Core Investment Company (CIC) is a type of Non-Banking Financial Company (NBFC) which holds investment in the form of shares, bonds, debentures, debt or loans in group companies but doesn’t trade into them and it also does not carry out any financial activity subject to a few exceptions. The criteria laid down by the Reserve Bank of India for indentifying a NBFC as a CIC are as follows:

  • The CIC should hold not less then 90% of its assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies out of which not less than 60% of its net assets should be investment made in equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies.
  • The CIC should not trade in the investment made in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment.
  • The CIC should not carry out any other financial activity referred to in Section 45I(c) and 45I(f) of the Reserve Bank of India Act, 1934 like financing, whether by way of making loans or advances or otherwise, letting or delivering of any goods to a hirer under a hire- purchase agreement, the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature; which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending Tiny manner etc., except for
  1. investment in
    1. bank deposits,
    2. money market instruments, including ,money market mutual funds
    3. government securities, and
    4. bonds or debentures issued by group companies, granting of loans to group companies and issuing guarantees on behalf of group companies
  2. granting of loans to group companies; and
  3. issuing guarantees on behalf of group companies

Systemically Important Core Investment Company

Core Investment Company (CIC) which have substantial value of Assets are called as Systemically Important Core Investment Company (CIC-ND-SI). A CIC which fulfills the following conditions is termed as a Systemically Important Core Investment Company1:

  1. 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
  2. Raises or holds public funds;

Where, “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 which are compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.

“Total assets” means the total of all assets appearing on the assets side of the balance sheet.

Some of the important rules and regulations for Systemically Important Core Investment Company are as follows2

Registration

Every Systemically Important Core Investment Company (CIC-ND-SI) has to apply to the Reserve Bank of India for grant of Certificate of Registration

Capital Requirements

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 offbalance sheet items as on the date of the last audited balance sheet as at the end of the financial year.

Leverage Ratio

The outside liabilities of a CIC-ND-SI shall at no point of time exceed 2.5 times its Adjusted Net Worth as on the date of the last audited balance sheet as at the end of the financial year.

Submission of Annual Statutory Auditors Certificate

Every CIC-ND-SI shall submit an annual certificate from its statutory auditors regarding compliance with the requirements of these directions within a period of one month from the date of finalisation of the balancesheet.

Exemptions

The Reserve Bank of India may, if it considers it necessary for avoiding any hardship for any other just and sufficient reason, grant extension of time to comply with or exempt any CIC-ND-SI from all or any of the provisions of these Directions either generally or for any specified period, subject to such conditions as the Reserve Bank of India may impose.

INVESTMENT IN INSURANCE BUSINESS

In order to regulate investment in Insurance Business by NBFCs, Reserve Bank of India had already issued guidelines for them however CICs although being a type of NBFCs were not specifically covered in the aforesaid guidelines. Considering the fact that Core Investment Companies (CICs) are having a unique business model and they were as such not covered in the earlier guidelines for NBFCs, a separate set of guidelines was issued by RBI vide Circular No. RBI/2012-13/466 - DNBS (PD) CC.No.322/03.10.001/2012-13 dated 1st April, 2013 for entry of CICs into Insurance Business. The guidelines were as follows:

  1. Eligibility Criteria A Core Investment Company (CIC) registered with RBI will be allowed to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards, upon satisfying the below mentioned eligibility criteria as per the latest available audited balance sheet of the CIC.
    1. A considerable value of owned funds should be there i.e. it should have not owned funds of than Rs. 500 crore.
    2. The level of non- performing assets should be very low i.e. it should exceed more than 1% of the total advances given by the Company.
    3. There should be registered profits i.e. the CIC should have registered net profit continuously for three consecutive years.
    4. Subsidiaries of the CIC, if any should have shown satisfactory performance
    5. All the applicable regulations including CIC Directions, 2011 should be complied by CIC. Thus Systemically Important Core Investment Company (CIC-ND-SI) shall maintain adjusted net worth which shall be not less than 30% of aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items.
  2. Insurance Business cannot be carried out by CIC Departmentally CIC will not be allowed to conduct the Insurance business departmentally. Also, an NBFC (within the group of CIC/ outside the group of CIC) not normally be allowed to join an insurance company on risk participation basis and hence should not provide direct or indirect financial support to the insurance venture
  3. Investment Limits Within the group, CICs may be permitted to invest up to 100% of the equity of the insurance company either on a solo basis or in joint venture with other non-financial entities in the group. This would ensure that only the CIC either on a solo basis or in a joint venture with the group company is exposed to insurance risk and the NBFC within the group is ring-fenced from such risk. Also the maximum equity contribution by a CIC in a Joint Venture will be approved by insurance Regulatory and Development Authority (IRDA)
  4. Foreign Contribution Where 26 percent of the equity has been contributed by a foreign partner after the approval of IRDA/Foreign Investment Promotion Board, more than one CIC may be allowed to participate in the equity of the insurance joint venture. However such CIC’s will also have to fulfill the eligibility criteria as they would be assuming Insurance Risk.
  5. Approval from RBI CICs which want to enter into Insurance Business as investors or on risk participation basis will have to take prior approval from the Reserve Bank of India. The permission will be granted by the Reserve Bank of India on case to case basis after considering all the relevant factors. However, it has to be ensured that risks involved in insurance business do not get transferred to the CIC
  6. Rules and regulations laid down by the IRDA/ Central Government will also have to be followed A promoter CIC which holds equity in an insurance company or does an investment in insurance business will also have to comply with any rules and regulations as laid down by the IRDA/Central Government including compliance with Section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time
  7. Exemption from Approval of RBI CICs which are exempted from registration with the Reserve Bank of India in terms of the Core Investment Companies(Reserve Bank) Directions, 2011 will be exempted from prior approval of RBI provided that the CIC have fulfilled all the necessary conditions of exemption.
  8. Restrictions CICs will not be allowed to enter into the business of insurance as insurance agents.

Conclusion

The Guidelines issued by the RBI with respect to investment in Insurance Business by Core Investment Companies (CICs) has provided clarity on the subject. Although CICs have been denied to carry on the business of insurance agents no ceiling is stipulated for CICs for their investment in an insurance joint venture. With the implementation of this Circular, CIC’s which meet the eligibility criteria will be able to go ahead with their plans for investment in an insurance joint venture in a smooth manner subject to compliance of rules and regulations laid down by Central Government/ Insurance Regulatory and Development Authority (IRDA).