Introduction Investment / holding companies (SPVs) are often used in structuring transactions for manifold reasons, a few being tax efficiencies, concentration of investment, retaining management control, etc. A key consideration while exploring such structures is whether such SPVs may potentially qualify as a ‘non-banking financial company (NBFC)’ and/or a ‘core investment company (CIC)’, and therefore, be subject to additional regulatory supervision and compliances.

Simply put, an NBFC is a company, the principal business of which is providing limited bank-like financial services such as receiving deposits, lending, acquiring securities etc. The determinant factor for ‘principal business’ of an NBFC is commonly referred to as the 50-50 test – i.e., a company having financial assets more than 50% of its total assets, and generating income from financial assets which is more than 50% of its gross income (50-50 Test).

CICs, on the other hand, are companies which have their assets predominantly as investments in shares for holding stake in group companies. A company which meets the ‘90-60 test’ qualifies as a CIC – i.e., holds not less than 90% of its net assets as investment (in shares, bonds, debentures, debt or loans) in group companies, and has investments in equity shares (including convertible instruments) in group companies that constitutes not less than 60% of its net assets. Only CICs meeting certain thresholds are required to register as CICs with the RBI.

In this article we will analyse certain nuances and practical aspects that should be considered while structuring transactions through layer(s) of SPVs.

Whether the SPVs can be classified as NBFCs

Layering holdings onshore through SPVs can get tricky. Apart from layering restrictions under the Companies Act, 2013 (which applies only to non-systemically important NBFCs), one must be mindful of staying clear of the 50-50 Test and thereby being classified as an NBFC. In recent times we have seen several instances where holdings of promotors and investors are consolidated in an SPV which in turn has investments in operating downstream companies. The question that arises is whether all such SPVs are NBFCs (perhaps CICs) on account of being holding companies.

To answer this question, it becomes crucial to determine the ‘principal business’ of the SPV. There is some guidance on this from RBI in the form of a press release – which has essentially referred back to the 50-50 asset-income pattern criteria, both of which have to be satisfied as per the last audited annual accounts of the concerned SPV, in order to be classified as an NBFC. Courts and tribunals have also ruled (in varied contexts) that the test is to determine the real, substantial and systematic activity conducted by an entity. Therefore, SPVs in holding company structures typically stay clear of engaging in lending and investing as their main or ‘principal’ activity and meeting both prongs of the 50-50 test (i.e., assets and income). Typically, SPVs engage in rendering backend support service to operating entities, housing brands and intellectual properties, owning assets and real estate (such as warehouses) and infrastructure projects (such as captive units), providing consultation services, and the like, to ensure that controversies around principal activity do not arise. 

Are all CICs necessarily NBFCs?

A question that remains a matter of debate is whether all CICs are necessarily NBFCs. One view is that the regulatory framework for CICs has been drafted with the underlying assumption that CICs are NBFCs to begin with. This is evident from the definition of CICs in the master direction issued by the Reserve Bank of India (RBI), which defines a CIC to mean a non-banking financial company which carries on the business of acquisition of securities and meets certain other identified criteria in relation to the investment size. However, at the same time, RBI in its FAQs on CICs has stated that CICs need not necessarily meet the 50-50 Test. Market precedents also indicate that most CICs today are companies operating as investment vehicles and engaged in non-financial sectors – in stark contradiction to the theory that all CICs are necessarily NBFCs.

Registration requirement

In the event the 50-50 Test is met, the SPV will have to get itself registered with the RBI as an NBFC before it commences business. A nuance to this is that, in case the balance sheet of the SPV reflects 90% of its net assets to be investments in ‘group companies’ (amongst other conditions) it will be considered as a CIC and will have to obtain a registration to that effect.

However, if such CIC has total assets of less than INR 1,000,000,000 (irrespective of whether it accesses public funds) or has total assets of INR 1,000,000,000 or more (and does not access public funds), it will not be required to get itself registered with the RBI as a CIC, even though it may otherwise meet the 50-50 Test. Strictly speaking, the requirement for such companies to register as an NBFC (despite not having to register as a CIC) is debatable.

Registration as an NBFC / CIC typically takes 4-6 months and once registered, hosts of compliances and other requirements become applicable to such SPV.

Other compliances

Apart from the requirement to make certain periodic filings, an NBFC is required to adhere to, amongst other things, stipulations as to capital adequacy, net owned fund and credit concentration norms.

For instance, an NBFC is required to have a minimum owned fund (i.e., equity capital, convertible preference capital, free reserves and securities premium account balance) of at least INR 20,000,000. Further, the leverage ratio of a non-deposit taking NBFC cannot exceed 7 times its owned funds. Additionally, the NBFC’s ‘Tier II Capital’ (i.e., non-convertible preference shares, debentures or other debt instruments) cannot exceed 100% of its ‘Tier I Capital’ (i.e., owned funds reduced by investments in shares of other NBFCs and investments in companies in the same group exceeding 10% of the owned funds).

There are additional restrictions in respect of investments and lending by systemically important NBFC, i.e., those NBFCs having an asset size of more than INR 5,000,000,000 (subject to certain exceptions). CICs on the other hand, are not subjected to arduous regulatory requirements applicable to NBFCs.

When it comes to CICs, it is important to note that not more than two layers of CICs (including the parent CIC) can form part of the same group. This restriction applies irrespective of the extent of direct or indirect holding by one CIC in another CIC in the group, deeming the latter as a layer for the investing CIC. While new CICs are required to comply with this requirement with immediate effect, existing groups have been given time until 31 March 2023 to reorganise their structures and comply with this requirement.

Structuring Considerations

Incorporation v acquisition

For structuring transactions through SPVs, parties have the option of either setting up a new SPV or acquiring an existing SPV. While acquiring an SPV may be a faster route, one has to be cognizant of the time required to be invested in undertaking a diligence of the target. Further, if the SPV is an NBFC / CIC, any change in its management or control pursuant to the acquisition will necessitate prior approval of the RBI. These factors aside, the decision on setting up an SPV versus acquiring one and the structure of the SPV may largely be driven by tax considerations.

Transactional considerations

For foreign investors, in case the SPV is not a registered NBFC / CIC (or is specifically exempt from registration with the RBI), but undertakes financial services activity, permission of the Department of Economic Affairs (DEA) will have to be obtained prior to foreign investment into the SPV. Additionally, DEA approval would also be triggered for any foreign investment in a CIC or an SPV which is an investment company (i.e., a company holding only investments in other Indian entities directly or indirectly, other than for trading of such holdings or securities) and not registered as an NBFC.

Use of Limited Liability Partnerships

Another nuance is that RBI regulations governing NBFCs / CICs only regulate companies and certain other corporate bodies, but not limited liability partnerships (LLP). Therefore, one way of looking at it is that if an SPV is set up as an LLP, the risk of it being classified as an NBFC / CIC will get eliminated. That said, from a practical perspective the registrar of companies has often not been forthcoming in permitting LLPs to engage in financial services business. Further, permissibility of FDI in LLPs engaged in financial services must be carefully considered as FDI is permitted only in LLPs that are engaged in automatic route businesses, without any performance conditions.


In the backdrop of growing instances of fraud in this space, the regulators are scrutinising the financial services sector even more closely. The RBI has recently reviewed the regulatory framework for CICs with the objective to reduce disparity in the regulatory treatment of NBFCs and CICs. It becomes all the more crucial in these times to stay mindful of the several considerations and regulatory compliances discussed above in structuring transactions with layers of SPVs.