KPMG IN INDIA

KPMG Flash News

6 January 2011
TAX

RBI liberalizes regulatory framework for Core Investment

Companies releases Core Investment Companies (Reserve Bank)
Directions, 2011
Background
The Reserve Bank of India (RBI) had earlier issued Guidelines
governing the regulatory framework for Core Investment Companies 1
(CICs) i.e. companies which have their assets predominantly as
investments in group companies (hereinafter referred to as CIC
Guidelines). RBI has now issued the Core Investment Companies
(Reserve Bank) Directions, 2011 2 giving legal sanctity to the earlier
CIC Guidelines (hereinafter referred to as CIC Directions).
Concurrently, through the CIC Directions, RBI has liberalized the
regulatory framework for CICs to, interalia, include the following:

CICs having total asset 3 size of Rs. 100 crore or more but not
accessing public funds are not treated as Systemically Important
CICs (CIC-ND-SI) and consequently exempted from the
requirement of obtaining RBI registration and complying with the
CIC regulations

Raising funds through instruments compulsorily convertible into

equity shares within 10 years from issue date are not considered as
public funds for determining CIC-ND-SI.

The leveraging capacity of CICs shall increase since instruments

compulsorily convertible into equity shares within 10 years from
issue date are not included as a part of outside liabilities while
calculating the leverage ratio.

DNBS (PD) CC.No. 197/03.10.001/2010-11 dated 12 August, 2010

Notification No. DNBS (PD) 219/CGM(US)-2011 dated 5 January, 2011

Total assets means total of all assets appearing on the assets side of the Balance Sheet

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Regulatory Framework
CIC is defined to mean a Non-Banking Financial Company (NBFC) carrying on the business of
acquisition of shares and securities and which satisfies the following conditions as on the date of last
audited balance sheet:

It holds at least 90 percent of its Net Assets 4 as investment in equity shares, preference shares,
bonds, debentures, debt or loans in group companies;

Its investments in the equity shares (including instruments compulsorily convertible into equity
shares within 10 years from issue date) in group companies is at least 60 percent of its Net
Assets;

It does not trade in its investments in shares, bonds, debentures, debt or loans in group companies
except through block sale for dilution or disinvestment;

It does not carry on any other financial activity referred to in Section 45-I(c) and 45-I(f) of the
RBI Act, 1934 except investment in bank deposits, money market instruments including money
market mutual funds, government securities, bonds or debentures issued by group companies,
loans to group companies or guarantees issued on behalf of group companies.

A CIC, which is not a CIC-ND-SI, is exempted from:

Obtaining RBI registration as a CIC and complying with section 45 IA of the RBI Act, 1934

Complying with Non-Banking Financial (Non-Deposit Accepting or Holding) Companies

Prudential Norms (Reserve Bank) Direction, 2007

A comparison between the regulatory framework prescribed for CIC-ND-SI in the CIC Guidelines and
CIC Directions is discussed below:
Particulars
Definition of
CIC-ND-SI

CIC Guidelines
CIC-ND-SI means a CIC
with an asset size of Rs. 100
crore or more. For this
purpose, all CICs belonging
to a group will be aggregated

CIC Directions
Our Comments
CIC-ND-SI means a CIC CICs having total asset
fulfilling both the following
size of Rs. 100 crore or
conditions:
more but not accessing
public funds are exempted
(i) having total assets of Rs. 100
from the requirement of
crore or more, either
obtaining RBI registration
individually or in aggregate
and complying with the
alongwith other CICs in the
CIC regulations
Group and;
(ii) raises or holds public The total assets of all CICs
in the group shall be
funds
aggregated for determining
Rs. 100 crore threshold
For the above:
(irrespective of whether
these CICs have accessed
Public funds" shall include
public funds or not). Thus,
funds raised either directly or

Net assets = Total assets excluding (i) cash and bank balances;(ii) investment in money
market instruments and money market mutual funds; (iii) advance payments of taxes;
and (iv) deferred tax payment.

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Particulars

Definition of
Companies
in the
Group

Registration
with RBI
Time limit for
obtaining
RBI
registration

Capital
requirement

CIC Guidelines

CIC Directions
Our Comments
indirectly
through
public
CICs
in
the
group
deposits, commercial papers,
accessing public funds
debentures,
inter-corporate
may be required to obtain
deposits and bank finance but
registration and comply
excludes funds raised by issue
with CIC norms (even
of instruments compulsorily
though its total assets do
convertible into equity shares
not exceed Rs. 100 crores)
within 10 years from the issue Raising funds through
date
instruments compulsorily
convertible into equity
shares within 10 years
from issue date are not
regarded as public funds
Not defined
Companies in the Group Group companies have been
means
an
arrangement liberally defined and should
involving two or more entities cover most of the related
related to each other through companies.
This
should
any
of
the
following positively help to avail
relationships : Subsidiary liberalized CIC regime for
parent (defined in terms of AS group
companies
as
21), Joint venture (defined in compared
to
NBFC
terms of AS 27), Associate regulations
(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
Required (whether they were No change
specifically exempted in the
past from registration with
the RBI or not)
- Existing
CIC-ND-SI: No change
Within six months from
date of the Notification.
CIC-ND-SI can continue
existing business till
disposal
of
their
application by the RBI.
- CICs whose asset size
would cross Rs. 100
crores at a later date:
Within three months of
crossing the asset limit
Ongoing maintenance of a No change in requirement of minimum Capital Ratio 30%
capital
adequacy
whereby its Adjusted Net requirement
Worth (ANW) shall be at
least 30% of its aggregate Mechanism for calculating risk
risk weighted assets on weighted assets on balance
balance sheet and risk sheet and risk adjusted value of

