58082788 kpmg flash news draft guidelines for core investment companies

7/24/2019 58082788 KPMG Flash News Draft Guidelines for Core Investment Companies

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KPMG IN INDIA

KPMG Flash News23 April 2010

TAX

RBI brings Core Investment Companies under its regulatory framework releases draft guidelines

Background

Under the extant regulations governing Non-Banking Financial Companies (NBFC), a company having its

principal business as acquisition of shares/ stocks/ bonds/ debentures is required to obtain registration with

the Reserve Bank of India (RBI) and comply with certain conditions. Further, non-deposit taking NBFCs

with an asset size of INR 100 crore and more as per the last audited balance sheet are classified as

systemically important (NBFC-ND-SI) and are required to comply with stringent capital adequacy and

credit concentration norms.

In the past, holding companies having stake in shares/ debentures etc. of other companies for the purpose

of investment, took a view that they are not carrying on business but merely holding such securities as

investments and therefore, are not required to be registered with RBI as NBFC. In some cases, pure

holding companies approached RBI to seek exemption from NBFC registration and such cases were

considered by RBI on a case-by-case basis.

Proposed Regulatory Framework

In line with Monetary Policy Statement for FY 2010-11, RBI has issued Draft Guidelines for Core

Investment Companies1(CICs) i.e. companies which have their assets predominantly as investments in

shares, not for tradingbut for holding stakes in group companies. In view of systemic implications of

access to public funds2by CICs, RBI has decided to bring CICs under its regulatory framework and

proposed that all CICs having an asset size of INR100 crore or more will be required to obtain Certificate

of Registration from RBI, even if they have been advised in the past that registration is not required.

Thus, holding companies of financial conglomerates, infrastructure groups and other industry groups are

likely to fall within the purview of CIC regulations and may be required to obtain registration with RBI.

The draft guidelines have been placed on RBI's website for public comments.

The following regulatory framework has been prescribed for CICs:

1DNBS (PD) CC.No. / 03.10.001/2009-10 dated 21 April, 20102Public funds are defined as funds raised either directly or indirectly through public deposits, Commercial Paper, debentures,

inter-corporate deposits, bank finance and other borrowings.

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member f irms affiliated with

KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

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Particulars CIC

(Asset size less than INR100 crore)

Systemically Important CIC

(CICs-ND-SI)

(Asset size of INR100 crore or more)

Registration requirements

Registration with

RBI

Not required Required (irrespective of whether they

were specifically exempted in the pastfrom registration with the RBI or not)

Time limit for

obtaining RBI

registration

Not Applicable - Existing CICs-ND-SI: Within six

months from date of the

Notification. CICs-ND-SI can

continue existing business till

disposal of their application by the

RBI.

- CICs whose asset size would cross

INR100 crores at a later date:

Within three months of crossing the

asset limit

Consequences of

non-registration

Not Applicable Will be regarded as contravening the

provisions of Section 45IA of the RBI

Act, 1934

Conditions

Investments 90 per cent of their total assets are in

investments in shares of investee

companies for holding stake in the

said investee companies

- 90 per cent of the total assets are

investments in equity, debt, or loans

in group companies

and-

Investment in equity shares of

group companies for holding stake

in these companies is not less than

60 per cent of total assets.

Embargo on trading

in shares

Cannot trade in shares except for

block sale to dilute or divest the

holding

Cannot trade in shares except for block

sale to dilute or divest the holding

Accepting or

holding Public

Deposits

Barred from accepting or holding

Public Deposits

Barred from accepting or holding

Public Deposits

Carrying out other

Financial Activities

Cannot carry on any other financial

activities3except investments in bank

deposits, Govt. securities, loans to

and investments in debt issuances of

group companies, or guarantees

Cannot carry on any other financial

activities3except investments in bank

deposits, Govt. securities, loans to and

investments in debt issuances of group

companies, or guarantees issued on

3Financial activities referred to in Section 45 I (c) and 45 I(f) of the RBI Act, 1934

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Particulars CIC Systemically Important CIC

(Asset size less than INR100 crore) (CICs-ND-SI)


issued on behalf of group companies behalf of group companies

Capital requirement Not Applicable Ongoing maintenance of a minimum

Capital Ratio whereby its Adjusted Net

Worth4

(ANW) shall be at least 30percent of its aggregate risk weighted

assets on balance sheet and risk

adjusted value of off balance sheet

items as on the date of the last audited

balance sheet.

