CIC Club: First Rule, Are We Even An NBFC?

As corporate ambitions stretch across sectors and geographies, companies are on the constant lookout for efficient ways to scale and manage growth across diverse verticals. In this pursuit, the playbook move is to place a parent entity at the helm, steering the ship, controlling the pooling of investments, and calling shots across its operating subsidiaries. This model offers several practical benefits: streamlined capital allocation, centralized governance, and cleaner lines of ownership.

This simple structuring, however, may risk scrutiny from the Indian financial regulator. Despite having little to do with financial intermediation, holding companies, in particular, may be pulled into the NBFC-CIC net.

The Reserve Bank of India Act, 1934, governs the scope of NBFCs, identifying them broadly as institutions undertaking 'financing activities'. In 1999, RBI introduced the widely cited '50-50 Test', laying down clear parameters to determine when a company's principal business would be regarded as financing activity, thereby removing ambiguity around the scope of regulation. The '50-50 Test' rests on two simple rules: if over half of a company's assets are financial assets, and over half of its income comes from them, the company is treated as being in the financing business. Meet both conditions, and you are classified as an NBFC!

While the 50-50 Test serves as the gatekeeper for NBFC classification, the regulatory framework further recognises certain sub-categories within NBFCs. This includes companies incorporated as holding companies, popularly known as core investment companies or CICs. Unlike conventional NBFCs that engage in lending or deposit-taking, CICs primarily hold shares and investments in group companies as part of a broader corporate structure. This places CICs in a unique position within the NBFC ecosystem – neither functioning as traditional financial institutions, nor operating entirely outside the regulatory web.

Unpacking CICs

CICs are recognised and regulated by RBI vide its master directions introduced in 2016 ("CIC Directions"). Broadly, a company is treated as a CIC if it meets three key parameters. First, at least 90% of its net assets must be invested in group companies, with a minimum of 60% in the form of equity shares. Second, it cannot actively trade in these investments, except through block sales. And third, it cannot carry on any other financial activity, apart from providing limited investments, loans, or guarantees to its group entities. Collectively referred to as "CIC Parameters".

That said, to be a regulated CIC, a company in addition to meeting the CIC Parameters should also have total assets worth INR 100 crores and should raise or hold public funds. CICs meeting the foregoing requirements are required to register with RBI and comply with a host of obligations, such as maintenance of adjusted net worth, minimum capital requirements, prudential regulations and leverage restrictions. Smaller CICs or those without public funds, however, remain outside the framework.

Where the Lines Blur: CICs in the NBFC Vortex

While the CIC framework appears clear on paper, its overlap with the broader NBFC regime has created persistent ambiguities. Notably, the CIC Directions state that they apply to "every NBFC" meeting the CIC Parameters. This choice of language has been the root of much confusion, suggesting that NBFC recognition is a prerequisite for a company to be a CIC. On a literal reading, it implies that a company must first cross the threshold of NBFC classification (by satisfying the 50-50 Test) before it can even be considered under the CIC framework. This creates a sequencing problem: if a company's principal business is merely to hold group investments, it may not neatly fit the 50-50 Test, and therefore may never technically be classified as an NBFC, despite squarely meeting the CIC Parameters. This is made even more interesting with RBI's clarifications where CICs are not required to meet the '50-50 Test', i.e., the principal business test. The unresolved question, therefore, is whether satisfying the CIC Parameters is alone enough to classify such companies as CICs.

Here's the catch – while RBI has issued clarifications, it has not amended the CIC Directions, which still seem to be premised on a company first passing the 'principal business' test before the CIC Parameters even get a seat at the table. The result? A grey zone that has spawned multiple interpretations in the market. For many group holding entities, especially those far removed from financial intermediation, working out whether they fall inside the regulatory net often feels less like compliance and more like a game of labels and loopholes.

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