Non-banking financial companies, or NBFCs, are financial institutions that provide banking services, but do not hold a banking

license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still covered under banking regulations.

NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activites. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business.

NBFCs offer all sorts of banking services, such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs and other obligations. These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business. Non-bank institutions also frequently support investments in property and prepare feasibility, market or industry studies for companies. However they are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments.

Classification
Depending upon their nature of activities, non- banking finance companies can be classified into the following categories:

1. Development finance institutions 2. Leasing companies 3. Investment companies 4. Modaraba companies 5. House finance companies 6. Venture capital companies 7. Discount & guarantee houses 8. Corporate development companies

Financial Reforms in India

The financial system comprises markets, intermediaries, instruments and other institutions that facilitate in carrying out the financial decisions of households, business firms and governments. It has been empirically established that a well developed financial system in sine-qua-non for achieving healthy and sustained economic growth. The book examines constituents of the Indian financial system in detail. It highlights strengths and weaknesses of the Indian financial system before 1991, making a strong case for undertaking comprehensive financial sector reforms in India to achieve a high and sustained economic growth. It describes in detail different types of reform measures undertaken after 1991 in the financial sector. The book also critically analyses the impact of financial sector reforms on commercial banks, cooperative banks, DFIs and NBFCs. Contents : Preface / List of Tables / Abbreviations / Structure of Financial System / Rationale of Financial Sector Reforms / Indian Financial System-Overview / Financial Sector Reforms in India / Impact of Financial Sector Reforms in India / Conclusion / Annexture / Bibliography / Index.

RESERVE BANK OF INDIA DEPARTMENT OF FINANCIAL COMPANIES CENTRAL OFFICE 15, NETAJI SUBHAS ROAD POST BOX NO.571 CALCUTTA 700 001 Non-Banking Financial Companies Auditors Report (Reserve Bank) Directions, 1998

Notification No.DFC. 117 /DG(SPT)-98 dated the January 2, 1998.

In exercise of the powers conferred by sub-section (1A) of section 45MA of the Reserve Bank of India Act, 1934 (2 of 1934), Reserve Bank of India, hereby, gives to every auditor the directions hereinafter specified. 1. Short title, application and commencement of the directions (1) These directions shall be known as 'Non-Banking Financial Companies Auditors Report (Reserve Bank) Directions, 1998.' (2) These directions shall apply to every auditor of a non-banking financial company as defined in Section 45I(f) of the Reserve Bank of India Act, 1934 (2 of 1934). (3) These directions shall come into force with effect from January 2, 1998. 2. Auditors Report to contain matters specified in paragraphs 3 and 4 In addition to every report made by the auditor under Section 227 of the Companies Act, 1956 (1 of 1956) on the accounts of a non-banking financial company examined by him for every financial year ending on any day on or after the commencement of these directions, the auditor shall also make a separate report to the Board of Directors of the Company on the matters specified in paragraphs 3 and 4 below. 3. Matters to be included in the auditors report The auditors report on the accounts of a non-banking financial company shall include a statement on the following matters, namely, : (A) In the case of all non-banking financial companies whether the company has applied for registration as provided in Section 45IA of the Reserve Bank of India Act, 1934 (2 of 1934), if it is a company incorporated before January 9, 1997 and whether it has received any communication from Reserve Bank of India about the grant of or refusal of certificate of registration to it, and whether the company has obtained a certificate of registration from the Reserve Bank of India if it is a company incorporated on or after January 9, 1997. (B) In the case of a non-banking financial company accepting/holding public deposits Apart from the matters enumerated in (A) above, the auditor shall include a statement on the following matters, namely, :(i) whether the public deposits accepted by the company together with other borrowings indicated below viz., (a) from public by issue of unsecured non-convertible debentures/bonds; [(ia) whether the public deposit held by the company in excess of the quantum of such deposit permissible to it under the provisions of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 are regularised in the manner provided in the directions;] (b) from its shareholders by a public limited company and (c) any other type of deposit which has not been excluded from the definition of public deposit in the Non-Banking Financial Companies (Reserve Bank) Directions, 1998 are within the limits admissible to the

