The State Financial Corporations Act, 1951
📘 The State Financial Corporations Act, 1951
1. Introduction
The State Financial Corporations Act, 1951 was enacted by the Parliament of India to establish State Financial Corporations (SFCs) for providing financial assistance to small and medium industrial enterprises in the states.
The Act was part of India’s broader economic strategy post-independence, aimed at industrial development and decentralization of credit to promote regional industrial growth.
2. Objectives of the Act
To provide long-term financial assistance to small and medium-scale industries.
To promote industrialization in the states by supporting new and existing enterprises.
To encourage entrepreneurship and generate employment opportunities.
To act as a catalyst for regional economic development by filling the credit gap left by commercial banks.
3. Applicability
The Act empowers the State Governments to establish State Financial Corporations by issuing a notification.
These corporations operate primarily within the state limits but can assist industries located outside the state if allowed.
The Act applies to all states across India except Jammu and Kashmir (at the time of enactment).
4. Key Provisions
Section 3 – Establishment of State Financial Corporation
The State Government may establish a State Financial Corporation (SFC) by notification.
The corporation is a body corporate with perpetual succession and a common seal.
Section 4 – Capital of the Corporation
The authorized capital of the corporation is determined by the State Government.
The capital is subscribed by the State Government, the Central Government, Scheduled Banks, and other financial institutions.
The shares are not transferable except with the government’s consent.
Section 5 – Management of the Corporation
The corporation is managed by a Board of Directors appointed by the State Government.
The Board includes representatives from the government, banks, financial institutions, and experts.
Section 6 – Functions of the Corporation
Provide financial assistance to industrial concerns, especially small and medium enterprises.
Give loans, advances, guarantees, and investments in industrial projects.
Acquire shares and securities in industrial concerns.
Assist in the development of industrial estates and infrastructure.
Section 7 – Financial Assistance
The corporation may provide financial assistance by way of:
Loans or advances.
Subscription to shares, debentures, or bonds.
Guarantees to help industries raise funds.
The corporation may also acquire assets or shares to safeguard its interests.
Section 13 – Powers of the Corporation
To borrow money for its functions.
To invest surplus funds.
To enter into contracts and engage staff.
To exercise other powers necessary for carrying out its purposes.
Section 21 – Borrowing Powers
The corporation can borrow money from the government or other sources.
Loans are repayable as per the terms laid down.
Section 23 – Accounts and Audit
The corporation must maintain proper accounts.
Annual accounts are audited by the Comptroller and Auditor General (CAG) or an appointed auditor.
Copies of accounts and audit reports are submitted to the State Government.
Section 25 – Annual Report
The corporation submits an annual report on its working to the State Government.
The report includes financial performance, assistance provided, and future plans.
5. Significance of the Act
The Act was a milestone in institutional finance for small and medium industries in India.
SFCs acted as important financial intermediaries, bridging the gap between commercial banks and industries.
Helped in decentralized industrial growth and reducing regional disparities.
Supported the government’s policy of import substitution and rural industrialization.
6. Important Case Laws
Case 1: State of Maharashtra v. Industrial Development Bank of India (1967 AIR 1446)
Issue: Whether the powers of an SFC include the authority to acquire and manage shares in industrial companies.
Held: The Supreme Court held that SFCs have wide powers to invest and manage shares as part of their mandate under the Act.
This was seen as essential to protecting the financial interests of the corporation.
Case 2: M/s. Gopalbhai Finance Pvt. Ltd. v. State Financial Corporation (1976 AIR 2487)
Issue: Challenge to the SFC’s refusal to extend further financial assistance.
Held: The Court held that SFCs have discretion in granting financial assistance and such discretion cannot be interfered with unless exercised arbitrarily or illegally.
This clarified the quasi-commercial nature of SFCs.
Case 3: Indian Bank Association v. Official Liquidator (1980 AIR 679)
Issue: Whether SFCs enjoy priority over other creditors during winding up of industrial companies.
Held: The Court held that SFCs enjoy preferential status for the recovery of dues in liquidation, recognizing their role in industrial promotion.
7. Relationship with Other Financial Institutions
SFCs work alongside Industrial Development Banks (IDBI), Commercial Banks, and other financial agencies.
They primarily focus on long-term and medium-term finance to industries.
Unlike commercial banks, SFCs are state-controlled and focus on developmental goals rather than profits alone.
8. Challenges and Evolution
Initially, SFCs played a vital role in industrial development.
Over time, with the entry of new financial institutions and liberalization, their role has become more specialized.
The Act has been amended occasionally to improve efficiency and allow for better corporate governance.
9. Summary
| Aspect | Details |
|---|---|
| Enactment Year | 1951 |
| Purpose | Establishment of State Financial Corporations to provide financial assistance to industries |
| Nature | Statutory corporation, body corporate |
| Functions | Provide loans, advances, guarantees, investments to industries |
| Governance | Board of Directors appointed by State Government |
| Financial Powers | Borrowing, lending, investing, acquisition of shares |
| Regulation | Annual audit, report submission to State Government |
| Legal Status of Decisions | Discretionary, subject to judicial review only if arbitrary or illegal |
10. Conclusion
The State Financial Corporations Act, 1951 is a foundational legislation aimed at promoting industrial growth at the state level by establishing financial institutions that provide necessary credit to small and medium enterprises. Its establishment marked a crucial step in India’s planned economic development, especially in industrial finance. Judicial interpretations have upheld the autonomy of SFCs while ensuring they function within the law.
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