New norms for core investment firms

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On 13th August 2020, the Reserve Bank of India (RBI) had announced strict guidelines for core investment companies (CICs), to ensure more disclosures, better risk management, and a simpler group structure.

CICs are non-bank lenders holding not less than 90 percent of their net assets as investments in equity shares, preference shares, debentures, bonds, debt, or loans in group companies. Experts have been seeking a review of CIC guidelines ever since defaults were made by Infrastructure Leasing and Financial Services Ltd

Among the parameters, a CIC will be expected to disclose details related to its investment in other CICs, its off-balance sheet exposures, and the maturity pattern of its assets and liabilities. To address the complication in group structures and the existence of multiple CICs within a group, the RBI has restricted the number of layers of CICs within a group to two. The central bank said in a notification that if a CIC makes any direct or indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC.

A group risk management committee (GRMC) will be formed by the parent CIC in the group or the CIC with the largest asset size. The GRMC shall comprise of a minimum of five members, including executive members. At least two members shall be independent directors, one of whom shall be the chairperson of the GRMC.

Although the regulation will be applicable from the date of the circular, existing entities have been given time till 31 March 2023 to reorganize their business structure.

 The GRMC will have to examine material risks to which the group, its businesses, and subsidiaries are exposed. Members will be required to have adequate experience in risk management practices. RBI said that it must discuss all risk strategies, both at the aggregated level and by type of risk, and make recommendations to the board considering the group’s overall risk appetite.

 Members will be required to have adequate experience in risk management practices. All CICs with asset size of more than Rs 5,000 crore shall appoint a chief risk officer (CRO) with clearly stated roles and responsibilities.

Tapan Ray had identified six major problems with the CIC ecosystem. Complex group structures, multiple gearing and excess leveraging, and the build-up of other risks at the group level were among them. The other problem areas were corporate governance, the option of being an ‘exempted’ CIC, and on- and off-site supervision.

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