company as per the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1998; (ii) whether the credit rating for fixed deposits of_________(mention the rating) assigned by the Credit Rating Agency viz.,____________ (Name of the agency) on ___________ (the date) is in force and the aggregate amount of deposits outstanding as at any point during the year has exceeded the limit specified by the Rating Agency; (iii) whether the company has defaulted in paying to its depositors the interest and /or principal amount of the deposits after such interest and/or principal became due; (iv) whether the company has complied with the prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts, and concentration of credit/investments as specified in the directions issued by the Reserve Bank of India in terms of the NonBanking Financial Companies Prudential Norms(Reserve Bank) Directions, 1998. (v) whether the capital adequacy ratio as disclosed in the return submitted to the Reserve Bank of India in terms of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 has been correctly determined and whether such ratio is in compliance with the minimum Capital to Risk Asset Ratio prescribed by Reserve Bank of India; (vi) Whether the company has complied with the prescribed liquidity requirement and kept the approved securities with a designated bank. (vii) whether the company has furnished to the Reserve Bank of India within the stipulated period the halfyearly return on prudential norms as specified in the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998; and (viii) whether the company has furnished to the Reserve Bank of India within the stipulated period the return on deposits as specified in the First Schedule to the Non-Banking Financial Companies (Reserve Bank) Directions, 1998. [(ix) In case of opening of new branches or offices to collect deposits or closure thereof and in the case of appointment of agent, whether the company has complied with the requirements contained in the NonBanking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 contained in Notification No. DFC. 118/DG (SPT)-98 dated January 31, 1998]. (C) In the case of a non-banking financial company not accepting public deposits Apart from the aspects enumerated in (A) above, the auditor shall include a statement on the following matters, namely, : (i) whether the Board of Directors has passed a resolution for the non- acceptance of any public deposits. (ii) whether the company has accepted any public deposits during the relevant period/year; and (iii) whether the company has complied with the prudential norms relating to income recognition, accounting standards, asset classification and provisioning for bad and doubtful debts as applicable to it. (D) In the case of a non-banking financial company which is an investment company not accepting public deposits and which has invested not less than 90 percent of its assets in the securities of its group/holding/subsidiary companies as long term investments

Apart from the matters enumerated in (A) above, the auditor shall include a statement on the following matters, namely, : (i) whether the Board of Directors has passed a resolution for the non- acceptance of public deposits; (ii) whether the company has accepted any public deposits during the relevant period/year; (iii) whether the company has through a Board resolution identified the group/holding/subsidiary companies; (iv) whether the cost of investments made in group or holding or subsidiary companies is not less than 90 percent of the cost of the total assets of the company at any point of time throughout the accounting period/year. (v) whether the company has continued to hold securities of group or holding or subsidiary companies as long term investments and has not traded in those investments during the accounting year/period. 4. Reasons to be stated for unfavourable or qualified statements Where, in the auditors report, the statement regarding any of the items referred to in paragraph 3 above is unfavourable or qualified, the auditors report shall also state the reasons for such unfavourable or qualified statement, as the case may be. Where the auditor is unable to express any opinion on any of the items referred to in paragraph 3 above his report shall indicate such fact together with reasons therefor. 5. Obligation of auditor to report to Reserve Bank of India Where, in the case of a Non-Banking Financial Company, the statement regarding any of the items referred to in paragraph 3 above is unfavourable or qualified, or in the opinion of the auditor the company has not complied with the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1998 or the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 to the extent applicable to the said company or the provisions of the Chapter IIIB of the Reserve Bank of India Act, 1934 (2 of 1934), it shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified statements and/or about the non-compliance, as the case may be, in respect of the company to the concerned Regional Office of the Department of Non-Banking Supervision of the Reserve Bank of India under whose jurisdiction the registered office of the company is located as per Second Schedule to the Non-Banking Financial Companies (Reserve Bank) Directions, 1998. 6. Applicability of Non-Banking Financial Companies (Reserve Bank) Directions 1998 For the purposes of this Order, reference to the Non-Banking Financial Companies (Reserve Bank) Directions 1998 shall include the Non-Banking Financial Companies (Reserve Bank) Directions 1977 as in force for the relevant period. (S. P. TALWAR) DEPUTYY. GOVERNOR

