What is Stock Exchange (SE)?

A stock exchange is simply an institution, a platform, or a facility where different stockbrokers and
traders can interact and bring about transactions by buying and selling shares. They can be shares of a
stock, a bond or any other related financial instrument. People involved in the business of a stock
market can be anyone, ranging from individual stock buyers to even big trade investors and
conglomerates. Participants can be based anywhere in the world without any restrictions. Stock
exchange markets also include banks and insurance companies who trade in stock with other
organizations.

Features of Stock Exchange

Knowing about the functions of stock exchange is the first step towards understanding the concept. A
stock exchange has its own features and characteristics like any other institution. Listed below are the
primary features of a Stock Exchange to look through at a glance.

1. It is a platform where shares and securities of government, corporate sectors are purchased, as well
as, sold.

2. Another feature of stock exchange is that only listed companies can engage in trading.

3. A major characteristic feature of stock exchange is that it becomes a representation of the economic
functioning of a nation.

4. It is a common platform that attracts hundreds of corporations and investors.

5. A stock exchange gathers an enormous amount of capital on a single platform.

https://www.adigitalblogger.com/share-market/how-many-stock-exchanges-in-india/
Functions of Stock Exchange in India

Here is a list of functions of stock exchange in India-

 Economic Barometer

 Pricing of Securities

 Contributes to Economic Growth

 Safety of Transactions

 Providing Scope for Speculation

 Spreading of Equity Cult

 Liquidity

 Better Allocation of Capital

 Promotes the Habits of Savings and Investment

Functions of Stock Exchange in Detail

Having an idea about the functions of the stock exchange can be highly advantageous in the
contemporary world. The stock exchange is a crucial part of the modern world of finance and business.
Discover below some of the different functions of the stock exchange.

1. One of the primary functions of the stock exchange is to provide a quick, persistent and constant
demand for the purchase and sale of securities. It has a ready outlet for the purpose of buying and
selling these securities. It also functions as an outlet for the sale of securities that are listed on the stock
exchange.

2. Among different functions of the stock exchange, one is to speed up, as much as possible, the whole
process of capital accumulation and formation. It induces or inculcates the habit of saving and investing
and risk-taking among the investors. The stock exchange aims at converting their precious savings into
profit. It also serves as a tool for capital formation. It functions as a medium for a secure and profitable
investment.

3. It is among the fundamental functions of stock exchange to impart necessary and essential
information to the potential and current investors. Such information can be easily found on their
websites. They regularly put out advertisements in various newspapers, business magazines and
television channels regarding different investment opportunities and provide proper guidance. This is
aimed to encourage investors and make them aware of stock market investments.

4. It is one of the top priority functions of the stock exchange to provide a safe and secure way of
conducting business and investments. The transactions in the stock exchange are done under clearly
outlined rules and regulations. It is the responsibility of the authority body of a stock exchange to keep
in check its employees. Practising forgery is discouraged and swiftly dealt with.

5. In a stock exchange, the companies which are listed have to consistently comply with the already
well-defined rules and regulations. Before enlisting themselves they are asked to submit various
documents, providing all the information about their return. Providing the documents acts as an
instrument to monitor any important activity that the organization is planning to undertake in the
course of the future. These rules and regulations have been made to ensure the safety of investments
and funds.

6. Another important function of stock exchange is to aid and enable the creation of new business
ventures. For a venture to be able to function, it needs financing and capital. This is done by stock
exchanges. They act as a major platform for the new business to raise capital to meet their financial
needs. Stock exchanges help in the establishment of new ventures.

7. A stock exchange not only helps individuals and business ventures to raise funds for their financial
needs but functions as a platform for a government to raise money for its major development and
expansion projects. Many times central, as well as, state governments have raised millions to meet their
growing needs.

Meaning of Listing:

Listing forms the very basis of the operations of stock exchange. A stock exchange does not deal in the
securities of all the companies. Instead, it deals only in the listed securities of certain selected
companies. Listing here means an act of inclusion of securities in the official list of a stock exchange for
the purpose of trading.

The company issuing securities for public subscription has to apply to a recognised stock exchange to get
its securities listed. If the permission is granted, then the securities are said to have been listed. Listing,
therefore, is a sort of sanction of the stock exchange permitting dealings in the specific securities. In
technical language, listed securities are also called ‘scrip’s’.
Formalities for Listing:

A company wishing to have its securities listed has to apply in the prescribed form supported by
following documents and particulars:

(a) Copies of Memorandum and Articles of Association, Prospectus or Statement in lieu of Prospectus
and agreements with underwriters.

(b) Specimen copies of shares’ and debentures’ certificates, letters of allotment, etc.

(c) Particulars of bonuses and dividends declared during the last 10 years.

(d) Particulars of shares or debentures for which permission is sought.

(e) A statement showing the distribution of shares.

(f) A brief history of the company’s activities since its incorporation with reference to its assets, liabilities
and capital structure.

After a careful examination of the application, the stock exchange authorities may call upon the
company to execute a listing agreement. This contains the obligations and restrictions on the part of the
company.

The company undertakes:

(a) That it would offer not less than 49 per cent of its issued capital for public subscription;

(b) That it would be fair to all applicants for shares while making allotments;

(c) That it would keep the stock exchange fully informed about vital matters affecting the company.

(d) That it would ensure equitable voting rights and dividend rights.

The stock exchange reserves the right to cancel or suspend the permission granted following any
breach of the obligations mentioned above.

1. Listing provides effective publicity and wide marketability of the securities.

2. It enhances the reputation of the concern which brightens its image in the investment market.

3. It protects investors’ interests through the enforcement of set rules and regulations.

4. It provides price continuity for securities.

5. It facilitates the correct evaluation of securities in terms of their real worth.

Disadvantages of Listing:
1. Listing encroaches upon the freedom and secrecy of the activities of concerned companies.

2. Listed securities may fall victim to erratic fluctuations in values.

3. Unscrupulous speculators often manipulate the values of listed securities to the disadvantage of the
company.

4. Gambling may thrive under the garb of genuine speculation

SEBI

The Securities and Exchange Board of India (SEBI)– Regulator of the financial markets in India that was
established on 12th April 1988.

It was initially established as a non-statutory body, i.e. it had no control over anything but later in 1992,
it was declared an autonomous body with statutory powers. he

This regulatory authority plays an important role in regulating the securities market of India. Thereby it
is important to know the purpose and objective of the same.

Powers of SEBI:

When it comes to stock exchanges, SEBI has the power to regulate and approve any laws related to
functions in the stock exchanges.

It has the powers to access the books of records and accounts for all the stock exchanges and it can
arrange for periodical checks and returns into the workings of the stock exchanges.

It can also conduct hearings and pass judgments if there are any malpractices detected on the stock
exchanges.

When it comes to the treatment of companies, it has the power to get companies listed and de-listed
from any stock exchange in the country.

It has the power to completely regulate all aspects of insider trading and announce penalties and
expulsions if a company is caught doing something unethical.

It can also make companies list their shares in more than one stock exchange if they see that it will be
beneficial to investors.

Coming to investor protection, SEBI has the power to draft legal rules to ensure the protection of the
general public.

It also has the power to regulate the registration of brokers and other middlemen who will deal with
investors in the market.
Why was SEBI formed?

At the end of the 1970s and during the 1980s, capital markets were emerging as the new sensation
among the individuals of India. Many malpractices started taking place such as unofficial self-styled
merchant bankers, unofficial private placements, rigging of prices, non-adherence of provisions of the
Companies Act, violation of rules and regulations of stock exchanges, delay in delivery of shares, price
rigging, etc.

Due to these malpractices, people started losing confidence in the stock market. The government felt a
sudden need to set up an authority to regulate the working and reduce these malpractices. As a result,
the Government came up with the establishment of SEBI.

Role of SEBI:

This regulatory authority acts as a watchdog for all the capital market participants and its main purpose
is to provide such an environment for the financial market enthusiasts that facilitate the efficient and
smooth working of the securities market. SEBI also plays an important role in the economy.

To make this happen, it ensures that the three main participants of the financial market are taken care
of, i.e. issuers of securities, investors, and financial intermediaries.

1. Issuers of securities

These are entities in the corporate field that raise funds from various sources in the market. This
organization makes sure that they get a healthy and transparent environment for their needs.

2. Investor

Investors are the ones who keep the markets active. This regulatory authority is responsible for
maintaining an environment that is free from malpractices to restore the confidence of the general
public who invest their hard-earned money in the markets.

3. Financial Intermediaries

These are the people who act as middlemen between the issuers and investors. They make the financial
transactions smooth and safe.
Functions of SEBI:

1. Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors and
other financial participants.

It includes-

 Checking price rigging

 Prevent insider trading

 Promote fair practices

 Create awareness among investors

 Prohibit fraudulent and unfair trade practices

2. Regulatory Functions

These functions are basically performed to keep a check on the functioning of the business in the
financial markets.

These functions include-

 Designing guidelines and code of conduct for the proper functioning of financial intermediaries
and corporate.

 Regulation of takeover of companies

 Conducting inquiries and audit of exchanges

 Registration of brokers, sub-brokers, merchant bankers etc.

 Levying of fees

 Performing and exercising powers

 Register and regulate credit rating agency

 Learn about stock market with Basics of Financial Markets Course by Market Experts

3. Development Functions

 This regulatory authority performs certain development functions also that include but they are
not limited to-
  Imparting training to intermediaries

 Promotion of fair trading and reduction of malpractices

 Carry out research work

 Encouraging self-regulating organizations

 Buy-sell mutual funds directly from AMC through a broker

Objectives of SEBI:

The objectives of the Stock Exchange Board of India are:

1. Protection to the investors

The primary objective of SEBI is to protect the interest of people in the stock market and provide a
healthy environment for them.

2. Prevention of malpractices

This was the reason why SEBI was formed. Among the main objectives, preventing malpractices is one of
them.

3. Fair and proper functioning

SEBI is responsible for the orderly functioning of the capital markets and keeps a close check over the
activities of the financial intermediaries such as brokers, sub-brokers, etc.

Organizational Structure:

SEBI
The SEBI Board consist of nine members

 One Chairman appointed by the Government of India

 Two members who are officers from Union Finance Ministry

 One member from Reserve Bank of India

 Five members appointed by the Union Government of India

Powers of SEBI:

When it comes to stock exchanges, SEBI has the power to regulate and approve any laws related to
functions in the stock exchanges.

It has the powers to access the books of records and accounts for all the stock exchanges and it can
arrange for periodical checks and returns into the workings of the stock exchanges.

It can also conduct hearings and pass judgments if there are any malpractices detected on the stock
exchanges.

When it comes to the treatment of companies, it has the power to get companies listed and de-listed
from any stock exchange in the country.
It has the power to completely regulate all aspects of insider trading and announce penalties and
expulsions if a company is caught doing something unethical.

It can also make companies list their shares in more than one stock exchange if they see that it will be
beneficial to investors.

Coming to investor protection, SEBI has the power to draft legal rules to ensure the protection of the
general public.

It also has the power to regulate the registration of brokers and other middlemen who will deal with
investors in the market.

Mutual Funds and SEBI:

Mutual funds are managed by Asset Management Companies (AMC), which have to be approved by
SEBI. A Custodian registered with SEBI holds the securities of various schemes of the fund. The trustees
of the AMC monitor the performance of the mutual fund and ensure that it works in compliance with
SEBI Regulations.

Recently, a self-regulation agency for mutual funds has been set up called the Association of Mutual
Funds of India (AMFI). AMFI focuses on developing the Indian mutual fund industry in a professional and
ethical manner.

AMFI aims to enhance the operational standards in all areas with a view to protect and promote mutual
funds and their stakeholders.

Functions of SEBI in managing secondary market activities

Secondary Market is considered to be a market where securities (collateral) are exchanged after
originally being offered to the public in the primary market and registered on the Stock Exchange. Major
trading is usually done in the secondary market. Secondary market includes equity markets and the debt
markets.

The secondary market presents a well-organized platform for the general investor for trading of his
securities. Secondary equity markets act as an examining and control channel for the organization of the
company by promoting value-enhancing control activities, authorizing execution of incentive-based
management contracts, and accumulating information (through price discovery) that aids management
decisions.

