A working group formed by Reserve Bank of India has suggested simplified structure for core Investment companies (CIC) with fewer layers, restrictions on their capital investments and stronger board structures with at least 50% independent directors.
The group has also recommended formation of board level committees for audit and remuneration for CICs as well as group risk management committees to address the concerns over corporate governance that were compromised over the years with opaque ownership structures in large conglomerates.
It said at least one third of the board should comprise of independent members if chairperson of the CIC is non-executive, otherwise at least half of the board should be of independent members, in line with the stipulations in respect of listed entities.
“Currently, corporate governance guidelines are not explicitly made applicable to CICs,” the panel said, adding “the complexity of large conglomerates renders opacity to the groups in terms of ownership, controls and related party transactions.” It recommended that the number of layers of CICs in a group should be limited to two.
A CIC is a non-banking financial company (NBFC) which carries on the business of acquisition of shares and securities and 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. Further investments in equity shares in group companies constitutes not less than 60% of its net assets.
In September 2018, Infrastructure Leasing and Financial Company (IL&FS), a CIC with over 300 subsidiaries, defaulted on its payment following which over Rs 90000 crore worth of combined banking sector exposure was declared as non-performing or bad asset in the subsequent months.
The working group led by former corporate affairs secretary Tapan Ray has suggested capital contribution by a CIC in a step-down CIC, over and above 10% of its owned funds, be deducted from its adjusted net worth, as applicable to other NBFCs. They are also against allowing step-down CICs to invest in any other CIC.
RBI formed the working group in July to review regulatory and supervisory framework for CICs. RBI has on Wednesday made their report public and invited public comments on it by November 30.
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 panel is also in favour of inducting independent directors, conducting internal audit and preparing consolidated financial statement. Ring fencing the boards of CICs by excluding employees, executive directors of group companies from its board is also thought of.
Periodic onsite inspection of CICs and offsite returns on the lines of other NBFCs are also part of recommendations.