The Reserve Bank of India (“RBI”) has revised the guidelines for non-banking financial companies which are core investment companies (“CICs”) vide its notification dated August 13, 2020. The revised guidelines provide for stricter corporate governance and disclosure requirements and are based on the recommendations of the working group which was set up to review the regulatory and supervisory framework for CICs.
The key takeaways from the revised guidelines are as follows:
1. Definition of adjusted net worth (“ANW”): While computing ANW, the amount representing any direct or indirect capital contribution made by one CIC in another CIC shall be deducted, to the extent such amount exceeds 10% of the owned funds of the investing CIC. In cases where the investment by a CIC in another CIC already exceeds 10%, no such deduction shall be made for the computation of ANW till March 31, 2023.
2. Group Structure of CICs: To simplify complex group structures, the number of layers of CIC within a group, including the parent CIC, has been restricted to 2, irrespective of the extent of direct or indirect holding/control exercised by a CIC in the other CIC. Any direct/ indirect equity investment made by one CIC in another CIC shall be deemed as a layer for the investing CIC.
3. Risk Management: A Group Risk Management Committee (“GRMC”) shall be constituted by the parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group. The GRMC shall comprise a minimum of 5 members, including executive members and least 2 members shall be independent directors, 1 of whom shall be the chairperson of the GRMC. The members shall have adequate and commensurate experience in risk management practices.
The responsibilities of the GRMC shall include (a) analysing the material risks to which the group, its businesses and subsidiaries are exposed; (b) identifying potential intra-group conflicts of interest; (c) assessing whether there are effective systems in place to facilitate exchange of information for effective risk oversight of the group; (d) assessing whether the corporate governance framework addresses risk management across the group; (e) carrying out periodic independent formal review of the group structure and internal controls and (f) articulating the leverage of the group and monitoring the same.
All CICs with an asset size of more than Rs. 5,000 crore are required to appoint a chief risk officer with clearly specified role and responsibilities. A quarterly statement of deviation showing deviations in the use of proceeds of any funding obtained by the CIC has to be submitted to the board by the CIC and shall be certified by its chief executive officer or the chief financial officer.
4. Corporate Governance and Disclosure Requirements: The corporate governance requirements of CICs shall be as per the Companies Act, 2013. CICs shall implement a policy with the approval of the board for ascertaining the ‘fit and proper’ status of directors not only at the time of appointment, but also on a continuous basis.
The guidelines also provide detailed disclosure requirements which are applicable to NBFC-CICs.
5. Consolidation of Financial Statement: CICs are required to prepare consolidated financial statements of the group as a whole as per the Companies Act, 2013. The auditor of a CIC, as the ‘principal auditor’ shall use the work of other auditors with respect to the financial information of other respective entities.
6. Exceptions to carrying other financial activities: CICs can invest in money market instruments, including mutual funds which make investments in money market instruments/debt instruments with a maturity of up to 1 year.
7. Registration of CICs: CICs (a) with an asset size of less than Rs. 100 crore, irrespective of whether accessing public funds or not and (b) with an asset size of Rs. 100 crore and above and not accessing public funds, are not required to register with the RBI under Section 45IA of the RBI Act, 1934.
8. Change in nomenclature: A systemically important CIC, as defined in sub-paragraph (xxv) of paragraph 3 of the Core Investment Companies (Reserve Bank) Directions, 2016 shall be termed as a CIC. A CIC not requiring registration under point 7 above, shall be termed as an ‘unregistered CIC’ instead of an ‘exempted CIC’.
Please find a copy of the revised guidelines for core investment companies here.
This update has been contributed by Protiti Basu (Associate).
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