SEBI and its role

The SEBI (The Securities and Exchange Board of India) is the administrative body formed under Section 3
of SEBI Act 1992 to secure the interests of the people investing in securities and to encourage the
growth of, and to manage the securities market and for the matters which are connected with it.

Various departments of SEBI regulating trading in the secondary market

The following units of SEBI take care of the activities happening in the secondary market:

1.Market Intermediaries Registration and Supervision department (MIRSD)

Registration, management, acquiescence monitoring and examines all market intermediaries as

concerns all sections of the markets namely equity, equity derivatives, debt as well as debt-related
derivatives.

2.Market Regulation Department (MRD)

Developing new policies and instructing the functioning and working (except matters relating to
derivatives) of securities exchanges, their divisions, and market organizations such as Clearing and
settling of organizations and repositories (referred to as ‘Market SROs’.)

3.Derivatives and New Products Departments (DNPD)

Administering trading at derivatives sections of stock exchanges, introducing new products to be traded,
and making certain changes in policy

Securities and Exchange Board Of India [SEBI] is a regulator of securities market in India. Initially, it was
formed for the purpose of observing the activities afterward in May 1992, Government of India granted
legal status to SEBI. What is the function of Primary Market under SEBI? What is the role of SEBI? What
is the process of issuance of securities? Role of SEBI in eliminating insider trading?

Functions Of Primary Market Under SEBI

Primary Market facilitates capital growth by encouraging individuals to convert savings into investments.

Primary Market being the part of Capital market also issues new securities.

Government or Public sector institutions and companies can obtain funds in exchange of a new stock or
bond issues via an investment Bank or financial Syndicate of securities dealers.

It encourages Initial Public Offerings [IPO]

Role of SEBI

Protecting the interest of investors

SEBI ensures that the investors do not get befooled by misleading and false advertisements. In return,
SEBI issued guidelines so as to protect investors and also ensured that the advertisement is fair and
concise.

Regulation of price rigging: Price rigging refers to manipulation of prices by way of fluctuating the prices
with the object of inflating and depressing the market price of securities.

SEBI make efforts to educate investors so that they are able to make choices between the offerings of
different companies and choose the most profitable securities.
SEBI has issued guidelines to investigate cases of fraud and insider trading. Adding to this the provisions
for fine and Imprisonment.

To ensure Development activities in Stock Exchange

E-Trading: Concept of E-trading have been introduced few years back by SEBI to eliminate the
discomfort. It simplifies the process of buying and selling of securities.

The initial public offering of Primary Market (which is a part of Capital market) permits through stock
exchange.

SEBI promotes training of intermediaries of securities market with the object of smooth functioning.

Regulate the business of stock exchange and activities of stock exchange

SEBI introduced proper Code Of Conduct applicable to everyone who is a part of the process of buying
and selling of securities, stock exchange, etc. Following are the areas of concern:

Rules and Regulations to regulate intermediaries such as Broker, underwriters, etc.

Registers and Regulates the working of merchant Bankers, sub-brokers, stock-brokers, share transfer
agent, trustees, etc.

Registers the working of mutual Funds.

SEBI regulates turnover of the companies.

It also conducts inquiry and audits.

To Regulate Insider Trading

Insider Trading have been a problem since the introduction of the Market dealing with buying and
selling of securities, stock exchange, etc. An Insider is a person or a group of people having first- hand
knowledge about the internal issues and Ups and downs of a company. The moment insider gets to
know about the loss which is going to occur, the shares under insider’s name are sold immediately.
Hence, company suffers a huge amount of loss.

It also includes information related to project, plant location, Technology, collaboration, products,
export obligations, etc. Intermediaries includes underwriters and Brokers are separately appointed by
the company to sell the minimum number of shares. Prospects issued by the company must be
approved by SEBI. A company offers minimum of 49 percent of the amount of shares to the public.

Financial sector refers to the part of the economy which consists of firms and institutions that have the
responsibility to provide financial services to the customers of the commercial and retail segment. The
financial sector can include commercial banks, non banking financial companies, investment funds,
money market, insurance and pension companies, and real estate etc. The financial sector is considered
as the base of the economy which is essential for the mobilization and distribution of financial
resources.

The financial sector reforms refer to steps taken to reform the banking system, capital market,
government debt market, foreign exchange market etc. An efficient financial sector is necessary for the
mobilization of households savings and to ensure their proper utilisation in productive sectors. Before
1991, the Indian financial sector was suffering from several lacunae and deficiencies which had reduced
their quality and efficiency of operations. Therefore, financial sector reforms had become essential at
that time.

Reasons for financial sector reforms in India

After independence, India inherited various deprivations and problems due to colonial legacy. The
country was lagging behind in social as well as economic affairs. To attain the goal of rapid economic
development, India adopted the system of planned economy based on the Mahalanobis model. This
model had started showing its limitations in the mid-80s and early nineties.

The government adopted the strategy of fiscal activism for economic growth and large doses of public
expenditure were financed by heavy borrowings at concessional rates. This was responsible for
comparatively weak and underdeveloped financial markets in India.

Due to the policy of Fiscal activism, the fiscal deficit increased year after year. The policy of automatic
monetization of Fiscal deficit had inflationary tendencies and other negative impacts on the economy.

The nationalisation of Banks had given complete control over these banks to the government, which
resulted in the limited role of market forces in the financial sector.

The growth rate was hovering around 3.5 % per annum before 1980, and it reached around 5% in the
mid-1980s. This growth rate was proving insufficient to solve the economic and financial problems of the
country.

Lack of transparency and professionalism in the banking sector and issues of red-tapism had been
responsible for the increase of non performing assets.

There were issues of inadequate level of proper Regulation in the financial sector. The technologies used
in the financial system and their institutional structures were outdated.

By 1991, India was facing several economic problems. The war in the Middle East and the fall of USSR
had put pressure on the Foreign Exchange Reserves of India. India was facing the balance of payment
crisis and reforms were now inevitable.

The strategy adopted by India for Financial Sector Reforms

To initiate financial reforms, India adopted the path of gradual reforms instead of Shock Therapy. This
was necessary to ensure continuity and stability of the financial sector in India.

India incorporated International best practices at the same time adjusted it as per the local
requirements.

The first generation reforms aimed to create an efficient and profitable financial sector by ensuring
flexibility to operate with functional autonomy.

The second generation reforms were incorporated to strengthen the financial system through structural
improvements.

India adopted the policy of consensus driven approach for liberalisation as this was necessary for a
democracy.

Financial sector reforms in India

Narasimham Committee report, 1991

The Narasimham committee was established in August 1991 to give comprehensive recommendations
on the financial sector of India including the capital market and banking sector. The major
recommendations made by the committee are

To reduce the cash reserve ratio CRR and the statutory liquidity ratio SLR- The committee recommended
reducing CRR to 10% and SLR to 25% over the period of time.

Recommendations on priority sector lending- the committee recommended to include marginal farmers,
small businesses cottage industries etc in the definition of priority sector. The committee recommended
for fixing at least 10% of the credit for priority sector lending.

Deregulation of interest rates- the committee recommended deregulating the interest rates charged by
the banks. This was necessary to provide independence to the banks for setting the interest rates
themselves for the customers.

The committee recommended to set up tribunals for recovering loans of non-performing assets etc. It
gave recommendations on asset quality classifications.

The committee recommended for entry of new private banks in the banking system.

Banking sector reforms

Changes in CRR and SLR: One of the most important reforms includes the reduction in cash reserve ratio
(CRR) and statutory liquidity ratio (SLR). The SLR has been reduced from 39% to the current value of
19.5%. The cash reserve ratio has been reduced from 15 % to 4%. This reduction in the SLR and CRR has
given banks more financial resources for lending to the agriculture, industry and other sectors of the
economy.

Changes in administered interest rates: Earlier, the system of administered interest rate structure was
prevalent in which RBI decided the interest rate charged by the banks. The main purpose was to provide
credit to the government and certain priority sectors at concessional rates of interest. The system has
been done away and RBI no longer decides interest rates on deposits paid by the banks. However, RBI
regulates interest on smaller loans up to Rs 2 lakhs on which the interest rate should not be more than
the prime lending rates.

Capital Adequacy Ratio: The capital adequacy ratio is the ratio of paid-up capital and the reserves to the
deposits of banks. The capital adequacy ratio of Indian banks had not been as per the international
standards. The capital adequacy of 8% on the risk-weighted asset ratio system was introduced in India.
The Indian banks had to achieve this target by March 31, 1994, while the foreign Bank had to achieve
this norm by 31st March 1993. Now, Basel 3 norms are introduced in India.

Allowing private sector banks: after the financial reforms, private banks we are given life and HDFC
Bank, ICICI Bank, IDBI Bank, Corporation Bank etc. were established in India. This has brought much
needed competition in the Indian money market which was essential for the improvement of its
efficiency. Foreign banks have also been allowed to open branches in India and banks like Bank of
America, Citibank, American Express opened many new branches in India. Foreign banks were allowed
to operate in India using the following three channels:

As foreign bank branches,

As a subsidiary of a foreign bank which is wholly owned by the foreign Bank,

A subsidiary of a foreign bank within maximum foreign investment of 74%

Reforms related to non performing assets (NPA): non performing assets are those loans on which the
loan installments have not been paid up for 90 days. RBI introduced the recognition income recognition
norm. According to this norm, if the income on the assets of the bank is not received in two quarters
after the last date, the income is not recognised. Recovery of bad debt was ensured through Lok adalats,
civil courts, Tribunals etc. The Securitisation And Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act was brought to handle the problem of bad debts.

Elimination of direct or selective credit controls: earlier, under the system of selective or direct credit
control, RBI controlled the credit supply using the system of changes in the margin for providing a loan
to traders against the stocks of sensitive commodities and to the stockbrokers against the shares. This
system of direct credit control was abolished and now the banks have greater freedom in providing
credit to their customers.

Promotion of microfinance for financial inclusion: for the promotion of financial inclusion, microfinance
scheme was introduced by the government, and RBI the gave guidelines for it. The most important
model for microfinance has been the Self Help Group Bank linkage programme. It is being implemented
by the regional rural banks, cooperative banks, and Scheduled commercial banks.

Reforms in the government debt market

The policy of automatic monetization of the fiscal deficit of government was phased out in 1997 through
an agreement between the government and RBI. Now the government borrows money from the market
through the auction of government securities.
The government borrows the money at market determined interest rates which have made the
government cautious about its fiscal deficits.

The government introduced treasury bills for 91 days for ensuring liquidity and meeting short-term
financial needs and for benchmarking.

Foreign institutional investors were now allowed to invest their funds in the government securities.

The government introduced the system of delivery versus payment settlement for ensuring
transparency in the system.

The system of repo was introduced for dealing with short term liquidity adjustments.

Role of regulators

Importance of the role of the regulator was recognised and RBI became more independent to take
decisions. More operational autonomy was granted to RBI to fulfill its duties.

The Securities and Exchange Board of India (SEBI) became an important institution in managing the
securities market of India.

The insurance regulatory and Development Authority was an important institution for initiating reforms
in the Insurance sector. Its responsibilities include the Regulation and supervision of the Insurance
sector in India.

Reforms in the foreign exchange market

Since 1950s, India had a highly controlled foreign exchange market and foreign exchange was made
available to the Reserve Bank of India in a very complex manner. The steps taken for the reform of the
foreign exchange market were:

In 1993, India moved towards market based exchange rates, and the current account convertibility was
now allowed. The commercial banks were allowed to undertake operations in foreign exchange.

The Rupee foreign currency swap market has been developed. New players are now allowed to enter
this market and undertake currency swap transactions subject to certain limitations.

The authorised dealers of foreign exchange were now given the permission for activities such as
initiating trading positions, borrowing and investing in foreign markets etc. subject to certain limitations
and regulations.

The foreign exchange Regulation Act, 1973 was replaced by the foreign exchange management Act,
1999 for providing greater freedom to the exchange markets.

The foreign institutional investors and non-resident Indians were allowed to trade in the exchange-
traded derivatives contracts subject to certain regulations and limitations.
Other important financial sector reforms

Some important steps were taken for the non-banking financial companies for the improvement of their
productivity, efficiency, and competitiveness. Many of the non-banking financial companies have been
brought under the regulation of Reserve Bank of India. Many of the other intermediaries were brought
under the supervision of the Board of Financial Supervision.

