Securitisation- Should India be moving to the next stage of development?

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Marketplace lending: Legal issues around “true lender” and “valid when made” doctrines

-Vinod Kothari (vinod@vinodkothari.com)

 

Marketplace lending, P2P lending, or Fintech credit, has been growing fast in many countries, including the USA. It is estimated to have reached about $ 24 billion in 2019[1] in the USA.

However, there are some interesting legal issues that seem to be arising.  The issues seem to be emanating from the fact that P2P platforms essentially do pairing of borrowers and lenders. In the US practice, it is also commonplace to find an intermediary bank that houses the loans for a few days, before the loan is taken up by the “peer” or crowd-sourced lender.

USA, like many other countries, has usury laws. However, usury laws are not applicable in case of banks. This comes from sec 85 of National Bank Act, and sec. 27 (a) of the Federal Deposit Insurance Act.

In P2P structure, the loan on the platform may first have been originated by a bank, and then assigned to the buyer. If the loan carries an interest rate, which is substantially high, and such high interest rate loan is taken by the “peer lender”, will it be in breach of the usury laws, assuming the rate of interest is excessive?

One of the examples of recent legal issues in this regard is Rent-Rite Superkegs West, Ltd., v. World Business Lenders, LLC, 2019 WL 2179688[2]. In this case, a loan of $ 50000 was made to a corporation by a local bank, at an interest rate of 120.86% pa. The loan-note was subsequently assigned to a finance company. Upon bankruptcy of the borrower, the bankruptcy court refused to declare the loan as usurious, based on a time-tested doctrine that has been prevailing in US courts over the years – called valid-when-granted doctrine.

Valid-when-granted doctrine

The valid-when-granted doctrine holds that if a loan is valid when it is originally granted, it cannot become invalid because of subsequent assignment. Several rulings in the past have supported this doctrine: e.g., Munn v. Comm’n Co., 15 Johns. 44, 55 (N.Y. Sup. Ct. 1818); Tuttle v. Clark, 4 Conn. 153, 157 (1822); Knights v. Putnam, 20 Mass. (3 Pick.) 184, 185 (1825)

However, there is a ruling that stands out, which is 2015 ruling of the Second Circuit court in Madden v. Midland Funding, LLC  (786 F.3d 246). In Madden, there was an assignment of a credit card debt to a non-banking entity, who charged interest higher than permitted by state law. The court held that the relaxation from interest rate restrictions applicable to the originating bank could not be claimed by the non-banking assignee.

The ruling in Madden was deployed in a recent [June 2019] class action suit against JP Morgan Chase/Capital One entities, where the plaintiffs, representing credit card holders, allege that buyers of the credit card receivables (under credit card receivables securitization) cannot charge interest higher than permitted in case of non-banking entities. Plaintiffs have relied upon the “true sale” nature of the transaction, and contend that once the receivables are sold, it is the assignee who needs to be answerable to the restrictions on rate of interest.

While these recent suits pose new challenges to consumer loan securitization as well as marketplace lending, it is felt that much depends on the entity that may be regarded as “true lender”. True lender is that the entity that took the position of predominant economic interest in the loan at the time of origination. Consider, however, the following situations:

  1. In a marketplace lending structure, a bank is providing a warehousing facility. The platform disburses the loan first from the bank’s facility, but soon goes to distribute the loan to the peer lenders. The bank exits as soon as the loan is taken by the peer lenders. Will it be possible to argue that the loan should be eligible for usurious loan carve-out applicable to a bank?
  2. Similarly, assume there is a co-lending structure, where a bank takes a portion of the loan, but a predominant portion is taken by a non-banking lender. Can the co-lenders contend to be out of the purview of interest rate limitations?
  3. Assume that a bank originates the loan, and by design, immediately after origination, assigns the loan to a non-banking entity. The assignee gets a fixed, reasonable rate of return, while the spread with the assignee’s return and the actual high interest rate paid by the borrower is swept by the originating bank.

Identity of the true lender becomes an intrigue in cases like this.

Securitization transactions stand on a different footing as compared to P2P programs. In case of securitization, the loan is originated with no explicit understanding that it will be securitized. There are customary seasoning and holding requirements when the loan is incubated on the balance sheet of the originator. At the time of securitization, whether the loan will get included in the securitization pool depends on whether the loan qualifies to be securitized, based on the selection criteria.

