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Core Investment Companies (CICs) 

Topic covered:

  1. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Core Investment Companies (CICs) 

 

What to study?

For prelims and mains: CICs- significance, challenges and their regulation.

 

Context: RBI panel proposes stricter rules for core investment companies.

The recommendations were made by the Working Group to Review Regulatory and Supervisory Framework for Core Investment Companies set up by the central bank on 3 July and headed by Tapan Ray, former secretary of the corporate affairs ministry.

 

These include:

  1. Core investment companies (CICs) will have to form board level committees, appoint independent directors and conduct internal audits.
  2. Prepare consolidated financial statement and ring-fence the boards of CICs by excluding employees or executive directors of group companies from its board.
  3. Step-down CICs may not be permitted to invest in any other CIC, but can invest freely in other group companies.
  4. The capital contribution by a CIC in a step-down CIC, can be over and above 10% of its owned funds. It should be deducted from its adjusted networth, as applicable to other NBFCs.
  5. The number of layers of CICs in a group should be restricted to two and any CIC within a group shall not make investment through more than a total of two layers of CICs, including itself.

 

What are Core Investment Companies (CICs)?

CICs are non-banking financial companies with asset size of ₹100 crore and above which carry on the business of acquisition of shares and securities, subject to certain conditions.

CICs, which are allowed to accept public funds, hold not less than 90% of their net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.

Investments of CIC 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.

Exemption: CICs having asset size of below Rs 100 crore are exempted from registration and regulation from the RBI, except if they wish to make overseas investments in the financial sector.

 

What do the term public funds include? Is it the same as public deposits?

Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of Commercial Papers, debentures etc. However, even though public funds include public deposits in the general course, it may be noted that CICs/CICs-ND-SI cannot accept public deposits.

 

Need:

This Concept was originated in order to safeguard NBFCs which are formed for group investments from stringent RBI procedures.

Experts have been seeking a review of CIC guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important core investment company.

 

Sources: the Hindu.