In 1992, the Monopoly of UTI was ended and mutual funds were opened for the private sector. The
mutual fund industry is now controlled by the SEBI Mutual Funds regulations, 1996 and its amendments.

In 1992, the Indian capital market was opened for the foreign institutional investors in all the securities.

Electronic trading was introduced in the National Stock Exchange (NSE) established in 1994, and later on
in the Bombay Stock Exchange (BSE) in 1995.

Assessment of financial sector reforms

After the financial sector reforms, the resilience and stability of Indian economy have increased. The
growth rate up the economy has increased from around 3.5 % to more than 6% per annum.

The country has been able to deal with the Asian economic crisis of 1977-98 and the recent Global
subprime crisis which affected the banking system of the world but did not have much impact on the
economy of India.

The banking sector and Insurance sector have grown considerably. The entry of private sector banks and
foreign banks brought much-needed competition in the banking sector which has improved its efficiency
and capability.

The Insurance sector has also transformed over the period of time. All these have benefited the
customer with diversified options.

The stock exchanges of the country have seen growth and stability, and it has adopted the international
best practices.

RBI has effectively regulated and managed the growth and operations of the non-banking financial
companies of India.

The budget management, fiscal deficit, and public debt condition have improved after the financial
sector reforms. The country is moving with more such future reforms in different sectors of the
economy.

However, all the issues of Indian economy have not been resolved. The social sector indicators such as
the provision of health facilities, quality of education, empowerment of women etc have not been at par
with the economic growth.

Further, the new issues like the recent rise in non-performing assets of banks, slow growth of
investments in the economy, the issues of jobless growth, high poverty rate, a much lower growth rate
in the agriculture sector etc need to be resolved with more concrete efforts.

Way forward

The overall impact of the financial sector reforms has been positive. However consistent reforms are
needed to maintain the economic growth and make it inclusive of all the sections of society. The recent
measures taken by government includes the bankruptcy and insolvency code for resolution of non
performing assets, the indradhanush strategy for strengthening the banking sector, the goods and
services tax for making India a unified market, single window clearance to remove red tapism and bring
transparency, startup India scheme and standup India scheme to boost economic growth in the country
etc. India has reached among the top 100 in the ease of doing business of World Bank. But continued
efforts are required to sustain and improve the economic growth rate.

What Are Nonbank Financial Companies?

https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92#:~:text=A%20Non%2DBanking%20Financial
%20Company%20(NBFC)%20is%20a%20company,leasing%2C%20hire%2Dpurchase%2C%20insurance

Nonbank financial companies (NBFCs), also known as nonbank financial institutions (NBFIs) are financial
institutions that offer various banking services but do not have a banking license. Generally, these
institutions are not allowed to take traditional demand deposits—readily available funds, such as those
in checking or savings accounts—from the public. This limitation keeps them outside the scope of
conventional oversight from federal and state financial regulators.

Nonbank financial companies (NBFCs), also known as nonbank financial institutions (NBFIs) are entities
that provide certain bank-like and financial services but do not hold a banking license.

NBFCs are not subject to the banking regulations and oversight by federal and state authorities adhered
to by traditional banks.

Investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private
equity funds, and P2P lenders are all examples of NBFCs.

Since the Great Recession, NBFCs have proliferated in number and type, playing a key role in meeting
the credit demand unmet by traditional banks.

1. What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does
not include any institution whose principal business is that of agriculture activity, industrial activity,
purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property. A non-banking institution which is a company and
has principal business of receiving deposits under any scheme or arrangement in one lump sum or in
installments by way of contributions or in any other manner, is also a non-banking financial company
(Residuary non-banking company).

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there
are a few differences as given below:

i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on
itself;

iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks

What is NBFC?

NBFC or Non-Banking Financial Company in India is a financial institution that provides banking services
without holding a bank license. Though, some of its activities performed are similar to banks. However,
they do not require any banking licenses.

NBFC in India is regulated under the Companies Act, with guidelines stipulated by RBI. Activities of
NBFCs include investment, giving loans and advances, leasing, hire-purchase, insurance business, chit-
fund business, acquisition of shares, bonds, debentures, stocks, and Government or local authority
bonds/ securities which are marketable

NBFC Controversy

Advocates of NBFCs argue that these institutions play an important role in meeting the rising demand
for credit, loans, and other financial services. Customers include both businesses and individuals—
especially those who might have trouble qualifying under the more stringent standards set by traditional
banks.

Not only do NBFCs provide alternate sources, proponents say, they also offer more efficient ones. NBFCs
cut out the intermediary—the role banks often play—to let clients deal with them directly, lowering
costs, fees, and rates, in a process called disintermediation. Providing financing and credit is important
to keep the money supply liquid and the economy humming.

Alternate source of funding, credit

Direct contact with clients, eliminating intermediaries

High yields for investors

Liquidity for the finance system

What does RNBC mean? What is the full form of RNBC?

The Full Form of RNBC is Residuary non banking companies.

The Residuary Non-Banking Company is yet another form of a financial institution engaged in the
principal business of accepting deposits, under any scheme or arrangement or in any other form and not
being asset financing, investment, loan company.

Simply, the Residuary Non-Banking Company primarily deal in accepting deposits in any form and
investing these in the approved securities. The operations of such company are regulated by RBI and in
addition, to the liquid assets it maintains its investments as per the RBI directions.

According to the Reserve Bank of India, a residuary non-banking company is:

A financial or a non-banking institution, being a company.

A company that accepts deposits in a lump sum or installments under any scheme or arrangement such
as by way of contributions, or subscriptions, or by a sale of units or certificates or in any other manner.

A company, which is according to the Miscellaneous Non-Banking Companies (Reserve Bank) Directions,
1977 is not:

A hire-purchase company

A housing finance company

An equipment leasing company

A mutual benefit company

A loan company

An investment company

An insurance company

A mutual benefit financial company

A miscellaneous non-banking company

The Residuary Non-banking company differs from the other non-0banking financial companies in terms
of the methods being used in the mobilization of deposits and the requirements of depositors with
respect to the funds deployment

4. Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or
carry on business of a non-banking financial institution without a) obtaining a certificate of registration
from the Bank and without having a Net Owned Funds of ₹ 25 lakhs ( ₹ Two crore since April 1999).
However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of
NBFCs which are regulated by other regulators are exempted from the requirement of registration with
RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with
SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as
notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of
Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank,
Stock Exchange or a Mutual Benefit company.

5. What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-
banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the
following:

i. it should be a company registered under Section 3 of the companies Act, 1956

ii. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net owned fund (NOF)
required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the FAQs on
specialized NBFCs)

Does the Reserve Bank regulate all financial companies?

No. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in
the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies,
Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the
requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital
Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange
Board of India, and Insurance companies are regulated by Insurance Regulatory and Development
Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi
Companies are regulated by Ministry of Corporate Affairs, Government of India. Companies that do
financial business but are regulated by other regulators are given specific exemption by the Reserve
Bank from its regulatory requirements for avoiding duality of regulation.

It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking
Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934. Core Investment Companies with
asset size of less than ₹ 100 crore, and those with asset size of ₹ 100 crore and above but not accessing
public funds are exempted from registration with the RBI.

Can all NBFCs accept deposits? Is there any ceiling on acceptance of Public Deposits? What is the rate
of interest and period of deposit which NBFCs can accept?

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a
specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits
to a limit of 1.5 times of its Net Owned Funds. All existing unrated AFCs that have been allowed to
accept deposits shall have to get themselves rated by March 31, 2016. Those AFCs that do not get an
investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh
deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-
investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till
they obtain an investment grade rating.

However, as a matter of public policy, Reserve Bank has decided that only banks should be allowed to
accept public deposits and as such has since 1997 not issued any Certificate of Registration (CoR) to new
NBFCs for acceptance of public deposits.

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or
compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public
deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept
deposits repayable on demand.

In respect of companies which do not fulfill the 50-50 criteria but are accepting deposits – do they
come under RBI purview?

A company which does not have financial assets which is more than 50% of its total assets and does
not derive at least 50% of its gross income from such assets is not an NBFC. Its principal business
would be non-financial activity like agricultural operations, industrial activity, purchase or sale of
goods or purchase/construction of immoveable property, and will be a non-banking non-financial
company. Acceptance of deposits by a Non-Banking Non-Financial Company are governed by the rules
and regulations issued by the Ministry of Corporate Affairs.

Why is the RBI so restrictive in allowing NBFCs to raise public deposits?

The Reserve Bank's overarching concern while supervising any financial entity is protection of
depositors' interest. Depositors place deposit with any entity on trust unlike an investor who invests
in the shares of a company with the intention of sharing the risk as well as return with the promoters.
Protection of depositors' interest thus is supreme in financial regulation. Banks are the most regulated
financial entities. The Deposit Insurance and Credit Guarantee Corporation pays insurance on deposits
up to ₹ One lakh in case a bank failed.

The Rs 54 lakh crore NBFC (non-banking finance companies) universe that saw the debacle of IL&FS,
Dewan Housing and most recently two SREI Group companies, will now have a scale-based regulation.
This means the level of regulation will be a function of the size, activity, and risk in the business.

Currently, there are close to 10,000 NBFCs spread across the country. The entire NBFC sector is about 25
per cent of the assets of the banking industry. The RBI's new supervisory framework is the result of the
failure of a few large NBFCs.

The sector poses a big threat to the stability of the financial system it has strong linkages with banks,
debt and equity market, insurance and the mutual fund industry. In fact, some NBFCs like Bajaj Finance
and Mahindra Finance are as big as any mid-sized bank in the country.

According to the RBI's new guidelines, the regulatory structure will have four layers based on their size,
activity, and perceived riskiness. NBFCs, in the lowest layer, will be known as NBFC-Base Layer. NBFCs in
the middle layer and the upper layer will be known as NBFC-Middle Layer and NBFC-Upper Layer,
respectively. The Top Layer is ideally expected to be empty and will be known as NBFC-Top Layer.

The new-age NBFCs, especially the P2P and accounts aggregator, will come under the Base Layer. The
Base Layer will have non-deposit taking NBFCs below the asset size of Rs 1,000 crore and NBFCs
undertaking activities like peer-to-peer lending, account aggregator and non-operative financial holding
company, and NBFCs not availing public funds and not having any customer interface.

"It is proposed to mostly continue with the 'light-touch regulation' and focus is not to burden such
entities with a higher level of prudential regulations, but increase transparency by way of greater
disclosures and improved governance standards," M Rajeshwar Rao, Deputy Governor, Reserve Bank of
India, said at the CII NBFC Summit today.

These new guidelines will be effective from October 01, 2022.

The middle layer has important NBFCs like deposit-taking and also housing and infrastructure financing
companies. According to the RBI, the middle layer will consist of all deposit-taking NBFCs, irrespective of
asset size, non-deposit taking NBFCs with asset size of Rs 1,000 crore and above, and NBFCs undertaking
activities like primary dealership, infrastructure debt funds, core investment companies, housing finance
companies and infrastructure finance companies.

"In the middle layer, we had proposed to plug the areas of arbitrage between banks and NBFCs where it
is felt continuance of the arbitrage would be detrimental to orderly growth in the sector and may
contribute to the marginal risk to the financial system," said Rao.

Also read: SREI Group insolvency proceedings: SREI Equipment borrowers' AIF connection

The Upper Layer will have NBFCs specifically identified by the RBI as warranting enhanced regulatory
requirements based on a set of parameters and scoring methodology.

"The top 10 eligible NBFCs in terms of their asset size will always reside in the Upper Layer, irrespective
of any other factor," said the RBI.

The NBFCs in this layer would be identified by the way of a scoring methodology based on size,
interconnectedness, complexity, and supervisory inputs. "The idea is to introduce prudential regulations
and intensive supervision for such entities proportionate to their systemic significance. Further, to
enhance transparency and disclosure, it is also proposed that NBFCs would have to mandatorily list in a
stock exchange within a given time frame," said Rao.

The top layer will ideally remain empty. This layer can get populated if the RBI is of the opinion that
there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such
NBFCs will move to the Top Layer from the Upper Layer. "Such entities in Top Layer would be required
to comply with significantly higher and bespoke regulatory and supervisory requirements," said Rao.

