A working group set up by the Reserve Bank of India (RBI) to review the regulatory and supervisory framework for core investment companies (CICs) suggested that CICs implement stronger governance practices like formation of board level committees, appointment of independent directors and internal audits.
The working group suggested that, capital contribution by a CIC in a step-down CIC, over and above 10 per cent of its owned funds, be deducted from its adjusted net worth, as applicable to other NBFCs. It is also against allowing step-down CICs to invest in any other CIC.
Currently, corporate governance guidelines are not explicitly made applicable to CICs. To strengthen the governance practices, the working group recommends constitution of board level committees viz. audit committee, nomination and remuneration committee and group risk management committee.
“Unlike NBFCs, which are required to constitute committees of the board, no such corporate governance standards are mandated for CICs. The same director could be part of boards of multiple companies in a group, including CICs. In a few cases, it has been observed that the CIC had lent funds to group companies at zero percent rate of interest with bullet repayment of three-five years and without any credit appraisal,” says the report of the working group.
Further, the report also proposed preparing consolidated financial statements and ring-fencing the boards of CICs by excluding employees or executive directors of group companies from its board.
Experts have been seeking review of CIC guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important core investment company. In September 2018, IL&FS) a CIC with over 300 subsidiaries, defaulted on its payment following which over Rs 90,000 crore worth of combined banking sector exposure was declared as non-performing or bad asset in the subsequent months.
Consequently a working group headed by Tapan Ray, former secretary, Ministry of Corporate Affairs was set up by the RBI in July 2019. The group made its report public on November 6 and invited public comments on it.
The report highlighted that the absence of restriction on the number of CICs that can exist in a group and non-deduction of capital of CICs for their exposures in group companies (including in step down CICs), creates scope for excessive leveraging.
The Working Group, therefore, suggested that step-down CICs may not be permitted to invest in any other CIC while allowing them to invest freely in other group companies. The number of layers of CICs in a group, it said, should be restricted to two and any CIC within a group shall not make investments through more than a total of two layers of CICs, including itself.
Currently, CICs are not required to submit off-site returns or statutory auditors certificate (SAC).
The committee recommended that offsite returns may be designed by RBI and prescribed for CICs on the lines of other NBFCs. IANS