31

C H A P T E R -II

CONCEPT A N D C LA S S IFIC A TIO N OF N O N -B A N K IN G

F IN A N C IA L COM PANIES

T h e Indian economy is going through a period o f rapid ‘financialiazation’.

Today, the ‘intermediation’ is being conducted by a wide range o f financial institution

through plethora o f customer-friendly financial products Financial institutions are

business organizations that act as mobilisers and depositories o f savings, and as

suppliers o f credit or finance. The major function o f financial intermediaries is to

transfer the savings o f surplus units to deficit units; hence, they can play a vital role in

the economy o f the country. They help in monetizing the economy and transferring

unproductive financial assets into productive assets. In fact, the nature and diversity o f

financial institutions themselves have become measures o f economic development of

a country^.

The activities o f financial institutions are different from the activities o f non-

financial (i.e. industrial and commercial) business organizations. The financial

institutions deal with financial assets such as deposits, loans, securities and so other

financial assets. O n the other hand non-financial business organizations deal with real

assets such as machinery, equipment, stocks o f goods, real estate and so on. The

activities o f different financial institutions may be either specialized or they may

overlap. The basis o f classification o f financial institutions can be stated as:

i. their primary activity, and

ii. the degree o f their specialization with relation to savers or borrowers

with whom they customarily deal or the manner o f their creation.

According to such classification, financial institutions are divided into

various groups.^

They are:

a) Regulatory;

b) Intermediaries;

c) Non-intermediaries; and
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d) Others;

B anking and non-banking institutions came under same group o f financial

intermediaries. The term ‘intermediaries’ indicates intermediate between savers and

investors. They lend money as well as mobilize savings. Their liabilities are

associated with savers, while their assets are related with investors or borrowers.

Banking and non-banking institutions have similarity in respect o f certain activities.

The distinction between banks and non-banking financial institutions is mainly in the

nature o f the liabilities o f the two and in the structure o f their assets.

The liabilities o f commercial banks usually consist o f demand and time

deposits but in case o f N B F C s , demand deposits do not ordinarily form the part o f

liabilities. So the term ‘nidhi’ will be an exception in this respect. Since demand

deposits are withdrawable by cheque and are considered to be a component of

‘money’, it is the degree o f ‘money ness’ o f the liabilities o f the two types o f

institutions which constitutes a major difference between the two From the assets

side, it may be said that banking institutions hold a wide variety ranging from short­

term and medium-term to long-term credits and they also use different types o f credit

instruments like overdrafts, cash credits, bills, etc. On the other hand, the assets o f

N B F C s are more specialized. For example, hire-purchase finance companies confine

their operations mainly to the financing o f transport operators and consumer credit

while housing finance companies make loans for housing purpose. Sometimes, the

differences are not demarcated as the banks are also m aking advances in fields like

transport and consumer credit. But banking institutions have special power to

participate in the economy’s payment mechanism, that is they provide transactions

services and they can create deposits. Banking institutions, subject to legal reserve

requirements, can advance credit by creating claims against themselves while non­

banking institutions can lend only out o f resource put at their disposal by the savers ^

A s we know that, our economy is going through a period o f increased

financialization and this phenomenon has been noticed when structural reforms have

been implemented in several sectors including trade, industry, foreign investment,

exchange rate, financial sector and monetary & fiscal policy. The process o f financial
intermediation supports increasing capital accumulation through the

institutionalization o f savings and investment and as such, fosters economic growth.

 33

Therefore, the gains to the real sector o f the economy depend on how efficiently the

financial sector performs this basic function o f financial intermediation

The Indian financial system comprises an impressive network o f banks and

financial institutions and a wide range o f financial instruments. There is no doubt that

there has been a considerable widening and deepening o f the Indian financial system,

particularly in the last two decades. The extension o f banking and other financial

facilities to a larger cross-section o f the people stands out as a significant

achievement. A s the demand for financial services grows, India needs to encourage

the development o f non-bank financial intermediaries besides banks and security

markets. N on-Banking Financial Companies (N B F C s) in India offer a wide variety o f

financial services and play an important role in providing credit to the unorganized

sector and to small borrowers at the local level. A s a sequel o f the previous

discussions one question necessarily arises: What is meant by the term non-banking

financial com pany? From the following discussions one can easily understand the

same.

