Working Group proposal for stricter vigilance on CICs

-By Anita Baid,

Regulators and stakeholders have been seeking a review of Core Investment Companies (CIC) guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important CIC. In August 2019, there were 63 CICs registered with the Reserve Bank of India (RBI). As on 31 March, 2019, the total asset size of the CICs was ₹2.63 trillion and they had approximately ₹87,048 crore of borrowings. The top five CICs consist of around 60% of the asset size and 69% borrowings of all the CICs taken together. The borrowing mix consists of debentures (55%), commercial papers (CPs) (16%), financial institutions (FIs) other corporates (16%) and bank borrowings (13%).

Considering the need of the hour, RBI had constituted a Working Group (WG) to Review Regulatory and Supervisory Framework for CICs, on July 03, 2019. The WG has submitted its report on November 06, 2019 seeking comments of stakeholders and members of the public.

Below is an analysis of the key recommendations and measures suggested by the WG to mitigate the related risks for the CICs:

Existing Provision & drawbacks Recommendation Our Analysis
Complex Group Structure
Section 186 (1) of Companies Act, 2013, which restricts the Group Structure to a maximum of two layers, is not applicable to NBFCs



The number of layers of CICs in a group should not exceed two, as in case of other companies under the Companies Act, which, inter alia, would facilitate simplification and transparency of group structures.

As such, any CIC within a group shall not make investment through more than a total of two layers of CICs, including itself.

For complying with this recommendation, RBI may give adequate time of say, two years, to the existing groups having CICs at multiple levels.

A single group may have further sub-division based on internal family arrangements- there is no restriction on horizontal expansion as such.

Further, the definition of the group must be clarified for the purpose of determining the restriction- whether definition of Group as provided under Companies Act 1956 (referred in the RBI Act) or under the Master Directions for CICs would be applicable.

To comply with the proposed recommendations, the timelines as well as suggested measures must also be recommended.

Multiple Gearing and Excessive Leveraging
Presently there is no restriction on the number of CICs that can exist in a group. Further, there is no
requirement of capital knock
off with respect to investments in other CICs. As a result, the step down CICs can use the capital for multiple leveraging. The effective leverage ratio can thus be higher than that allowed for regular NBFCs.
For Adjusted Net Worth (ANW) calculation, any capital contribution of the CIC to another step-down CIC (directly or indirectly) shall be deducted over and above the 10% of owned funds as applicable to other NBFCs.

Furthe, step-down CICs may not be permitted to invest in any other CIC.

Existing CICs may be given a glide path of 2 years to comply with this recommendation.

Certain business groups developed an element of multiple gearing as funds could be raised by the CICs and as well as by the step down CICs and the other group companies independently. At the Group level, it therefore led to over-leveraging in certain cases.

A graded approach, based on the asset size of the CICs, must have been adopted in respect of leverage, instead of a uniform restriction for all.

Build-up of high leverage and other risks at group level
There is no requirement to have in place any group level committee to articulate the risk appetite and identify the risks (including excessive leverage) at the Group level Every conglomerate having a CIC should have a Group Risk Management Committee (GRMC) which, inter alia, should be entrusted with the responsibilities of

(a)   identifying, monitoring and mitigating risks at the group level

(b)   periodically reviewing the risk management frameworks within the group and

(c)   articulating the leverage of the Group and monitoring the same.

Requirements with respect to constitution of the Committee (minimum number of independent directors, Chairperson to be independent director etc.), minimum number of meetings, quorum, etc. may be specified by the Reserve Bank through appropriate regulation.

There is no particular asset size specified. Appropriately, the requirement should extend to larger conglomerates.








