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State Financial Corporations (SFCs) are the State level financial institutions which play a vital role in the growth of small & medium enterprises in the concerned States. They offer financial assistance in the form of direct subscription to debentures/equity, term loans, guarantees, discounting of bills of exchange & seed/ special capital, etc. SFCs have been set up with the purpose of catalyzing higher investment, engendering greater employment & extending the ownership base of industries. They have also started offering assistance to newer types of business activities like tissue culture, floriculture, poultry farming, services related to engineering, marketing and commercial complexes.
It was in 1951 that State Financial Corporations Act was passed. In accordance with the provisions of the Act, first Corporation by Punjab Government was set up in 1953. At present there are 18 such corporations.
Capital of the State Corporations:
Each corporation can have a maximum authorised capital of Rs. 5 crores. The shares of the corporation can be purchased by the general public as well. The State Government concerned guarantees a minimum dividend of 3 1/2 per cent on the share capital.
The dividend however, cannot exceed 5 per cent on the share capital. The corporations can augment their resources by floating bonds and debentures. By the end of March 1974, the corporations had issued bonds amounting to Rs. 116 crores. The corporations can borrow from the Reserve Bank of India as well as from the State Governments.
Functions of State Finance Corporation
The important functions of State Finance Corporations are:
(i) The SFCs grant loans mainly for acquisition of fixed assets like land, building, plant and machinery.
(ii) The SFCs provide financial assistance to industrial units whose paid-up capital and reserves do not exceed Rs. 3 crore (or such higher limit up to Rs. 30 crore as may be specified by the central government).
(iii) The SFCs underwrite new stocks, shares, debentures etc., of industrial concerns.
(iv) The SFCs provide guarantee loans raised in the capital market by scheduled banks, industrial concerns, and state co-operative banks to be repayable within 20 years.
In India, there are 19 State Financial Corporations (SFCs).
The State Financial Corporations Act, 1951
The main features of the Act are as follows:—
(i) It provides that the State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State.
(ii) The share capital shall be fixed by the State Government but shall not exceed Rs. 2 crores. The issue of the shares to the public will be limited to 25 per cent, of the share capital and the rest will be held by the State Government, the Reserve Bank, Scheduled Banks, Insurance Companies, Investment Trusts, Co-operative Banks and other Financial Institutions.
(iii)Shares of the Corporation will be guaranteed by the State Government as to the re-payment of principal and the payment of a minimum dividend to be prescribed in consultation with the Central Government. 1 The State Financial Corporations Act, 1951 2
(iv) The Corporation will be authorised to issue bonds and debentures for amounts which together with the contingent liabilities of the Corporation shall not exceed five-times the amount of the paid-up share capital and the reserve fund of the Corporation. These bonds and debentures will be guaranteed as to the payment of the principal and the payment of interest at such rate as may be fixed by the State Government.
(v) The Corporation may accept deposits from the public repayable after not less than five years, subject to the maximum not exceeding the paid-up capital.
(vi) The Corporation will be managed by a Board consisting of a majority of Directors nominated by the State Government, the Reserve Bank and the Industrial Finance Corporation of India.
(vii) The Corporation will be authorised to make long-term loans to industrial concerns and to guarantee loans raised by industrial concerns which are repayable within a period of not exceeding 25 years. The Corporation will be further authorised to underwrite the issue of stocks, shares, bonds or debentures by industrial concerns, subject to the provision that the Corporation will be required to dispose of any shares, etc., acquired by it in fulfilment of its underwriting liability within a period of 7 years.
(viii) Until a reserve fund is created equal to the paid-up share capital of the Corporation and until the State Government has been repaid all amounts paid by them, if any, in fulfilment of the guarantee liability, the rate of dividend shall not exceed the rate guaranteed by the State Government. Under no circumstances shall the dividend exceed 5 per cent, per annum and surplus profits will be re-payable to the State Government.
(ix) The Corporation will have special privileges in the matter of enforcement of its claims against borrowers.