Meaning ofNBFC
Non-banking finance company (N B F C ) is a business entity whether

incorporated under the Companies Act, 1956 or not which devotes its resources in

providing to society the financial services o f various descriptions which are distinct

from and uncompared to normal banking services^. In other words, non-banking

financial companies (N B F C s) are those companies and institutions, which accept non-

chequeable deposits for the purpose o f lending or investment

W e know that the activities o f N B F C s are directly regulated and controlled

by the Reserve B an k o f India (R B I), obviously, the definition given by the R B I is

worth mentioning in this respect. According to Section 45-1 o f Reserve Bank o f India

A ct 1934(as amended by Ordinance 1997), the business o f non-banking financial

institution means carrying on the business o f a financial institution as per clause ( c )

and includes the business o f non-banking financial company as per clause ( f )

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Selection 45-1 (f) o f the R B I Act, 1934 defines N on-Banking Financial

Com pany as below ^:-

N on-Banking Financial Company means—

(i) a financial institution which is a company,

(ii) a non-banking institution which is a company and which has its principal

business the receiving o f deposits, under any scheme or arrangement or in

any other manner,

(iii) such other non- banking institution or class o f such institutions as the bank

may, with the previous approval o f the central Government and by

notification in the official Gazette, specify.

I f we examine the above definition then we find that the definition uses two

expressions i, e. “financial institution” and “non-banking institution”. These two

expressions are also defined by the R B I Act, 1934. The close relationships between

the two expressions are also necessary to understand the meaning o f non-banking

financial company.

Deflnition o f F in a ncial Institution

Financial Institution has been defined under clause(c) o f section 45-1 o f the

R B I Act, 1934. Financial Institution means any non-banking institution which carries

on as its business or part o f its business any o f the following activities:-

(i) The financing, whether by way o f m aking loans or advances or otherwise,

o f any activity other than its own.

(ii) The acquisition o f shares, stock, bonds, debentures, or securities issued by

a Government or local authority or other marketable securities o f a like

nature,

(iii) Letting or delivering o f any goods to a hirer under hire purchase agreement

as defined in clause(c)of section 2 o f the Hire Purchase A c t , 1972 (26 of

1972);

(iv) The carrying on o f any class o f insurance business;

(v) Managing, conducting or supervising, as foreman, agent or in any other

capacity, o f chits or kuries as defined in any law which is for the time

being in force in any state, or any business, which is similar thereto;

(vi) Collecting, for any purpose or under any scheme or arrangement by

whatever name called, monies in lump sum or otherwise, by way o f

 35

subscriptions or by sale o f units or other instruments or in any other means

and awarding prizes o f gifts, whether in cash or in kind or disbursing

monies in any other way, to persons from whom monies are collected or to

any other person, but does not include any institution, which carries on as

its principal business:-

(a) agricultural operation; or

(b) industrial activity;* or

(c) the purchase or sale o f any goods (other than securities) or the

providing o f any services; or

(d) the purchase, construction or sale o f immovable property, so however,

that no portion o f the income o f purchase, constructions or sale o f

immovable property by other persons;

D efinition o f n on -b an kin g institution:-

The clause (e) o f the section 45-1 o f the R B I Act, 1934 has been defined

“Non-banking institution” as under:-

“Non-banking institution” means company, corporation or Co-operative

society. The definition is looking at every detail as it starts with the word “means”.

The definition is very simple and envisages only three kinds o f entities as non­

banking institution as evident from the definition. This means that other forms o f

business entities like proprietorship firm/partnership firm, Hindu undivided

fam ily/AOP/BOI are outside the limit o f the definition " .

Activities o f Fin ancial Institution :~

Sim ply financial institution means any non-banking institution i.e, company

or corporation or co-operative society which carries on as its business or part o f its

business any o f the following activities

(i) Extending financial assistance in the form o f loans and advances. This activity

covers the loan companies.

* Industrial Activity means any activity specified sub-clauses (i)to (xviii)

o f clause (c) o f section 2 o f the Industrial Development Bank o f India Act, 1964 (18

o f 1964).
 36

(ii) Acquisition of shares/bonds/ debentures/ government securities/ local

authority securities for the purpose o f m aking investment. This covers

investment companies.

(iii) Delivering o f goods under hire purchase agreement. This covers hire purchase

finance companies.

(iv) Insurance business.

(v) Promotion/conducting o f chit business. This covers miscellaneous non­

banking companies.

