State Financial Corporations

Establishment
In order to meet the financial requirements of small scale and medium-sized industries, there was a need of special financial institutions. With this view, the Central Government passed the State Financial Corporation Act of 28th September, 1951 which empowered the state government to establish financial corporation to operate within the state. So far (till now) 18 state financial corporations have been established in different states.

Objectives:

(i) To establish uniformity in regional industries

(ii) To provide incentive to new industries

(iii) To bring efficiency in regional industrial units

(iv) To provide finance to small-scale, medium sized and cottage industries in the state

(v) To develop regional financial resources.

Prohibited Functions

(i) Not to give loan to an industrial unit exceeding 10% of its paid-up capital or Rs. 60,000 whichever is lower.

(ii) Not to accept public deposits for a period exceeding 5 years.

(iii) Not to accept deposits exceeding the paid up capital.

(iv) Not to give loan on the security of its shares.

(v) Not to declare dividend on its shares without the sanction of the Central Government.

(vi) Not to purchase shares and stocks directly of an industrial unit or limited public company.

Management
State Financial Corporation of every State is governed by a board of directors consisting of 18 directors in all, duly elected and nominated.

·         Share Capital: The State Financial Corporation can have share capital ranging from Rs. 50 lakhs to Rs. 5 crores. It can be increased up to Rs. 10 crores with the prior sanction of the Central Government.

·        Bond and Debentures: The State Financial Corporation can issue bonds and debentures to a maximum of ten times the amount of its paid-up capital and reserve fund.

·         Public Deposits: The State Financial Corporation can accept public deposits for a maximum period of 5 years. However, the total amount received by way public deposits should not exceed twice its paid-up capital.

·         Other Sources: Borrowings from the state government and the Reserve Bank.