Core Investment Company
Core Investment Companies (CICs) are specialized Non-Banking Financial Companies that need to undergo NBFC registration with the RBI. These CICs, which have an asset size of ₹100 crore and above, carry on the business of acquisition of shares and securities, subject to certain conditions.
CICs, which do not hold less than 90% of their net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies, are permitted to accept public funds.
Core Investment Companies are limited companies that hold equity shares, and also preference shares or debentures in other group companies. Very often these companies are primarily establishing as group businesses and they control the subsidiaries through holding majority shareholding.
A group company is an arrangement which involves two or more entities related to each other through any of these relationships- joint venture, subsidiary, associate, a related party, promoter-promotee for listed companies, common brand name, and investment in equity shares of 20% and above.
In other words, a Core Investment Company (CIC) is essentially a company which holds the stake in the group companies without practically being involved in its trading. A core investment company is also defined by the Reserve Bank of India as a Non-Banking Financial Company and therefore, needs NBFC registration.
Exemption: The CICs that have an asset size of below Rs 100 crore do not need NBFC registration and therefore not bound by the regulations from the RBI, but they would have to apply for NBFC registration in case they wish to make overseas investments in the financial sector.
Further, all Core Investment Companies that have an asset size of less than Rs. 100 crore are required to apply for NBFC registration, within a period of 3 months, from the date of achieving Rs. 100 crore in the balance sheet.
Classification of Core Investment Company/CIC
Core Investment Company can be classified into two categories: CIC-ND- Non Systemically Important (NSI) and CIC-ND- Systemically Important (SI).
- Non-Systemically Important CIC (NSI): It is a non-deposit taking CIC which has an asset size of less than Rs. 100 crore according to the last audited balance sheet.
- A Systemically Important CIC (SI): It is a CIC that has total assets of Rs. 100 crore or more whether individually or collectively along with other CICs in the Group according to the last audited balance sheet, and holds or raises public funds.
It is mandatory for such a company, to avail NBFC registration with the RBI and if they operate without obtaining a Certificate of Registration from the apex bank; they would be violating the Core Investment Companies (Reserve Bank) Directions, 2016.
In the general course even though public funds include public deposits it is worth noticing that CICs cannot accept public deposits and it may be noted that no NBFC, even after NBFC registration, is permitted to accept public deposits without specific permission of the RBI.
Directions for the purpose of Public deposits shall have the same meaning as defined in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
Thus, let us examine what “Public funds” include. Public funds are those funds that are raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures etc. At the same time the public funds exclude funds that are raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.
CICs are permitted to make investments in money market instruments, including money market mutual funds and as Liquid Funds also fall in the category of mutual funds the CICs are permitted to invest their surplus funds in Liquid Fund Schemes.
What do Net Assets mean?
Net asset refers to the total assets as appearing on the assets side of the balance sheet but excluding:
- cash and bank balances;
- investment in money market instruments;
- advance payments of taxes; and
- deferred tax asset.
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Prerequisites for Registering a Core Investment Company
Every Company which wants a certificate of CIC should apply for systemically important Core Investment Company (CIC-ND- SI). For registration as a CIC, the company must satisfy the below conditions as on the date of last audited balance sheet:
- Company should hold at least 90% of its net assets, in the form of preference shares, bonds, debentures, investment in equity shares, debt or loans in group companies.
- Its investment in the equity shares in group companies is at least 60% of its net assets.
- It does not trade in its investments in bonds, debentures, shares, debt or loans in group companies except by block sale for dilution or disinvestment.
- It carries out the financial activity according to the Section 45-I(c) and 45-I(f) of the RBI Act, 1934 except investment in
One could download the relevant application form for CICs-ND- SI from the website of the RBI, the application should be filed in and submitted to the Regional Office of the DNBS in whose jurisdiction the Company is registered along with required supporting documents as mentioned in the application form.
The application form for Core Investment Companies (CICs) has been redesigned with two checklists of documents. However, the checklists are indicative and not exhaustive.
If necessary, the RBI can call for other documents on the eligibility for getting registration as CIC. In case the Bank calls for further documents, the applicant company is required to respond within 30 days failing which the original CoR application may be returned to the company for fresh submission along with the required information/documents.
Capital Requirements for CIC-ND-SI
A minimum Capital Ratio has to be maintained at all times by CIC-ND-SI whereby on the date of the last audited balance sheet as at the end of the financial year its Adjusted Net Worth shall not be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items.