(vi) Clause (vi) o f the definition envisages on agreement where money is collected

from certain people under some mode then prizes are awarded from the

money so collected to some people. The arrangement is quite similar to the

definition o f ‘prize chit’ as provided in the Prize Chits and M oney Circulation

(Banning) Act, 1978.

The activities o f Financial Institution do not include the following

(i) Agricultural operations,

(ii) Industrial activity,

(iii) Purchase o f goods,

(iv) Sale o f goods,

(v) Providing o f services,

(vi) Purchase o f immovable property,

(vii) Sale o f immovable property and

(viii) Construction o f immovable property.

Here we can present an example to understand the mater. Suppose a

refrigerator manufacturing entity, in order to promote its sales, gives refrigerator on

hire purchase or installment sales to its customers, it will not become a financial

institution. M ore precisely stated that the above-mentioned entities principal business

is not providing money by hire purchase or installment method. Here the principal

business is manufacturing o f refrigerator which is not under the purview o f the

definition.

From the above discussion we can infer a conclusion whether the business

entities will be treated-as Non-banking financial companies or not.

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An entity w ill be NBFC if it is ;

i. A company plus a financial institution, or

ii. A Company plus a carrying on as its principal business o f receiving of

deposit or lending, or

iii. A corporation / co-operative society which has declared as NBFC by

RBI with the previous approval o f Central Government.

It appears that some o f the activities o f the financial institutions and the
NBFCs are common to both the definitions. Hence, the NBFC can be termed as a
financial institution for all practical purposes. RBI has announced that in order to
identify an NBFC, it w ill consider both the assets and the income pattern as evidenced
from the last audited balance sheet o f a company. The company w ill be treated as an
NBFC i f its financial assets are more than 50 percent o f its total assets (netted o ff by
intangible assets) and income from financial assets should be more than 50 percent of
the gross income. Both these tests are required to be satisfied as the determining
factor for principal business o f a company.

Further, NBFC has been defined under clause (xi) o f paragraph 2(1) o f Non-
Banking Financial Companies Acceptance o f Public Deposits (Reserve Bank)
Directions, 1998 as under

“ Non- banking financial company” means only the non-banking institution

which is a loan company or an investment company or a hire purchase finance
company or an equipment leasing company or a mutual benefit finance company.

Though the definition o f NBFC exclusively deals with providing financial

services o f various descriptions to the society, it is divided under three broad
categories. These are:-

I. NBFC General,

II. Miscellaneous Non-Banking Companies (MNBCs),

III. Residuary Non-Banking Companies (RNBCs).

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‘NBFC General’ has been defined earlier and as a passing reference the
definition o f MNBCs and RNBCs is given below:

Meaning of MNBC:- ,
In the field o f NBFCs, there are certain NBFCs whose activities, not defined
under NBFC Acceptance o f Public Deposit (Reserve Bank) Directions, 1998, are
covered under Miscellaneous Non-Banking Companies (Reserve Bank) Directions,
1977.

Such MNBCs are divided into two segments. These are:

i. MNBCs which carry business o f the type o f described in para 2(1) o f the
MNBCs (Reserve Bank), Directions, 1997 in the State o f Jammu and
Kashmir; and

ii. The MNBCs which carry any type o f business referred to in sub-para (2) to (4)
o f para 2 o f the Directions.
The definitions which are given under MNBCs in the state o f J & K, para 2(1)
o f the Directions is as ''^:-
i. Collecting whether as a promoter, foreman, agent or in any other capacity,
monies in one lump-sum or in installments by way o f contributions or
subscriptions or by sale o f units, certificates or other instruments or in any
other manner or as membership fees or admission fees or service charges
to or in respect o f any savings mutual benefit, thrift or any other scheme or
arrangement by whatever name called and utilizing the monies so collected
or any part thereof or the income accruing from investment or other use of
such monies for all or any o f the following purposes.

