Holding companies face stiff RBI norms

In a move that will affect several top business houses, the Reserve Bank of India (RBI) today introduced minimum capital adequacy norms and limits to the amount that can be borrowed by core investment companies (CIC), which operate as holding companies.

Experts said the move will crimp borrowings by several large companies and force them to revamp their ownership structures.

The guidelines issued today said the holding companies need to have a minimum capital ratio whereby the adjusted net worth should not be less than 30 per cent of their aggregate risk-weighted assets and risk-adjusted value of off-balance sheet items.

RBI has also said that holding companies must ensure that their outside liabilities do not exceed 2.5 times their adjusted net worth. This restricts such companies from borrowing outside the group.

Most of India’s top corporate houses such as the Tatas, the Aditya Birla Group, Bajaj, UB, GMR, have holding company structures that are essentially unlisted family-owned parent companies with equity stakes in all group companies.

Holding company structures have been popular, as they allow fund-raising at various levels, without the promoter losing control.

Tata Sons, one of the oldest holding companies in the country, has raised money by selling its stakes in other companies, which part-financed growth plans of subsidiaries.

Such companies will have to register with RBI within six months. Only those which meet capital adequacy and leverage ratios will be exempted from complying with the norms for maintaining minimum net owned funds as well as rules relating to exposures, RBI said.

RBI has described such companies as 'systemically important core investment companies’ that are involved in the business of acquiring shares and other securities and hold at least 90 per cent of their investment in shares or loans in group companies. They typically don’t accept deposits or trade in shares. It is difficult to determine if these companies are buying shares for holding a stake or for trading, the RBI said explaining the rationale of the need to register them. Such absence of clarity is not good for the system, it said.

Prabal Banerjee, group president and group CFO, Hinduja Group, said group holding companies would have limited resources available with them. As a consequence of the RBI move to bring in more discipline among Indian business houses, holding companies will have to bring in a lot more owned money. As a consequence of capital adequacy norms for risk weighted assets, holding companies will also have to provide for loss-making investments.

These companies, with an asset size of more than '100 crore, often raise funds through commercial paper, debentures, inter-corporate deposits, and other borrowings, and have inter-connectivity with the financial system and hence the need to register with RBI, it said.

Core investment companies are non-bank finance companies whose investment in shares of group companies form at least 60 per cent of its assets and it doesn’t trade in shares, bonds or loans in group companies except through a block sale.

“Investment holding companies that have been borrowing and leveraging under this umbrella are likely to come under the scanner of the central bank,’’ said a financial sector analyst.