Adjusted net worth can be explained as the aggregate of Owned Funds as defined in Non Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and 45% of the amount standing to credit of Revaluation Reserve arising from revaluation of investments in quoted investments, if any,
- i) increased by:-
- 50% of the unrealized appreciation in the book value of quoted investments as at the date of the last audited balance sheet as at the end of the financial year; and
- the increase if any, in the equity share capital since the date of the last audited balance sheet.
- ii) reduced by:-
- the amount of diminution in the aggregate book value of quoted investments; and the reduction, if any, in the equity share capital since the date of the last audited balance sheet.
Market Value of Quoted Investments means: It refers to the average of the highs and lows of the quoted prices of the investments, on a recognized stock exchange where the investment is most actively traded, during the period of 26 weeks immediately preceding the end of the financial year.
Leverage Ratio: Every CIC-ND-SI has to ensure that its outside liabilities shall not exceed 2.5 times of its Adjusted Net Worth at any time and as on the date of the last audited balance sheet at the end of the financial year.
Outside Liabilities: The term stands for total liabilities that appears on the liabilities side of the balance sheet 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 but excluding ‘paid up capital’ and ‘reserves and surplus’.
No CIC-ND-SI Shall Lend Against Its Own Shares
CICs are prohibited to be partners in partnership firms including Limited Liability Partnerships (LLPs) or having any association with entities similar in nature to partnership firms and also barred from contributing capital to any partnership firm.
Those CICs that intend investing in a joint venture or subsidiary or even a representative office overseas in the financial sector need to take prior approval from the RBI.
Other CICs who are desirous of making overseas investment in the financial sector are required to seek a Certificate of Registration (CoR) from the Apex Bank and beyond that are bound to comply with all the regulations that are applicable to CIC-ND-SI.
CICs that are presently exempted from the regulatory framework of the Bank (exempted CICs), shall be required to be registered with the Bank and shall be regulated like CICs-ND-SI, where they intend to make overseas investment in the financial sector.
Further, a CIC-ND-SI need not obtain prior approval from the Department of Non-Banking Supervision (DNBS), RBI, for overseas investment in the non-financial sector. However it shall report to the Regional Office of DNBS where it is registered within 30 days of such investment in the stipulated format and at the prescribed periodicity.
Those CICs that possess an asset size of below Rs 100 crore are exempt from NBFC registration and regulation from the RBI. In case such CICs wish to make overseas investments in the financial sector then it is mandatory for them to seek NBFC registration and comply with all the rules and regulations.
Here it is pertinent to note that the exempted CICs which intend making overseas investment in the non-financial sector do not require registration from the RBI. Although these CICs are exempted from registration requirements with the Apex Bank but they are required to pass a Board Resolution stating that it will not, in the future, access public funds. However, such entities may be required to issue guarantees or take on other contingent liabilities on behalf of their groups.
Before doing so, all CICs must ensure that they can meet the obligations there under, as and when they arise.
RBI Rules for CIC-ND-SI
- Mandatory registration with the RBI
- Maintaining a minimum capital ratio
- Maintaining records of investment policies by the board
- Investments should be diversified into long term and current
- Any quoted investment by the CIC shall be considered on the market value or cost whatever sums to be lower
- For any long term investment standards would be followed as stated in ICAI Accounting Standards
- Overseas investments are limited to a value of 400% of CIC’s owned funds
- Statutory Auditors annual certification is to be procured necessarily and submitted to DNBS for overseas investments
FAQ’s on Core Investment Company
- What is the meaning of the term ‘Group Companies’?
It means an arrangement involving two or more entities related to each other through relationships including those of a related party, joint venture, associate, promoter-promotee, and subsidiary – parent.
- How is ‘The 100 crore limit’ determined?
It is determined by aggregating the total assets of all CICs in the group.
- How do you define ‘Net Assets’?
Net Assets mean total assets excluding cash and bank balances, investment in money market instruments and mutual funds, Advance tax payments; and deferred tax payment.
- What all do you include in ‘Public funds’?
Public Funds include funds raised through public deposits, debentures, commercial papers, inter-corporate deposits and bank finance.
- Does a CIC with net assets worth less than 100cr need to register with the RBI?
The RBI has exempted the CICs with net assets worth less than 100 crore from registration although if such companies are interested in investment overseas they do need to file registration.
- What if a NSI CIC crosses its net worth of 100 crore?
If a NSI CIC crosses its net worth of 100 crore then it becomes mandatory for it to notify the regional office of NBFC and change its status compulsorily.
- How is the net asset of a CIC calculated?
Net asset worth of a CIC is the total of any value reflected in its balance sheet of a financial year excluding advance tax payments, taxes incurred, cash, and investment by the company in mutual funds, and money market instruments.
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