The Reserve Bank of India recently issued a discussion paper which proposes a significant overhaul of its approach to the regulation of non-banking financial companies (NBFCs), commonly referred to as 'shadow banks'. Recent events – in particular, defaults at certain storied NBFC groups and the effect thereof on the sector and financial markets as a whole – have brought the need to further tighten NBFC regulation into sharper focus.
Introduction
The concept of a core investment company (CIC) was first introduced by the Reserve Bank of India (RBI) in 2010. While, at that time, the RBI clarified that companies which invest in shares of other companies, even for the purpose of holding a stake in such company, should be regarded as carrying on the business of a non-banking financial institution, it specifically acknowledged that such class of non-banking financial institution should be afforded differential treatment. This led to the introduction of a differentiated framework for CICs – the main points of difference being the substitution of the capital to risk-weighted assets ratio (as applicable to non-banking financial companies (NBFCs)) with different capital requirements and an exemption from the rules on investment and credit concentration.
Introduction
The unprecedented and unanticipated business disruption brought about by COVID-19 has sharpened the focus on the importance of conservation and optimum utilisation of cash by various companies. In this context, the requirement for a company to maintain 15% of the value of all non-convertible debentures (NCDs) maturing in a year (NCD deposit requirement) by 30 April of that year in fixed deposits with scheduled commercial banks or other specified investments is likely to be a cause of concern.(1) This is especially true when considering the negative carry on such funds in a falling interest rate regime, as well as the opportunity cost of being able to utilise such available cash for the company s operations at a time when most companies cashflows have been drastically affected.