This Concept was originated in order to safeguard NBFCs which are formed for group investments from stringent RBI procedures. Core Investment Companies, (CIC) are those companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity.
Concept
As per Core Investment Companies (Reserve Bank) Directions, 2016 issued by RBI, Core Investment Company (CIC) is 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 the last audited balance sheet:-
1. 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;
2. its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies and units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its net assets as mentioned in clause (i) above; Provided; that the exposure of such CICs towards InvITs shall be limited to their holdings as sponsors and shall not, at any point in time, exceed the minimum holding of units and tenor prescribed in this regard by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended from time to time
3. 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
4. it does not carry on any other financial activity referred to in Section 45I(c) and 45I (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 and liquid 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.
“Companies in the Group” means an arrangement involving two or more entities related to each other through any of the following relationships, viz. Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies, a related party (defined in terms of AS 18) Common brand name, and investment in equity shares of 20% and above).
Neither LLPs nor Partnerships are companies and hence have been deliberately excluded from the definition of Group Company. Further, in view of the loose structure and regulatory framework for these entities, it is felt that they should not be included in the definition.
Net Assets means: total assets as appearing on the assets side of the balance sheet but excluding :-
- cash and bank balances;
- investment in money market instruments;
- advance payments of taxes; and
- deferred tax asset.
Systemically Important Core Investment Companies (CICs-ND-SI) is a Non-Banking Financial Company (NBFC) with asset size of Rs 100 crore and above carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet and it accepts public funds
Even though public funds include public deposits in the general course, it may be noted that CICs cannot accept public deposits. It may further be reiterated that no NBFC can accept public deposits without specific permission of the Bank even if it holds a CoR from the Bank
Public deposit for the purpose of these Directions shall have the same meaning as defined in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
“Public funds” includes funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures etc. but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.
As per the present directions for CICs, they are permitted to make investments in money market instruments, including money market mutual funds. Since Liquid Funds are also mutual funds with the underlying being money market instruments; CICs are permitted to invest their surplus funds in Liquid Fund Schemes also
RBI has now recognized that such CICs justifiably deserve a differential treatment in the regulatory prescription applicable to Non-Banking Financial Companies which are non deposit taking and systemically important. It is decided by RBI that only those CICs having an asset size of Rs.100 crore and above would be treated as systemically important core investment companies. Systemically important core Investment Company means a Core Investment Company fulfilling both the following conditions:
1. Having total assets of not less than Rs.100 crore, either individually or in aggregate along with other Core Investment Companies in the Group;
2. Raises or holds public funds;
The rules covering systemically important CICs:
They would require registration with the Reserve Bank and would be given exemption from maintenance of net owned fund and exposure norms subject to certain conditions.
Capital Requirements: Every CIC-ND-SI shall ensure that at all times it maintains a minimum Capital Ratio whereby its Adjusted Net Worth shall not be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as an the date of the last audited balance sheet as at the end of the financial year.
Adjusted net worth means the aggregate, as appearing in the last audited balance sheet as at the end of the financial year, of Owned Funds as defined in Non Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and 45% of the amount standing to credit of Revaluation Reserve arising from revaluation of investments in quoted investments, if any,
i) increased by :-
50% of the unrealized appreciation in the book value of quoted investments as at the date of the last audited balance sheet as at the end of the financial year (such appreciation being calculated, as the excess of the aggregate market value of such investments over the book value of such investments); and
the increase if any, in the equity share capital since the date of the last audited balance sheet.
ii) reduced by :-
the amount of diminution in the aggregate book value of quoted investments (such diminution being calculated as the excess of the book value of such investments over the aggregate market value of such investments ) and the reduction, if any, in the equity share capital since the date of the last audited balance sheet.
Market Value of Quoted Investments means: the average of the highs and lows of the quoted prices of the investments, on a recognized stock exchange where the investment is most actively traded, during the period of 26 weeks immediately preceding the end of the financial year at which date the last audited balance sheet is available.
Leverage Ratio: Every CIC-ND-SI shall ensure that its outside liabilities at all times shall not 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.
Outside Liabilities means: total liabilities as appearing on the liabilities side of the balance sheet excluding ‘paid up capital’ and ‘reserves and surplus’ but including all forms of debt and obligations having the characteristics of debt whether created by issue of hybrid instruments or otherwise and value of guarantees issued whether appearing on the balance sheet or not.
Every CIC shall apply to the Bank for grant of Certificate of Registration within a period of three months from the date of becoming a CIC-ND-SI
Exemptions: A CIC-ND-SI which adheres to the requirements regarding capital requirements and leverage ratio as specified above, may to the extent necessary, be exempted from compliance with:-
- maintenance of statutory minimum Net Owned Fund (NoF) and
- requirements of “Non-Banking Financial (Non-Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007” including requirements of capital adequacy and exposure norms.
Every CIC-ND-SI shall undertake transactions in Government securities through its CSGL account or its demat account: Provided that no CIC-ND-SI shall undertake any transaction in government security in physical form through any broker.
