Promoters may be told to simplify group structures, remove multiple layers

Illustration by Binay Sinha
Promoters of Indian companies who hold shares in group firms via core investment companies (CICs) are likely to be asked to streamline the structures of these CICs to make them less complex by removing multiple layering.

According to banking sources, the Reserve Bank of India (RBI) may ask the registered CICs to merge into a single entity, a move aimed at improving corporate governance in the wake of the scandal involving Infrastructure Leasing & Financial Services (IL&FS).

Taking a cue from the move, the Aditya Birla group has started the process and is merging its promoter holding companies into Birla Global Holdings Ltd (BGHL). The plan is to merge Trapti Trading, TGS Investments, and Turquoise Investments with BGHL. With this, BGHL will emerge as the main investment company of the group, holding substantial stakes in group firms. When contacted, an Aditya Birla group spokesperson declined to comment.

The Tata group holds stakes in various group companies via its holding company, Tata Sons Pvt Ltd, which is registered with the RBI as a CIC. That is the right model to follow, said the sources. “Multiple CICs are not only a governance nightmare, they also complicate inspections by the RBI,” said a source close to the development. 

Early this month, the RBI had formed a committee to give suggestions on how Indian promoters holding shares in listed companies could improve their corporate governance structures and streamline stakes in various group entities. 

The committee's report is expected by October-end. “Over the years, corporate group structures have become more complex involving multiple layering and leveraging, which has led to greater inter-connectedness with the financial system through their access to public funds. Further, in the light of recent developments, there is a need to strengthen the corporate governance framework of CICs,” the RBI said.

CICs with assets of Rs 100 crore and above are compulsorily registered with the RBI as non-banking finance companies and are not allowed to raise funds as public deposits. These CICs are also not allowed to trade in shares, bonds, debentures, debt or loans in group companies, except through block sale for the purpose of dilution or disinvestment. CICs with assets of Rs 100 crore and below are not registered with the RBI, unless they raise funds from overseas.

Statistics collated from the stock exchanges show that several Indian promoters hold shares in their group companies via CICs. 

Many of these investment companies have been passed on from one generation to another by business families. The RBI's new rule will impact the older companies which have followed this practice for a long time. 

Apart from CICs, Indian promoters also hold stakes in their companies via trusts and limited liability partnerships to save on taxes. 

Regulator’s view

| Consolidation of CICs to help improve corporate governance standards
| Promoters may hold shares in listed companies via lower number of CICs
| Birla group begins consolidation of CICs, others to follow
| RBI may give a deadline for consolidation