Strengthening of the Core Investment Companies Regulatory Framework

The concept of a core investment company (CIC) was first introduced by the Reserve Bank of India (RBI) in the year 2010. While the RBI, at the time of introduction of this framework, clarified that companies investing in shares of other companies, even for the purpose of holding stake should be regarded as carrying on the business of non-banking financial institution; it specifically acknowledged that such class of non-banking financial institutions should be afforded a differential treatment. This led to the introduction of a differentiated framework for CICs; the crucial points of difference being substitution of CRAR (as applicable to NBFCs) with different capital requirements and exemption from the rules on investment and credit concentration.

The recent downfall of a prominent group helmed by a highly rated core investment company has brought the relatively lighter touch regulatory regime for CICs into sharp focus and a need was felt to strengthen the same; especially to tackle issues of over leveraging, complexity in group structures, governance and lack of rigorous regulatory supervision. In this the context the RBI had constituted a working group under the chairmanship of Mr. Tapan Ray, former secretary, Ministry of Corporate Affairs, Government of India (WG) to review the regulatory and supervisory framework for CICs. After considering the recommendations of the WG, the RBI, on August 13, 2020, modified the regulatory regime for CICs. Some of the key changes introduced are articulated below:

Capital Knock for direct and indirect CIC Investments

The capital requirement currently applicable to all systemically important CICs (CIC NDSI) is a requirement to ensure that its adjusted net worth is at least equal to 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items. Further, another key requirement for CIC NDSIs to comply with is the leverage ratio i.e. to ensure that its outside liabilities do not exceed 2.5 times its adjusted net worth.

With a view to address the risk of overleveraging by multiple CICs within a group, the RBI has introduced a requirement for a CIC to make a deduction of the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds 10% of owned funds of the investing CIC from its owned funds for computation of its adjusted net worth. Any such reduction would automatically impact computation of both the aforesaid capital requirement and leverage ratio. To the extent that investments, pre-dating the date of this circular, result in the aggregate investments made by a CIC in other CICs exceeding 10% of the owned funds, the RBI has offered a glide path until March 31, 2023.

While the rationale of the change is understood, it raises the following questions/ concerns:

> The method of arriving at the ‘indirect’ investment by one CIC into another for the capital knock is not fully articulated and may require further clarification. For example if a CIC invests a certain amount into a non-CIC company which in turn holds the shares of a CIC company it is unclear whether such investment would automatically be construed as an ‘indirect’ investment into a CIC or whether it is only to be so construed where there is a demonstrable back to back investment of the same funds into the step-down CIC.

> The universal application of the capital knock irrespective of whether the investing CIC made the investment into the step-down CIC using borrowed funds or equity/ internal accruals appears to be incongruous given that rationale for the introduction of the provision was only to prevent excessive leverage at multiple levels; which situation may not arise in case of investments being made out of the proceeds of equity or internal accruals of the investing CIC.

Limiting the number of layers of CIC within the group

With a view to address the complexity in group structures and existence of multiple CICs within a group, the circular restricts the number of layers of CICs within a group (including the parent CIC) to two, irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC. If a CIC makes any direct/ indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC. While this restriction has been made applicable from the date of the circular, existing entities have been provided time upto March 31, 2023 to reorganise their group structures and adhere to this guideline.

While the recommendation of the WG for inclusion of a provision capping layers drew inspiration from the Companies Act, 2013 and in particular the Companies (Restriction on Number of Layers) Rules, 2017, the meaning and scope of a ‘layer’ as articulated in the circular (any direct/ indirect investment by a CIC into another) is markedly different from the Companies Act, 2013, which confines layers to subsidiaries. Also, the exact methodology for computing the number of layers in widely spread group with multiple CICs is not fully articulated and a clarification from the regulator (through the issuance of FAQ or otherwise) would be helpful in this regard.

Introduction of risk monitoring requirements

The circular stipulates a requirement for 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, to constitute a group risk management committee (GRMC); which committee is to be chaired by an independent director and to have atleast two independent directors as members. The GRMC has been primarily tasked with undertaking risk management at the group level and is required to report to the board. In addition, all CICs with asset size of more than INR 5,000 crore are required to appoint chief risk officers with clearly specified roles and responsibilities.

CICs are also now required to submit to the board, a quarterly statement of deviation certified by the chief executive officer/ chief financial officer, indicating deviations in the use of proceeds of any funding obtained by the CIC from creditors and investors from the objects/ purpose stated in the application, sanction letter or offer document for such funding.

Corporate governance and disclosure requirements

CICs have now also been made subject to the requirements relating to ensuring the ‘fit and proper’ status of its directors; as are presently applicable to systemically important NBFCs, including, the requirement to put into place a board approved policy in this regard.

The circular also introduces a host of additional disclosure requirements for the CICs, which include disclosures required to be made on the website of the CIC and in its annual financial statements. Amongst other things, CICs are required to place on their website its corporate governance report and the management discussion and analysis covering, inter alia, the industry structure and developments, risks and concerns for the group and adequacy of internal controls.

Consolidated financial statements

The circular, in addition to reiterating the requirement for CICs to prepare consolidated financial statements as per provisions of Companies Act, 2013, also requires CICs to include disclosures in respect of entities that meet the definition of group as per RBI directions but are not required to otherwise be consolidated as per statutory provisions/ applicable accounting standards. In light of the broad definition of ‘companies in the group’[1] under the existing directions which also includes categories such a companies having a common brand name, this may require certain CICs to obtain and include information about various  entities which were not hitherto covered by its consolidated financial statements. This requirement will apply from the date of the circular and CICs will need to gear up by setting up the required protocols in advance with a view to preparation of their consolidated financial statements for financial year ending 2021.

Investment in money market instruments of maturity of up to 1 year

Under the pre-amendment CIC master directions, the exceptions for CIC from not carrying on any other financial activities inter alia included investments in money market instruments, including money market mutual funds and liquid mutual funds. The circular now allows CICs to 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. This is a welcome move which will provide greater flexibility to CICs to make treasury investments of its surplus funds until required for deployment for its core activities.

Changes in nomenclature

The circular states that a systemically important core investment company will henceforth be termed as a ‘CIC’ and an ‘exempted CIC’ will now be referred to as unregistered CICs.

Other Changes

The circular now requires the CICs to adhere to the guidelines on submission of data to credit information companies as are applicable to systemically important NBFCs and RBI’s circular dated March 13, 2020 on implementation of Indian accounting standards.

All in all, the new framework is a welcome move and will aid in fostering an environment of better corporate governance, monitoring and risk management for CICs. The enhanced compliance and disclosure requirements will however mean that existing CIC companies, especially those with lean teams, will need to put into place adequate operational machinery to comply with the framework on an ongoing basis. It would be helpful if the few ambiguities discussed above are expressly clarified by the regulator as that will bring much needed clarity to CICs in their efforts to re-align group structures and investments to adhere to the circular.

We do hope the above is helpful. Please do not hesitate to reach out to the authors, Gautam Ganjawala, Partner, ( and Lokesh Deshwal, Associate ( for any clarifications.


Gautam Ganjawala, Partner
Lokesh Deshwal, Associate


[1] “Companies in the Group” means an arrangement involving two or more entities related to each other through any of the following relationships, viz. Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997 for listed companies, a related party (defined in terms of AS 18) Common brand name, and investment in equity shares of 20% and above).

Published In:International Law Office
Date: February 16, 2021