RECOMMENDED

Reserve Bank of India is entrusted with the responsibility of regulating and providing Non-Banking
Financial Company or NBFC, the guidelines to operate. The powers are listed in Chapter III B of the
Reserve Bank of India Act, 1934. The objective is to:

ensure the healthy growth of financial institutions.

ensure that these companies operate within the policy framework, as a part of the financial system. In
such a manner that their existence and functioning do not lead to systemic aberrations.

the quality of supervision and surveillance exercised by RBI over the NBFCs is sustained by keeping pace
with the developments that take place in this segment of the financial system.

NBFC

An NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and
advances, acquisition of shares/stocks/debentures/bonds/securities issued by Government or local
authority or other marketable securities of similar nature, insurance business, leasing, hire-purchase,
chit business but does not include an institution whose principal business is that of agriculture activity,
industrial activity, providing any services and sale/purchase/construction of the immovable property or
purchase or sale of any goods (other than securities).

A non-banking institution which is a company and has the principal business of receiving deposits under
any scheme or arrangement by way of contributions or in some other manner is also an NBFC-RNBC
(Residuary non-banking company).

The functions of top NBFC in India are similar to banks. However, there are some differences between
the two. For example, unlike banks, NBFCs cannot accept demand deposits. NBFCs do not form part of
the payment and settlement system and cannot issue cheques drawn on itself. The deposit insurance
facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of an NBFC
vs bank.

Conditions, NOF & Principal Business

As per Section 45-IA of the RBI Act, 1934, no company can commence or carry on the business of non-
banking financial activities without obtaining a certificate of registration (CoR) from RBI. The pre-
conditions for NBFC License are:

It should be a company registered u/s 3 of the Companies Act. Either 1956 or 2013.

It should have a minimum net owned fund (NOF) of Rs. 2 crores.

Here, NOF is what remains after reducing the amount of investment in shares of subsidiaries, companies
in the same group, and all other NBFCs, the book value of debentures, bonds, outstanding loans, and
advances including hire purchase and lease finance made to and deposits with subsidiaries and
companies in the same group, from the owned funds. Owned funds are the total of paid-up equity
capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share
premium account, and capital reserves representing surplus arising out of sale proceeds of an asset,
excluding reserves created by revaluation of an asset, after deducting accumulated balance of loss,
deferred revenue expenditure, and other intangible assets.

The Principal Business of an NBFC is determined with the help of the 50-50 rule. This means that if a
company is principally engaged in financial activities with:

A) The financial assets of the company comprising at least 50% of the total assets held by the company,

&

B) At least 50% of income is derived from financial assets.

A company that fulfills the above conditions requires to be registered as NBFC as per RBI Guidelines.

NBFC Prudential Guidelines

Leverage Ratio: The leverage ratio of an applicable NBFC (other than NBFC-MFIs and NBFC-IFCs) shall not
be more than 7 at any point in time.

Accounting Standards: Accounting Standards and Guidance Notes issued by ICAI to be followed if they
are not inconsistent with any of the Directions by RBI.

Accounting of Investments: The Board of Directors shall frame investment policy for the company and
shall implement the same, including criteria to classify the investments into the current and long-term.

Need for Policy on Demand/Call Loans: The Board of Directors granting/intending to grant demand/call
loans shall frame a policy for the company and implement the same.

Asset Classification: Assets to be classified as: (i) Standard assets; (ii) Sub-standard assets; (iii) Doubtful
assets; and (iv) Loss assets.

Standard Asset provisioning: Every applicable NBFC shall make provision for standard assets at 0.25% of
the outstanding liabilities.

Multiple NBFCs: All NBFCs belonging to a group shall be aggregated to check the limit of Rs. 500 crore
asset size.

Disclosures: Every applicable NBFC shall separately disclose provisions for bad and doubtful debts and
provisions for depreciation in investments, in the balance sheet.

Schedule: Particulars in the schedule as set out by RBI Directions, to be added to its balance sheet, by
every applicable NBFC.

Loans against NBFCs own shares prohibited: No applicable NBFC is allowed to lend against its own
shares.

NBFC License India is a leading online platform for NBFC Registration. You can contact us if you wish to
buy NBFC or sell NBFC. We also aid in mergers, take-overs, and collaborations.

Q. What is NBFC?

NBFC or Non-Banking Financial Company in India is a financial institution that provides banking services
without holding a bank license. Though, some of its activities performed are similar to banks. However,
they do not require any banking licenses.

NBFC in India is regulated under the Companies Act, with guidelines stipulated by RBI. Activities of
NBFCs include investment, giving loans and advances, leasing, hire-purchase, insurance business, chit-
fund business, acquisition of shares, bonds, debentures, stocks, and Government or local authority
bonds/ securities which are marketable.

A Non–Banking Financial Corporation is a company incorporated under the Companies Act 2013 or
1956. According to section 45-I (c) of the RBI Act, a Non–Banking Company carrying on the business of a
financial institution will be an NBFC. It further states that the NBFC must be engaged in the business of
Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local
authority or other marketable securities.

A Non-Banking Financial Corporation (NBFC)

https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92

A non-banking institution that is a company and has principal business of receiving deposits under any
scheme or arrangement by any mode is also a non-banking financial company (Residuary non-banking
company).

Exclusions from the definition: The NBFC business does not include business whose principal business is
the following:

Agricultural Activity

Industrial Activity

Purchase or sale of any goods excluding securities

Sale/purchase/construction of any immovable property – Providing of any services

Meaning of Principal Business: The Reserve Bank of India has defined financial activity as principal
business to bring clarity to the entities that will be monitored and regulated as NBFC under the RBI Act.
The criteria s is called the 50-50 test and its as follows:

The company’s financial assets must constitute 50% of the total assets.

The income from financial assets must constitute 50% of the total income. It is governed by the Ministry
of Corporate Affairs as well as the Reserve Bank of India. The License for operation is obtained from the
RBI and it is incorporated as a company under applicable laws of the land.
Different types of NBFCs

The NBFCs are categorised on the basis of liabilities and activity. Following are the types of NBFCs:

NBFCs Which Need Not be Registered With RBI

The following NBFCs are not required to obtain any registration with the Reserve Bank of India under
the idea that they are regulated by other regulators:

Core Investment Companies – (assets are less than 100 crore or public funds not taken)

Merchant Banking Companies

Companies that are engaged in the business of stock-broking

Housing Finance Companies

Companies engaged in the business of Venture Capital.

Insurance companies holding a certificate of registration issued by IRDA.

Chit Fund Companies as defined in the Sec 2 clause (b) of the Chit Fund Act, 1982

Nidhi Companies as notified under Section 620(A) of the Companies Act 1956

Procedure to Incorporate an NBFC

A company should first be registered under the Companies Act 2013 or should already be registered
under the Companies Act 1956 as either a Private Limited or a Public Limited Company.

The minimum net owned funds of the Company should be Rs. 2 Crore.

1/3rd of the Directors must possess finance experience.

The CIBIL records of the Company should be clean.

The company must have a detailed business plan for five years.

The company must comply with the requirements for capital compliances and FEMA.
After all of the above conditions have been satisfied the online application on the website of RBI should
be filled and submitted along with the requisite documents.

A CARN Number will be generated.

A hard copy of the application also has to be sent to the regional branch of the Reserve Bank of India.

After the application is properly scrutinized, the License will be given to the Company.

Guidelines an NBFC Needs to Follow

Once the Company gets a valid license it has to adhere to the following guidelines:

They cannot receive deposits that are payable on demand.

The public Deposits which the company can take should be for a minimum time period of 12 months
and a maximum time period of 60 months.

The interest charged by the Company cannot be more than the ceiling prescribed by the Reserve Bank of
India from time to time.

The repayment of any amount so taken by the Company will not be guaranteed by the Reserve Bank of
India.

All the information about the company as well as any change in the composition of the Company has to
be furnished to the Reserve Bank of India.

The deposits taken by the Public will be unsecured.

The Company has to submit its audited balance sheet every year.

A statutory return on the deposits taken by the company has to be furnished in the form NBS – 1 every
year.

A Quarterly Return on the liquid assets of the company has to be furnished.

A certificate from the auditors had to be taken stating that the company is in a position to pay back all
the deposits or money taken from the Public.

A half-yearly Asset Liability Management (ALM) return has to be given by the company which has a
Public Deposit of Rs. 20 Crore and above or has assets worth Rs. 100 Crore and above.

The credit rating has to be taken every 6 months and submitted to the RBI.

A minimum level of 15% of the Public Deposits has to be maintained by the Company in Liquid Assets.

If the NBFC defaults in the payment of any amount taken, the consumer can go to the National Company
Law Tribunal or the Consumer Forum to file a suit against the Company.
A four-layered scale-based approach to regulate non-banking finance companies (NBFC) in the country
will kick in from October 1, 2022 to ensure tight oversight of the sector. Further, the Reserve Bank of
India (RBI) has set a limit of Rs 1 crore per borrower for financing subscriptions to initial public offer
(IPO). The ceiling will come into effect from April 1, 2022. The NBFC sector can fix more conservative
limits, the RBI said in its preface to the new rules.

The regulatory structure will comprise four layers based on their size, activity, and perceived risk. The
lowest layer will be the base layer, followed by the middle, upper and top layers. The top layer might
remain empty, the RBI.

The base layer will have non-deposit-taking NBFCs with assets worth up to Rs 1,000 crore. Finance firms
working as peer-to-peer (P2P) lending, account aggregator firms, non-operative financial holding
company (NOFHC) and entities that do not avail of public funds or have any customer interface will also
be in this layer.

The middle layer will comprise deposit-taking NBFCs irrespective of asset size, non-deposit-taking firms
with assets worth Rs 1,000 crore or more, as well as housing finance firms. Standalone primary dealers,
infrastructure debt fund investment companies and infrastructure finance companies will also come
under this category.

NBFCs which warrant enhanced regulatory requirements based on a set of parameters and scoring
methodology will feature in the upper layer. The top-10 eligible NBFCs in terms of asset size will always
be in the upper layer, irrespective of any other factor.

The top layer can get populated if the regulator thinks there is a substantial increase in the potential risk
from specific NBFCs in the upper layer.

Government-owned NBFCs will be placed in the base or middle layer, and not in the upper layer until
further notice.

The regulatory revision announcement comes after the RBI in January this year released a discussion
paper — ‘Revised Regulatory Framework for NBFCs -- A Scale-based Approach’ — for public comments.

The regulatory minimum net-owned fund for finance companies acting as microfinance firms and those
factoring business will be increased to ₹10 crore.
The RBI has set a three-year glide path for the existing NBFCs to achieve the net-owned funds (NOF) of
Rs 10 crore.

However, for NBFC-P2P, NBFC-AA, and those with no public funds and no customer interface, the NOF
shall continue to be Rs 2 crore.

The RBI has revised existing norms for classifying loans as non-performing assets (NPAs). Now, the
overdue of more than 90 days will be termed NPAs for all categories of NBFCs. The central bank has
provided a three-year transit period to NBFCs in the base layer to adhere to the revision.

NBFCs in middle and upper layers have to make a thorough internal assessment of the need for capital,
commensurate with the risks in their business.

NBFCs in the upper layer will have to have a common equity tier-1 capital of at least nine per cent to
enhance the quality of regulatory capital. In addition to the CRAR, the upper layer NBFCs will also be
subjected to leverage requirements to ensure that their growth is supported by adequate capital.

A suitable ceiling for leverage will be prescribed subsequently as and when necessary, the RBI said.

Changes in norms

https://www.moneycontrol.com/news/business/economy/nbfcs-reserve-bank-to-step-up-vigil-with-
four-layered-regulatory-framework-7615581.html

https://www.business-standard.com/article/finance/four-tier-scale-based-regulatory-guidelines-for-
nbfcs-from-oct-2022-rbi-121102201530_1.html

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12179&Mode=0

Merchant Banking

https://edurev.in/studytube/Concept--Evolution-Merchant-Banking--Financial-Mar/dc4a6af9-df2f-404e-
a37e-79f6faa036fd_t#

Merchant banking comprises a wide set of banking activities which involves issues management by
trading in securities, underwriting security issuances (e.g. an IPO), undertaking valuation of businesses
and setting up and packaging M&A deals. In business parlance, it is distinguished from commercial
banking, which largely revolves around accepting deposits and giving loans (nowadays, commercial
banks also provide additional services such as bill payments, certificates of deposits etc.).

