November 08, 2019

Reserve Of India Working Group Moots Stronger Corporate Governance Practices For Core Investment Companies

[ By Bobby Anthony ]


A Reserve Bank of India (RBI) Working Group has suggested that core investment companies (CICs) should implement stronger governance practices like formation of board level committees, appointment of independent directors, and internal audits.

These are part of the recommendations submitted by the RBI Working Group to review regulatory and Supervisory Framework for Core Investment Companies (CICs) set up in July 2019. The group was headed by Tapan Ray, a former Secretary at the Union Ministry of Corporate Affairs.

RBI formed the working group in July to review regulatory and supervisory framework for CICs, whose report was made public recently after which the public was invited to comment on it.

“Currently, corporate governance guidelines are not explicitly made applicable to CICs. To strengthen governance practices, the RBI working group has recommended constitution of board level committees like audit committee, nomination and remuneration committee and group risk management committee,” the report stated.

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, the working group said, it has been observed that the CIC had lent funds to group companies at zero percent rate of interest with bullet repayment of 3-5 years and without any credit appraisal,” it said.

Further, the committee has also proposed preparing consolidated financial statements and ring-fencing boards of CICs by excluding employees or executive directors of group companies from its board.

The report highlighted that the absence of restriction on the number of CICs which 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. That apart, the committee also suggested that the capital contribution by a CIC in a step-down CIC, over and above 10% of its owned funds, should be deducted from its adjusted net worth, as applicable to other NBFCs.

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.

The committee recommended that offsite returns may be designed by RBI and prescribed for CICs on the lines of other NBFCs.

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