New norms for holding companies in the works

The Reserve Bank of India (RBI) has sought to regulate companies which only invest in shares of group companies and do not carry on any other financial activity. RBI calls them core investment companies (CICs).

“Companies which have their assets predominantly as investments in shares not for trading but for holding stakes in group companies and also do not carry on any other financial activity justifiably deserve a differential treatment in the regulatory prescription applicable to other financial companies,” RBI said in its annual monetary policy on Tuesday.

To rationalise the policy approach for CICs, and based on feedback from them, RBI proposes to treat such companies with an asset size of Rs100 crore or more as systemically important core investment companies. “Such companies will be required to register with the Reserve Bank,” the central bank said.

Most large industrial groups -- from the Tatas and the Birlas to the Bajajs and the Ruias -- have investment companies through which a large portions of their shareholding is controlled.

The Tata group has Tata Sons, Kumar Mangalam Birla has TGS Investment & Trade and Pilani Investment & Industrial Corporation, Rahul Bajaj has Jamnalal Sons, the Ruias have Essar Investments, Mahindra has Corbel Estate & Investments and Azrael Investments.

Some of these companies may already have been registered with RBI. For example Tata Industries one of the principal holding companies of the group and Tata Investment Corporation which too holds stakes in some Tata companies are both registered with it. But others such as Tata Sons are not registered.

Ashvin Parekh, partner and national leader of global financial services at Ernst & Young, said “So far there was no need for these companies to go to RBI at all. Now, the RBI on its own has said, these companies will have to register with it.”

The RBI has proposed to treat CICs having an asset size of Rs 100 crore and above as systemically important core investment companies. Such companies will be required to register with the Reserve Bank.

The regulatory framework for non-banking financial companies has evolved in the recent past with particular focus on inter-connection and systemic risk. In this approach, access to public funds has been perceived as a systemic issue necessitating close regulation and monitoring of NBFCs, including systemically important non-deposit taking financial companies.

“The proposed RBI regulatory framework for CICs basically seeks to unburden the group holding companies of large corporate houses from the requirement to comply with stringent net owned fund norms and exposure norms -- applicable to NBFCs carrying on the investment business. The registration of these entities as CICs will also unlock non-investment capital and assets to better leverage fund requirements of a group. A lot will, however, depend on the fine print of guidelines yet to be issued by RBI,” said Manoj Kumar, managing partner of Hammurabi & Solomon.

Lalit Bhasin, managing partner of Bhasin & Co, another law firm, said, “The proposed regulatory framework for CICs is not consistent with the powers and authority vested in RBI under the law. It is open to RBI to regulate, monitor and even control the functioning of banking companies, financial institutions and NBFCs. It is not open to RBI to regulate companies which have their assets predominantly as investments in shares not for trading purposes but for holding stakes in group companies.”

According to him, CICs do not carry on any other financial activity. He said it was not clear how CICs with an asset size of Rs 100 crore or more could be required to register with RBI. “CICs, which are nothing but holding companies, cannot be required to register with RBI because they are not engaged in any financial activity which would bring them under the central bank’s jurisdiction,” Bhasin said.

Financial Chronicle, New Delhi, 21-04-2010.