However, in case of most P2P programs, the intent of the platform is evidently to distribute the loan to peer-lenders. The facility from the bank is, at best, a bridging facility, to make it convenient for the platform to complete the disbursement without having to wait for the peer-lenders to take the portions of the loan.

US regulators are trying to nip the controversy, by a rule that Interest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment, or other transfer of the loan. This is coming from a proposed rule by FDIC /OCC in November, 2019[3].

However, the concerns about the true lender may still continue to engage judicial attention.

Usurious lending laws in other countries

Usurious lending, also known as extortionate credit, is recognised by responsible lending laws as well as insolvency/bankruptcy laws. In the context of consumer protection laws, usurious loans are not regarded as enforceable. In case of insolvency/bankruptcy, the insolvency professional has the right to seek avoidance of a usurious or extortionate credit transaction.

In either case, there are typically carve-outs for regulated financial sector entities. The underlying rationale is that the fairness of lending contracts may be ensured by respective financial sector regulator, who may be imposing fair lending standards, disclosure of true rate of interest, etc. Therefore, judicial intervention may not be required in such cases. However, the issue once again would be – is it justifiable that the carve-out available to regulated financial entities should be available to a P2P lender, where it is predesigned that the loan will get transferred out of the books of the originating financial sector entity?

Conclusion

P2P lending or fintech credit is the fastest growing part of non-banking financial intermediation, sometimes known as shadow banking. A lot of regulatory framework is designed keeping a tightly-regulated bank in mind. However, P2P is itself a case of moving out of banking regulation. Banking laws and regulations cannot be supplanted and applied in case of P2P lending.

Further research

We have been engaged in research in the P2P segment. Our report[4] on P2P market in India describes the basics of P2P lending structures in India and demonstrates development of P2P market in India.

Our other write-ups on P2P lending may also be referred:

 

 

 

[1] https://www.statista.com/outlook/338/109/marketplace-lending–consumer-/united-states#market-revenue

[2] https://www.docketbird.com/court-documents/Rent-Rite-Super-Kegs-West-LTD-v-World-Business-Lenders-LLC/Corrected-Written-Opinion-related-document-s-44-Written-Opinion-48-Order-Dismissing-Adversary-Proceeding/cob-1:2018-ap-01099-00049

[3] https://www.occ.gov/news-issuances/news-releases/2019/nr-occ-2019-132a.pdf

[4] http://vinodkothari.com/2017/10/india-peer-to-peer-lending-report/

RBI further extends relaxation on MHP & MRR requirements till 30th June 2020

Aiming to curb the situation of the current liquidity crisis in the NBFCs sector of the country, the Reserve Bank of India (RBI), once again, in a gap of 6 months has extended the relaxation to NBFCs with regards to the Minimum Holding Period (MHP) requirements originating on NBFCs.

As a quick recollection of the dispensations provided to the NBFCs vide the circular DNBR (PD)CC.No.95/03.10.001/2018-19 dated November 29, 2018[1] on “Relaxation on the guidelines to NBFCs on securitisation transactions”, the following were the key takeaways of the relaxations as covered in our previous write-up (please click here[2]).

  Loans assigned between 31St December, 2019- 30th June, 2020 Loans assigned after 30th June, 2020
MHP requirements for loans with original maturity less than 5 years Loans upto 2 years maturity – 3 months

Loans between 2-5 years – 6 months

Loans upto 2 years maturity – 3 months

Loans between 2-5 years – 6 months

MHP requirements for loans with original maturity of more than 5 years Repayments of atleast 6 monthly instalments or two quarterly instalments (as applicable)

If revised MRR requirements fulfilled – 6 months

If revised MRR requirements fulfilled – 12 months

Repayments of atleast 12 monthly installments or four quarterly instalments (as applicable)
MRR requirements for loans with original maturity of less than 5 years Loans with original maturity upto 2 years – 5%

Loans with original maturity more than 2 years -10%

Loans with original maturity upto 2 years – 5%

Loans with original maturity more than 2 years -10%

Bullet repayment loans / receivables- 10%

MRR requirements for loans with original maturity of more than 5 years If benefit of MHP requirements availed – 20%

