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The Reserve Bank of India [Get Quote] (RBI) has decided "in principle" to bring under its regulatory ambit holding companies floated by business groups and companies that also own non-banking finance companies (NBFC).

Sources close to the development said the move was prompted by the fact that NBFCs had frequently complained of an acute shortage of funds and some had received liquidity support from the government in consultation with RBI as a result. 
The criteria are:

Company should be of systemic importance if it fails or belongs to a group posing a systemic risk
 
Investment companies with 90 per cent of their investments in shares of its own NBFC and other NBFCs
 
Entities should derive more than 50 per cent of income as dividend from investments

But the central bank's own inspection and tax reports from the income tax department and registrar of companies have shown that many of these NBFCs have transferred surplus funds earned in good times to their holding companies, which are currently regulated under the Companies Act, in the form of loans or dividends.

This mechanism, thus, acts as a tax haven for the income of the entire business group. Dividend is taxed as dividend distribution tax at 15 per cent in the hands of the company offering the dividend. If the same company retains the amount as profit, it will have to pay tax at 30 per cent. The tax department has also raised this issue in several court cases.