Securities and Exchange Board of India (SEBI) is the regulatory authority for merchant banking in
India. Activities of merchant banks are regulated by the  SEBI (Merchant Bankers) Regulations, 1992.

As per RBI’s Master Circular on Para-Banking activities, banks are allowed to undertake merchant
banking activities through a separate subsidiary which would be required to comply with SEBI
regulations. Banking Institutions performing merchant banking activities are also required to follow the
requirements laid down in the  prudential exposure norms prescribed by RBI, as well as the statutory
limits contained in Section 19(2) & (3) of the Banking Regulation Act, 1949.

Merchant banking can also be pursued by entities other than banks (however, they should not be NBFCs
as defined under the RBI Act), provided they are registered with SEBI. In case a bank pursues merchant
banking activities, it would need a banking license from RBI (to carry out banking activities) and a SEBI
registration under the SEBI Merchant Bankers Regulations to carry out merchant banking business.

It is to be noted that, those banks and merchant banking subsidiaries which are performing any of the
activities under Portfolio Management Scheme (or any similar scheme) are also required to comply with
the provisions of the SEBI (Portfolio Managers) Rules and Regulations, 1993.

However, RBI exempts a merchant banking company from following requirements:

1. Provisions related to mandatory registration, maintenance of liquid assets and creation of

reserve funds under the RBI Act, 1934;

2. Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,

1998; and

3. Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998.

To be eligible for the above exemptions, a merchant banking company would need to fulfil the following
criteria:

 It should be registered with SEBI under section 12 of the SEBI Act 1992;

 It should conduct the business of merchant banking in accordance with rules or regulations
framed by SEBI;

 It should acquire securities only as part of its merchant banking activities;

 It should not be engaged in any other financial activities as mentioned in section 45I(c) of the
RBI Act 1934; and

 It should not accept or hold public deposits.

[See, RBI Master Circular on Exemption from the provisions of RBI Act, 1934]

Provisions related to the registration of a merchant bank are laid down in Chapter-II of SEBI Regulations,
which provides for mandatory registration to carry out the business of merchant banking in India.
Following are some of the requirements which are taken into consideration for grant of certificate:

 Applicant should be a corporate body other than a Non-Banking Financial Company (as defined
under the RBI Act);
  Applicant should not engage in any activity other than those connected to securities market;

 Applicant should have a minimum of two employees having prior experience in merchant
banking;

 Applicant must not be related (directly or indirectly) to any other entity which is registered as a
merchant banker;

 Applicant has not been found guilty for any economic offence; and

 Applicant should have a minimum capital of 5 crore rupees (for category-I merchant banker).

Many statutes and regulations require certain functions [such as valuation of shares under Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations,
2000] to be performed by SEBI registered Merchant Bankers, and hence for businesses operating in the
financial sector, obtaining a merchant banking license can be a strategic advantage. Examples of some of
the important functions that are performed by Merchant Bankers are given below:

1. Corporate Counselling – After conducting a detailed market analysis to evaluate feasibility of

corporate policies, merchant bankers render commercial and strategic advice to improve overall
efficiency of a company.

2. Project Counselling – Studying the nature and scale of investment in a business project and
assisting clients with finance & procedural aspect for the successful implementation of the
project.

3. Portfolio Management – Advising clients (such as Institutional Investors and high net worth
individuals) on managing their investments in order to earn maximum profit in a time bound
manner.

4. Issue Management – Sponsoring of corporate securities (e.g. IPOs) including marketing,

compliance of listing requirements, procuring private subscription and offering securities to
existing shareholders of the company.

Due to factors such as growth of primary market, increasing need of corporate restructuring and easing
of FDI norms, merchant banking has never been more relevant in India. Therefore, it is very much
required that the restrictive norms governing merchant banking, especially those related to capital
adequacy and registration, should be relaxed in order to allow small players to enter and further expand
the exclusive club of merchant bankers in India.

Functions of Merchant banks :

 (1) Underwriting of shares and debentures

 (2) Management of Public issues

  (3) Portfolio management

 (4) Credit syndication which involves all the steps of applying for a loan.

 (5) Corporate Advisory services.

 (6) Management of off shore funds.

 (7) Leasing and financing

 (8) Foreign collaborations and foreign currency management.

 (9)Investment services for non resident Indians.

 (10) Counselling small scale business organizations

 (11) Project finance and project promotion services.

 (12) Treasury management services

 (13) Disbursement of dividends.

In India Merchant banking services are provided by

 (1) Commercial Banks

 (2) Financial Institutions

 (3) Private consultancy firms.

Classification of Merchant Banks :

In India Every organization providing merchant-Banking services should register with SEBI. On the basis
of the Capital Adequacy and operational activities SEBI has classified the merchant bankers into
following types :

Minimum Net Worth for

Category             Activities Permitted by SEBI
Capital Adequacy 

Issue Manager, Advisor, Consultant, Underwriter

Category – I Rs. 5 Crore
and Portfolio Manager

Category – II Rs. 50 Lakhs Advisor, Consultant, Underwriter and Portfolio

 Manager

Category – III Rs. 20 Lakhs Advisor, Consultant, Underwriter

Category – IV -NIL Advisor and Consultant Service Only

Growth of Financial Services Sector in India

The growth of financial sector in India at present is nearly 8.5% per year. It is essential for any country to
maintain a healthy growth percentage in the financial services sector as the rise in the growth rate
suggests the growth of the economy.

