Working Group on Core Investment Companies

A Non-Banking Financial Organization (NBFO) is a Core Investment Company (CIC). It carries on the business of acquiring securities and shares and holds not less than 90% of its net assets in the form of bonds, debentures, investment in equity shares, preference shares, and debt or loans in group companies. Further, investments in group companies constitute not less than 60% of its net assets. 

Working group

To monitor the interconnectedness & the complex group structures of core investment companies (CIC) with financial systems & strengthen the corporate governance framework for them, the working group examined the current regulatory and supervisory framework. To suggest & identify measures to limit the risks posed by the companies. Accordingly, the working group met spokespersons of banks & CICs acquiring the viewpoint of the shareholders to analyze data presented by the Department of Non-Banking Supervision.

Furthermore, the working group recognized a few major issues to be addressed & suggested measures to reduce the related risks for the CICs as well as for the system as a whole.

Multiple gearing & excessive leveraging

The working group with its regulatory and supervisory framework recommends that step-down CICs may not be permitted to invest in any other CIC while allowing them to invest freely in other group companies. The absence of restriction on the number of CICs that can exist in a group & non-deduction of the capital of CICs for their exposures in group companies creates an opportunity for excessive leveraging.

High leverage and risks at the group level

To comprehend & identify the risks including excessive leverage at the group level, the working group’s regulatory and supervisory framework endorsed forming a Group Risk Management Committee (GRMC) and maintaining control of the evolving risks in the group as a fraction or as a whole. 

Complex group structure

The working group advised the number of layers of CICs in a group to be regulated by limitation. Since the complexity of large combinations provides unintelligibility to the groups in terms of ownership, related party transactions & controls. Additionally, as Section 186 (1) of the Companies Act, 2013 (which restricts the Group Structure to a maximum of two layers) does not apply to NBFCs, the scope of complication gets aggravated.

Corporate governance 

To strengthen the governance practices, the working group recommends the formation of broad level committees since corporate Governance guidelines are not accurately applicable to CICS. Namely, these committees are the Group Risk Management Committee, Nomination, Remuneration Committee, and Audit Committee. The WG advocates conducting internal audits for the preparation of the consolidated financial statement. Also inducting independent directors and fencing the boards of the CICs by excluding employees, and executive directors of group companies from its board. 

Exempt Category and Registration

Retention of Registration Criteria as per the WG states that the current threshold of Rs. 100 crore access to public funds and asset size for registration as CIC is to be continued. Even more CICs without public funds are not to be registered with the Reserve Bank. Further Retention of Registration Criteria suggests doing away with the compilation of released CIC to preclude scopes of its misinterpretation by anybody.

Enhancement of off-site surveillance and on-site supervision over CICs

Being no prescription for submission of off-site returns or Statutory Auditors Certificate (SAC) for CICs, It is recommended via the regulatory and supervisory framework, that Offsite returns may be designed by the RBI and prescribed for CICs on the lines of other NBFCs and to stipulate Annual SAC submission while onsite inspection of the CICs can be conducted periodically. 

Terms of reference of the working group

• To suggest changes to the current approach of the Reserve Bank of India towards the registration of CICs. Also to assess the appropriateness including the practice of multiple CICs being allowed within a group.

• To suggest ways to strengthen corporate governance and disclosure requirements for CICs.

• To suggest the right measures for enhancing RBI’s on-site supervision and off-site surveillance.

• Suggest changes within and assess the adequacy of supervisory returns submitted by CICs.

• Suggest changes and examine the current regulatory framework for CICs in terms of efficacy, effectiveness, and adequacy of every component.

Report of the working group

With their regulatory and supervisory framework, the Working Group has submitted its report to the Governor of India. The report is available on the RBI website for comments of stakeholders and members of the public. Moreover, Comments on the report may be sent through email.