properly, would serve the society better.

Reference 

RBI communication “RBI releases the Report of the Working Group to Review the Regulatory and Supervisory Framework for Core Investment Companies”.

Author Bio

Qualification: Post Graduate
Company: subramanian natarajan cpa firm
Location: NEW DELHI, New Delhi, IN
Member Since: 09 May 2017 | Total Posts: 133
A banker with 27 years of experience, a CPA from USA with specialization in US taxation, individual, partnership, S corporation or LLC taxation etc View Full Profile

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