An overview of the Indian system would suggest that the financial system in India comprises of financial
institutions, financial markets, financial instruments, and services and is characterised by its two major
segments - an organised sector and a traditional sector. The major players in the market providing such
services include IL&FS, IDFC, ICICI, IDBI, L&T, etc. The stability in the market is governed by how policy
makers draft their policies vis-à-vis these sectors. The below article would throw light on getting a basic
understanding of the Indian financial sector and the regulatory bodies for different services sector. 1.
Financial Services Sector | Present Situation 1.1 The term ‘financial service’ is not defined in any statute.
Financial services generally means (i) services rendered by banking and non-banking finance companies
regulated by the Reserve Bank of India (“RBI”), established under the Reserve Bank of India Act, 1934
(“RBI Act”), (ii) insurance companies regulated by the Insurance Regulatory and Development Authority
(“IRDA”) which is a body established under the Insurance Regulatory and Development Authority Act,
1999 (“IRDA Act”) and (iii) other entities regulated by the Securities and Exchange Board of India
(“SEBI”), which is a body established under the Securities and Exchange Board of India Act, 1992 (“SEBI
Act”). 1.2 Present financial system in India The present situation of the financial services sector in India
can be broadly represented as follows: a. RBI, at the apex; b. Commercial banks, which includes, public
sector banks and private sector banks; c. Developmental financial institutions, which can be divided into,
all India institutions and state level institutions; Article 18 * LLM, Business Laws, Mumbai University
(2011-13). Published in Articles section of www.manupatra.com 2012] 223 Chartered Accountant
Practice Journal v 1 May – 15 May, 2012 d. Insurance companies, which can be classified as, Life
Insurance Corporation of India, general insurance corporation of India and private sector insurance
companies; e. Other public sector financial institutions, like, post office savings bank, National Bank for
Agriculture and Rural Development, National Housing Bank Export Import Bank of India and Small
Industries Development Bank of India; f. Mutual funds, like, Unit Trust of India and other mutual funds;
g. Non-banking finance corporations, which may be public sector firms or private sector firms; h. Asset
reconstruction companies; i. Capital market intermediaries; and j. Credit information companies. 2.
Financial Sector Reforms 2.1 The reform process was initiated in India in 1991 with the aim of
accelerating the pace of economic growth and eradication of poverty. India’s economic liberalization
introduced many policy changes and it impacted industry and trade, the most. Foreign direct investment
(“FDI”) being a vehicle for technology transfer, industry and service sectors was thrown open for foreign
investment. The policy and procedure has since been fine-tuned to attract investment much needed for
our development. 2.2 The economic reforms initiated in 1991 introduced far-reaching measures, which
changed the working and machinery of the economy. These changes were pertinent to the following: a.
dominance of the public sector in the industrial activity; b. discretionary controls on industrial
investment and capacity expansion; c. trade and exchange controls; d. limited access to foreign
investment; and e. public ownership and regulation of the financial sector. 2.3 The reforms have
unlocked India’s enormous growth potential and unleashed powerful entrepreneurial forces. Since
1991, successive governments, across political parties, have successfully carried forward the country’s
economic reform agenda. 2.4 Need of Financial sector reforms Financial sector reforms have long been
regarded as an integral part of the overall policy reforms in India. India has recognized that these
reforms are imperative for increasing the efficiency of resource mobilization and allocation in the real
economy and for the overall macroeconomic stability. The reforms have been driven by a thrust towards
liberalization and several initiatives such as liberalization in the interest rate and reserve requirements
have been taken on this front. At the same time, the government has emphasized on stronger regulation
aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of
systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient 19
AN OVERVIEW OF FINANCIAL SERVICES SECTOR IN INDIA: A HUGE UNTAPPED POTENTIAL IN THE
MARKET Published in Articles section of www.manupatra.com 224 KNOWLEDGE RESOURCE [Vol. 38
Chartered Accountant Practice Journal v 1 May – 15 May, 2012 and globally competitive. During the last
fifteen years, the Indian financial system has been incrementally deregulated and exposed to
international financial markets along with the introduction of new instruments and products. 3. Banking
Business & Development Of Banking System in India 3.1 RBI is the supreme monetary authority
responsible for controlling the banking system in the country. RBI was established on 1 April 1935, in
accordance with the provisions of the RBI Act. Though originally privately owned, since nationalization in
1949, RBI is fully owned by the Government of India. It was nationalized on the basis of the Reserve
Bank of India (Transfer to Public Ownership) Act, 1948. As a result all shares in the capital of the bank
were deemed transferred to the Central Government on payment of a suitable compensation. The
Banking Regulation Act, 1949 (“Banking Regulation Act”) provides the legal framework for regulation of
the banking sector by RBI. 3.2 Between the period from 1913 and 1948, there were approximately 1100
small banks in India and the growth in banking sector was very slow. To streamline the functioning and
activities of commercial banks, the Government of India came up with the Banking Companies Act, 1949
which was later changed to Banking Regulation Act 1949 as per amending Act of 1965. RBI was vested
with extensive powers for the supervision of banking in India as a Central Banking Authority. 3.3 After
independence, Government has taken most important steps in regard of Indian Banking Sector reforms.
In 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of India”, to
act as the principal agent of RBI and to handle banking transactions all over the country. It was
established under State Bank of India Act, 1955. Seven banks forming subsidiary of State Bank of India
were nationalized in 1960. In 1969, major process of nationalization was carried out. At the same time
14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were
nationalized, and thus raising the number of nationalized banks to 20. Seven more banks were
nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the banking
segment in India was under government’s ownership. The result of national control of the banks was a
gradual decline in productivity and rise in the non-performing assets (“NPAs”). 3.4 Banking Regulation
Act was then amended in 1993 and thus the gates for the new private sector banks were opened. This
move along with the rapid growth in the economy of India revolutionized the banking sector in India
which has seen rapid growth with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks. The next stage for the Indian banking has been
setup with the proposed relaxation in the norms for FDI, where all foreign investors in banks may be
given voting rights upto 10% which has gone up to 49% with some restrictions. 3.5 The 1991 policy
shook the banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method
(Borrow at 4%; Lend at 6%; Go home at 4%) of functioning. The new wave ushered in a modern outlook
and tech-savvy methods of working for the traditional banks. All this led to the retail boom in India.
Now, banking in India is generally fairly mature in terms of supply, product range and reach-even though
reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality
of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets as compared to other banks in 20 Published in Articles section of www.manupatra.com
2012] 225 Chartered Accountant Practice Journal v 1 May – 15 May, 2012 21 comparable economies in
its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the
government. With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail banking, mortgages
and investment services are expected to be strong. 3.6 Activities that can be carried out by banks a.
Banks in India can only carry out the business of banking and other permitted activities. Apart from
these activities, a bank in India cannot carry on any other activities and/ or business. b. Banking business
means the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.1 c. In addition
to the business of banking, a banking company may also carry on any one or more of the following
permitted activities, namely: (a) the borrowing, raising, or taking up of money; the lending or advancing
of money either upon or without security; the drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading,
railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether
transferable or negotiable or not; the granting and issuing of letters of credit, traveller’s cheques and
circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign
exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and
dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and
investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on
behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of
bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit
vaults; the collecting and transmitting of money and securities; (b) acting as agents for any Government
or local authority or any other person or persons; the carrying on of agency business of any description
including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as
an attorney on behalf of customers, but excluding the business of a managing agent or secretary and
treasurer of a company; (c) contracting for public and private loans and negotiating and issuing the
same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out
of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or
debenture stock of any company, corporation or association and the lending of money for the purpose
of any such issue; 1. Section 5(b), Banking Regulation Act AN OVERVIEW OF FINANCIAL SERVICES SECTOR
IN INDIA: A HUGE UNTAPPED POTENTIAL IN THE MARKET Published in Articles section of
www.manupatra.com 226 KNOWLEDGE RESOURCE [Vol. 38 22 Chartered Accountant Practice Journal
v 1 May – 15 May, 2012 (e) carrying on and transacting every kind of guarantee and indemnity business;
(f) managing, selling and realising any property which may come into the possession of the company in
satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with
any property or any right, title or interest in any such property which may form the security or part of
the security for any loans or advances or which may be connected with any such security; (h)
undertaking and executing trusts; (i) undertaking the administration of estates as executor, trustee or
otherwise; (j) establishing and supporting or aiding in the establishment and support of associations,
institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the
company or the dependents or connections of such persons; granting pensions and allowances and
making payments towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition,
construction, maintenance and alteration of any building or works necessary or convenient for the
purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing of or turning into account or otherwise dealing with all or any part of the property and rights
of the company; (m) acquiring and undertaking the whole or any part of the business of any person or
company, when such business is of a nature enumerated or described in this sub-section; (n) doing all
such other things as are incidental or conducive to the promotion or advancement of the business of the
company; (o) any other form of business which the Central Government may, by notification in the
Official Gazette, specify as a form of business in which it is lawful for a banking company to engage viz.
insurance business, para-banking activities, mutual fund business, etc. 3.7 Commercial banks a. A bank
in India is a company formed under the Companies Act, 1956 (“Companies Act”) which carries on the
business of ‘banking’ in accordance with the provisions of the Banking Regulation Act. ‘Banking’ means
the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable
on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. b. As per the RBI Act,
banks in India are classified into scheduled and nonscheduled banks. Scheduled banks are those which
are entered into the second schedule of the RBI Act. It includes those banks which have a paid-up capital
and reserves of an aggregate value of not less than Rs. 5 lakhs and which Published in Articles section of
www.manupatra.com 2012] 227 Chartered Accountant Practice Journal v 1 May – 15 May, 2012 23
satisfy RBI that their affairs are being carried out in the interests of the depositors. Non-scheduled banks
are those which are not included in the second schedule of the RBI Act. c. The scheduled banks comprise
scheduled commercial banks and scheduled cooperative banks. Further, the scheduled commercial
banks in India are categorized into 5 different groups according to their ownership and/or nature of
operation: (a) Nationalized Banks; (b) State Bank of India and its associates; (c) Regional Rural Banks; (d)
Foreign banks; and (e) Other Indian private sector banks. 4. Entities engaged in providing financial
services (Other Than Banking Business) 4.1 Developmental Financial Institutions Since independence, a
large number of financial institutions have been set up with the sole purpose of catering to the long-
term financial needs of the industrial sector. The structure of financial institutions comprises of all India
long term financing institutions (like Industrial Development Bank of India, Industrial Finance
Corporation of India and the Industrial Credit and Investment Corporation of India), State Financial
Corporations and State Industrial and Development Corporations. 4.2 Insurance Companies a. The
insurance sector is broadly controlled by two public sector companies: the Life Insurance Corporation of
India and the General Insurance Corporation of India which is a holding company that has four fully
owned subsidiaries in its fold. With the liberalization of the insurance sector, several private players
have also entered the insurance field. b. Currently, insurance business in India is governed by the
provisions of Insurance Act, 1938 (“Insurance Act”), IRDA Act and the regulatory body to permit the
carrying on the business of insurance is IRDA. Every insurer seeking to carry out the business of
insurance and the allied activities in India is required to obtain a certificate of registration from the IRDA
prior to commencement of business. The pre-conditions for applying for such registration have been set
out under the Insurance Act, and the various regulations prescribed by IRDA. 4.3 Other Public Sector
Financial Institutions A variety of public sector financial institutions exist. The important ones are: a. Post
Office Savings Bank (“POSB”) Run by the Post and Telegraph department the POSB is operated through
the vast network of post offices. AN OVERVIEW OF FINANCIAL SERVICES SECTOR IN INDIA: A HUGE
UNTAPPED POTENTIAL IN THE MARKET Published in Articles section of www.manupatra.com 228
KNOWLEDGE RESOURCE [Vol. 38 24 Chartered Accountant Practice Journal v 1 May – 15 May, 2012 b.
National Bank for Agriculture and Rural Development (“NABARD”) NABARD is the apex bank for
agricultural financing and channelizing the assistance through various regional, state level and field level
institutions like the Regional Rural Banks, State Cooperative Banks, etc. c. National Housing Bank
(“NHB”) The aim of NHB is to harness and promote the market potentials to serve the housing needs of
all segments of the population with the focus on low and moderate income housing. d. Export Import
Bank of India (“EXIM”) EXIM is a leading export finance provider in India. Since the time of its inception
in 1982, the bank has played a significant role in supporting overseas investment and trade. Beginning
its operations as an export credit provider, the bank has developed into an organization that helps
Indian companies in their export and import activities by offering a broad variety of products and
services. e. Small Industries Development Bank of India (“SIDBI”) SIDBI was established in 1989 as the
principal financial institution for the promotion, financing and development of industry in the small scale
sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or
developing the industry in the small scale sector. 4.4 Mutual Funds a. Mutual fund is a mechanism for
pooling the resources by issuing units to the investors and investing funds in securities in accordance
with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-
section of industries and sectors and thus the risk is reduced. The profits or losses are shared by the
investors in proportion to their investments. The mutual funds normally come out with a number of
schemes with different investment objectives which are launched from time to time. b. Unit Trust of
India (“UTI”) was the first mutual fund set up in India in the year 1963. In early 1990s, Government
allowed public sector banks and institutions to set up mutual funds. In the year 1992, SEBI Act was
passed which established SEBI as the governing body and mandated the registration of every mutual
fund with SEBI. SEBI formulates policies and regulates the mutual funds to protect the interest of the
investors. c. A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
management company (“AMC”) and custodian. The trust is established by a sponsor or more than one
sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the
benefit of the unit holders. AMC approved by SEBI manages the funds by making investments in various
types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the
fund in its custody. The trustees are vested with the general power of superintendence and direction
over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

Nature of Financial Services

Customer Oriented: Financial services are customer-focused services that are offered as per the
requirements of customers. Financial institutions properly study customer needs before designing and
offering such services. They are meant to fulfill the specific needs of a customer which differs from
person to person.

Intangibility: These services are intangible which makes their marketing a challenging task for financial
institutions. Such institutions need to focus on building their brand image by providing innovative and
quality products to customers. Firms enjoying better credibility in market are easily able to sell off their
products.

Inseparable: Financial services are produced and delivered at the same time simultaneously. These
services are inseparable and can’t be stored in advance. Here production and supply function both
occurs at the same time.

Manages Fund: Financial services are specialized at managing funds of people. These services enable
peoples in allocating their idle lying funds into useful means for earning revenues. Financial services
provide various means to people for converting their savings into investment.

Financial Intermediation: These services does the work of financial intermediation as it brings together
the lender and borrower. Financial services mobilize the funds of people who are having enough of it
and

made it available to the one who are in need of it.

Market Based: Financial services are market based which changes as per the changing conditions. It is a
dynamic activity which varies as per the variations in socio-economic environment and varying needs of
customers.

Distributes Risk: Risk distribution is the key feature offered by financial services. These services transfer
the risk of an individual not willing to take among different persons who all are willing to bear it.
Financial institutions diversify the risk and secure people against damages by providing them various
insurance policies.

Scope of Financial Services

Financial services consist of wide range of activities which are broadly classified into 2: –

Traditional Activities.

Modern Activities.

Scope of Financial Services

Scope of Financial Services

Traditional Activities

Financial intermediaries have been offering a large range of services traditionally

Related to capital and money market activities. These services are classified into 2 groups: – Fund based
activities and Non-fund based activities.

https://commercemates.com/wp-content/uploads/2020/08/Scope-of-Financial-Services.jpg?
ezimgfmt=ng:webp/ngcb8

Fund Based Activities.

Fund based activities comprises of activities which are concerned with acquiring funds and assets for
clients. Different services covered under fund based activities are: Primary and secondary market
activities, dealing in money market instruments, foreign exchange market activities and involving in hire
purchase, venture capital, equipment leasing etc.

Non-fund based Activities.

These services are provided by financial intermediaries on non-fund basis and are called fees-based
services. Non-fund bases activities are specialized services offered by financial institutions to customers
in exchange for fees, commission, dividend and brokerage. This comprises of services such as Portfolio
management, issue management, stock broking, merchant banking, credit rating, debt and capital
reconstructing, bank guarantee etc.

Modern Activities

Financial intermediaries beside the traditional services offers a wide range of financial services at
present. These activities are mostly in the category of non-fund based activities.

Few of the modern activities are listed below: –

Merger and acquisition planning and helping with their smooth carry out.

Providing guidance in capital reconstructing to corporate customers.

Assisting in rehabilitation and reconstruction of sick companies.

Portfolio management of large public sector corporations.

Providing recommendations in management style and structure for attaining better results.

Acting as trustees to the debentures-holders.

Providing project advisory services ranging from project preparation to capital raising.
 Venture Capital Funds

Investment funds that help investors seeking private equities in startups, small, and mid-sized
enterprises possessing strong growth potential, by managing their money are known as Venture Capital
Funds (VCF). They are institutions that are dedicated to funding new ventures and are regulated by the
guidelines issued by the Securities and Exchange Board of India (SEBI). Though there is a high-risk
involved in funding new projects, the investors are eager to do so because they anticipate high returns
on the investment.
Venture Capital Funds ensure that the money of the investors is used to fund projects which have a
potential to grow and the money provided in the process is known as Venture Capital. Venture capital
funds are given out on the basis of the company’s assets, size and stage of product development. Since
these firms in question are usually start-up/ small in size, they are said to have high-risk/high-return
profiles.

Features of Venture Capital Funds

 The main focus of VCFs is on early-stage investment but sometimes, it can also involve expansion-
stage financing.
 Often, equity stakes of the enterprises or companies that are funded by the VCFs are purchased by
the VCFs.
 Along with the capital, VCFs also bring with them the knowledge and experts of the investors which
will help the company make further advancements.
 Sometimes the VCFs also help in developing new products/services and acquire latest technologies
that will help the company to improve efficiency.
 The biggest advantage that VCFs offer is the networking opportunities. With influential and wealthy
investors promoting the company, it will in no time, achieve stellar growth.
 VCFs hold the authority to influence the decisions of the enterprises they are investing in.
 To mitigate the risks involved in funding new projects, VCFs invest in a variety of young startups with
a belief that at least one firm will achieve massive growth and reward them with a large payout.
How a Venture Capital Fund operates:
Depending on the maturity of the business when the investment is done, venture capital investments
can be seen as early-stage capital, seed capital or expansion-stage financing. However, the investment
stage does not affect how venture capital funds operates.
To begin with, before making any investments, venture capital funds (like all funds), has to raise money.
Potential investors are given a prospectus of the fund after which they commit money to. Once a
commitment is made, the fund's operators call all the potential investors and finalize individual
investment amounts.
After that, private equity investments that have the potential of generating positive returns for its
investors are sought out by the venture capital fund. This process involves the fund's manager/
managers reviewing business plans in hundreds, searching for potentially high-growth companies.
Investment decisions are made by the fund managers and are decided according to the prospectus and
the investor’s expectations. An annual management fee of around 2% will be charged by the fund once
an investment is made.
When a portfolio company exits, investors of a venture capital fund make returns either in a merger and
acquisition or an IPO. Along with the annual management fee, the fund will also keep a percentage of
the profits, if the investment makes a profit.