Outside liabilities5shall not exceed 2.5

times of its ANW calculated as on the

date of the last audited balance sheet

Leverage ratio Not Applicable

Exemption from :

(i) maintenance ofstatutory minimum

Net Owned Fund

(NOF); and

(ii) requirements of

Non-Banking

Financial (Non-

Deposit Accepting or

Holding) Companies

Prudential Norms

(Reserve Bank)

Directions, 2007including

requirements of

capital adequacy

and exposure norms

Not Applicable Exemption available provided all above

conditions are complied with6

.CICs-ND-SI which do not meet the

above conditions may approach RBIs

Regional Office in whose jurisdiction

they are registered, with an action plan

for compliance with these conditions, in

order to avail the exemption. RBI may

examine the action plan of such CICs-

ND-SI and impose such conditions and

restrictions as it deems fit.

Submission of

statutory auditors

certificate for

Not Applicable Annually

4Adjusted Net Worth have been defined in Draft regulations as Owned Fund + 50 percent of Revaluation reserve arising from

valuation of shares (if any) as per latest audited Balance sheet + 50 percent appreciation in the book value of quoted investment (-

)diminution in the aggregate book value of quoted investments as per latest audited Balance sheet.

5 Outside Liabilities means total liabilities other than paid up capital and reserves but including bank borrowings, all forms of

debt, obligations having characteristics of debt whether created by issue of hybrid instruments or otherwise, and value of

guarantees issued.

6It may be interesting to note while the extant NBFC regulations provided that exemption from expsoure norms is available only

if public funds have not been accessed by the NBFC, this condition is relaxed under the Draft CIC Guidelines. Thus, CICs are

exempted from exposure norms, even when public funds are accessed.




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Particulars CIC

(Asset size less than INR100 crore)

Systemically Important CIC

(CICs-ND-SI)


compliance with the

guidelines

Our Comments

Hitherto, there was uncertainty whether holding companies are governed by NBFC regulations. The Draft

CIC Guidelines provide a framework for supervision/ regulation of holding companies in India. Further,

exemption from extant NOF requirements and exposure norms applicable to NBFCs would support the

peculiar business model of CICs viz: holding stake in group companies. However, there are some areas

which require clarity from RBI before the final guidelines are issued:

CICs have not been specifically defined in the Draft CIC Guidelines. It is not clear whether holding-

cum-operating companies, which do not fall within the definition of NBFC because they do not satisfy

the 50:50 financial asset/ income criteria7, are governed by the Draft CIC Guidelines.

While granting exemption to CICs having asset size of less than INR 100 crore, the qualifying criteria

is 90 percent investment in shares of investee companies. However, in respect of CICs-ND-SI, the

qualifying criteria is 90 percent investment in equity/ debt/ loan in group companies.

The objective of RBI appears to regulate only CICs-ND-SI primarily holding stake in investee

companies. Thus, holding companies with asset size of INR 100 crore or more and investing in non-

group companies may continue to subject to NOF requirements and exposure norms under the NBFC

regulations.

7RBI has clarified that a company will be treated as an NBFC if its financial assets are more than 50 percent of its total assets

(netted off by intangible assets) and income from financial assets is more than 50 percent of the gross income. Both these tests are

required to be satisfied as the determinant factor for principal business of a company (Press Release dated April 8, 1999)


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in.kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of

any particular individual or entity. Although we endeavour to provide accurate and timely information, there

can be no guarantee that such information is accurate as of the date it is received or that it will continue to

be accurate in the future. No one should act on such information without appropriate professional advice

after a thorough examination of the particular situation.

2010 KPMG, an Indian Partnership and a member firm

of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (KPMG

International), a Swiss entity. All rights reserved.

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58082788 kpmg flash news draft guidelines for core investment companies

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