On August 13, 2020, the Reserve Bank of India (“RBI”), issued a circular titled ‘Review of Guidelines for Core Investment Companies’ (the “RevisedGuidelines”) to modify it's Master Direction on Core Investment Companies (Reserve Bank) Directions, 2016 (“Master Directions”).
The Revised Guidelines have amended the methodology adopted for calculating the adjusted net worth (“ANW”). Under the extant law, while computing the ANW of a core investment company (“CIC”), the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent that such amount exceeds 10% of owned funds of the investing CIC, would have to be deducted. Prior to the amendment, the law did not provide for any deductions in the ANW of a CIC with respect to investments made by it in another CIC in a group. Through this measure, the RBI aims to limit CICs from multi-gearing on the same capital and creating excessive leverage at the group level. Further, the RBI has restricted the number of layers of CICs in a group to two. Any direct or indirect equity investment by a CIC in another CIC will be deemed to be a layer for the investing CIC. This has been done to reduce the complexity of group structures and address concerns of opaqueness in terms of ownership, control and related party transactions between group companies. The amendment will help to simplify and create transparency of group structures. Existing entities have been granted time till March 31, 2023 to comply with the aforementioned guidelines.
Further, the Revised Guidelines have issued directions related to risk management at the group level. For instance, the parent CIC in a group must constitute a group risk management committee which will inter alia be entrusted with the responsibilities to identifying, monitoring and mitigating risks at the group level and periodically reviewing the risk management frameworks within the group. Additionally, CICs with asset size of more than INR 5000/- crore are mandated to appoint a chief risk officer with specified roles and responsibilities. Such measures will help to strengthen the risk management systems of CICs and their group. Through the Revised Guidelines, RBI has also attempted to harmonize the norms under the Master Directions with those of the Companies Act, 2013 (“Companies Act”). Accordingly, CICs will now have to follow corporate governance norms as per the Companies Act. Further, CICs will be required to put in place a policy which would ascertain the ‘fit and proper’ status of a director, not only at the time of appointment but also on a continuous basis. Similarly, the CICs will also be required to prepare consolidated financial statements as per the Companies Act in order to provide a clearer picture of the financials of the group as a whole. Furthermore, the RBI has scrapped the nomenclature of a systemically important CIC (CIC-ND-SI). Henceforth, CIC-ND-SI, as defined in Section 3(xxv) of the Master Directions would be considered as ‘CICs’, while the CICs which are not required to register with the RBI would be called as ‘unregistered CICs’. The RBI has done away with the nomenclature of ‘exempted CICs’ which was observed to have provided unintended credibility to such CICs, as ‘exempted’ by the RBI, and created scope for misrepresentation. The aforementioned measures should play a positive role in strengthening the governance, transparency and risk management standards of CICs and their group companies.