Types of Venture Capital Funds

Venture Capital Funds are classified on the basis of their utilisation at different stages of a business. The
3 main types are early stage financing, expansion financing, and acquisition/buyout financing
Early stage financing
There are 3 sub-categories in early stage financing. These are seed financing, startup financing, and first
stage financing. Seed financing is a small sum given to the entrepreneur to serve the purpose of
qualifying for a startup loan. Startup financing is when the companies receive funds to complete the
development of its services and products. When companies need capital to begin the business activities
in full swing, they need first stage financing.
Expansion financing
Expansion financing is classified into second stage financing, bridge financing, and third stage financing.
The second stage and third stage financing are given to companies so that they can start their expansion
process in a major way. Bridge financing is offered to companies in the form of monetary support when
they employ Initial Public Offerings (IPO) as a principal business strategy.
Acquisition or buyout financing
Acquisition finance and leveraged buyout financing are the categories falling under acquisition or buyout
financing. When a company needs funds to acquire another company or parts of a company, acquisition
financing comes to aid. Leveraged buyout financing is required when a management group of a
company wishes to acquire another company’s particular product.
Disadvantages of Venture Capital Funds
Though venture capital funds come with an array of benefits, there are also a few disadvantages that
they offer. Some of them are given below:
 When investors fund a startup or a small enterprise, they partly become the owners of the enterprise
which means that they have a control in the decision-making process. This results in the founders
losing their control and autonomy.
 The entire process of venture capital financing is lengthy and complex.
 This form of financing is very uncertain and benefits can be realised only in a long run.

Top 10 Venture Capital Firms in India

The Indian startup ecosystem highly relies on venture capital funding. However, many entrepreneurs are
confused, hesitant, and sometimes find it difficult to ascertain which investors are reliable. Therefore,
we have made a list of the top 10 venture capital firms in India and also provided some basic
information about these firms below:
1. Accel Partners
With over 3 decades of experience in the field of venture capital financing, Accel Partners have helped
hundreds of companies evolve. Its vision is to provide assistance to the global entrepreneur
community.
Investment structure - Invests between $0.5 million and $50 million.
Industries - Infrastructure, Storage Technologies, Data-Driven technologies, Cloud-based services,
Mobile and Software, SaaS, Biotechnology, Healthcare, Education.
Startups funded - BookMyShow, Urbanclap, Swiggy, Rentomojo, Freshdesk, Myntra, Commonfloor,
Flipkart, BabyOye, TaxiForSure.
2. Helion Venture Partners
Based in Mauritius, Helion Venture Partners aids entrepreneurs to develop a strategy to accomplish
their plan in the marketplace. Apart from financing startups, Helion also helps companies to solve
complex business problems.
Investment structure - Invests between $2 million to $10 million.
Industries - Retail services, Outsourcing, E-commerce, Consumer Services, Mobile, Advertising,
Healthcare, Enterprise Software, Travel and Tourism, Internet, Education.
Startups funded - MakeMyTrip, Yepme, NetAmbit, PubMatic, RedBus, SimpliLearn, EzeTap, Wooplr.
3. Sequoia Capital India
A venture capital firm that is specialised in funding startups, seed, early, series-A funding, etc.,
Sequoia Capital India, is an affiliate of Sequoia Capital based in California.
Investment structure - Invests between $100,00 to $1 million in seed stage, between $1 million to $10
million in the early stage, and between $10 million to $100 million in the growth stage.
 Industries - Financial, Outsourcing, Public Sector, Energy, Healthcare, Technology, Mobile, Enterprise
Software.
Startups funded - Practo, JustDial, Zomato, OYO Rooms, Groupon India, MobiKwik, Grabhouse,
Knowlarity, iYogi, BankBazaar.
4. Nexus Venture Partners
This venture capital firm looks for passion, innovation, feasibility, and differentiability in enterprises
and has a decade of experience in guiding entrepreneurs.
Investment structure - Invests between $0.5 million and $10 million in the early growth stage. In their
seed program, they invest up to $0.5 million.
Industries - Data Security, Infrastructure, Storage, Rural Sector, Mobile, Agribusiness, Energy, Media,
Technology, Consumer and Business Services, Food, Tourism, Lifestyle.
Startups funded - Stayzilla, Craftsvilla, Delhivery, Snapdeal, Komli, Housing.com, PubMatic.
5. Venture East
It is a venture capital firm that focuses on Indian startups. With over 15 years of experience, Venture
East prefers to invest in fresh, strange, and potential ideas while also helping them to establish and be
competent in the market.
Investment structure - Invests between $1 million to $10 million in multiple rounds.
Industries - Financial Services, Digital Healthcare, Internet of Things (IoT), Education, E-commerce, Life
Sciences, Information Technology.
Startups funded - Portea, Seclore, Goli Vada Pav, Little Eye Labs, 24 Mantra.
6. Blume Ventures
Termed as ‘Founder’s VC’, Blume Ventures helps startups with funding, mentoring, and support. It
was founded in 2011 and has over 60 active companies.
Investment structure - Invests between $0.05 million to $0.3 million in the seed stage.
Industries - Telecommunications Equipment, Mobile Applications, Data Infrastructure, Logistics, E-
commerce, Fin-Tech, Hospitality Services, Gaming.
Startups funded - HealthifyMe, Instamojo, TaxiForSure, Cashify, Chillr, Explara, EKI Communications,
Audio Compass, Exotel, Printo.
7. Inventus Capital Partners
This venture capital firm primarily invests in technology-based startups and was founded in 2007. It is
managed by industry veterans and entrepreneurs,
Investment structure - Invests between $1 million to $2 million in the first venture round and with the
growth in business, it invests between $0.25 million to $10 million.
Industries - Hotels, Restaurants and Leisure, Healthcare, Information Technology,
Telecommunications, Media, Hardware, and Equipment.
Startups funded - CBazaar, Poshmark, Savaari, Poshmark, PolicyBazaar, Insta Health Solutions.
8. Fidelity Growth Partners
 Fidelity Growth Partners is the investment arm of Fidelity International Limited and has been
rechristened as Eight Roads Ventures. It has invested in many sectors including technology,
healthcare and life sciences, etc. since 2008 and focuses on the Indian startup ecosystem.
Investment structure - Invests between $10 million to $50 million.
Industries - Energy and Industrial Technology, Food and Agriculture, Data and Business Services,
Education and Skills Development, Consumer and Enterprise Technology.
Startups funded - Yebhi, NetMagic, Coastal Projects, Milk Mantra Dairy Pvt. Ltd.
9. Qualcomm Ventures
This venture capital firm was founded in 2000 and has more than 140 active portfolio companies
under its belt. It is the private equity arm of Qualcomm Incorporated and has focus on investing in
automotive, data center, mobile, and digital health sectors.
Investment structure - Not Applicable
Industries - Consumer Software, Business Software, Infrastructure, Automotive, Internet of Things
(IoT).
Startups funded - Fitbit, Invensense, Appsdaily, Deck, Portea, Capillary, Cruise Automation.
10. IDG Ventures India
IDG Ventures India holds a portfolio of more than 220 companies and has an experience of 15 years in
the venture capital space.
Investment structure - Invests between $1 million to $10 million.
Industries - Consumer Media, Mobile, Media and Technology, Enterprise Software, Engineering, Fin-
Tech, Health-Tech.
Startups funded - Lenskart, Zivame, Yatra, FirstCry, Ozone Media, UNBXD, Myntra.
Regulatory norms for Venture Capital
http://www.legalservicesindia.com/article/265/Regulatory-Aspects-of-Venture-Capital-In-India.html

Leasing
Types of Lease
https://www.iedunote.com/lease#:~:text=Leasing%20is%20the%20process%20by,making%20payments
%20to%20the%20owner.

Lease Vs Borrow

https://www.mbaknol.com/business-finance/lease-vs-buy-decision/

CREDIT RATING:
CONCEPT, TYPES AND FUNCTIONS

Many a times, it has happened that investors in debentures or fixed deposits were shown rosy pictures
of companies and offered very high rates of interests by bogus companies and in the end the investor
neither got his money back nor the promised interest. Actually, it is very difficult for an individual
investor to gather details about creditworthiness of a company, neither he has the time nor the skills to
undertake risk evaluation. Every investor wants to ensure safety of his investment. Credit rating
agencies investigate the financial position of the company issuing various kinds of instruments and
assess risks involved in investing money in them. In the system of credit rating, the credit rating agency
rate the risks involved in investment in instruments of a particular company, they may rank it from very
safe to very risky. At present credit rating is done only for debt-instruments and rarely for preference or
equity shares. DEFINITION Credit rating system can be defined as an act of assigning values to credit
instruments by assessing the solvency i.e., the ability of the borrower to repay debt, and expressing
them through predetermined symbols. Investopedia defines Credit Rating as “An assessment of the
creditworthiness of a borrower in general terms or with respect to a particular debt or financial
obligation”. A credit rating can be assigned to any entity that seeks to borrow money – an individual,
corporation, state or provincial authority, or sovereign government.

CHARACTERISTICS OF CREDIT RATING 1. Assessment of issuer's capacity to repay. It assesses issuer's

