Reserve Bank of India [RBI] had on 12 August 2010 issued guidelines for Core Investment Companies [CICs]. RBI has on, 5 January 2011 notified Core Investment Companies (Reserve Bank) Directions, 2011 [CIC Directions]. The CIC Directions and the consequential amendments to the existing regulatory framework for NBFC which are CIC are effective from 5 January 2011.

Salient features of the Regulatory regime applicable to NBFCs which are CICs are as under:

Overview

Core Investment Companies (CIC)

As per the CIC Directions, “CIC means a NBFC 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:-

(i)         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;

(ii)        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 constitutes not less than 60% of its net assets as mentioned in clause (i) above;

(iii)       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;

(iv)       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

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.”

 

Different types of CICs

•           Systemically important CIC [CIC-ND-SI]:- CIC-ND-SI means a CIC having total assets of not less than ` 1 billion either individually or in aggregate along with other CIC in the Group and which raises or holds Public funds.

•           CICs which is not CIC-ND-SI.

Registration requirements under the Reserve Bank of  India Act, 1934 [the Act] for NBFC which are CIC

•           CICs which are not CIC-ND-SI under the CIC Directions are exempted from the registration as NBFC and the net owned fund requirements specified in Section 45-IA of the Act.

•           CIC which are CIC-ND-SI under the CIC Directions are required to be registered as NBFC and obtain Certificate of Registration [CoR]. However, they are exempted from the net owned fund requirements specified in Section 45-IA of the Act if they meet with the Capital requirement and leverage ratio.

Time period for obtaining CoR by CIC-ND-SI

•           For CIC-ND-SI which are in existence on 5 January 2011 – The application for CoR must be made within 6 months from 5 January 2011. CIC-ND-SI which has made application for grant of CoR can continue to carry on its existing businesses as CIC, till the disposal of the application by RBI.

•           For new CIC-ND-SI – Within 3 months from the date of becoming CIC-ND-SI.

Capital requirements applicable to CIC-ND-SI

•           Adjusted Net Worth of CIC-ND-SI shall at no point of time be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of last audited balance sheet as at the end of the financial year.

•           The CIC Directions lays down the manner of computation of risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items.

•           Leverage ratio to be maintained by CIC-ND-SI

•           Outside liabilities of CIC-ND-SI shall at no point of time 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.

 

Continuous compliance requirements under the CIC Directions

•           CIC-ND-SI shall submit annual certificate from its statutory auditors regarding compliance with the CIC Directions within 1 month from the date of finalization of balance-sheet.

Exemptions available from compliance with the CIC  Directions

•           RBI has powers to grant extension of time to comply with or exempt any CIC-ND-SI from all or any of the provisions of the CIC Directions either generally or for any specified period, subject to such conditions as RBI may impose.

Other exemptions available to a CIC

RBI has amended the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 [Prudential Norms]. Accordingly:

•           Prudential Norms will not apply to a CIC which is not a CIC-ND-SI.

•           Following requirements of Prudential Norms will not be applicable to a CIC-ND-SI which submits annual auditors certificate and comply with the capital and leverage ratio requirements specified in the CIC Directions:

–          Paragraph 15 – Submission of certificate from Statutory Auditors to RBI. This is consequential to the CIC Directions requiring CIC-ND-SI to submit Annual Statutory Auditors Certificate.

–          Paragraph 16 – Capital adequacy. This is consequential to the CIC Directions requiring CIC¬ND-SI to meet the Capital requirement.

–          Paragraph 18 – Concentration of credit / investment. Paragraph 18 provides limits on lending and investment by a NBFC in investee company and group of investee company.

Other definitions

Adjusted Net Worth

 

 

Owned Funds (as defined in Prudential Norms) as per last audited balance sheet as at the end of the financial year

+
50% of the unrealized appreciation in the book value of quoted investments (being excess of aggregate market value over the book value) as per the last audited balance sheet as at the end of the financial year
+
increase in the equity share capital since the date of the last audited balance sheet
(-)
diminution in the aggregate book value of quoted investments (being excess of the book value over aggregate of market value)
+
reduction in equity share capital since the date of the last audited balance sheet

 

Companies in the Group

 

Arrangement involving two or more entities related to each other through any of the following relationships, viz.:

•           Subsidiary – parent (as defined under AS 21 – Consolidated Financial Statements),

•           Joint venture (as defined under AS 27 – Financial Reporting of Interests in Joint Ventures),

•           Associate (as defined under AS 23 – Accounting for investments in Associates in Consolidated Financial Statements),

•           Promoter-promotee [as defined under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997] for listed companies,

•           related party (as defined under AS 18 – Related Party Disclosures)

•           Common brand name

•           Investment in equity shares of 20% and above.

Investment

Investment in shares, stock, bonds, debentures or securities issued by Government or local authority or other marketable securities of a like nature.

Market Value of quoted investments

Average of the weekly highs and lows of the closing price of the investments, on a recognized stock exchange where the investment is most actively traded, during 26 weeks immediately preceding the end of the financial year at which date the last audited balance sheet is available.

Net assets

Total assets excluding –

•           cash and bank balances;

•           investment in money market instruments and money market mutual funds

•           advance payments of taxes; and

•           deferred tax payment.

Outside Liabilities

Total liabilities as appearing on the liability side of the balance sheet excluding paid up capital, reserves and surplus and instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue 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.

Public funds

Public funds includes funds raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits and bank finance 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.

Total Assets

Total of all assets appearing on the assets side of the balance sheet.

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