I have already written in one of my earlier articles that I was amazed to find the names of 13 companies at the entrance of an office but with no receptionist or any semblance of company activities therein.

 This type of behavior of companies might have forced RBI to constitute a Working Group (WG) to Review the Regulatory and Supervisory Framework for Core Investment Companies (CICs), under the Chairmanship of Shri Tapan Ray, former Secretary, Ministry of Corporate Affairs, Government of India. The report of the WG was placed in the public domain in November 2018 seeking comments from the stakeholders. Based on the recommendations of the WG and inputs received from stakeholders, RBI approved its circular which amply nails irregular or misleading investment in India. Clear directives emerge.

Review of Guidelines for Core Investment Companies


Now the details of the circular for our knowledge.

Definition of Adjusted Net worth (ANW)

One of the most and path making announcements is the text reproduced below for any professional associated with an investment in this country.

While computing Adjusted Net Worth (ANW), the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds ten percent of Owned Funds of the investing CIC, shall be deducted. All other terms and conditions for the computation of ANW remain the same.

 The deduction requirement shall take immediate effect for any investment made by a CIC in another CIC after the date of issue of this circular. In cases where the investment by a CIC in another CIC is already in excess of 10 percent as on the date of this circular, the CIC need not deduct the excess investment as on the date of this circular from owned funds for computation of its ANW till March 31, 2023.”

What does this instruction imply for a banker, insolvency professional, a lawyer or an investor?

Giving double benefits to a corporate which invested only once, is not admitted now by RBI. Now, the instructions lead us further to explain the corporate structure, simplified.

Group structure

To address the complexity in group structures and the existence of multiple CICs within a group, it was decided that the number of layers of CICs within a Group (including the parent CIC) would not exceed two irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC

 If a CIC would invest any direct/ indirect equity investment in another CIC, it would be considered as a layer for the investing CIC.  While the regulation shall be applicable from the date of the circular, existing entities shall reorganize their business structure and adhere to this guideline latest by March 31 2023.

But these instructions may be interpreted as applicable even on that date of circular or after that date even in 2020 by the lending instructions. Any conservative public sector/private sector bank, particularly, after the massive build-up of NPAs during the last two decades would restrict lending to any group with two layers only.

What improvements have been suggested and approved after feedback from the web regarding risk management, the weakest link among corporate groups today?

The following instructions have been strictly laid down by RBI.

Risk management

The parent CIC or any corporate in the group with the largest asset size has to constitute a Group Risk Management Committee(GRMC) which will report to the Board of the CIC and shall meet once a quarter and that the composition of the committee at least with 5 members and among them two independent directors, one of whom to head the GRMC as Chairperson. Obviously, these members would be adequately educated and well versed to work in the risk committee.

My observation

It is sad but true that all private sector banks had objected to the nomination of independent directors in the audit committee since they felt that they would not be qualified for those positions when the recent RBI committee recommendations on Governance in Banks were recently put in its web and comments/suggestions were invited openly by RBI. But here none has any right to disobey RBI stipulations.

Let us continue with RBI instructions on risk committee.

What are the responsibilities of GRMC?

The following instructions are very regulatory in nature and no discretion is given to any group other than strictly implementing them.

The GRMC will have the following responsibilities:

  • Analyze the material risks to which the group, its businesses and subsidiaries are exposed. It must discuss all risk strategies both at an aggregated level and by type of risk and make recommendations to the Board in accordance with the group’s overall risk appetite.
  • Identify potential intra-group conflicts of interest.
  • Assess whether there are effective systems in place to facilitate the exchange of information for effective risk oversight of the group.
  • Assess whether the corporate governance framework addresses risk management across the group.
  • Carry out a periodic independent formal review of the group structure and internal controls.
  • Articulate the leverage of the Group and monitor the same.”

Let us discuss the implications of these directives, if we may call them.

Taking a trip in history lane, Enron the kingpin of all frauds heralded the businessmen to create any number of group companies to perpetrate frauds which would be too difficult to be understood by even auditors.

I can quote many absconding owners of real estate corporates who had created too many companies with them as Chairperson or a director and with many persons including their drivers/home maids/their assistants as directors and the funds provided by banks/financial institutions/investors/bondholders were conveniently diverted to fifty or more companies with the collusion of other banks which allowed the operation of current accounts fully being aware of non-financing by them. The documents executed by the borrowers forbid opening of accounts in other banks and it was purely intended to avoid diversion of funds during the operation of the units which availed loan facilities.

