The State Financial Corporations (SFCs) were set up in the states under SFCs Act, 1951 (Central Act) during 50s and early 60s and have been functioning for more than four decades. The SFCs Act was last amended in 1985 to meet the emerging requirements of industrial growth in the country. During the last more than a decade, many important developments have taken place affecting the functioning of financial institutions in the country, as a result of which the SFCs were placed in a most disadvantageous position vis-a-vis commercial banks and other financial institutions. Recognising the need for large scale amendments in the SFCs Act, a high-level Committee was set up by IDBI under the directions of the Union Finance Ministry in 1993 under the chairmanship of the then Managing Director, IDBI Shri S.H. Khan, to suggest amendments to the Act. This Committee had submitted its report in May 1994. The Khan Committee had made sweeping recommendations for bringing about changes in the SFCs Act. Ever since the Committee submitted its report, the amendments of SFCs Act have been under the active consideration of the Government of India. Since the time gap between the submission of the Committee's report (May, 1994) and final action initiated by the Government (December 1999) was too long, a number of important developments had taken place in the country resulting from the process of economic liberalisation and financial sector reforms initiated by the Government in 1991, affecting the general economic outlook, functioning of banks and financial institutions and throwing up newer challenges to the SLFIs. As a result of the de-regulation of the financial sector, some of the recommendations of the Committee have lost relevance in the changed circumstances and warrant some fresh amendments to the Act to cope with the changed business environments. An urgent need has, therefore, been felt by all concerned to bring about necessary reforms in the SFCs Act and provide SFCs a level-playing field. Keeping this in view and the future role which the SFCs were expected to play, it was considered necessary to invite suggestions from our chief executives with regard to the amendments to the SFCs Act. 

COSIDICI had convened a special meeting of its Executive Committee at Mysore on January 08, 2000, to discuss the proposals for amendment of the SFCs Act. On our special invitation, Shri Anoop Mishra, IAS Joint Secretary, Banking Division, Ministry of Finance, had attended the E.C. meeting and had made a detailed presentation on the subject. It was emphasized that with the ongoing financial sector reforms and gradual move towards universal banking, there was an imperative need to remove restrictive provisions in the SFCs Act so that the corporations were able to enjoy operational flexibility and functional autonomy. After discussions in the meeting, a general consensus had emerged with regard to the amendments of SFCs Act. 

As desired by the Executive Committee, a delegation from COSIDICI headed by Dr. D.C. Misra, IAS CMD, DFC and consisting of Shri Pradeep Kumar, IAS MD, KSFC and Shri K.K. Mudgil, Secretary General held a meeting with Shri Devi Dayal, Special Secretary (Banking), on January 25, 2000, and had submitted a structured Memorandum containing the views of COSIDICI on the amendment of SFCs Act, as also other related issues. We are happy to state that our meeting with the Special Secretary (Banking) had proved very useful and he had reacted most favourably to the proposals made by COSIDICI. During the course of our discussions, the Special Secretary (Banking) had suggested that representatives of COSIDICI might also call on the Minister of State for Finance, Shri Balasaheb Vikhe Patil, to apprise him about COSIDICI's views on the subject and request him to expedite the matter. Our meeting with the Minister of State for Finance was fixed for February 17, 2000 and two of our Members, S/Shri Man Mohan Singh, IAS MD, MSFC and P. Basumatary, IAS MD, AFC had also come to Delhi to attend the meeting. However, on account of last-minute change in the Minister's programme, the meeting did not materialise. We are seeking another meeting with the Minister in the middle of March, 2000. 

The outcome of our meeting with the Special Secretary (Banking) on January 25, 2000, was quite positive. Some of the issues on which there was general agreement in the meeting are as follows :- 

a) The Special Secretary had conceded the point that, in view of the changed economic scenerio in the country, the SFCs, which still have a great role to play in promoting industrial development in the States, particularly first generation entrepreneurs, the scope of activities of SFCs needed to be broadened to impart to their functioning the features of general financial corporation. It was agreed that SFCs should cater to the financial requirements of small entrepreneurs and should function as composite financing organisations. The SFCs could also finance activities like floriculture, horticulture, transport vehicles, industrial housing etc. He also agreed that SFCs could handle insurance agency business in the areas of their operation. He also conceded that SFCs may be allowed to maintain venture capital fund to assist the weak SSIs. 

b) Shri Devi Dayal indicated that the management of SFCs was proposed to be radically changed. While the Chairman of SFC would be appointed by SIDBI, the Managing Director of SFC would continue to be appointed by State Governments since they have 51% share in their equity. The composition of Board of Directors of SFCs was proposed to be changed to include three representatives of State Governments, two from SIDBI, two from other financial institutions and four representatives of the individual shareholders. 

c) The ceiling on the amount of assistance to an industrial concern would be Rs.10 crores and Rs.5 crores, as against the present limit in the Act of Rs.150 lakhs and Rs.90 lakhs. The authorised share capital of SFCs would be raised to Rs.500 crores and Rs.1,000 crores (upto which the increase can be permitted by the Central Government) as against the existing limit of Rs.50 crores and Rs.100 crores. The share-holding pattern of SFCs may be revised so as to permit issue of shares not exceeding 49% to the public and the restriction on share transfers would be removed subject to the condition that such transfer should not result in reducing the share-holding of the State Government to below 51%. 

d) The State Government guarantee in respect of payment of shares by SFCs and payment of minimum dividend will be dispensed with. 

e) It is envisaged that SIDBI should meet all the financial requirements of SFCs. However, SFCs would be free to borrow from other sources. 

f) Regarding obtaining of re-finance from NABARD in respect of SFCs lendings to village and agro-based industries, Shri Devi Dayal informed that there was no prohibition in this regard and the SFCs could avail of assistance from NABARD under the above scheme. He desired that a formal letter in this regard may be addressed to him by COSIDICI. 

g) As a result of proposed amendments to SFCs Act, the selective audit of SFCs by CAG would be dispensed with. 

h) Regarding constitution of a High Level Committee to look into the problems of SLFIs, Shri Devi Dayal assured that, after the SFCs Act had been amended, he will consider setting up the said committee under the aegis of IDBI, as suggested by RBI Governor, to look into the residual problems of SLFIs. 

Exemption to SIDCs from the applicability of certain provisions of the RBI Act, 1934

As the members are aware, in terms of RBI Act, 1934 (Chapter III-B), as amended with effect from January, 1997, the SIDCs were treated as NBFCs and were also required to seek registration from the RBI under section 45-1A of the Act. Besides their registration, the Act had prescribed a number of requirements including maintenance of liquid assets, special reserve fund, submission of periodical returns, etc. to protect the interests of the depositors. 

Soon, thereafter, COSIDICI had taken up the matter with RBI and impressed upon them the desirability of exempting SIDCs from the provisions of the RBI Act on the ground that SIDCs, unlike other NBFCs, were subject to State Control on the one hand, and supervision of IDBI through inspections on the other. It was emphasised that the possibility of misuse and the application of funds visualised in the RBI Act cannot arise in the case of SIDCs which were set up as wholly-owned state government undertakings. A delegation from COSIDICI met with the Governor RBI in February, 1999 and had taken up the matter of exempting SIDCs from the provisions of the RBI Act.