Inside The NBFC And CIC Framework: Tug Of War Between The 50-50 And 90-60 Tests

I. Introduction

The Reserve Bank of India ("RBI") was established under the Reserve Bank of India Act, 1934 ("RBI Act") to act as India's central monetary authority, regulate the issuance of bank notes, maintain reserves to secure monetary stability in India, regulate the monetary policy framework, and operate the currency and credit system to the country's advantage.¹

Traditionally, the responsibility for facilitating routine monetary operations in India has rested with banks, which are regulated by the RBI. Banks accept deposits from the public and regulate the payment and settlement system. They play a key role in meeting the financing and credit requirements of individuals and businesses.²

As India's economy expanded, several entities began undertaking monetary operations akin to those traditionally carried on by banks and forming part of the payment and settlement system. These entities have been recognised as non-banking financial companies ("NBFCs"). The emergence of NBFCs raised concerns regarding depositor protection, financial stability, misuse of public funds, and the growth of unregulated credit intermediation.³

In response to the need for better regulation of the NBFC sector, the RBI Act was amended in 1997 to provide a comprehensive regulatory framework for NBFCs. Chapter IIIB of the RBI Act introduced a regulatory framework governing NBFCs, including norms relating to the acceptance of public deposits, capital adequacy, income recognition, asset classification, provisioning requirements, exposure limits, and other prudential measures prescribed by the RBI to monitor their financial health and functioning.⁴

The classification of an entity as an NBFC has principally been anchored in whether the company is a financial institution carrying on the business of financing or a non-banking institution whose principal business is the receiving of deposits. Historically, the "principal business" test, commonly referred to as the 50-50 Test, evaluates whether the financial assets of an entity constitute more than 50 per cent of its total assets and whether income derived from such assets exceeds 50 per cent of its total income.⁵

Within this broader NBFC framework, Core Investment Companies ("CICs") have evolved as a specialised sub-category of NBFCs designed to regulate holding companies that primarily invest in group entities, rather than engaging in financial activities involving public funds.⁶ The issuance of the Reserve Bank of India (Core Investment Companies) Directions, 2025 ("CIC Directions"), as part of the consolidation exercise undertaken by the RBI in November 2025, sought to streamline the regulatory regime. Ho⁷wever, there is an apparent ambiguity between paragraph 3 and paragraph 17(3) of the CIC Directions. Paragraph 3 defines a CIC as a type of NBFC, which would ordinarily mean that a company should first satisfy the principal business test that qualifies it as an NBFC, while paragraph 17(3) simultaneously states that CICs need not meet the principal business test.

These parallel provisions create uncertainty as to whether a company must first qualify as an NBFC before becoming a CIC, or whether merely satisfying the CIC-specific conditions is sufficient for an entity to be classified as a CIC.

II.  Regulatory Framework

A. NBFC Classification under the RBI Act

Section 45-I(c) of the RBI Act defines a “financial institution” to include entities engaged in financial activities such as lending, investment in securities, and financing transactions. Section 45-I(f) further clarifies that an NBFC is one that carries on such financial activity as its principal business.

The RBI operationalised this statutory framework through the principal business criteria, requiring both asset and income thresholds to be satisfied. In essence, these criteria provide that financial activity is a company's principal business when its financial assets constitute more than 50 per cent of its total assets and income from financial assets constitutes more than 50 per cent of its gross income ("50-50 Test"). A company that fulfils the 50-50 Test is required to register as an NBFC with the RBI.⁸ This test has functioned as the jurisdictional gateway for regulatory oversight, ensuring that only entities substantially engaged in financial activity are brought within the ambit of NBFC regulation.

This test also brings a wider range of companies within NBFC regulation, even where a company was not incorporated with the intention of carrying out financial activities but is, in fact, mainly engaged in financial activities. Such companies, if they satisfy the 50-50 Test, are considered NBFCs for the purposes of RBI regulation.

B.  CICs as a Sub-category of NBFCs

CICs are defined under paragraph 3 of the CIC Directions as companies carrying on the business of acquisition of shares and securities and satisfying the "90-60 Test"⁹, i.e.:

• Not less than 90 per cent of net assets must be invested in group companies; and
• At least 60 per cent of such investments must be in equity

The CIC Directions expressly state that they apply to "every CIC, that is to say, a non-banking financial company" satisfying the incremental conditions specified therein.¹⁰ This formulation reinforces the conceptual position that CICs are not standalone entities but a specialised category within the NBFC framework.

