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Issue of Guarantees by CICs

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On 11 May 2012, the Reserve Bank of India (“RBI”) issued a notification (“Notification”) relating to issuance of guarantees by core investment companies (“CICs”). CICs are companies which have their assets predominantly in shares for holding stake in group companies but not for trading or carrying any other financial activity.

CICs are regulated by the Core Investment Companies (Reserve Bank) Directions, 2011, dated 5 January 2011 (“Directions”). CICs which have raised or hold public funds and have assets worth Rs. 100 crore and more, either individually or in aggregate with the other CICs in the same group are classified as systemically important CICs. Systemically important CICs require registration from the RBI under Section 45 IA of the Reserve Bank of India Act, 1934. CICs that have an asset size of less than Rs.100 crore irrespective of whether they are accessing public funds or not, and CICs that have an asset size of Rs. 100 crore and above and are not accessing public funds are exempt from registration.

The Notification recognizes that the CICs may be required to issue guarantees or take on other contingent liabilities on behalf of other group entities. The notification requires that CICs must ensure that they can meet their obligations under such guarantees as and when they arise. In particular, CICs which are exempted from obtaining registration from the RBI must be able to meet their liabilities arising out of such guarantees without recourse to public funds. If CICs having assets worth Rs. 100 crore or above access public funds without obtaining a registration certificate from the RBI, they will be deemed to have violated the Directions. The term ‘public funds’ for the above purposes includes funds raised either directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance, but excludes funds raised by issue of instruments which are compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.

Shantanu Jindel [shantanu.jindel@pxvlaw.com]

 

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