Smaller holding companies exempted from registration

While the August 2010 Guidelines of Core Investment Companies (“CICs”) have been discussed in detail earlier on this blog, the final notification of the Directions by the Reserve Bank of India on 5th January 2011 needs attention for a different reason. And this is to understand how Reserve Bank of India has solved – for itself and for the companies – the problem of thousands of unregistered investment/holding companies. This has done by a separate notification of the same date.
It is worth understanding this peculiar problem. It is almost an open secret that there are in all probability thousands of holding investment companies that are not registered as non-banking financial companies with the Reserve Bank of India under Section 45-IA of the Reserve Bank of India Act, 1934. Punishment for non-registration is, on conviction, a mandatory minimum 1 year imprisonment which may extend upto 5 years and fine under Section 58B(4A) of the Act.
The reasons why thousands of such investment companies have not registered are many. Numerous older (pre-1997) such companies apparently simply forgot to apply for registration and missed the deadline of July 1997 for registration. After this date, technically, as per Reserve Bank of India, they could not continue as such. Then there were some companies that took a legal stand that holding investment companies were not required to be registered. Some of these took such a stand possibly also because otherwise it would have been impossible for them to comply with the requirements of minimum net  owned fund, some of the Prudential Norms, etc. Holding companies are typically those companies that hold shares in group companies not for regular sale or dealing, but as Promoters for the long term.
Apart from the technical stand some of such companies took that they are not really “NBFCs” as defined under the Act, the fact that most of such holding companies do not accept “public deposits” as defined, RBI may have found taking action against such companies not worth, particularly since the consequential punishment is quite harsh. Further, though not widely known, Reserve Bank of India has even been giving “exemptions” on a case-to-case basis to some such companies that applied to it. Thus, there are companies that are unregistered because of default, some unregistered because of a legal stand  andsome unregistered because of exemption.
This situation has continued for several years. Recently, however, Reserve Bank of India realized that while such companies may not accept public deposits, many of them are “systemically important”. This means that they are of such a size that their actions (or defaults) can affect the financial system.  Further, while they may not accept public deposits, many of them borrow heavily from banks, etc. Thus, the latest initiative to require such companies to come forward and register as NBFCs and comply with a diluted version of the requirements relating to net owned funds, Prudential Norms, etc.
What is important and not highlighted is that, simultaneously, the Reserve Bank of India has also exempted all those holding companies that are not systemically CICs from the requirement of registration. Thus, at one stroke, all these holding companies that are having total group assets of less than Rs. 100 crores are now not required to be registered.
Some areas of concern still remain.
  1. What about the past period of “default” by such holding companies – both for systemically important CICs that come forward for registration and other CICs that are only now exempted from registration?
  2. What about those holding companies that are not systemically important but have still registered. Can they claim to be no more required to be registered and thus surrender their registration?
  3. What about those holding companies that are registered as investment companies and not as CICs? Can they apply for registration as CICs and thus get benefit of relaxed requirements of net owned funds, Prudential Norms, etc.
  4. It is the Act that lays down the type of NBFCs that require registration. Since the RBI has only issued a notification requiring such investment companies to register, and not amended the Act itself, can holding companies still take a stand that they are still not required to register?

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CA Jayant Thakur

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