III.  The 50-50 and 90-60 Tests

A. The Sequential Model

 The RBI primarily governs financial activities in India through banks, where public funds are directly involved. NBFCs are categorised separately because they have limited exposure to financial activities. CICs are a sub-category of NBFCs, where exposure is relatively minimal and, accordingly, the governance requirements are less onerous than those applicable to other NBFCs.

Because CICs are specifically sub-categorised within the broader structure of NBFCs, they are permitted to enjoy CIC status without fulfilling the income criteria that are otherwise mandatory for NBFCs.

B.  The Disruption under the 2025 Directions

The insertion of paragraph 17(3) of the CIC Directions provides that CICs need not meet the principal business criteria specified under the NBFC Directions.¹¹ This provision has led to a competing interpretation that entities satisfying the 90-60 Test may be classified as CICs irrespective of whether they meet the 50-50 Test thresholds specified for NBFCs.

At first glance, this appears to decouple CIC classification from NBFC status. However, such an interpretation raises fundamental questions regarding the RBI's regulatory intention in categorising CICs as NBFCs.

IV. The Role of RBI FAQs

Prior to the issuance of amendment to the CIC Directions in 2025, RBI FAQs had indicated that CICs may not be required to satisfy the principal business criteria. However, FAQs constitute interpretative guidance rather than binding law.

The incorporation of such clarifications into the CIC Directions has elevated their normative status, but not without creating tension with the underlying statutory framework. It is therefore necessary to read these provisions harmoniously, giving effect to both the text and the legislative intent.

V. Practical Implications for Holding Companies

A. Operating Holding Companies

In some cases, the main business activity of a company may be agricultural operations, industrial activities, trading, or similar activities, and the company may continue to derive its primary income from these activities. Additionally, a company may also hold securities of subsidiaries or invest excess funds in listed entities.

If such entities are treated as CICs solely on the basis of the 90-60 Test, they would be brought within the regulatory ambit despite not being engaged in financial intermediation. This would extend the scope of NBFC regulation beyond its intended boundaries.

B.  Pure Investment Holding Companies/CICs

Entities that predominantly hold investments in group companies and derive income primarily from dividends may satisfy the asset limb of the 50-50 Test but fail the income limb. Given the volatility and discretionary nature of dividend income, strict adherence to the income threshold may lead to regulatory uncertainty. As CICs are a sub-category of NBFCs, and where the income criteria under the 50-50 Test are not fulfilled, a company may not be considered a CIC. Accordingly, the clarification that CICs may not be required to fulfil the NBFC income criteria is crucial.

Paragraph 17(3) appears to address this concern by allowing CICs to continue their registration even if they do not meet the principal business criteria on an ongoing basis.

VI. A Harmonised Interpretation

A coherent interpretation of the CIC Directions would involve the following propositions:

1. NBFC Status: An entity must satisfy the criteria for being an NBFC, e., the entity must either be a financial institution or satisfy the 50-50 Test.
2. Classification Requirement: Upon qualifying as an NBFC, the entity must meet the 90-60 Test thresholds to be classified as a CIC, in addition to satisfying the other applicable criteria.

This interpretation preserves the statutory foundation of NBFC regulation while giving meaningful effect to paragraph 17(3).

VII.  Conclusion

The consolidation of the CIC Directions in 2025 was intended to enhance clarity and ease of compliance. However, the introduction of paragraph 17(3) has created an interpretational dilemma that goes to the heart of NBFC classification.

A purposive reading of the regulatory framework suggests that CICs remain a sub-category of NBFCs and that the principal business test continues to serve as the gateway for regulatory jurisdiction. The exemption under paragraph 17(3) is best understood as a relaxation applicable to CICs, rather than a dispensation from the foundational requirement of being an NBFC.

The current ambiguity underscores the need for regulatory guidance that reconciles textual inconsistencies with the underlying statutory intent.

Footnotes

^{1 Preamble to the Reserve Bank of India Act,}

^{2 Section 5(b), The Banking Regulation Act, 1949}

^{3 Chapter VI, Manual on Financial and Banking Statistics - March 2007}

^{4 Chapter IIIB, Reserve Bank of India Act,}

^{5 RBI (NBFC – Scale Based Regulation) Directions, 2025, para 38 and Press Release 1998-99/1269 dated April 08, 1999 available at: https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/6059.pdf}

^{6 RBI (Core Investment Companies) Directions,}

^{7 RBI Master Directions Consolidation Notification, 28 November}

^{8 Section 45-IA of the RBI Act, 1934 read with RBI FAQs available at ALLNBFC23042025.PDF}

^{9 CIC Directions, 2025, para 3.}

^{10 Ibid}

^{11 CIC Directions, 2025, para 17(3).}

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