RBI Tightens Core Investment Company Rules: Key Definitions Revised

RBI/2010-11/360 DNBS (PD) CC.No. 206 /03.10.001/2010-11 January 5, 2011 All Core Investment Companies Dear Sir, Regulatory Framework for Core Investment Companies(CICs) The Bank had issued the captioned guidelines DNBS(PD)CC.No. 197/03.10.001/2010-11 dated August 12, 2010 to all Core Investment Companies (CICs) in terms of which CICs were defined and systemically important CICs (CICs-ND-SI) are required to be registered with RBI. It was also advised therein that all CICs-ND-SI should apply to RBI for obtaining CoR within a period of six months from the date of the Notification. In continuation of the above Guidelines, CICs are advised as follows. 2. The following definitions in the Guidelines have been modified as given below: a) “Adjusted net worth” means the aggregate, as appearing in the last audited balance sheet as at the end of the financial year, of Owned Funds as defined in Non Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007; i) as increased by :- 50% of the unrealized appreciation in the book value of quoted investments as at the date of the last audited balance sheet as at the end of the financial year (such appreciation being calculated, as the excess of the aggregate market value of such investments over the book value of such investments); and the increase if any, in the equity share capital since the date of the last audited balance sheet. ii) as reduced by :- the amount of diminution in the aggregate book value of quoted investments (such diminution being calculated as the excess of the book value of such investments over the aggregate market value of such investments ) and the reduction, if any, in the equity share capital since the date of the last audited balance sheet. Explanation: Investments, shall include investment in shares, stock, bonds, debentures or securities issued by the Government or local authority or other marketable securities of a like nature. b) Core Investment Company(CIC) means a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:- (i) it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies; (ii) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets Net assets, for the purpose of this provisio, would mean total assets excluding – (i)  cash and bank balances; (ii) investment in money market instruments and money market mutual funds (iii) advance payments of taxes; and (iv) deferred tax payment. (iii)it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; (iv) it does not carry on any other financial activity referred to in Section 45 I (c) and 45 I (f) of the Reserve Bank of India Act, 1934 except: a) investment in bank deposits, money market instruments, including money market mutual funds, government securities, and bonds or debentures issued by group companies; b) granting of loans to group companies; and c) issuing guarantees on behalf of group companies. c) Market value of quoted investments means the average of the weekly highs and lows of the closing price of the investments, on a recognized stock exchange where the investment is most actively traded, during the period of 26 weeks immediately preceding the end of the financial year at which date the last audited balance sheet is available. d) Outside liabilities means total liabilities as appearing on the liabilities side of the balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue but including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not. e) Systemically important core investment company means a Core Investment Company fulfilling both the following conditions: Having total assets of not less than Rs.100 crore, either individually or in aggregate along with other Core Investment Companies in the Group; Raises or holds public funds; Explanations: “Companies in the Group ”, shall mean an arrangement involving two or more entities related to each other through any of the following relationships : 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. “Public funds" shall include funds raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits and bank finance but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue. f) Total assets means the total of all assets appearing on the assets side of the balance sheet. 4. Notifications issued in this regard DNBS.PD.No.219/CGM (US)-2011 , DNBS.PD.No. 220/CGM (US)-2011 and DNBS. PD. No. 221 / CGM (US)-2011 dated January 5, 2011 are enclosed for meticulous compliance. To the extent the guidelines referred to in paragraph 1 above are inconsistent with these notifications, the directions contained in these notifications shall prevail. Yours sincerely, (Uma Subramaniam) Chief General Manager-in-Charge RESERVE BANK OF INDIA DEPARTMENT OF NON-BANKING SUPERVISION CENTRAL OFFICE CENTRE I, WORLD TRADE CENTRE, CUFFE PARADE, COLABA, MUMBAI 400 005 Notification No. DNBS. (PD) 219/CGM(US)-2011 dated January 5, 2011 The Reserve Bank of India having considered it necessary in the public interest and being satisfied that for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, it is necessary to give the directions set out below, hereby, in exercise of the powers conferred by sections 45JA, 45K, 45L and 45M of the Reserve Bank of India Act, 1934 (2 of 1934), and of all the powers enabling it in this behalf, hereby gives the directions hereinafter specified. PART I PRELIMINARY Short