Holding companies of business conglomerates will come under the radar of the Reserve Bank of India. Business groups will have to register these investment firms’ holding shares on behalf of promoters with the central bank.
These entities, which unlike non-banking finance companies do not accept deposits or trade, will be known as core investment companies (CICs) with a new set of rules.
NBFCs, particularly the large ones and those taking deposits, have to maintain a minimum net-owned fund (net worth minus investment in group companies). Indications are that the CICs will get exemption from this only if they follow certain capital norms and rein in their borrowings.
The proposed guidelines for them would be circulated by the end of the month, the central bank said as part of its regulatory initiative while presenting the annual monetary policy review on Tuesday.
Many investment firms and special vehicles formed by corporate groups borrow heavily against a shallow capital base. This has been a concern for RBI.
The move would help the central bank focus on these companies’ overseas transactions more closely. It would also help companies to overcome the funding requirements which are quite stringent for finance companies.
“RBI needs to regulate foreign funds flow in such companies,” says Shanto Ghosh, principal economist with Deloitte India. “The move to register such companies with the central bank is aimed with that objective.” Holding companies with assets of more than Rs 100 crore would be treated as core investment companies, or CICs.
The option of flexible financing has made the concept popular with large business conglomerates such as the Aditya Birla group, GMR Group, the Tatas, the Adanis and liquor baron Vijay Mallya.
“The primary aim is to raise money without losing control in the subsidiaries,” says KPMG executive director Girish Vanvari.
The proposal may meet with some restrictions from corporates. Few would like to report their holding structures to central bank which technically has jurisdiction over them.
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