Core Investment Companies (‘CICs’) is a less discussed topic in professional circles. It is perhaps owing to the fact that there are only 59 CICs registered as of 31st January, 2022. However, this is a preferred vehicle for funnelling investments in group companies in the case of large corporate groups. CICs are unique because the requirement of registration is triggered only after crossing the prescribed asset threshold (which arises after the entity is already carrying out the business of investment).
Meaning and nature of CICs
CICs are a type of NBFCs that are engaged in the business of acquisition of shares and securities. As on the last audited balance sheet date,
- holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies; and
- its investments in the equity shares (including instruments compulsorily convertible into equity shares within 10 years from the date of issue) in group companies constitute not less than 60% of its net assets.
Group companies include subsidiary companies, joint ventures, related party entities, common brand companies, companies where equity investment exceeds 20%, and promotee companies.
The requirements differ slightly regarding the investment in units of Infrastructure Investment Trusts (InvITs) which we have specifically excluded for the sake of simplicity.
Permissible activities of NBFC
The permissible activities of CICs include:
- investment in bank deposits, money market instruments, government securities,
- investment in bonds or debentures issued by group companies,
- granting of loans to group companies and
- issuing guarantees on behalf of group companies.
Requirement of registration
The registration is required to be made where the asset size of a CIC (or together with other CICs in the group) exceeds INR 100 Crores and it raises public funds. Public funds include funds raised through direct or indirect public deposits, inter-corporate deposits, bank finance, debentures or other debt sources excluding compulsorily convertible instruments convertible within 10 years.
Where the public funds are not accessed by the Company, it need not register even if the asset size goes above INR 100 Crores.
Once the asset size crosses INR 100 Crores, the application for registration is required to be made within 3 months.
Capital requirements
Though there is no particular number prescribed as the minimum capital requirement, there are 2 conditions that are required to be complied with at all times.
- The Adjusted Net Worth shall at no point of time be less than 30% of its aggregate risk-weighted assets on the balance sheet and risk-adjusted value of off-balance sheet items. The percentage weights of different classes of assets and liabilities are prescribed by RBI.
- The outside liabilities of a CIC shall at no point of time exceed 2.5 times its Adjusted Net Worth.
Other restrictions and conditions
While the CIC enjoys the exemptions from Section 186 of the Companies Act, 2013, there are certain other restrictions. One of the restrictions is that no CIC shall contribute to the capital of a partnership firm (including an LLP or an Association of persons) or become a partner of such firm.
CICs are required to maintain a functional website with appropriate disclosures and details. Further, there are a number of additional disclosures which are required to be made in the financial statements of the CICs.
The directors of the CICs must fulfil the ‘fit and proper’ criteria and enter into a Deed of Covenants with the CIC.
Though the regulations may seem onerous, CICs are to be preferred because of centralized funding and control, cheaper and easier raising of finance, and mitigation of risks.
- Team Efficax