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Particulars

Leverage
ratio

Exemption
from :
(i)
maintenance
of statutory
minimum Net
Owned Fund
(NOF); and
(ii)

CIC Guidelines
adjusted value of off balance
sheet items as on the date of
the last audited balance sheet
as at the end of the financial
year.
ANW is calculated as
follows:
Owned Fund
Add: 45% of Revaluation
reserve
arising
from
revaluation
of
quoted
investments (if any) as per
latest audited Balance sheet
at end of financial year
50%
unrealized
Add:
appreciation in the book
value of quoted investment
Add: Increase in equity share
capital since last Balance
sheet date
Less: Diminution in the
aggregate book value of
quoted investments
Less: Reduction in equity
share capital since last
Balance sheet date
Outside liabilities shall not
exceed 2.5 times of its ANW
calculated as on the date of
the last audited balance sheet
as at the end of the financial
year
Outside Liabilities means
total liabilities as appearing
on the liability side of
Balance Sheet excluding paid
up capital and reserves and
surplus but including all
forms of debt and obligations
having characteristics of debt
whether created by issue of
hybrid
instruments
or
otherwise, and value of
guarantees issued whether
appearing on balance sheet or
not
Exemption
available
provided CIC-ND-SI meets
the
above
conditions
regarding capital adequacy
and leverage ratios

CIC Directions
off balance sheet items has been
prescribed

Our Comments

ANW:
(i) Requirement to adjust 45%
of
Revaluation
reserve
arising from revaluation of
quoted investments removed
from the definition of ANW
(ii) Investments are now
defined
to
include
investment in shares, stocks,
bonds,
debentures
or
securities issued by the
Government
or
local
authorities
or
other
marketable securities of a
like nature

No change in the leverage ratio

Definition of Outside Liabilities
amended to exclude instruments
compulsorily convertible into
equity shares within 10 years
from issue date

No change

The leveraging capacity of

CICs shall increase since
instruments
compulsorily
convertible into equity shares
within 10 years from issue
date are not included as a part
of outside liabilities while
calculating the leverage ratio.
However,
instruments
compulsorily convertible into
equity shares within 10 years
from issue date continue to be
excluded from the definition
of ANW

It may be interesting to note

while the extant NBFC
regulations provided that
exemption from exposure
norms is available only if
public funds have not been
accessed by the NBFC, this
condition is relaxed under the
CIC Guidelines. Thus, CIC-

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Particulars
requirements
of NonBanking
Financial
(NonDeposit
Accepting or
Holding)
Companies
Prudential
Norms
(Reserve
Bank)
Directions,
2007
including
requirements
of capital
adequacy and
exposure
norms
Submission
of statutory
auditors
certificate for
compliance
with the
guidelines

CIC Guidelines

CIC Directions

Annually within 1 month No change

from finalization of balance
sheet

Our Comments
ND-SI are exempted from
exposure norms, even when
public funds are accessed

Conclusion
With the amendment in CIC Guidelines, large industrial groups having holding companies and not
accessing public funds would be saved from registration and compliance under the CIC regulations. Also,
wide definition of Group companies and exclusion of compulsorily convertible instruments from
definition of public funds & leverage ratio computation are welcome liberalizations by RBI.

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

www.kpmg.com/in

Bangalore
Maruthi Infotech Centre, 11-12/1
Inner Ring Road
Koramangala, Bangalore 560071
Phone: + 91 80 3980 6000
Fax: +91 80 3980 6999
Chennai
KPMG House
No.10, Mahatma Gandhi Road,
Nungambakkam High Road,
Chennai 600034
Phone: +91 44 39145000
Fax: +91 44 39145999
Chandigarh
SCO 22-23
1st Floor, Sector 8 C
Madhya Marg
Chandigarh 160019
Tel: 0172 3935778
Fax: 0172 3935780

Mumbai
Lodha Excelus, Apollo mills
compound,
NM Joshi Marg, Mahalaxmi,
Mumbai 400 011
India
Phone: +91 22 39896000
Fax: + 91 22 39836000
Pune
703, 7th Floor Godrej Castlemaine,
Next to Ruby Hall Clinic,
Bund Garden Road, Pune 411001
Phone: +91 20 30585764/65
Fax: +91 20 3058 5775
Kochi
4/F, Palal Towers, M. G. Road,
Ravipuram, Kochi 682016
Phone: +91 (484) 305 9000
Fax: +91 (484) 305 9001

Delhi
DLF Cyber City, Building no. 10,
Block B, Phase II
Gurgaon, Haryana 122 002
Phone: +91 124 307 4000
Fax: +91 124 254 9195
Hyderabad
KPMG, 8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad - 500 034
Phone: +91 40 30465000
Fax: + 91 40 30465299
Kolkata
KPMG Infinity Benchmark
Plot No. G-1, 10th floor Block - EP &
GP,
Sector V, Salt Lake City
Kolkata - 700091
Phone: +91 33 4403 4000

The information contained herein is of a general nature and is not intended to address the circumstances of

2011 KPMG, an Indian Partnership and a member firm

any particular individual or entity. Although we endeavour to provide accurate and timely information, there

of the KPMG network of independent member firms

2010that
KPMG,
an Indian Partnership
a member
of the
KPMG
member
firmsInternational
affiliated with
can be no guarantee
such information
is accurate asand
of the
date it is firm
received
or that
it willnetwork
continueof
toindependent
affiliated
with KPMG
Cooperative (KPMG
International
Cooperative
(KPMG
International),
a Swiss professional
entity. All rights
be accurate inKPMG
the future.
No one should
act on such
information
without appropriate
advicereserved.
International), a Swiss entity. All rights reserved.
after a thorough examination of the particular situation.