Core Investment Companies :-Reserve Bank of India [RBI] has announced on 20 April 2010 a proposal to introduce a new regulatory framework for Non-Banking Financial Companies [NBFC] which are “Core Investment Companies” [CIC]. The announcement was made as part of Annual Monetary Policy for the year 2010-11.

Background

With respect to the regulatory framework for NBFC, RBI has focused on inter-connectedness and systemic risk. Access to public funds by NBFC is being perceived by RBI as a systemic issue. As a consequence, RBI has laid emphasis on greater regulation and monitoring of NBFCs, including systemically important non deposit taking NBFCs [NBFCs-ND-SI].

It has been represented that companies which have their assets predominantly as investments in shares not for trading but for holding stakes in group companies and who do not carry on any other financial activity [i.e. CIC] needs to be treated differentially in the regulatory prescription applicable to NBFCs-ND-SI. To rationalize the policy approach for such companies RBI has made the policy announcement.

Salient features of the policy announcement

CIC having an asset size of Rs.1 billion or more will be treated as a systemically important core investment companies. Such companies will be required to be registered with RBI.

CIC fulfilling minimum capital and leverage criteria will be given an exemption from maintenance of net owned fund [NOF] and exposure norms applicable to NBFCs-ND-SI. Such CIC will be required to submit annual certificate from statutory auditors regarding compliance with the prescribed norms.

RBI will issue draft guidelines to implement the policy decision by 30 April 2010 for public comments.

Analysis

One need to wait for the detailed guidelines before acting on this announcement. However, the policy announcement should allow CIC to freely invest in / lend to group companies without the need to comply with the stringent requirements of maintenance of minimum NOF and also requirements of adhering to prudential guidelines for concentration of credit / investment limits.

Source: RBI’s Annual Policy Statement for the Year 2010-11 issued on 20 April 2010

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