The Reserve Bank of India (RBI) had constituted a Working Group Committee vide notification dated July 03, 2019 with the sole objective of reviewing the existing regulatory and supervisory framework for Core Investment Company (CIC) and recommending plausible changes in the framework. The report of the Working Group Committee was made public in October 2019 wherein the Committee had recommended number of measures in existing regulatory framework of CIC. The RBI accepted majority of the changes so recommended by the Committee and amended the Master Directions on CIC, 2016 w.e.f August 13, 2020. In this article, we have compared the recommendations made by the Committee vis-Ã -vis changes made in the CIC Master Directions, 2016:
S. No. |
Recommendations of the Committee |
Changes made in the Directions |
Impact |
1. |
Alteration in the method of calculation of Adjusted Net Worth (ANW) by deducting capital contribution of the CIC to another step-down CIC (directly or indirectly) shall be deducted over and above the 10% of owned funds. |
This recommendation is accepted and manner of calculating ANW has been changed. |
This will impact few groups (the list of registered CIC is available at RBI website) who have multiple CICs within the group since any investment made by Parent CIC in step down CIC which shall be deducted from owned funds if that investment is in excess of 10% of its owned funds. This move is in line with the RBI NBFC-ND-SI Master Directions, 2016. |
2. |
Change in the nomenclature of ‘Exempted CIC’ and ‘Systemically Important CIC/ CIC-ND-SI’. |
The terminology ‘Exempted CIC’ is replaced by ‘Unregistered CIC’ whereas ‘Systemically Important CIC/ CIC-ND-SI’ is replaced with CIC which required to be registered with the RBI. |
With this change, the clarity is provided to such CICs which are not required to be registered with the RBI. Earlier, Unregistered CIC cannot raise public funds and used to pass board resolution for not accepting public funds but such restriction has now been done away until the asset size is less than Rs. 100 crores. |
3. |
The number of layers of CICs in a group should not exceed 2 (two), as in case of other companies under the Companies Act, which, inter alia, would facilitate simplification and transparency of group structures. |
The recommendation is accepted by the RBI and has made changes in the Directions. |
The few groups have to restructure their model to come in line with this new change. They have to option either to convert the excess CICs in the group into NBFC or merge with another CIC. |
4. |
Corporate Governance
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New chapter of ‘Corporate Governance and Disclosure requirements’ has been added in the revised framework. This will make CICs more responsible towards the governance issues in their business model since they need to disclose financial and non-financial parameters not only in their Annual Report but also need to disclose on their website. Further, compulsory appointment of Independent Directors and constitution of ACB/ NRC will bring in more transparency in the functioning of CICs. However, this will increase the cost of CICs to have Independent Directors on their board and have functional website particularly smaller CICs. Following recommendations are not accepted:
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5. |
Fit and Proper criteria of Director |
The RBI has mandated CIC to have a board approved policy on ‘fit and proper’ status of directors not only at the time of appointment but on continuous basis.Â
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In line with RBI NBFC Master Directions, the CIC shall abide by the ‘Fit and Proper’ Criteria while appointing any person as a director on its board and on continuous basis wherein proposed director has to undertake and provide every possible information in order to test the skills and other attributes of becoming a director of CIC. |
6. |
Risk Management |
The RBI has accepted the recommendations of the Committee with respect to risks associated with the CIC and accordingly, has made amendments in the Directions:
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In consistent with the RBI NBFC Master Directions, CIC having asset size of more than Rs. 50 Billion is required to appoint CRO who shall be senior officer in the CIC and must possess adequate qualifications in the area of risk management. CRO is expected to function independently who is required to report directly to the Managing Director & CEO or Risk Management Committee. Further, as recommended by the Committee, the parent CIC is required to constitute Group Risk Management Committee which will analyse the risks associated with the group companies, assess effective system in place to address risk management, etc. |
From the above table, it is clearly visible that all material recommendations of the Committee have been accepted by the RBI and made part of the principal CIC Master Directions. These new rules of the game will surely bring much required transparency and is expected to remove opaqueness in the operations of the CICs. With the change in calculation of ANW, the practise of generating excessive leverage ratio, through stepdown CICs in the group, adopted by many corporates will be curtailed. All registered CIC are now subject to corporate governance norms and on this front, CICs are equally treated as systemically important NBFCs. The complex group structure has now been streamlined by allowing only 2 CICs in the group. Since CIC has exposure to public funds in the nature of NCDs, Commercial Papers, Term Loans, etc from Banks/ other Financial Institutions for onward lending to group companies and these group companies in turn have varied risks associated with their businesses. Thus, the requirement is felt to constitute the group level Risk Management Committee to mitigate the risks connected with the borrower companies since the repayment, indirectly, has to be made by these borrowers through the liability to repay loan is that of CIC only. Besides this, the appointment of CRO in case of large CIC and Independent Directors will render the CIC to be more responsible towards any default or malpractices, if any adopted by the CIC. However, the time will tell the implication of these new changes in the CIC framework.