“Understand NBFC-CICs with this note covering their definition, qualification criteria, types of NBFCs, and specific details on Core Investment Companies. Stay compliant with RBI regulations. Contact us for queries.”
Note on NBFC-CICs
NBFCs:
As per section 45-I(c) read with section 45-I(f) of RBI Act, 1934, NBFC means:
- a financial institution which is a company;
- a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
- such other Non‐Banking Institution or class of such institutions, as RBI specifies with prior approval of the CG.
However, a company will not be considered an NBFC, if it is engaged in the following business:
- agricultural operations;
- industrial activity;
- the purchase, or sale of any goods (other than securities) or the providing of any services;
- the purchase, construction or sale of immovable property, provided no portion of the income is derived from the financing of such activities.
where financial institution means any non-banking institution which carries on business in any of the following financing activities, namely:
- the financing, including granting loans or advances;
- the acquisition of shares, stock, bonds, debentures or securities issued by a Government;
- letting or delivering of any goods to a hirer under a hire-purchase agreement;
- the carrying on of any class of insurance business;
- agency services of chits or kuries;
- collecting monies pursuant to scheme of arrangement, by way of subscriptions or by sale of units
A non-banking financial company can commence business as an NBFC only after:
- obtaining a certificate of registration; and
- having net owned funds of INR 2 Cr.
where net owned funds is aggregate of the paid-up equity capital, CCPS, free reserves, securities premium reserve and capital reserves, excluding reserves created by revaluation of asset after deducting therefrom accumulated balance of loss, deferred revenue expenditure, intangible assets, the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund.
Qualification as an NBFC
- As per RBI Press Release No. 99/1269 dated 8 April 1999, in order to identify a particular company as a NBFC, both the assets and the income pattern as evidenced from the last audited balance sheet of the company needs to be considered to decide its principal business.
- A company will be considered an NBFC if it clears the 50-50 test:
1. The financial assets of the company are >50% of its total assets (netted off by intangible assets); and
2. The income from financial assets is > 50% of the gross income,
Types of NBFCs
NBFC may be classified into following categories –
i. Liabilities Based Classification
-
- NBFCs taking public deposits;
- NBFCs not taking public deposits based on size
– Systematically important (NBFC-NDSI)
– Others (NBFC-ND)
ii. Asset Based Classification
-
- Asset Finance Company;
- Investment Company;
- Systemically Important Core Investment Company ;
- Others
Core Investment Companies (CICs)
CIC means a core investment company having total assets of not less than ₹100 crore either individually or in aggregate along with other CICs in the Group and which raises or holds public funds. It is an NBFC which carries on the business of acquisition of shares and securities and which satisfies the following conditions:
- The company holds not less than 90% of Net Assets in the form of investment in group companies; and
- Investment in equity shares of group companies and InvITs (including any instrument that is compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) which is not less than 60% of Net Assets are held as equity stake in group companies;
- 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;
- The exposure of such CICs towards InvITs should be limited to their holdings as sponsors and should not exceed the minimum holding of units and tenor prescribed in this regard by SEBI (InvITs) Regulations, 2014.
- It does not carry on any other financial activity discussed above except
– investment in:
i. bank deposits;
ii. money market instruments, including money market mutual funds that make investments in debt/money market instruments with a maturity of up to 1 year;
iii. government securities; and
iv. bonds or debentures issued by group companies.
– granting of loans to group companies and
– issuing guarantees on behalf of group companies
where Companies in a 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)
where Net Assets includes all assets except cash and bank balances, investment in money market instruments and money market mutual funds, advance payments of taxes; and deferred tax payment.
Where Public Funds include 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.
Group Structure in case of CICs
The number of layers of CICs within a Group (including the parent CIC) shall be restricted to two, irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC. If a CIC makes any direct/ indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC.
Unregistered CICs
The following CICs will fall under the category of “Unregistered CICs” and are not required to seek registration:
- CICs with an asset size of less than INR 100 crore, irrespective of whether accessing public funds or not; and
- CICs with an asset size of INR 100 crore and above and not 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 violating Core Investment Companies (Reserve Bank) Directions, 2016.
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 case of unregistered CICs, they 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.
Unregistered CICs shall be required to be registered with the Bank and shall be regulated like a registered CIC in case they intend to make overseas investment in financial sector. However, in case of investment in non-financial sector, unregistered CICs will not be required to obtain registration since registration requirements are not applicable to them.
For more clarity, you can visit the Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016 (Updated as on December 29, 2022) issued by RBI in this regard.
Please connect at Sakshi.jain@in.gt.com for any queries.
Author Bio
very informative.