Corporate Governance
Currently, Corporate Governance guidelines are not explicitly made applicable to CICs i.     At least one third of the Board should comprise of independent members if chairperson of the CIC is non-executive, otherwise at least half of the Board should comprise of independent members, in line with the stipulations in respect of listed entities. Further, to ensure independence of such directors, RBI may articulate appropriate requirements like fixing the tenure, non-beneficial relationship prior to appointment, during the period of engagement and after completion of tenure, making removal of independent directors subject to approval of RBI etc.

ii.   There should be an Audit Committee of the Board (ACB) to be chaired by an Independent Director (ID). The ACB should meet at least once a quarter. The ACB should inter-alia be mandated to have an oversight of CIC’s financial reporting process, policies and the disclosure of its financial information including the annual financial statements, review of all related party transactions which are materially significant (5% or more of its total assets), evaluation of internal financial controls and risk management systems, all aspects relating to internal and statutory auditors, whistle-blower mechanism etc. In addition, the audit committee of the CIC may also be required to review (i) the financial statements of subsidiaries, in particular, the investments made by such subsidiaries and (ii) the utilization of loans and/ or advances from/investment by CIC in any group entity exceeding rupees 100 crore or 10% of the asset size of the group entity whichever is lower.

iii.  A Nomination and Remuneration Committee (NRC) at the Board level should be constituted which would be responsible for policies relating to nomination (including fit and proper criteria) and remuneration of all Directors and Key Management Personnel (KMP) including formulation of detailed criteria for independence of a director, appointment and removal of director etc.

iv.  All CICs should prepare consolidated financial statements (CFS) of all group companies (in which CICs have investment exposure). CIC may be provided with a glide path of two years for preparing CFS. In order to strengthen governance at group level, if the auditor of the CIC is not the same as that of its group entities, the statutory auditor of CIC may be required to undertake a limited review of the audit of all the entities/ companies whose accounts are to be consolidated with the listed entity.

v.   All CICs registered with RBI should be subjected to internal audit.

vi.  While there is a need for the CIC’s representative to be on the boards of its subsidiaries / associates etc., as necessary, there is also a scope of conflict of interest in such situations. It is therefore recommended that a nominee of the CIC who is not an employee / executive director of the CIC may be appointed in the Board of the downstream unlisted entities by the respective CIC, where required.

The extent of applicability of NBFC-ND-SI regulations is not clear. The FAQs issued by RBI on CICs (Q12), state that CICs-ND-SI are not exempt from the Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and are only exempt from norms regarding submission of Statutory Auditor Certificate regarding continuance of business as NBFC, capital adequacy and concentration of credit / investments norms.

Further, no asset size has been prescribed – can be prescribed on “group basis”. That is, if group CICs together exceed a certain threshold, all CICs in the group should follow corporate governance guidelines, including the requirement for CFS.

Most of the CICs are private limited companies operating within a group, having an independent director on the board may not be favorable.

Further, carrying out and internal audit and preparing consolidated financials would enable the RBI to monitor even unregulated entities in the Group.

Currently, the requirement of
consolidation comes from the
Companies Act read along with
the applicable accounting
standards. Usually, consolidation
is required only where in case of
subsidiaries, associates and joint

However, if the recommendation
is accepted as is then even a
single rupee investment
exposure would require















Review of Exempt Category and Registration
Currently there is a threshold of ₹ 100 crore asset size and access to public funds for registration as CIC
  1. The current threshold of ₹ 100 crore asset size for registration as CIC may be retained. All CICs with public funds and asset size of ₹ 100 crore and above may continue to be registered with RBI. CICs without access to public fund need not register with the Reserve Bank.
  2. The nomenclature of ‘exempted’ CIC in all future communications / FAQs etc. published / issued by the Reserve Bank should be discontinued.
Since the category of ‘exempted CICs; were not monitored, there was no means to detect when a CIC has reached the threshold requiring registration.

This remains to be a concern.

 Enhancing off-site surveillance and on-site supervision over CICs
There is no prescription for submission of off-site returns or Statutory Auditors Certificate (SAC) for CICs Offsite returns may be designed by the RBI and prescribed for the CICs on the lines of other NBFCs. These returns may inter alia include periodic reporting (e.g. six monthly) of disclosures relating to leverage at the CIC and group level.

A CIC may also be required to disclose to RBI all events or information with respect to its subsidiaries which are material for the CIC.

Annual submission of Statutory Auditors Certificates may also be mandated. Onsite inspection of the CICs may be conducted periodically.

The reporting requirements may help in monitoring the activities of the CICs and developing a database on the structures of the conglomerates, of which, the CIC is a part. This may assist in identification of unregulated entities in the group.



Our other related write-ups:

Our write-ups relating to NBFCs can be viewed here:




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