Unlocking Investment Opportunities: The Role of Core Investment Company (NBFC)

Introduction

The RBI Act of 1934 defines Non-Banking Financial Companies (NBFCs) as financial institutions that are companies; non-banking institutions that are companies and whose primary activity is the receiving of deposits under any scheme or arrangement or in any other manner; or any other non-banking institution or class of such institutions, as designated by the RBI with prior approval from the Central Government. Cultivating, producing, purchasing, selling, or providing any form of a commodity (except securities); purchasing, building, or selling real estate, provided that these activities do not account for a portion of the income.?

“financial institution” refers to any non-banking organization that carries out any of the following financing activities: financing, which includes lending money or making advances; buying stocks, bonds, debentures, or other securities issued by the government; leasing or delivering goods to a hirer under a hire-purchase agreement; running an insurance company of any kind; acting as an agency for chits or queries; and raising money in line with a plan of arrangement through subscriptions.

Qualifications to Act as an NBFC?

According to RBI Press Release No. 99/1269, dated 8 April 1999, the most recent audited balance sheet’s income pattern and assets must be considered for determining a company’s principal business. A company will be categorized as an NBFC if it meets the 50-50 test:?

• The company’s financial assets make up more than half of its total assets after excluding intangible assets.?
• Financial assets account for more than half of total revenue.

Core Investment Companies (CICs)

It is an NBFC that functions within the share and securities acquisition industry and satisfies the following qualifications:?

• The company has at least 90% of the group businesses in which it invests 90% of its net assets;
• Investment in group company equity shares and InvITs (including any instrument that is mandatory convertible into equity shares within ten years of the date of issuance), with a minimum of sixty percent of net assets held as equity in group firms;
• Except for block transactions meant to dilute or disinvest, it does not exchange its group business holdings in bonds, shares, debentures, debt, or loans.

Framework for Regulations

1. Systemically important CIC: A CIC is deemed systemically significant if its assets exceed one hundred crore rupees and it qualifies for public support. It is legally required for these CICs to be registered with the RBI. It should be mentioned that the combined asset value of all CICs is considered when there are several CICs.

2. Principal Business: CICs must invest at least 90% of their net assets in group enterprises, with 60% going towards equity shares—which are held for a prolonged period as opposed to being traded. Net assets are the total assets less cash and bank balances, money market mutual fund investments, advance and deferred tax payments, and money market instrument holdings.

3. Capital Requirement: As of the end of the fiscal year and the most recent audited balance sheet date, a CIC’s adjusted net worth cannot be less than 30% of both its risk-adjusted value of off-balance sheet items and its total risk-weighted assets on the balance sheet.?

4. Leverage Ratio: The leverage ratio measures how much debt a business has relative to its net worth after adjustments. For CICs, the maximum leverage ratio allowed is 2.5:1.?

5. Asset Classification: Each CIC must categorize its assets, including lease/hire purchase assets, loans and advances, and any other forms of credit, into four groups: standard assets, sub-standard assets, doubtful assets, and loss assets.

Classification of Core Investment Company (CIC)

Two types of Core Investment Companies can be distinguished: Non-Systemically Important (NSI) and Systemically Important (SI) CIC-ND (SI).

1. Non-Systemically Important CIC (NSI): According to the most current audited balance statement, this CIC has assets under Rs. 100 crore and does not accept deposits.
2. A CIC (SI) of Systemically Importance: It can be deemed a CIC if it raises or retains public funds and if its total assets surpass Rs. 100 crore, either by itself or in conjunction with other CICs within the Group. The most current audited balance sheet serves as the basis for this.

An NBFC registration must be with the RBI in order for the business to operate. If they do not have a central bank Certificate of Registration, they are in violation of the Reserve Bank’s 2016 Core Investment Companies (Guidelines).

Exemption from Registration

• According to the Act, CICs with assets under Rs. 100 crore are exempt from registration requirements. One way to get the total asset value of a Core Investment Company is to add up the individual asset sizes of all the CICs in a given group.
• It is crucial to keep in mind that if these CICs have assets under Rs. 100 crore and wish to engage in the international financial sector, they must register with the RBI. Additionally, they must adhere to all rules and requirements relevant to registered CIC-ND-SIs. On the other hand, registration with the RBI is not necessary if a specific Core Investment Company is investing overseas in non-financial sectors.
• According to the Act, Core Investment Companies that have assets under Rs. 100 crore must apply for a certificate of registration no later than three months after the day their balance sheets surpass the Rs. 100 crore mark.

RBI Guidelines about CIC-ND-SI

The RBI has established the following fundamental requirements that the Core Investment Companies must meet:

• Keeping the required ratio of capital.
• Keeping track of the board’s investment strategy.
• The CIC will evaluate each investment against its cost or market value, whichever is less.
• The ICAI Accounting Standard applies to all long-term investments.
• For foreign investments, DNBS requires an annual certification from a statutory auditor.

For more information, visit us on: https://www.registerkaro.in/