Holding companies in India (Your own group not for NBFC nor Venture Capitalists)

Thinking of making a Holding company in India for your own group of companies? Here are a few things to consider towards the govt guidelines. We talk about the benefits of holding companies in another article soon.

At the cost of being repetitive – This article is for investments in shares for holding stake in your own group companies; this is not relevant for trading companies, nor for venture capitalists nor for NBFC’s (CIC are treated differently than NBFC).

So what are these holdings companies called?

Such companies that have core investments in their group of companies and follow a certain criteria are known as Core Investment Companies a.k.a CIC’s.

RBI guides us on this –

Most companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity, i.e., CICs, justifiably deserve a differential treatment in the regulatory prescription applicable to Non-Banking Financial Companies which are non deposit taking and systemically important to this extent.

These companies as per RBI qualify as a CIC when the following directions are followed:-

(i) it 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;

(ii) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (i) above;

(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(iv) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the Reserve Bank of India Act, 1934 except investment in

(a) bank deposits,

(b) money market instruments, including money market mutual funds

(c) government securities, and(d) bonds or debentures issued by group companies, granting of loans to group companies and issuing guarantees on behalf of group companies.

Incase you want to read more about our layman interpretation was derived from the following Notification from RBI Master Circular– Regulatory Framework for Core Investment Companies (CICs)

Breaking down the above further…

So what we talk about are CIC’s then there is also Systemically important CIC.What are they?

Till the time you don’t cross 100 Crore total asset you wont be counted as a Systematically Important CIC ( acronym: CIC-ND-SI) and hence you would not need to get registered with RBI. Once you cross the 100 crore mark more regulations and also allowances follow. We don’t discuss those here we just talk about the less than 100 cr CIC”s here

A few things to set the lingo right –

What are Net Assets (as per RBI towards this cause)?

9.(e) “net assets” means total assets excluding –

(i) cash and bank balances;

(ii) investment in money market instruments and money market mutual funds

(iii) advance payments of taxes; and

(iv) deferred tax payment.

What is Total Asset (as per RBI towards this cause) ?

9.(i) “total assets” means the total of all assets appearing on the assets side of the balance sheet.

So now since we are less than 100 Cr total assets and we know the definitions, this is what a Holding company needs to ensure so that they don’t fall under the category of and NBFC and fall under CIC :-

(Side note:- Generically, CIC’s are also NBFC but since they only invest in their group of companies and follow these set prescribed rules as per RBI we don’t “discuss” them as just another NBFC)

These directions shall apply to every CIC, that is to say, a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:-

The 60% equity criteria will determine all your other asset actions. Since that will cap the assets you can purchase keeping in mind that the 90% of net assets rule. So your trademarks, company physical assets all would be needed under 10% of the net assets as defined above.

Registration with RBI needed? Anything else?

Every CIC (read as under 100Cr assets and also as those who become Systematically Important but have been awarded an exemption) is exempted from registration requirement with RBI shall pass a Board Resolution that it will not, in the future, access public funds. However CICs may be required to issue guarantees or take on other contingent liabilities on behalf of their group entities. Before doing so, all CICs must ensure that they can meet the obligation there under, as and when they arise. In particular, CICs which are exempt from registration requirement must be in a position to do so without recourse to public funds in the event the liability devolves, else they shall approach RBI for registration before accessing public funds.

Any special action towards Overseas Investment or Branches?

Yes,  Prior Approval of RBI in cases of Overseas investment by CICs ! Since the core is just investing in your group of companies and no other (major) activity; anything that requires Overseas action needs to be as per master circulars of RBI. Please consult with a Chartered Accountant or FEMA expert on this for any details

When does all of this get information get captured?

Conditions need to be Satisfied as on the date of the last audited balance sheet

LAST UPDATE TO THIS INFORMATION – 2020 October

Written by one of the Team Members so as to share knowledge. This should not be construed as legal advice. Please talk to your CA, CS or Business Lawyer for advice.