Core Investment Companies (CICs) are vital to the financial ecosystem, managing long-term investments such as shares and debentures in other companies. To ensure their efficient and transparent operation, and to align with regulatory standards, the Reserve Bank of India (RBI) has established a set of compliance requirements for these companies.

Meaning of Core Investment Companies (CICs):

Core Investment Companies (CICs) are non-banking financial companies (NBFCs) primarily involved in holding a substantial portion of shares and securities of other companies. Unlike other NBFCs that may focus on lending or asset management, CICs generally focus on managing their investments in other businesses. Their role is significant in the capital market as they provide a steady flow of capital to companies in need, especially in the form of equity or hybrid instruments. CICs can be classified into three categories based on their asset size and operational capacity: Lower Layer, Middle Layer, and Upper Layer.

Compliance List for Core Investment Companies (CICs):

1. Internal Capital Assessment

• Proportional capital assessment: CICs must evaluate their capital requirements in line with the size and complexity of their operations, following a methodology approved by their board.
• Risk factors: Internal capital assessments must consider credit risk, market risk, operational risk, and other risks, according to an internally determined methodology.
• Realistic risk assessment: CICs should assess risks realistically; Pillar 2 capital is not mandatory.
• Alignment with ICAAP: Capital assessment should align with the process used for commercial banks (ICAAP under Basel III).
• Capital needs: CICs should ensure their capital base is sufficient to cover the value of their assets, maintain a healthy leverage ratio, and safeguard against the risks associated with their business operations.

2. Classification & Provisioning

• Account classification: CICs need to classify accounts based on recovery history in lease and hire purchase transactions.
• Provisioning for standard assets: CICs are required to show provisions for standard assets separately in their balance sheet, rather than netting them from the gross advances.
• Middle Layer CICs: CICs in the Middle Layer must make a provision of 0.40% on standard assets. This provision is to be kept separate and does not impact the calculation of net Non-Performing Assets (NPAs)

3. Government Securities & AIF Investments

• Government securities transactions: CICs must conduct transactions in government securities through a gilt or demat account, or any account authorized by the RBI.
• AIF investment provisioning: Provisions must be based only on CIC’s investment in an AIF scheme that invests in the debtor company, not the entire AIF scheme.
• Full provision for non-liquidated investments: CICs must make a 100% provision on investments if they are unable to liquidate them within 30 days of a downstream investment by the Alternative Investment Fund (AIF).

4. Investment Restrictions & Downstream Investments

• Investment restrictions in AIFs: CICs should avoid investing in AIF schemes with downstream investments in their debtor companies.
• Exclusion of equity shares in debtor companies: Downstream investments should not include equity shares of the debtor company but can include hybrid instruments.

5. Compensation & Governance

• Compliance with rules: CICs must follow all statutory rules while formulating compensation policies.
• Committee roles: The board must define the role of committees like the Nomination and Remuneration Committee (NRC).
• Compensation policy: CICs must have a Board-approved compensation policy to address excessive risk-taking caused by misaligned compensation packages.
• Directorship restrictions: CICs must ensure their independent directors do not serve on the boards of more than three NBFCs, as permitted by the Companies Act, 2013.
• Key Managerial Personnel (KMP) restrictions: Key Managerial Personnel (KMP) of CICs should not hold any positions in other NBFCs.
• Director expertise: CICs must ensure that at least one director has relevant experience in a bank or NBFC.

6. Risk Management

• Risk Management Committee (RMC): CICs must form an RMC to evaluate and notify the board about risks, including liquidity risks.
• Board-level RMC: CICs must establish an RMC at the Board or executive level to focus on risk management.

7. Regulatory Compliance

• Compliance with RBI Master Directions: CICs in the Upper Layer must comply with the relevant sections of the Reserve Bank of India’s Master Direction (2023), as applicable, to ensure adherence to regulatory guidelines.
• Operational Risk Management: CICs must adhere to the guidance on operational risk management and resilience outlined in the 2024 framework, ensuring they are prepared to manage and mitigate operational risks effectively.

8. Credit Information Maintenance & Submission

• Credit information maintenance: CICs must keep credit information updated regularly (fortnightly, on the 15th and last day of the month or as agreed with credit information companies).
• Submission to credit information companies: CICs must submit credit information promptly, ensuring it is provided within seven days following the end of each reporting fortnight.

9. Customer Service & Data Quality

• Customer service directions: CICs must follow guidelines on strengthening customer service for credit information and compensation for delays (as per RBI circulars).
• Data Quality Index: CICs must comply with the Data Quality Index guidelines, ensuring the accuracy and consistency of the credit information they maintain and report.

10. Wilful Defaulters & Large Defaulters

• Defaulter classification: CICs must follow the RBI’s guidelines issued in July 2024 for classifying borrowers as wilful defaulters or large defaulters, ensuring proper procedures are followed in identifying and handling such cases.

11. Fortnightly Reporting

• Fortnightly credit information reporting: CICs must submit credit information to credit information companies within seven calendar days after the relevant fortnight ends.

Importance of Compliances for Core Investment Companies (CICs) – The regulatory framework for CICs is designed to ensure that these companies maintain robust risk management and operational practices. Compliance with these guidelines ensures:

1. Capital Adequacy: CICs must assess their capital needs in line with their operations and the risks they face. This helps prevent financial instability.
2. Risk Management: By evaluating credit, market, and operational risks, CICs can mitigate potential threats and ensure long-term sustainability.
3. Investor Protection: Adherence to provisions around asset classification and provisioning protects investors from the risks posed by defaulting borrowers.
4. Transparency and Accountability: Compliances ensures transparency in financial reporting, especially in terms of investments in Alternative Investment Funds (AIFs) and government securities.
5. Customer Satisfaction: Ensuring that customer service standards are met, including timely rectification of credit information, enhances trust in the financial system.

Conclusion:

Adhering to the compliance guidelines set by the Reserve Bank of India (RBI) is vital for Core Investment Companies (CICs) to maintain their operational integrity and financial stability. These regulations are designed to ensure that CICs operate in a transparent and responsible manner, effectively managing the risks they face, such as credit, market, and operational risks. By following these guidelines, CICs can prevent financial instability, protect investor interests, and foster a culture of good governance.

Disclaimer:  This is an effort by Lexcomply.com, to contribute towards improving compliance management regime. User is advised not to construe this service as legal opinion and is advisable to take a view of subject experts.