If benefit of MHP requirements not availed – 10%

Loans with original maturity more than 2 years – 10%

Bullet repayment loans / receivables- 10%

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11422&Mode=0

[2] http://vinodkothari.com/2018/11/rbi-temporarily-relaxes-the-guidelines-on-securitisation-for-nbfcs/

RBI introduces another minimum details PPI

BACKGROUND

The Reserve Bank of India (RBI) has vide its notification[1] dated December 24, 2019, introduced a new kind of semi-closed Prepaid Instrument (PPI) which can only be loaded from a bank account and used for purchase of goods and services and not for funds transfer. This PPI has been introduced in furtherance of Statement on Developmental and Regulatory Policies[2] issued by the RBI. The following write-up intends to provide a brief understanding of the features of this instrument and carry out a comparative analysis of features of existing kinds of PPIs and the newly introduced PPI.

BASIC FEATURES

The features of the newly introduced PPIs has to be clearly communicated to the PPI holder by SMS / e-mail / post or by any other means at the time of issuance of the PPI / before the first loading of funds. Following shall be the features of the newly introduced PPI:

  • Issuer can be banks or non-banks.
  • The PPI shall be issued on obtaining minimum details, which shall include a mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’ or ‘officially valid document’ (OVD) listed in the KYC Direction.
  • The new PPI shall not require the issuer to carry out the Customer Due Diligence (CDD) process, as provided in the Master Direction – Know Your Customer (KYC) Direction (‘KYC Directions)[3].
  • The amount loaded in such PPIs during any month shall not exceed ₹ 10,000 and the total amount loaded during the financial year shall not exceed ₹ 1,20,000.
  • The amount outstanding at any point of time in such PPIs shall not exceed ₹ 10,000.
  • Issued as a card or in electronic form.
  • The PPIs shall be reloadable in nature. Reloading shall be from a bank account only.
  • Shall be used only for purchase of goods and services and not for funds transfer.
  • Holder shall have an option to close the PPI at any time and the outstanding balance on the date of closure shall be allowed to be transferred ‘back to source.’

COMPARATIVE ANALYSIS

The Master Direction on Issuance and Operation of Prepaid Payment Instruments[4] contain provisions for two other kinds of semi-closed PPIs having transaction limit of ₹10,000. The features of these PPIs seem largely similar. However, there are certain differences as shown in the following table:

 

Basis PPIs upto ₹ 10,000/- by accepting minimum details of the PPI holder

(Type 1)

PPIs upto ₹ 1,00,000/- after completing KYC of the PPI holder 

(Type 2)

PPIs upto ₹ 10,000/- with loading only from bank account

(Type 3)

Issuer Banks and non-banks Banks and non-banks Banks and non-banks
PPI holder identification procedure Based on minimum details (mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the officially valid document (OVD) as per PML Rules 2005[5]) KYC procedure as provided in KYC Directions Based on minimum details (mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’[6] or OVD as per KYC Directions[7]
Reloading Allowed Allowed Allowed (only from a bank account)
Form Electronic Electronic Card or electronic
Limit on outstanding balance ₹ 10,000 ₹ 1,00,000 ₹ 10,000
Limit on reloading ₹ 10,000 per month and ₹ 1,00,000 in the entire financial year Within the overall PPI limit ₹ 10,000 per month and ₹ 1,20,000 during a financial year
Transaction limits ₹ 10,000 per month ₹ 1,00,000 per month in case of pre-registered beneficiaries and  ₹ 10,000 per month in all other cases ₹ 10,000 per month
Utilisation of amount Purchase of goods and services Purchase of goods and services and transfer to his bank account or ‘back to source’ Purchase of goods and services
Conversion Compulsorily be converted into Type 2 PPIs (KYC compliant) within 24 months from the date of issue No provisions for conversion Type 1 PPIs maybe converted to Type 3, if desired by the holder
Restriction on issuance to single person Cannot be issued to same person using the same mobile number and same minimum details more than once No such provision No such provision
Closure of PPI Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ or to other PPIs of the holder Holder to have option to close and transfer the outstanding balance ‘back to source’ (i.e. the bank account of the holder only)
Pre-registered Beneficiary Facility not available Facility available Facility not available

THE UPPER HAND

Based on the aforesaid comparative analysis, it is clear that for issuance of the newly introduced PPI or the Type 3 PPI, the issuer is not required to undertake the CDD process as provided in the KYC Directions. Only authentication through mobile number and OTP supplemented with a self-declaration regarding of details provided in the OVD shall suffice. This implies that the issuer shall not be required to “Originally See and Verify” the KYC documents submitted by the customer. This would result into digitisation of the entire transaction process and cost efficiency for the issuer.

