Chillin' out till it needs to be funded
Global investors following the India story likely traverse the same names with Reliance, Tatas, Vijay Mallya’s UB, Bajaj and Airtel. However, three out of five here have managed their vast empires thru a holding company structure favored by Europeans and yes Britishers. That puts lawmakers in a spot as these holding companies have historically been categorized as other investment companies i.e. speciality NBFCs. Recently, in a note that would be critical for those considering large investment activity in this public opportunity i.e. India, RBI also set forth regulation setting apart such “Core Investment Companies” from other NBFCs that may continue primary borrowing, lending and proprietary trading activity under existing restrictions.
Under law, NBFCs cannot borrow from banks for investments and also they cannot approach international debt investors for ECB issues without RBI approvals as they need to show use of funds. As THE FIRM of CNBC India points out, that is quite contradictory for holding companies as they need funding for M&A and need to maintain buy back and investment/ divestment activity in equity on a regular basis. CICs are defined based on:
Given above conditions are satisfied, the holding companies are firstly freed from NBFC capital adequacy norms of 12%/15% of risk weighted assets. Now the adjusted net worth also includes 50% appreciation of the holding’s investments from book value and the amount would easily support such CICs in keeping its leverage to 2.5 times the said net worth at 30% of risk weighted assets. Thus the Tatas are neither under pressure to take public their 100 odd unlisted investments in unlisted Tata ventures as Tata Sons would easily romp in its portfolio of INR1.73 trillion from the 12 listed Tata firms as an example. There is however still no clarity on how these CICs would be enabled to raise M&A debt or otherwise get funds for growth as banks are not distinctly allowed to lend to such holding companies as for other real estate / NBFC / infrastructure NBFC constituencies. Also there is the usual inconsequential discussion on why trading is excluded from allowed activities for CICs as they are limited to ‘block’ transactions apparently just used colloquially and independent of other SEBI/Corporate law definitions.
Well, we are still a much more capital friendly country than China but there is not that much a mile to separate us!