The Evolution The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better

understood divided into following phases: Phase 1. Establishment and Growth of Unit Trust of India - 1964-87 Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was tranferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Mastershare (Inida's first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores. Phase II. Entry of Public Sector Funds - 1987-1993 The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Muatual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

Assets Under 1992-93 UTI Public Sector Total Amount Mobilised Management 11,057 1,964 13,021 38,247 8,757 47,004

Mobilisation as % of gross Domestic Savings

5.2%

0.9%

6.1%

Phase III. Emergence of Private Secor Funds - 1993-96 The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutal fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes. Phase IV. Growth and SEBI Regulation - 1996-2004 The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Invetors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutal fund players on the same level. UTI was re-organised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilisation of funds from investors and assets under management which is supported by the following data:

GROSS FUND MOBILISATION (RS. CRORES) PRIVATE FROM 01-April-98 01-April-99 01-April-00 01-April-01 01-April-02 01-Feb.-03 01-April-03 01-April-04 01-April-05 TO 31-March-99 31-March-00 31-March-01 31-March-02 31-Jan-03 31-March-03 31-March-04 31-March-05 31-March-06 UTI 11,679 13,536 12,413 4,643 5,505 * PUBLIC SECTOR SECTOR 1,732 4,039 6,192 13,613 22,923 7,259* 68,558 1,03,246 1,83,446 7,966 42,173 74,352 1,46,267 2,20,551 58,435 5,21,632 7,36,416 9,14,712 TOTAL

21,377

59,748

92,957

1,64,523

2,48,979

65,694

5,90,190

8,39,662

10,98,158

ASSETS UNDER MANAGEMENT (RS. CRORES) AS ON 31-March-99 UTI 53,320 PUBLIC SECTOR 8,292 PRIVATE SECTOR 6,860 TOTAL

68,472

Phase V. Growth and Consolidation - 2004 Onwards The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

Sebi plans fresh round of mutual fund reforms

Vandana / Mumbai November 16, 2009, 0:12 IST

Advisory committee for lower charges, stricter compliance. The next set of reforms in the mutual funds industry is round the corner with the Securities and Exchange Board of India (Sebi) likely to lower the fund management charges and introduce stricter compliance standards.
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The mutual funds advisory committee, which met on Friday, has recommended that asset management companies lower the fund management fee from the present level. Fund houses currently charge 1.25 per cent as asset management charges for the first Rs 100 crore garnered by a scheme, and 1 per cent thereafter. The advisory committee, comprising industry representatives and investor bodies, has suggested that the fee should be lowered as the assets under management increase. The recommendation comes just as the dust was settling over the ban on entry load and the revamp of the exit load structure. The ban on entry load from August has led to complaints from fund houses that can no longer pass on distribution costs to investors.

1] A change of Re. 1 in the price of a share when one speaks of a share rising or falling by so many points. In stock market indices, however, a point is one unit of the composite weighted average on market capitalisation of rupee values. 2] A stock market index indicating weighted average of 30 scrips, also known as the BSE Sensitive Index. The daily closing figure of this index broadly reflects the performance of the capital markets. 3] It was alleged that Global Trust Bank exceeded its Capital market exposure. 4] Co-operative banks are under the dual control of RBI and the Registrar of Co-operative Societies. The RBI regulates banking functions while the registrar looks after the managerial and administrative functions. 5] An investor who expects share prices to go up and hence buys them.

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.
a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring

i. ii. iii. iv. v. vi. vii. viii. ix. x.

xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix.

Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit

The debt market is the market for trading debt securities. The debt market thus involves corporate bonds, government bonds, municipal bonds, negotiable certificates of deposit, and various money market investments. The debt market also includes individual loans bought from lenders and often packaged together in large amounts. The debt market includes the primary market, where debts are first sold to the public; and the secondary market, where investors sell debts to each other afterward. On the secondary debt market, debts can be sold on exchanges or on the over-the-counter market, but most are traded over the counter. Many debts are also packaged together into mutual funds. There are publications that publish the daily prices of bonds on the debt market.