No CIC-ND-SI shall lend against its own shares.
CICs are prohibited from contributing capital to any partnership firm or to be partners in partnership firms including Limited Liability Partnerships (LLPs) or any association of person similar in nature to partnership firms.
All CICs investing in Joint Venture/Subsidiary/Representative Offices overseas in the financial sector shall require prior approval from the Bank. CICs desirous of making overseas investment in financial sector shall hold a Certificate of Registration (CoR) from the Bank and shall comply with all the regulations applicable to CIC-ND-SI. CICs that are presently exempted from the regulatory framework of the Bank (exempted CICs), shall be required to be registered with the Bank and shall be regulated like CICs-ND-SI, where they intend to make overseas investment in financial sector.
Further, a CIC-ND-SI need not obtain prior approval from Department of Non-Banking Supervision (DNBS), RBI, for overseas investment in non-financial sector. However it shall report to the Regional Office of DNBS where it is registered within 30 days of such investment in the stipulated format and at the prescribed periodicity.
CICs having asset size of below Rs 100 crore are exempted from registration and regulation from the RBI, except if they wish to make overseas investments in the financial sector. Exempted CICs making overseas investment in non-financial sector shall not require registration from the Bank
Every CIC exempted from registration requirement with Bank shall pass a Board Resolution that it will not, in the future, access public funds. However CICs may be required to issue guarantees or take on other contingent liabilities on behalf of their group entities. Before doing so, all CICs must ensure that they can meet the obligations thereunder, as and when they arise. In particular, CICs which are exempt from registration requirement must be in a position to do so without recourse to public funds in the event the liability devolves, else they shall approach the Bank for registration before accessing public funds. If unregistered CICs with asset size above ₹100 crore access public funds without obtaining a Certificate of Registration (CoR) from the Bank, they shall be seen as violating Core Investment Companies (Reserve Bank) Directions, 2016.
Accounting of Investments:
(1)(a) The Board of Directors of every CIC-ND-SI shall frame investment policy for the company and shall implement the same;
(b) The criteria to classify the investments into current and long term investments shall be spelt out by the Board of the company in the investment policy;
(c) Investments in securities shall be classified into current and long term, at the time of making each investment;
(d) In case of inter-class transfer –
(i) There shall be no such transfer on ad-hoc basis;
(ii) such transfer, if warranted, shall be effected only at the beginning of each half year, on April 1 or October 1, with the approval of the Board;
(iii) the investments shall be transferred scrip-wise, from current to long-term or vice-versa, at book value or market value, whichever is lower;
(iv) the depreciation, if any, in each scrip shall be fully provided for and appreciation, if any, shall be ignored;
(v) the depreciation in one scrip shall not be set off against appreciation in another scrip, at the time of such inter-class transfer, even in respect of the scrips of the same category.
(2) (a) Quoted current investments shall, for the purposes of valuation, be grouped into the following categories, viz.
(i) equity shares,
(ii) preference shares,
(iii) debentures and bonds,
(iv) Government securities including treasury bills,
(v) units of mutual fund, and
(vi) others.
(b) Quoted current investments for each category shall be valued at cost or market value whichever is lower. For this purpose, the investments in each category shall be considered scrip-wise and the cost and market value aggregated for all investments in each category. If the aggregate market value for the category is less than the aggregate cost for that category, the net depreciation shall be provided for or charged to the profit and loss account. If the aggregate market value for the category exceeds the aggregate cost for the category, the net appreciation shall be ignored. Depreciation in one category of investments shall not be set off against appreciation in another category.
(3) Unquoted equity shares in the nature of current investments shall be valued at cost or breakup value, whichever is lower. However, CICs-ND-SI may substitute fair value for the breakup value of the shares, if considered necessary. Where the balance sheet of the investee company is not available for two years, such shares shall be valued at one Rupee only.
(4) Unquoted preference shares in the nature of current investments shall be valued at cost or face value, whichever is lower.
(5) Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying cost.
(6) Unquoted investments in the units of mutual funds in the nature of current investments shall be valued at the net asset value declared by the mutual fund in respect of each particular scheme.
(7) Commercial papers shall be valued at carrying cost.
(8) A long term investment shall be valued in accordance with the Accounting Standard issued by ICAI.
Note: Unquoted debentures shall be treated as term loans or other type of credit facilities depending upon the tenure of such debentures for the purpose of income recognition and asset classification.
General Conditions
i. Direct investment in activities prohibited under FEMA shall not be permitted.
ii. The total overseas investment shall not exceed 400% of the owned funds of the CIC.
iii. The total overseas investment in financial sector shall not exceed 200% of its owned funds.
iv. Investment in financial sector shall be only in regulated entities abroad.
v. Entities set up abroad or acquired abroad shall be treated as wholly owned subsidiaries (WOS) /joint ventures (JV) abroad.
vi. Overseas investments by a CIC in financial /non-financial sector shall be restricted to its financial commitment. However with regard to issuing guarantees/Letter of Comfort in this regard the following shall be noted:
(a) The CIC can issue guarantees / letter of comfort to the overseas subsidiary engaged in non-financial activity;
(b) CICs must ensure that investments made overseas shall not result in creation of complex structures. In case the structure overseas requires a Non-Operating Holding Company, there shall not be more than two tiers in the structure. CICs having more than one non-operating holding company in existence, in their investment structure, shall report the same to the Bank for a review.
