Understanding Core Investment Companies (CICs): Role, Regulation & its significance in NBFC‘s sector

NBFC (Non-Banking Financial Company) is the main component of the Indian financial system and among the NBFCs in the recent past, Core Investment Companies have come up with a very specific and significant role. Although the roles of CICs may not always be visible they are very critical in the corporate structure, particularly about investments in group companies.

In this Blog, we will explain what are Core Investment Companies (CICs), how they are regulated, their role in NBFC space and the CIC registration process for businesses. Whether you are planning to register as an NBFC or just want to know how CICs work this comprehensive guide will answer your questions.

What Are Core Investment Companies (CICs)?

Core Investment Companies are NBFCs which invest in shares and securities usually within a corporate group. Unlike other NBFCs which may be into lending, leasing or microfinance, CICs are strictly into investment management within group companies. This focus is what differentiates them from other financial entities.

Here are few key characteristics of CICs:

• Investment Focus: CICs invest at least 90% of their net worth in shares, bonds or loans of same group companies.
• Limited Financial Activities: They do not engage in other financial activities like lending, asset financing or lending to external entities.
• Group Oriented: At least 60% of the net worth should be invested in equity shares of group companies so that their primary focus is around the parent company and its subsidiaries.

This framework allows large corporate groups to consolidate their investments in an organised manner, ensuring a streamlined approach to managing financial resources.

Role of CICs in the NBFC Ecosystem

Core Investment Companies (CICs) may appear to be a niche segment within the financial sector, but they are essential to the NBFC ecosystem. CICs assist group companies in optimizing their investments and establishing a robust financial framework, which enhances operational efficiency. By overseeing equity investments within the group, CICs ensure that resources are allocated effectively and that risks are managed more effectively.

Additionally, CICs facilitate the smooth flow of funds throughout the group, maintaining liquidity and efficiency. Their responsibilities extend beyond mere financial management; they contribute to the overall financial stability of the group. With regulatory oversight from the RBI, CICs play a vital role in risk mitigation, allowing group companies to concentrate on growth and strategic initiatives while remaining secure in a dynamic financial environment.

Here’s how this is beneficial to the larger financial landscape:

• Investment Management: CICs manage investment portfolios on behalf of group companies, allocating funds in such a manner as to support the overarching financial strategy of the corporate group.
• Structured Financial Control: Because of concentrated investments, CICs provide the advantage of having more structured financial controls over the interunit flows, which aids the group in focusing on its long-term strategic goals.
• Smooth Capital Allocation: . The CIC helps ensure proper capital allocation among subsidiaries. Group companies have access to the right amount of capital without having to seek outside funding.

Essentially, CICs allow corporate groups to be financially sound and stable while ensuring the effective management of group investments.

Regulatory Guidelines for Core Investment Companies (CICs)

Given the role that Core Investment Companies play in the financial system, the RBI has laid clear guidelines to regulate their activities. These regulations are crucial in the sense that they keep CICs operating within a defined framework and avoid risks likely to arise from unchecked financial activities.

Some of the most critical RBI guidelines for CICs are as follows:

• Registration Requirements: CICs with an asset size of over ₹100 crores are required to be registered with RBI as a Systemically Important CIC, CIC-ND-SI. That ensures the RBI regulates and monitors the large CICs.
• Capital Adequacy Ratio: The CIC shall maintain a CAR of minimum 30%. This would mean there is an adequate amount of capital to absorb losses arising and hence, company financial stability.
• Borrowing Limits: The borrowing capacities of the CICs are restricted to only 2.5 times its adjusted net worth so that the company is not exposed to excessive leverage and maintain prudence in finance.
• Risk Management: RBI asks the CICs to have great risk management practices without overexposure of risks in order to prevent its financial positions.

These norms are vital for monetary stability of group companies maintained by the CIC while being controlled by RBI.

The Process of Registering as an NBFC – CIC

If you want to set off as an NBFC, while your concern is mainly on Core Investment Company of the NBFC, to be compliant with RBI norms you will have to execute a series of operations. Here’s the process:

• Assess Eligibility: Verify whether the company is a CIC by checking that 90% of its assets are invested in group companies and it has a net worth over ₹100 crore.
• Document Preparation: Prepare and submit certain documentation which includes a full list of all required materials. Some such materials include the following:

1. Memorandum of Association (MoA) and Articles of Association (AoA)
2. Group company structure and investment details
3. Latest financial statements
4. Shareholding pattern of the group companies

• Approval From RBI: Send the required paperwork to the RBI using the COSMOS portal.
• Wait For RBI Approval: RBI will inspect the filing and may ask you for more information or explanations.
• Meet Regulator’s Requirements: You have to get a CIC to follow by various requirements including minimum capital ratio, filing regular reports .

Although the CIC registration process can be challenging, the advantages of maintaining a well-regulated, systematic approach to investment management are enough.

Challenges and Benefits of Operating a CIC

On the one hand, a CIC provides numerous advantages such as more organized investment management and tighter control of group finances, but at the same time there are issues that one has to align oneself with too.

Key Challenges:

• Regulatory Compliance: Following RBI’s strict compliance can become troublesome for smaller CICs, as they have very short resources.
• Limited Financial Activities: In the case of CICs, they are only permitted to do share management which means that they have to remain within their investment function.
• Risk Management: Investing in a highly mobile market may pose the risk of the customer’s balance sheet, so a solid risk management methodology should be adopted.

Benefits:

• Financial Structuring: CICs provide a structured manner to handle the finance of the corporations, for instance, permitting smooth allocation of capital among the units.
• Efficient Tax Planning: CICs help to find better tax schemes inside corporation groups, which eventually reflects in lower taxes.
• Centralized Management: The CICs, by investing through one location, allow companies to make the right decisions that ensure they continue to grow in the long term.

The Impact of CICs on the Financial Sector

Through Core Investment Companies within the corporate groups, their stability is affected by the CICs. CICs also play a role in the stability of the overall financial sector. Through the concentration of investments within a group and compliance with the RBI rules, the CICs are the main agents in the elimination of the risks that could affect the financial system.

Here are some of the impacts:

• Reduced Systemic Risk: CICs are the source of reduced financial instability by the enforcement of RBI norms which can avert the situation resulting from over-liability or irrational investment decisions
• Support for Corporate Growth: CICs are the ones who provide the possibility for corporates to distribute the resources more effectively which, in its turn, leads to business growth in general as a result of the companies being able to enter new markets and expand their products or services offerings.
• Enhanced Governance: The stringent regulatory environment ensures that CICs function with the highest level of financial discipline, thus contributing to the better control and management of the NBFC sector of the country.

Conclusion: Is Registering as a CIC Right for Your Business?

Knowing the function and the norms of Core Investment Companies is necessary for any business being a part of a corporate group. CICs operate as a planned and regulated way to manage investments, ensuring that the companies in the group can rely on funds from the financial institution while following the strict RBI requirements

If your business is thinking of enrolling as an NBFC, particularly as a CIC, the process can be overwhelming. However, the advantages of responsible investment management and regulatory compliance make it a good decision for a long time. Are you interested in learning more about the role and impact of Core Investment Companies (CICs)? Share your thoughts in the comments, engage with us by sharing this blog with your network, or get in touch with NBFC Advisory for personalized advice on CIC registration and navigating the complexities of RBI guidelines. Let’s build a sustainable financial future together!