A recent circular of RBI on 13th August has prohibited the opening of current accounts by non-financing banks and those banks who intend to open current accounts should verify the facts or get an undertaking to that effect. But the recent issue of RBI circular may imbibe a better sense of responsibility among the erring banks.

Recent newspaper reports included the names of many private sector banks which helped the opening of current accounts causing financial loss to those banks which financed the borrowers.

Coming to our topic of risk management, an independent committee of expert independent directors will definitely advise suitable financial instructions to the board of the main group company.

Further instructions have made it compulsory for all CICs with asset size of more than Rs 5000 Crores to appoint Chief Risk Officer whose duties had been well explained as per para  71 on Appointment of Chief Risk Officer of Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

Let me quote the explicit advice by RBI on reporting of diversion of funds.

“CICs shall submit to the Board, a quarterly statement of deviation certified by the Chief Executive Officer/ Chief Financial Officer, indicating deviations in the use of proceeds of any funding obtained by the CIC from creditors and investors from the objects/ purpose stated in the application, sanction letter or offer document for such funding”.

Who will ensure this governance standard by CICs? It is expected that the Audit committee will ensure the observance of this stipulation. We are too aware that independent directors well qualified and with impeccable honesty will deliver good governance.

Corporate Governance and Disclosure Requirements

CICs have been alerted to strictly follow “Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 as updated from time to time,” in respect of Corporate governance standards, the appointment of directors, financial activities that can be engaged by CICs and Companies Act 2013 updated with latest provisions for submission of Consolidated Financial Statements of the group and the role of an auditor of main COC or other companies in the group.

With an annexure, RBI has given detailed instructions on disclosure requirements.

Let us dwell on them.

Disclosure requirements

1. Every CIC shall maintain a functional website containing basic information about itself and about its group.

2. The following shall be disclosed by the CIC with regard to group entities that are not consolidated in the CFS:

a) Name of the entity, type of business, size of its assets, debt-equity ratio, and profitability for the last two years

b) Nature and type of exposure on each entity: i) Investments in equity ii) investments in convertible instruments, iii) investments in bonds/ debentures/ other instruments, iv) loans and advances, v) any other

c) The total exposure of the CIC towards non-financial business (entity–wise)

d) Loans and advances to firms/companies in which directors are interested

e) Investments by the loanee of the CIC in the shares of the parent company and group companies

3. Disclosures to be made in the Annual Financial Statements

  • Disclosures to be made in the Annual Financial Statements
  • Investment in other CICs
  • Off-Balance Sheet Exposure
  • Investments
  • ALM – Maturity pattern of Assets and Liabilities (from 1-7 days and up to/ over 5 years, a massive disclosure)
  • Business Ratios (ROE, ROA, etc.)
  • Provisions and Contingencies

4. Miscellaneous disclosures

a) Registration/ license/ authorization, by whatever name called, obtained from other financial sector regulators

b) Penalties imposed by RBI and other regulators including strictures or directions on the basis of inspection reports or other adverse findings. c) If the auditor has expressed any modified opinion(s) or other reservation(s) in his audit report or limited review report in respect of the financial results of any previous financial year or quarter which has an impact on the profit or loss of the reportable period, with notes on –

(i) How the modified opinion(s) or other reservation(s) has been resolved; or

 (ii) If the same has not been resolved, the reason thereof and the steps which the CIC intends to take in the matter.

It is obvious from the above that most of the important disclosures deal with virtually everything about the financial structure, risk management, loans and advances, investments, etc.

Conclusion :  The revised instructions issued by RBI virtually nails the irregular activities of COCs by directing them to take actions on risk management, the appointment of GRMC, Chief Risk Officer, and submission of detailed disclosures which should be strictly verified by the audit committee, top management personnel, and the internal/external auditors. RBI should fulfill its obligations as it has itself laid down in various circulars, public forum, and all other communications.

The investing public including all types of stakeholders are anxiously waiting for a strengthening of Governance Standards of COCs so that investment capital will be used for proper purposes and help them multiply their investments.

The above article is as per my way of looking at the RBI circular, quoted by me. Neither RBI nor taxguru.in is responsible for my views. COCs must be guided by professionals.

Author Bio

Qualification: Post Graduate
Company: subramanian natarajan cpa firm
Location: NEW DELHI, Delhi, India
Member Since: 09 May 2017 | Total Posts: 183
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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October 2021