(c) CICs shall comply with the regulations issued under FEMA, 1999 from time to time;
(d) An annual certificate from statutory auditors shall be submitted by the CIC to the Regional Office of DNBS where it is registered, certifying that it has fully complied with all the conditions stipulated under these Guidelines for overseas investment. The certificate as on end March every year shall be submitted by April 30 each year;
(e) If any serious adverse features come to the notice of the Bank, the permission granted shall be withdrawn. All approvals for investment abroad shall be subject to this condition.
Author Bio
You are requested to give guidelines/clarification/ interpretation on following points regarding Public Fund if you can guide:
1. Will ‘loan from own shareholders taken by a private limited nbfc’ come under the definition of Public Fund as per RBI Circular dated 01.09.2016 vide chapter II point 3 (xxv), though deposit/loan from own shareholders is not regarded “Public Deposit” and there is no outside fund, loan belongs to shareholders of company themselves.
2. Will ‘Overdraft against own Bank FDR taken by a private limited nbfc’ come under the definition of Public Fund/Bank finance as per RBI Circular dated 01.09.2016, whereas Bank FDR is not considered even as Financial Assets as per Rbi circular RBI/2011-12/446 DNBS (PD)CC.No.259 /03.02.59/2011-12 dated March 15, 2012 , since this Overdraft is only against NBFC’s own fund deposit as FDR to save interest, and there is no real Bank Finance, means any body can take Overdraft against FDR without going through any process as in other bank Finance, where one has to be understood of having character of three C’s i.e. Capability, Capacity and Character. In another words, If there is no FDR, there will be no overdraft, means no real Bank Finance.
In addition to this, even bond or debenture issued against any other asset is not regarded as Public Deposit, thus Overdraft against FDR should not be regarded as Bank Finance/Public Fund since there is no real Bank Finance or outside Public Fund. AS PER Master Direction – Non-Banking Financial Companies Acceptance of PublicDeposits (Reserve Bank) Directions, 2016. Dated August 25, 2016 under head of Definitions : 3. For the purpose of these Directions, unless the context otherwise requires:
….
(xv) “public deposit” means a deposit as defined under section 45-I(bb) of the Reserve Bank of India Act, 1934 (2 of 1934), excluding the following:
….
f) any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company; or by any other asset or which would be compulsorily convertible into equity in the company provided that in the case of such bonds or debentures secured by the mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;
In addition to above in following RBI circular, overdraft against Fdr was not included in the definition of Loans and Advances
RBI/2015-16 /95
DBR.No.Dir.BC.10/13.03.00/2015-16 July 1, 015
All Scheduled Commercial Banks
(Excluding RRBs)
Master Circular- Loans and Advances – Statutory and Other Restrictions
2. GUIDELINES
2.1 Statutory Restrictions
2.1.2 Advances to bank’s Directors
2.1.2.1 Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans and advances to the directors and the firms in which they hold substantial interest. Purchase of or discount of bills from directors and their concerns, which is in the nature of clean accommodation, is reckoned as ‘loans and advances’ for the purpose of Section 20 of the Banking Regulation Act, 1949.FAQs regarding applicability of Section 20 of BR Act, 1949 is given in ‘Annex 2’.
2.1.2.2 Banks are prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any firm in which any of its directors is interested as partner, manager, employee or guarantor, or any company [not being a subsidiary of the banking company or a company registered under Section 8 of the Companies Act, 2013, or a Government company] of which, or the subsidiary or the holding company of which any of the directors of the bank is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or any individual in respect of whom any of its directors is a partner or guarantor.
2.1.2.3 For the above purpose, the term ‘loans and advances’ shall not include the
2.1.2.3 For the above purpose, the term ‘loans and advances’ shall not include the following:
(a) loans or advances against Government securities, life insurance policies or fixed deposit; ….
Thus can it be inferred from the above that overdraft against FDR be not include in Bank Finance.
3. Will loan from ‘Holding private limited NBFC’ to its ‘associate private limited NBFC’ and vice versa or ‘loan within group entities to one another’ come under ‘inter corporate deposit’ under Public Fund as per RBI Circular dated 01.09.2016, since in real sense there is no outside Public Fund is involved. Even as per RBI at following sight https://www.rbi.org.in/scripts/FS_FAQs.aspx?Id=92&fn=14 under the head of
All you wanted to know about NBFCs point 16. It is guided that
Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.
From this it can be deduced that as far as Public funds is concerned, Holding, Associates and group entities are regarded one, thus loan within themselves can also not be regarded as inter corporate deposit as per RBI Circular dated 01.09.2016 under Public Fund as there is no outside sources/fund is involved.
Can a CIC (exempt from registration less then 100 CR) accept inter corporate loan from group companies ??