a) Giving or awarding by lot, draw or in any manner, prizes or gifts in

cash or in kind, whether or not the recipient o f the prize or gift is
under a liability to make any further payment in respect o f such
scheme or arrangement;
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b) Refunding to the subscribers or such o f them as have not won any

prize or gift, the whole or part o f the subscriptions, contributions or
other monies collected, with or without any bonus, premium,
interest or other advantage, howsoever called on the termination of
the scheme or arrangement or, on or after the expiry o f the period
stipulated therein.
The following businesses are defined as MNBCs under the MNBC
(Reserve Bank) Directions 1977, in the case o f other than Jammu & Kashmir, para
2(2) to (4) o f the Directions.
Miscellaneous Non-Banking Company (MNBC) is a company which is
carrying on all or any o f the following types o f business;
(i) Managing conducting or supervising as a promoter, foreman or agent of
any transaction or arrangement by which the company, enters into an
agreement with a specified number o f the subscribers that everyone of
them shall subscribe a certain sum in installments over a definite period
and that every one o f such subscribers shall, in his turn, as determined by
lot or by auction or by tender or in such other manner as may be provided
for in the agreement be entitled to the prize amount.
(ii) Conducting any other form o f chit or kuri which is different from the type
o f business referred to in sub-paragraph (i) above.
(iii) Undertaking or carrying on or engaging in or executing any otherbusiness
referred to in sub-paragraph (i) and (ii) above

Meaning & Definition of Residuary Non-Banking Company (RNBC)

Residuary Non-Banking Company has not been defined under the Residuary
Non-Baking Companies (Reserve Bank) Directions, 1987. It is clear fi-om the result of
their activities and interpretation that RNBC is that company which is neither a non­
banking finance company nor a miscellaneous non-banking company but is engaged
in such activities the nature o f which is banking or financial activities.
Residuary Non-Banking Company (RNBC) refers to a company which
receives any deposit under any scheme or arrangement, by whatever name called, in
one lump-sum or in installments by way o f contributions or subscriptions or by sale of
units or certificates or other instruments, or in any other manner and which, according
to the definitions contained in the Non-Banking Financial Companies (Reserve Bank)
 40

Directions, 1977 or, as the case may be, the Miscellaneous Non-banking Companies
(Reserve Bank)
Directions, 1977, is not —
(i) an equipment leasing company;
(ii) a hire- purchase finance company;
(iii) a housing finance company;
(iv) an insurance company;
(v) an investment company;
(vi) a loan company;
(vii) a mutual benefit financial company, and
(viii) miscellaneous non-banking company.

So, residuary non-banking company is non-banking institution (company,

corporation, or co-operative society) which receives deposits under any scheme and is
not any other type o f NBFC. The definition o f RNBC excludes all other non-banking
financial companies from its boundary. The definition refers to Non-Banking
Financial Companies (Reserve Bank) Direction, 1977 which have been superseded by
Non-Banking Financial Companies Acceptance o f Public Deposits (Reserve Bank)
Directions, 1998.
Since the study is related with NBFC General, no further discussions have
been made in regard to MNBC and RNBC.
Now coming to the definition o f NBFC General’ herein referred to as NBFC,
it may be said that NBFCs have got wide varieties o f the services which they offer to
the corporate clients. The business o f NBFC as per NBFC (RBI) Directions, typically
include the following
(i) Equipment leasing.
(ii) Hire Purchase Financing
(iii) Housing Finance
(iv) Loan Finance
(v) Investments, and
(vi) Other miscellaneous financial services
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The above mentioned financial services are fund-based services and as a

passing reference it is likewise to define each service. From the following one easily
understand the same.

Equipment Leasing
Lease is a financial system which was innovated by the Americans. Lease
Financing is very ancient, dates back to 1400 B.C. in the Phoenician Civilization era
particularly around the Western Coast o f the Mediterranean Sea. In India, Mr. Farouk
Irani started the first leasing company, appropriately named, First leasing company o f
India Ltd in 1973. At present there are about 500 leasing companies operating in India
18

Lease is a contract whereby one person agrees to provide an asset to another

person for use for a specific period for a specific consideration, payable usually at an
agreed fixed interval o f time, with a stipulation that the asset w ill be returned back
upon expiry o f the agreed period
In lease terminology, the person who gives the asset and who is the owner of
the asset is known as lessor. The person who uses the asset is called lessee. The period
for which the asset is given to lessee for using is called lease tenure and the
consideration which lessor receives from lessee is called lease rent.
A lease is a contract whereby the owner o f an asset (the lessor) grants to
another party (the lessee) the exclusive right to use the asset in return for the payment
o f rent
According to the Transfer o f Property Act, 1882 lease is “ a transaction in
which a party owning the asset provide the asset for use over a certain period o f time
to another for consideration in the form o f periodical payment with or without further
down payment” ^'
The Equipment Leasing Association (ELA) defines a lease as “ a contract
between a lessor and a lessee for the hire o f a specific asset selected from a
manufacturer or vendor o f such assets by the lessee. The lessor retains the ownership
o f the asset. The lessee has possession and use o f the asset on payment o f specified
rentals over a period o f time. The immediate benefit lessee enjoys is the notional
flows o f funds, thereby, it is considered as a source o f finance.
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Definition o f Equipment Leasing Company:-