title and commencement of the directions (i) These directions shall be known as the Core Investment Companies (Reserve Bank) Directions, 2011. (ii) These directions shall come into force with immediate effect. Extent of the directions 2. These directions shall apply to every Core Investment Company, that is to say, a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:- (i) it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies; (ii) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (i) above; (iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; (iv) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the Reserve Bank of India Act, 1934 except a) investment in i) bank deposits, ii) money market instruments, including money market mutual funds iii) government securities, and iv) bonds or debentures issued by group companies, b) granting of loans to group companies and c) issuing guarantees on behalf of group companies. Definitions 3. (1) For the purpose of these directions, unless the context otherwise requires, - (a) “adjusted net worth” means – i) the aggregate, as appearing in the last audited balance sheet as at the end of the financial year, of Owned Funds as defined in Non Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007; ii) as increased by :- (A) 50% of the unrealized appreciation in the book value of quoted investments as at the date of the last audited balance sheet as at the end of the financial year (such appreciation being calculated, as the excess of the aggregate market value of such investments over the book value of such investments); and (B) the increase, if any, in the equity share capital since the date of the last audited balance sheet. iii) as reduced by :- (A) the amount of diminution in the aggregate book value of quoted investments (such diminution being calculated as the excess of the book value of such investments over the aggregate market value of such investments ) and (B) the reduction, if any, in the equity share capital since the date of the last audited balance sheet. (b) “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). (c) “investment” means investment in shares, stock, bonds, debentures or securities issued by the Government or local authority or other marketable securities of a like nature. (d) “market value of quoted investments” means the average of the weekly highs and lows of the closing price of the investments, on a recognized stock exchange where the investment is most actively traded, during the period of 26 weeks immediately preceding the end of the financial year at which date the last audited balance sheet is available. (e) “net assets” means total assets excluding – (i) cash and bank balances; (ii) investment in money market instruments and money market mutual funds (iii) advance payments of taxes; and (iv) deferred tax payment. (f) “outside liabilities” means total liabilities as appearing on the liabilities side of the balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issuebut including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not. (g) “ Public funds" includes funds raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits and bank finance but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue. (h) “systemically important core investment company” means a Core Investment Company having total assets of not less than Rs.100 crore either individually or in aggregate along with other Core Investment Companies in the Group and which raises or holds public funds. (i) “total assets” means the total of all assets appearing on the assets side of the balance sheet. PART II REGULATORY FRAMEWORK Registration 4. (1) Every Systemically Important Core Investment Company (CIC-ND-SI) shall, within a period of six months from the date of this Notification, apply to the Reserve Bank of India for grant of Certificate of Registration, irrespective of any advise in the past, issued by the Reserve Bank of India, to the contrary. (2) A CIC-ND-SI which applies for grant of Certificate of Registration to the Reserve Bank of India within the said period of six months shall be entitled to continue to carry on its existing businesses as Core Investment Company, till the disposal of its application by Reserve Bank of India. (3) Every Core Investment Company shall apply to the Reserve Bank of India for grant of Certificate of Registration within a period of three months from the date of becoming a CIC-ND-SI. Capital Requirements 5. Adjusted Net Worth of a CIC-ND-SI shall at no point of time be less than 30% 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 as at the end of the financial year. Explanations On balance sheet assets (1) In these Directions, degrees of credit risk expressed as percentage weightages have been assigned to balance sheet assets. Hence, the value of each asset / item requires to be multiplied by the relevant risk weights to arrive at risk adjusted value of assets. The aggregate shall be taken into account for reckoning the minimum capital ratio. The risk weighted asset shall be calculated as the weighted aggregate of funded items as detailed hereunder: Weighted risk assets - On-Balance Sheet items

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2010-11/360 · issued 05 Jan 2011. The plain-English explanation above is BankPulse’s own independent summary.

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