Compared to the other 2 kinds of PPIs, one which requires carrying out of the KYC process prescribed in the KYC Directions and the other, which can be issued without carrying out the prescribed KYC process but has to be converted into Type 2 PPI within 24 months, this new PPI can be a good shot aiming at ease of business and digital payments upto a certain transaction limit.

CONCLUSION

The newly issued PPI will ensure seamless flow of the transaction. As compared to other PPIs, it will be easier to obtain such PPIs. Further, the limitations such as reloading only from the bank account, restriction of transfer of money from PPI etc. are some factors that shall regulate the usage of such PPIs. These may, however, pull back their acceptance in the digital payments space.

 

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11766&Mode=0

[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48803

[3] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11566

[4] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

[5] “officially valid document” means the passport, the driving licence, the Permanent Account Number (PAN) Card, the Voter’s Identity Card issued by the Election Commission of India or any other document as may be required by the banking company, or financial institution or intermediary

[6] Permanent Account Number (PAN)

[7] “Officially Valid Document” (OVD) means the passport, the driving licence, proof of possession of Aadhaar number, the Voter’s Identity Card issued by the Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government and letter issued by the National Population Register containing details of name and address.

 

Our other write-ups relating to PPIs can be viewed here:

 

Our other resources can be referred to here:

 

 

 

FAQs on Fraud Reporting

Team Corplaw & Finserv | corplaw@vinodkothari.com, finserv@vinodkothari.com

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RBI revises qualifying assets criteria for NBFC MFIs

Team, Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

The RBI on November 08, 2019[1] revised the limits relating to the qualifying assets criteria, giving a much needed boost to Micro-Finance Institutions. The change in limits comes pursuant to the Statement on Developmental and Regulatory Policies[2] issued as part of the Monetary Policy Statement dated 04 October, 2019.

A detailed regulatory framework for MFI’s was put into place in December, 2011 based on the recommendations of a Sub-Committee of the Central Board of the Reserve Bank. The regulatory framework prescribes that an NBFC MFI means a non-deposit taking NBFC that fulfils the following conditions:

  • Minimum Net Owned Funds of Rs. 5 Crore.
  • Not less than 85% of its net assets are in the nature of qualifying assets.

Thus meeting the qualifying assets criteria is crucial to be classified as an NBFC-MFI. The income and loan limits to classify an exposure as an eligible asset were last revised in 2015.

In light of the above and taking into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid and to enable them to play their assigned role in a growing economy, it was decided to increase and review the limits.

Revised Qualifying assets criteria

The changes are highlighted in the table below:

Qualifying Assets Criteria
Erstwhile Criteria Revised Criteria
Qualifying assets shall mean a loan which satisfies the following criteria:
  i.       Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;    i.      Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,25,000 or urban and semi-urban household income not exceeding ₹ 2,00,000;
ii.       Loan amount does not exceed ₹ 60,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;  ii.      Loan amount does not exceed ₹ 75,000 in the first cycle and ₹ 1,25,000 in subsequent cycles;
iii.       Total indebtedness of the borrower does not exceed ₹ 1,00,000; iii.      Total indebtedness of the borrower does not exceed ₹ 1,25,000;
Note: All other terms and conditions specified under the master directions shall remain unchanged.

The Statement on Developmental and Regulatory Policies called for revisions in the household income and loan limits only. The notification of the RBI additionally, in light of the change in total indebtedness of the borrower, felt it necessary to also increase the limits on disbursal of loans.

The revised limits are effective from the date of the circular, i. e. November 08, 2019.

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11727&Mode=0

[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48318

Links of related articles:

Working Group proposal for stricter vigilance on CICs

-By Anita Baid

anita@vinodkothari.com, finserv@vinodkothari.com

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
ventures.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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: http://vinodkothari.com/nbfcs/