Equipment Leasing Company means any company which is a financial
institution carrying on as its principal business, the activity o f leasing o f equipment.
I f we analyze the above definition, then we can easily observe that there are
three in-built parameters, the satisfaction o f which w ill make an entity as equipment-
leasing company. The parameters are
(i) That the entity is a company.
(ii) That the entity is a “ financial institution” .
(iii)That the entity is “ carrying on” leasing o f equipment as its “ principal
business” .
As far as I know parameter (i) is not require any interpretation, it simply a
company within the meaning o f companies Act, 1956. Parameter (ii) which is related
to the financial institution, already discussed in the definition o f financial institution.
Parameter (iii) is very crucial, the expression “ Carrying on” means the conduct o f the
operation and the “ principal business” o f the entity should be leasing o f equipment.
The expression “ principal business” is not defined in the Act or the Directions. As
there is no specific yardstick for determining the principal business, there are certain
things which guide us to do something. These are
a. Percentage o f income derived from that source,
b.Percentage o f assets employed in that source,
c. Frequency o f transactions relating to those activities.
These factors are indicative in nature.

Hire Purchase Finance Company:

Hire purchase system was introduced by the British Company. In the middle
o f the nineteenth century Singer Sewing Machine Company first installed the
installment credit system for the promotion o f sale o f its machines. In India hire
purchase system was introduced around 1940.
Hire purchase is an alternative source o f finance. It is a type o f installment
credit where the hire purchaser called ‘hirer’ agrees to take the assets/ goods on hire at
a stated rental, which is inclusive o f the repayment o f principal as well as interest with
an option to purchase. Under this form o f finance when items o f fixed assets are
purchased then immediate payment o f money is not required. The purchaser pays a
stipulated amount initially, the balance is payable by a number o f specified
 43

installments at a given rate o f interest. The ownership o f the assets passes to the
purchaser only on payment o f final installment
Section 2(C) o f the Hire Purchase Act, 1972, defines hire purchase
agreement as “ hire purchase agreement means an agreement under which goods are
let on hire and under which the hirer has an option to purchase them in accordance
with the terms o f the agreement under which-
a. possession o f goods is delivered by the owner thereof to a person on
condition that such person pays the agreed amount in periodical
installments,
b. the property in goods is to pass to such person on the payment o f the
last o f such installments, and
c. such person has a right to terminate the agreement at any time before
the property so passes.
From the above definition it is clear that, hire purchase is a hiring
agreement like leasing and there is a close relationship between the two. Only the
difference is, in case o f lease, the lessee (hire) may not necessarily be given any
option to purchase the goods on the expiry o f the lease. Ownership remains vested to
the lessor (owner) throughout the lease agreement. But in case o f hire purchase, the
ownership is transferred to the hirer upon the payment o f final installment.

Hire purchase Finance Company means any company which is a financial

institution carrying on as its principal business the activity o f hire purchase
transactions
The RBI has mentioned two norms for an NBFC grouped under as
equipment leasing company or hire purchase finance company The norms:-
i) A t least 60% o f its total assets are employed in hire purchase
and/or equipment leasing.
ii) At least 60% o f total income is derived from hire purchase and/or
equipment leasing.

Housing Finance Companies:

The three basic needs o f human being are food, clothing and shelter. After
the fulfillment o f first two needs a human being search for a safety dwelling house.
After 58 years o f our independence we find that a large number o f people do not have
 44

their own accommodation. After the industrial revolution people try to take shelter in
and around urban areas. This obviously led to high demand for dwelling units. To fill
the gap between the demand and supply o f housing units, Government constituted
different land development and house building authorities. In that situation if a
person wants to buy a house but he does not possess sufficient money, what w ill he
do? He must search for some body (entity / person) who is willing to extend financial
assistance to the person so that he can fu lfill his long demand. In that situation
Housing Finance Companies (HFCs) originated in the field o f finance business.