capacity to meet its financial obligations i.e., its capacity to pay interest and repay the principal amount
borrowed. 2. Based on data. A credit rating agency assesses financial strength of the borrower on the
financial data. 3. Expressed in symbols. Ratings are expressed in symbols e.g. AAA, BBB which can be
understood by a layman too. 4. Done by expert. Credit rating is done by expert of reputed, accredited
institutions. 5. Guidance about investment-not recommendation. Credit rating is only a guidance to
investors and not recommendation to invest in any particular instrument. WHAT CREDIT RATING IS NOT
1. Not for company as a whole. Credit rating is done for a particular instrument i.e., for a particular class
of debentures and not for the company as a whole, it is quite possible that two instruments issued by
the same company may carry different rating. 2. Does not create a fiduciary relationship. Credit rating
does not create a fiduciary relationship (relationship of trust) between the credit rating agency and the
investor. 3. Not attestation of truthfulness of information provided by rated. company. Rating does not
imply that the credit rating agency attests the truthfulness of information provided by the rated
company. 4. Rating not forever. Credit rating is not a one-time evaluation of risk. which remains valid for
the entire life of a security. It can change from time to time. COMPULSORY CREDIT RATING Obtaining
credit rating is compulsory in the following cases 1. For debt securities. The Reserve Bank of India and
SEBI have made credit rating compulsory in respect of all non-government debt securities where the
maturities exceed 18 months 2. Public deposits. Rating of deposits in companies has also been made
compulsory. 3. For commercial papers (CPs). Credit rating has also been made compulsory for
commercial papers. As per Reserve Bank of India guidelines rating of P2 by CRISIL or A2 by ICRA or PP2
by CARE is necessary for commercial papers. 4. For fixed deposits with non-banking financial institutions
(NBFCs). Under the Companies Act, credit rating has been made compulsory for fixed deposits with
NBFs. FACTORS CONSIDERED IN CREDIT RATING 1. Issuers ability to service its debt. For this credit rating
agencies calculate a) Issuer company's past and future cash flows. b) Assess how much money the
company will have to pay as interest on borrowed funds and how much will be its earnings. c) How
much are the outstanding debts? d) Company's short term solvency through calculation of current ratio.
e) Value of assets pledged as collateral security by the company. f) availability and quality of raw
material used, favorable location, cost advantage. g) Track record of promoters, directors and expertise
of the staff. 2. Market positon of the company. What is the market share of various products of the
company, whether it will be stable, does the company possess competitive advantage due to
distribution network, customer base research and development facilities etc. 3. Quality of management.
Credit rating agency will also take into consideration track record, strategies, competency and
philosophy of senior management. 4. Legal position of the instrument. It means whether the issued
instrument is legally valid, what are the terms and conditions of issue and redemption; how much the
instrument is protected from frauds, what are the terms of debenture trust deed etc. 5. Industry risks.
Industry risks are studied in relation to position of demand and supply for the products of that industry
(e.g. cars or electronics) how much is the international competition, what are the future prospects of
that industry, is it going to die or expand? 6. Regulatory environment. Whether that industry is being
regulated by government (like liquor industry), Whether there is a price control on it, whether there is
government support for it, can it take advantage of tax concessions etc. 7. Other factors. In addition to
the above, the other factors to be noted for credit rating of a company are its cost structure, insurance
cover undertaken, accounting quality, market reputation, working capital management, human resource
quality, funding policy, leverage, flexibility, exchange rate risks etc. CREDIT RATING PROCESS In India
credit rating is done mostly at the request of the borrowers or issuer companies. The borrower or issuer
company requests the credit rating agency for assigning a ranking to the proposed instrument. The
process followed by most of the credit rating agencies is as follows: 1. Agreement. An agreement is
entered into between the rating agency and the issuer company. It covers details about terms and
conditions for doing the rating. 2. Appointment of analytical team. The rating agency assigns the job to a
team of experts. The team usually comprises of two analysts who have expert knowledge in the relevant
business area and is responsible for carrying out rating. 3. Obtaining information. The analytical team
obtains the required information from the client company and studies company's financial position, cash
flows, nature and basis of competition, market share, operating efficiency arrangements, managements
track cost structure, selling and distribution record, power (electricity) and labour situation etc. 4.
Meeting the officials. To obtain clarifications and understanding the client's business the analytical team
visits and interacts with the executives of the client. 5. Discussion about findings. After completion of
study of facts and their analysis by the analytical team the matter is placed before the internal
committee (which comprises of senior analysts) an opinion about the rating is taken. 6. Meeting of the
rating committee. The findings of internal committee are referred to the “rating committee" which
generally comprises of a few directors and is the final authority for assigning ratings. 7. Communication
of decision. The rating decided by the rating committee is communicated to the requesting company. 8.
Information to the public. The rating company publishes the rating through reports and the press. 9.
Revision of the rating. Once the issuer company has accepted the rating, the rating agency is under an
obligation to monitor the assigned rating. The rating agency monitors all ratings during the life of the
instrument. TYPES OF CREDIT RATING 1. Rating of bonds and debentures. Rating is popular in certain
cases for bonds and debentures. Practically, all credit rating agencies are doing rating for debentures
and bonds. 2. Rating of equity shares. Rating of equity shares is not mandatory in India but credit rating
agency ICRA has formulated a system for equity rating. Even SEBI has no immediate plans for
compulsory credit rating of initial public offerings (IPOs). 3. Rating of preference shares. In India
preference shares are not being rated, however Moody's Investor Service has been rating preference
shares since 1973 and ICRA has provision for it. 4. Rating of medium term loans (Public deposits, CDs
etc.). Fixed deposits taken by companies are rated on regular scale in India. 5. Rating of short-term
instruments [Commercial Papers (CPs). Credit rating of short term instruments like commercial papers
has been started from 1990. Credit rating for CPs is mandatory which is being done by CRISIL, ICRA and
CARE. 6. Rating of borrowers. Rating of borrowers, may be an individual or a company is known as
borrower’s rating. 7. Rating of real estate builders and developers. A lot of private colonisers and flat
builders are operating in big cities. Rating about them is done to ensure that they will properly develop a
colony or build flats. CRISIL has started rating of builders and developers. 8. Rating of chit funds. Chit
funds collect monthly contributions from savers and give loans to those participants who offer highest
rate of interest. Chit funds are rated on the basis of their ability to make timely payment of prize money
to subscribers. CRISIL does credit rating of chit funds. 9. Ratings of insurance companies. With the entry
of private sector insurance companies, credit rating of insurance companies is also gaining ground.
Insurance companies are rated on the basis of their claim paying ability (whether it has high, adequate,
moderate or weak claim-paying capacity). ICRA is doing the work of rating insurance companies. 10.
Rating of collective investment schemes. When funds of a large number of investors are collectively
invested in schemes, these are called collective investment schemes. Credit rating about them means
(assessing) whether the scheme will be successful or not. ICRA is doing credit rating of such schemes. 11.
Rating of banks. Private and cooperative banks have been failing quite regularly in India. People like to
deposit money in banks which are financially sound and capable of repaying back the deposits. CRISIL
and ICRA are now doing rating of banks. 12. Rating of states. States in India are now being also rated
whether they are fit for investment or not. States with good credit ratings are able to attract investors
from within the country and from abroad. 13. Rating of countries. Foreign investors and lenders are
interested in knowing the repaying capacity and willingness of the country to repay loans taken by it.
They want to make sure that investment in that country is profitable or not. While rating a country the
factors considered are its industrial and agricultural production, gross domestic product, government
policies, rate of inflation, extent of deficit financing etc. Moody’s, and Morgan Stanley are doing rating
of countries.

FUNCTIONS/IMPORTANCE OF CREDIT RATING

1. It provides unbiased opinion to investors. Opinion of good credit rating agency is unbiased because it
has no vested interest in the rated company.

2. Provide quality and dependable information. Credit rating agencies employ highly qualified, trained
and experienced staff to assess risks and they have access to vital and important information and
therefore can provide accurate information about creditworthiness of the borrowing company.

3. Provide information in easy to understand language. Credit rating agencies gather information,
analyse and interpret it and present their findings in easy to understand language that is in symbols like
AAA, BB, C and not in technical language or in the form of lengthy reports.

4. Provide information free of cost or at nominal cost. Credit ratings of instruments are published in
financial newspapers and advertisements of the rated companies. The public has not to pay for them.
Even otherwise, anybody can get them from credit rating agency on payment of nominal fee. It is
beyond the capacity of individual investors to gather such information at their own cost.

5. Helps investors in taking investment decisions. Credit ratings help investors in assessing risks and
taking investment decision.

6. Disciplines corporate borrowers. When a borrower gets higher credit rating, it increases its goodwill
and other companies also do not want to lag behind in ratings and inculcate financial discipline in their
working and follow ethical practice to become eligible for good ratings, this tendency promotes healthy
discipline among companies.

7. Formation of public policy on investment. When the debt instruments have been rated by credit
rating agencies, policies can be laid down by regulatory authorities (SEBI, RBI) about eligibility of
securities in which funds can be invested by various institutions like mutual funds, provident funds trust
etc. For example, it can be prescribed that a mutual fund cannot invest in debentures of a company
unless it has got the rating of AAA. BENEFITS OF CREDIT RATING Credit rating offers many advantages
which can be classified into A. Benefits to investors. B. Benefits to the rated company. C. Benefits to
intermediaries. D. Benefits to the business world.

BENEFITS TO INVESTORS 1. Assessment of risk. The investor through credit rating can assess risk
involved in an investment. A small individual investor does not have the skills, time and resources to
undertake detailed risk evaluation himself. Credit rating agencies who have expert knowledge, skills and
manpower to study these matters can do this job for him. Moreover, the ratings which are expressed in
symbols like AAA, BB etc. can be understood easily by investors. 2. Information at low cost. Credit
ratings are published in financial newspapers and are available from rating agencies at nominal fees.
This way the investors get credit information about borrowers at no or little cost. 3. Advantage of
continuous monitoring. Credit rating agencies do not normally undertake rating of securities only once.
They continuously monitor them and upgrade and downgrade the ratings depending upon changed
circumstances. 4. Provides the investors a choice of Investment. Credit ratings agencies helps the
investors to gather information about creditworthiness of different companies. So, investors have a
choice to invest in one company or the other. 5. Ratings by credit rating agencies is dependable. A rating
agency has no vested interest in a security to be rated and has no business links with the management
of the issuer company. Hence ratings by them are unbiased and credible.

BENEFITS TO THE RATED COMPANY 1. Ease in borrowings. If a company gets high credit rating for its
securities, it can raise funds with more ease in the capital market. 2. Borrowing at cheaper rates. A
favourably rated company enjoys the confidence of investors and therefore, could borrow at lower rate
of interest. 3. Facilitates growth. Encouraged by favourable rating, promoters are motivated to go in for
plans of expansion, diversification and growth. Moreover, highly rated companies find it easy to raise
funds from public through issue of ownership or credit securities in future. They find it easy to borrow
from banks. 4. Recognition of lesser known companies. Favourable credit rating of instruments of lesser
known or unknown companies provides them credibility and recognition in the eyes of the investing
public. 5. Adds to the goodwill of the rated company. If a company is rated high by rating agencies it will
automatically increase its goodwill in the market. 6. Imposes financial discipline on borrowers.
Borrowing companies know that they will get high credit rating only when they manage their finances in
a disciplined manner i.e., they maintain good operating efficiency, appropriate liquidity, good quality
assets etc. This develops a sense of financial discipline among companies who want to borrow. 7.
Greater information disclosure. To get credit rating from an accredited agency, companies have to
disclose a lot of information about their operations to them. It encourages greater information
disclosures, better accounting standards and improved financial information which in turn help in the
protection of the investors.

BENEFITS TO INTERMEDIARIES

1. Merchant bankers' and brokers' job made easy. In the absence of credit rating, merchant bankers or
brokers have to convince the investors about financial position of the borrowing company. If a
borrowing company's credit rating is done by a reputed credit agency, the task of merchant bankers and
brokers becomes much easy. BENEFITS TO THE BUSINESS WORLD 1. Increase in investor population. If
investors get good guidance about investing the money in debt instruments through credit ratings, more
and more people are encouraged to invest their savings in corporate debts. 2. Guidance to foreign
investors. Foreign collaborators or foreign financial institutions will invest in those companies only
whose credit rating is high. Credit rating will enable them to instantly identify the position of the
company. CREDIT RATING AGENCIES IN INDIA There are 6 credit rating agencies which are registered
with SEBI. These are CRISIL, ICRA, CARE, Fitch India, Brickwork Ratings, and SMERA. 1. Credit Rating and
Information Services of India Limited (CRISIL)  It is India’s first credit rating agency which was
incorporated and promoted by the erstwhile ICICI Ltd, along with UTI and other financial institutions in
1987.  After 1 year, i.e. in 1988 it commenced its operations  It has its head office in Mumbai.  It is
India’s foremost provider of ratings, data and research, analytics and solutions, with a strong track
record of growth and innovation.  It delivers independent opinions and efficient solutions.  CRISIL’s
businesses operate from 8 countries including USA, Argentina, Poland, UK, India, China, Hong Kong and
Singapore.  CRISIL’s majority shareholder is Standard & Poor’s.  It also works with governments and
policy-makers in India and other emerging markets in the infrastructure domain. 2. Investment
Information and Credit rating agency (ICRA)  The second credit rating agency incorporated in India was
ICRA in 1991.  It was set up by leading financial/investment institutions, commercial banks and financial
services companies as an independent and professional investment Information and Credit Rating
Agency.  It is a public limited company.  It has its head office in New Delhi.  ICRA’s majority
shareholder is Moody’s. 3. Credit Analysis & Research Ltd. (CARE)  The next credit rating agency to be
set up was CARE in 1993.  It is the second-largest credit rating agency in India.  It has its head office in
Mumbai.  CARE Ratings is one of the 5 partners of an international rating agency called ARC Ratings. 4.
ONICRA  It is a private sector agency set up by Onida Finance.  It has its head office in Gurgaon.  It
provides ratings, risk assessment and analytical solutions to Individuals, MSMEs and Corporates.  It is
one of only 7 agencies licensed by NSIC (National Small Industries Corporation) to rate SMEs.  They
have Pan India Presence with offices over 125 locations.

https://globaljournals.org/GJMBR_Volume11/8-Credit-Rating-in-India-A-Study-of-Rating.pdf

https://amity.edu/UserFiles/admaa/90423Paper%203.pdf

FACTORING, FORFAITING AND I BILL DISCOUNTING

https://www.egyankosh.ac.in/bitstream/123456789/6452/1/Unit-19.pdf

https://keydifferences.com/difference-between-factoring-and-forfaiting.html#:~:text=Factoring
%20refers%20to%20a%20financial,gets%20an%20immediate%20cash%20payment.

https://www.thesisbusiness.com/difference-between-bill-discounting-and-factoring.html