Regulatory Framework of Core Investment Companies in India

As per the provisions of Section 45I of the Reserve Bank of India Act, 1934 (“RBI Act”), a company registered under the Companies Act, 1956/ Companies Act, 2013 which is engaged in the business of acquisition of shares/bonds/debentures/securities or other marketable securities like leasing, hire-purchase, insurance business, chit business, loans and advances is considered as a Non-Banking Financial Company (“NBFC”). Similarly, a company engaged in the business of receiving deposits under a scheme or arrangement of lump sum or instalments (by way of contributions or any other manner) is also included under the ambit of the NBFC. All the NBFCs are required to obtain Certificate of Registration (“CoR”) under Section 45-IA of RBI Act.
Mr. Pankaj Singla
Sr. Associate
+919971508320
pankaj@indiacp.com
The reason behind such requirement of obtaining CoR is to keep the financial activities of NBFCs under a check through disclosure requirements. However, the requirement of obtaining CoR and compliance with NBFC guidelines was considered to be unnecessary burden on companies that are mainly engaged in holding investments in their group companies.

Legal Framework of Core Investment Companies

Keeping in mind the nature of business of the companies which have their assets predominantly as investments in shares for holding stake in group companies1 and are not for trading purpose, and also do not carry on any other financial activity, are defined as Core Investment Companies (CICs). Accordingly, differential treatment in the regulatory prescription applicable to Non-Banking Financial Companies which are non-deposit taking is made available to CICs. CICs that are non-deposit taking and are not Systematically Important are exempted from the requirement of registration with the RBI applicable guidelines. As per Para 2 of RBI’s Master Circular on Regulatory Framework for Core Investment Companies, the CICs were not considered as carrying on the business of acquisition of shares and securities in the following cases:
  1. if not less than 90% of their net assets2 were in investments in shares for the purpose of 
  2. holding stake in the investee companies; with invest of at least 60% in equity shares;
  3. if they were not trading in these shares except for block sale (to dilute or divest holding);
  4. if they were not carrying on any other financial activities; and 
  5. if they were not holding / accepting public deposits.
The relevant provisions applicable to the CICs under The Core Investment Companies (Reserve Bank) Directions, 2011 have been reproduced herein below: 
“These directions shall apply to every Core Investment Company, that is to say, a non-banking financial company 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 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, granting of loans to group companies and issuing guarantees on behalf of group companies.”

Systematically Important Core Investment Company

As per the definition of systematically important core investment company (“CICs-ND-SI”) if a CIC satisfies both the conditions as follows it is required to get registered with RBI as CICs-NDSI. 
  1. The CIC has total assets of not less than 100 crore either individually or in aggregate along with other Core Investment Companies in the Group; AND
  2. The company raises and holds Public Funds.
Such CIC-ND-SI is required to obtain CoR under Section 45-IA of the RBI Act and be governed by the provisions of the RBI Act and the directions issued by the Reserve Bank from time to time.

Foreign Investment in CICs

Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies requires prior approval from the Government of India, regardless of the amount or extent of foreign investment. Since the CICs are engage in the activity of investing in the capital of their group companies, any foreign investment into a CIC is subject to prior approval from the Government of India.

This article has already published in "Indo-Japan Trade and Investment Bulletin, September 2014" which can be read below:


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