Meaning of HFCs
A housing Finance Company is a Company incorporated in India which
transacts the business o f providing long term finance for housing. We know that in
our country NBFCs are governed by the RBI but HFCs are regulated by the National
Housing Bank (NHB) Act, 1987.Sections 30 and 31 o f the National Housing Bank
Act, 1987 confer powers on the National Housing Bank in dealing with HFCs. The
NHB has issued Direcfions applicable to HFCs in 1989 known as Housing Finance
Companies (NHB) Directions, 1989

“ Housing Finance Company” means a company incorporated under the

companies Act, 1956, which primarily transacts or has as its principal object, the
transacting o f the business providing finance for housing, whether directly or
indirectly. In other words, housing finance company means any company which is
carrying on as its principal business the financing or acquisition or construction o f
houses including the acquisition or development o f plots o f land in connection there
with
From the above definition it is clear that the principal object o f the housing
finance company is to provide finance for housing.

National Housing Bank has issued a draft Memorandum o f Association for the
HFCs. As per the Memorandum o f Association the main objects are:--
(i) The finance should be long-term,
(ii) The borrower can be a person/ company / association o f person /
society / corporation,
(iii) The loan can be with or without any interest.
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(iv) The loan can be with or without any security,

(v) The purpose o f finance is to enable the borrower to construct /
purchase house for residential purposes only.

Loan Company:-
Loan means money that an organization such as bank lends and somebody
borrows it. It is a kind o f debt representing in money form. Loan Company provides
loans for the business activity or for any other purpose against security or without
security.
The term ‘Loan Company’ means any company which is a financial
institution carrying on as its principal business the providing o f finance whether by
making loans or advances or otherwise for any activity other than its own but does not
include an equipment-leasing company or a hire purchase finance company

Investment Company-
Investment Company means any company, which is carrying on as its
principal business the acquisition o f securities. These companies perform their
functions in varied forms though the object ultimately is the prudent investment of
funds in securities on behalf o f their clients. These companies deal directly in both
primary and secondary capital market and invest accumulated funds in units o f mutual
funds and money market instruments.

Other Miscellaneous Financial Services

Under this group / category following types o f companies are engaged for
providing different fund based activities.

(I) Mutual Benefit Financial Company (MBFC) or Nidhi: - Mutual Benefit

financial company (MBFC) or Nidhi is governed under section 620-A o f the
Companies Act, 1956. MBFC or Nidhi companies were originated in south India.
Such companies are non-banking financial companies since they fit into the definition
o f NBFC provided in section 451 (f) o f the RBI Act, 1934 being a non-banking
institution which is a company and which has as its principal business the receiving of
deposits, under any scheme or arrangement or in any other manner or lending in any
 46

manner^® The activities o f the company are to accept deposits form their members and
invest in their benefits.
The objectives o f the companies are:-
(i) To provide the guidelines to the members to save their hard earned money:
(ii) To invest their savings; and
(iii) To provide their loans to the needy members at a favorable rate o f return.

These companies usually maintain fixed capital base and their shares are
allotted to members who desire to take advantage o f the benefits and concession
offered by these companies for depositing or borrowing monies. These companies
never deal with outsiders and concentrate their activities among their members. They
provide various types o f financing scheme to the members, among these most
attractive scheme is recurring deposit scheme for different periods. These companies
grant loans to the members on security o f their recurring deposits.

(II) Chits Business:

NBFC may engage in the business o f conducting chits. The need for having
money for human being is eternal. In the financial market different financial
intermediaries supply the money to the society at a certain rate o f interest. In the rural
India, people innovated a novel way o f accommodation o f money to each other. The
mode o f accommodation is very simple. Under this method, a specific number of
persons called members join the scheme, and contribute a specific sum, at fixed
intervals o f time, say every month. The funds so generated are given to one member
every month, selected through a number o f ways, and this goes on till all the members
have got their contributions in one lump sum amount. The arrangement is called chit.
The Chit Funds Act, 1982 require a NBFC to get registration o f chits, commencement
and conduct o f chit business under the Act without which such business cannot be
conducted^'.

