The much-awaited press note on credit information companies (CICs) is finally out, ending months of uncertainty on the fate of foreign investment in these companies (Press Note No. 1 of 2008, dated 12 March 2008).
The press note has come as a breather, especially for those companies whose applications were held up with the Reserve Bank of India (RBI) for want of regulatory clarity. The applications are now likely to move ahead.
Illustration: Jayachandran/ Mint
CICs are set up to maintain records of credit histories on individuals and business entities. They develop credit scores for their users, which can be accessed by credit institutions to assess their reputation in the credit market. A good score means lower interest rates and other preferential treatment at the time of granting credit.
Foreign direct investment (FDI), in most situations, would be under the “automatic” route (that is, post investment filing). One of them relates to non-banking financial companies, or NBFCs, earlier not under the automatic route and subsequently included, subject to certain conditions.
The NBFC list comprises 19 activities, including credit reference agencies—the capitalization norms are separately specified for fund-based and non- fund-based activities, and it would be logical to assume that credit reference agencies would be considered a non- fund-based activity.
However, due to certain regulatory concerns, the Credit Information Companies (Regulation) Act, 2005, (Cicra) was enacted for regulating CICs and to facilitate efficient distribution of credit and for matters connected therewith.
This Act defines credit information as information relating to amounts of loans and advances, amounts outstanding under credit cards and other credit facilities granted (or to be granted) by a credit institution to any borrower, and the term also includes information regarding the nature of security taken from such a borrower, his creditworthiness, etc.
In addition to the business of credit information, a CIC may engage in the business of providing credit information to individuals and corporate borrowers, providing data management services to credit institutions that are members of the CIC concerned, and collating and disseminating information related to property mortgaged to credit institutions. The prescribed limit on issued capital is Rs20 crore, and minimum paid-up capital is 75% of the issued capital.
The maximum admission fee chargeable by CICs on member credit institutions or other credit information companies that are also members of the CIC concerned is Rs15 lakh.
CICs can charge amounts not exceeding Rs500 in the case of individuals and Rs5,000 in the case of other borrowers towards fee for providing credit information to a specified user in respect of such borrower.
The management of a CIC has to be entrusted to a whole-time chairperson and a part-time chairperson, who can be of a non-executive nature. The board of directors should consist of persons with special knowledge in the fields of public administration, law, banking, finance, accountancy, management and information technology.
The Act envisages a certificate of registration given by RBI as provided in section 5(2) of Cicra. Following the promulgation of Cicra, RBI had issued a press release, dated 18 April, requiring companies to apply to it in accordance with Cicra.
This background is important in the context of the press note. It is interesting to note that, as of date, no company has obtained a registration from RBI.
Incidentally, the information can be used by any specified user, which includes any credit institution, CIC as also insurance companies, registered brokers, broking agencies registered with the Securities and Exchange Board of India, a cellular/phone company, etc.
Clearly, there is significant sensitivity in the context of the fact that sensitive credit information would be available to a very large mass of people which, perhaps, was an important dimension that the government has considered in terms of the relatively stringent regulations of CIC.
The press note makes it clear that foreign investment in CICs would be subject to Cicra, notified in April 2006.
Foreign investment in CICs would be allowed up to 49%, with prior government approval. The limit of 49% would include both FDI as well as investments from registered foreign institutional investors (FIIs).
The press note provides that FIIs would be permitted to invest a maximum of 24% in a listed CIC, within the overall limit of 49%. In addition, a single FII would not be permitted to hold directly or indirectly more than 10% equity of CIC. Furthermore, any acquisition in excess of 1% by an FII would need to be reported to RBI. Besides, FIIs would not be permitted to nominate a representation on the board of directors.
The above restrictions are not applicable for investment under the FDI scheme, as long as the overall limit of 49% is not breached. This has come as a big respite as media reports in the recent past had led to speculation that these restrictions for FIIs would apply to FDI investments as well.
There are a few dimensions to the above
—How a CIC will be structured with foreign investment up to 49% is something that needs to be seen. It is possible that it could be FDI (with no FII investment) up to 49%, with the balance being held by Indian residents.
—Assuming that there is an Indian partner, that is, it is a joint venture, the 51% Indian holding will lead to tricky dimensions of structuring a relationship somewhat similar to what used to happen at the time when FDI limits were 40% under the Foreign Exchange Regulation Act, or Fera, regime.
—The CIC could be listed, in which case it could be 24% maximum, with no single FII holding more than 10%.
—If not listed, then the level of interest of an FII may not be strong in the absence of an exit route.
Nevertheless, this is a marked divergence from existing regulations, which allowed 100% FDI in credit reference agencies under the automatic route. The press note fortifies the government’s intention of adapting a cautious approach with regard to CICs.
Credit reference agencies were included in the 19 specified activities permitted to be undertaken by NBFCs under the automatic route. Consequently, it has been decided to remove this from the list of NBFC activities provided in Press Note 4 (2006), dated 10 February 2006. RBI, through its press release dated 18 April 2007, had invited applications from companies for the credit information business.
The last date for making such applications was 31 July 2007; however, practically, the foreign applicants were faced with a dilemma because press reports indicated a foreign investment limit of 49% but the government notification has come only this month.
It would be interesting to see how RBI deals with applications which had sought foreign investment over and above the proposed ceiling of 49%. Whether or not it would provide them sufficient time to scout for new Indian joint venture partners and amend their applications accordingly would need to be seen.
Also, what remains to be seen is the number of players to whom RBI grants licences.
While it is important to avoid a monopolistic situation with very few players, it is equally relevant not to have too many players dealing with sensitive information.
However, the greater challenges would definitely be for CICs, which would now have to start afresh. All of them would have to apply to the Foreign Investment Promotion Board for approvals.
The real problems would be faced by those applicants who had not anticipated such a steep cut in permissible investment limits. Though most of the applicants may have tied up with one or more Indian partners, they would now need to renegotiate the terms of their partnership. That the Indian partners will now be in a stronger position to dictate terms will be one more implication; this can often happen regardless of whether the Indian party can add proportionate value or otherwise.
Cicra and the press note are expected to facilitate the creation of a robust and regulated credit culture, thus improving the prospects of loan recovery and outstanding amounts from borrowers, be it individuals or corporations.
While there are difficulties envisaged as above, overall, this can be viewed as a step in the right direction, as it would help lenders access the information to take the right lending decisions and help them avoid getting into situations such as those leading to the subprime crisis that has rocked the global economy.
Ketan Dalal is executive director of PricewaterhouseCoopers.
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