(III) Venture Capital Finance:

Venture capital is the organized financing o f relatively new enterprises to
achieve substantial capital gains. Such young companies are chosen because o f their
potential for considerable growth due to advanced technology, new products or
services, or other valued innovations. A high level o f risk is implied by the term ‘
 47

venture capital’ and is implicit in this type o f investment, since certain ingredients
necessary for success are missing and must be added later

Characteristics of Venture Capital:-

(i) Investment is generally made in equity capital.
(ii) Return from investment is taxed under capital gain.
(iii) Investment is made in new potential enterprises, which uses new
technology to produce the goods.
(iv) Direct involvement o f the investors in the management.
(v)Investors directly contact with the promoter to protect their investment.
(vi) Due to direct involvement in the business, investor’s view is different
from the stock market investor or from the banker.
(vii) Venture Capital investment is illiquid.
Venture Capital Finance Companies are under the supervision o f SEBI from
April, 1995. So permission from SEBI is requires to incorporating a new NBFC with
venture capital finance under SEBI (venture capital funds) Regulations, 1996.

(IV) Mutual Funds

Mutual fund is the form o f either an investment company that raises money
selling its own stock to the public or a trust under which units w ill be issued to the
investors. In India, it w ill be safe to define mutual fund as trusts because excepting
mutual funds promoted by Unit Trust o f India, all have been organized under Indian
Unit Trust Act. Mutual funds sell equity shares to investors and use these funds to
purchase stocks and / or bonds. The mutual funds are basically two types These
are:-
(i) Open-end Mutual Funds and
(ii) Close-end Mutual Funds.
Open-end Mutual Funds means that the fund itself is ready to buy back the
shares surrendered and sell new shares. Thus there is no fixed number o f outstanding
shares. The transaction o f purchase or sale is made at the net assets value (NAV).
On the other hand close-ended mutual funds operates like a limited company,
since units are bought and sold on a regular secondary market and the market price of
the unit is determined by supply and demand.
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In India, the concept o f mutual fund may be traced back to 1964 when Unit
Trust o f India (UTI) was formed under Unit Trust o f India Act, 1963. Now, several
commercial banks are entered into the fields o f mutual funds viz, SBI Mutual Fund,
Can stock fund o f Canara Bank, Swarupushpa Mutual Fund o f Indian Bank and BOI
Mutual Fund o f Bank o f India Mutual Fund is a SEBI regulated NBFC and activity
under SEBI (Mutual Funds) Regulations, 1996. So in order to incorporate a Mutual
Fund Trust and company the organizer has to take approval o f SEBI under above-
mentioned Regulations.
From the above it is clear that NBFCs operating in India provide different
types o f fund-based activities. The different services which have been provided by the
NBFCs are compared to banks. But in the prevailing situation, subsequent to drastic
squeeze o f norms o f financial assistance, the NBFCs are looking forward to venture
into those service areas where there is shortage o f expertise at institutional level.
These are mainly corporate advisory and fee-based services in nature. Consultancy
services in the area o f finance cover capital restructuring and financial engineering,
project identification and project finance, loan syndication with banks financial
institution and other related sources. A brief discussion about these fee based services
o f NBFCs are given below:-

(i) Issue Management:-

Issue management refers to the overall management o f issuing o f share
capital o f the company. The institutions, which provide these services effectively,
have been able to develop a network o f the brokers and these have the money power
to make the issue a success by applying themselves in the issue. Since such kind o f
funds is not available with the NBFCs, the NBFCs can develop the expertise of
marketing the issues and enlarging the network o f the promoters

(ii) Portfolio Management:

Portfolio management refers to investment o f funds o f the clients in various
forms o f profitable securities and giving adequate returns to the clients. However, it
should be mentioned that the NBFCs are to follow the guidelines as laid down by the
RBI in regard to the guaranteed returns to the clients.
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(iii) Corporate Counselling:-

Corporate counselling is very important all over the world because the
whole business world is going through a period o f intense competition, globalization
and rapid technological changes. At the time o f diversification and expansion many
medium scale companies do require expert knowledge regarding the area of
investment where they want to invest, project selection etc. In this regard NBFCs can
play a significant role by providing necessary information to their customers.

(iv) Project Counselling:-

An entrepreneur needs to know the details o f technical feasibility and
financial viability o f the project in advance to ensure smooth and profitable operation
o f the business. The financial institutions provide finance to a project and render
complete information about the economic necessity, technical feasibility and financial
viability o f the project

Project counselling refers to providing technical information for the

proposed project. This information can be mentioned bellow:--
(i) Identification o f the source o f raw materials:
(ii) Selection o f project site;
(iii) Identification o f the suppliers o f plant and machinery;
(iv) Advising the company on alternate source o f financing;
(v) Tax incentives etc.
In this respect NBFCs help in the project counselling by arranging the funds
and tying-up the technology.

(v) Loan Syndication

In loan syndication two or more financial institutions / banks agree to
finance a particular project. One o f the institutions may become a lead institution and
bring about co-ordination in the financing arrangements o f different financial
institutions.
Process o f loan syndication arrangement:-
(i) The borrower directly apply to a lead financial institution for the
arrangement o f loan syndication or
 50

(ii) The borrower may apply to a merchant bank to arrange a loan

syndication.
Loan syndication is a form o f fee based service that is offered to the clients
for tying-up the funds for the purpose o f term-loans and working capital assistance. In
this context NBFCs can play a major role in arranging the funds for the clients and act
as a broker.
 51

REFERENCES:-
1. Reserve Bank o f India Bulletin, October 1997, p-807.
2. Janies. S.Raj,(1975): “ Study on Non-banking Financial Institutions” ,
RBI Bombay, July 14, p-55.
3. Reserve Bank o f India Bulletin, July 1997, p-551.
4. Janies. S.Raj, op., cit .p-53.
5. Janies. S.Raj, op., cit .p-54.
6. Reserve Bank o f India Bulletin, July 1997, p-549.
7. Verma. J.C. (Dr.)(2001): Concepts, Practices and Procedures o f Non-
Banking Financial Companies, Bharat Law House Pvt. Ltd.,Nev^
Delhi, p-14.
8. A khan J.A., (1999): “ Role o f NBFCs in the financial system in India” ,
an un-published thesis, p-14.
9. Jyoti N & Gupta R,(1999): Practice Manual to Non-Banking Financial
Companies, Taxmann Allied Services Pvt. Ltd. New Delhi,, p-119.
10. Jyoti, N & Gupta, R,op, Cit ,p-120.
11. Jyoti N & Gupta R, op cit. p-121.
12. Statutory Guide for Non-Banking Financial Companies, An
Authorized Publication o f RBI, (2004): Taxmann Allied Services Pvt.
Ltd. New Delhi, pp-I-4 to5.
13. Reserve Bank o f India Bulletin, August 1997, p-589.
14. Jyoti N & Gupta R, op cit. pp-742-743.
15. Miscellaneous Non-Banking Companies ( RBI) Directions, 1977.
DNBC 39/ DG (H)-77, Dated 20.6.1997
16. Reserve Bank o f India Bulletin, February 1998, p-69.
17.Reserve Bank o f India Bulletin, July 1994, p-825.
18. Jyoti N & Gupta R, op cit. p-358.
19. Van Home, James. C. (2002): Financial Management and Policy,
Pearson Education,p-543.
20. Jyoti N & Gupta R, op cit. p-359.
21. Maheswari, S.N.(2004): Financial Management-Principles and
Practices, Sultan Chand & Sons, New Delhi, p. E-65.
22. Jyoti N & Gupta R, op cit. p-122.
23. RBI Bulletin, October 1997, p-809.
 52

24. Banerjee, B.(1990): Financial Policy and Management Accounting,

World Press Pvt. Ltd, Kolkata, p-29.
25. Reserve Bank o f India Bulletin, February 1998, p-68.
26. Jyoti N & Gupta R, op cit. p-124.
27. Op. Cit, p-825.
28.Reserve Bank o f India Bulletin, August 1997, p-589.
29. Reserve Bank o f India Bulletin February 1998, p-68.
30. Verma. J.C. (Dr.), op.cit ,p-97.
31. Puliani, R & Puliani, R (2002): Manual o f Non-Banking Financial
Companies, Bharat Law House Pvt. Ltd., New Delhi, p-29.
32. Verma. J.C. (Dr.), op cit. p-98.
33.Website- www.finance.indiamart.com
34.Verma. J.C. (Dr.)(1997): Guide to Mutual Funds & Investment
Portfolio, p-453.
35. H.R Machiraju(1998): Merchant Banking,. New Age International (P)
Ltd., Publishers, New Delhi, p-146.
36. Maheswari S. N. (Dr.), op.cit. p. D-163..