Page 273 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 21: Capital Market in India and Working of SEBI

been doing very useful work in subscribing to the shares and debentures of new and old companies, Notes
in giving loan assistance, in underwriting new issues, and so on. At present, many of them have
become powerful shareholders in many prominent companies. LIC and UTI mobilise resources from
the public and place them at the disposal of the capital market. On the other hand, the development
financial institutions (DFIs) are engaged in providing funds to the private sector enterprises. The
structure of public sector financial institutions is shown in chart 3 next page.
1. Industrial Finance Corporation of India (IFCI)
The Government of India set up the Industrial Finance Corporation of India (IFCI) in July 1948
under a special Act. The Industrial Development Bank of India, scheduled banks, insurance
companies, investment trusts and co-operative banks are the shareholders of I.F.C.I. The Union
Government had guaranteed the repayment of capital and the payment of a minimum annual
dividend. The Corporation was authorised to issue bonds and debentures in the open market,
to borrow foreign currency at from the World Bank and other organisations, accept deposits
from the public and also borrow from the Reserve Bank.
The IFCI performed three important functions :
(a) It granted loans and advances to industrial concerns and subscribed to the debentures
floated by them.
(b) It guaranteed loans raised by the industrial concerns in the capital market.
(c) It underwrote the issue of stocks, shares, bonds and debentures of industrial concerns. It
also subscribed to the equity and preference shares and debentures of companies.
IFCI was authorised to give long and medium-term finance to companies engaged in
manufacturing, mining, shipping and generation and distribution of electricity.
IFCI had played a pioneering role in financing private sector investment and had a big hand in
the rapid industrial development of India. The loans sanctioned by IFCI increased from ` 210
crores in 1980-81 to Rs 2.430 crores in 1990-91 and 1,860 crores in 2000-01. This was partly due
to the mobilization of large financial resources by IFCI (in fact, by all public sector financial
institutions such as IDBI and ICICI) and also due to the rapid development of industries during
this period. But the same time, IFCI was plagued by the accumulation of non-paying assets
(NPAs) mainly because it was forced to lend to wrong parties. Accordingly IFCI is no more a
development financing institution.
2. State Financial Corporations
The scope of assistance provided by the Industrial Finance Corporation of India was limited
since it dealt with large public limited companies and co-operative societies which were engaged
in manufacturing, mining, shipping and generation and distribution of electricity. But there
were both small-scale and medium-sized industries which require financial assistance and for
this purpose the State Governments desired to set up State Financial Corporations. The
Government of India passed the State Financial Corporations Act in 1951 and made it applicable
to all the states. The authorised capital of a State Financial Corporation is fixed by the State
Government within the minimum and maximum limits of ` 50 lakhs and ` 5 crores and is
divided into shares of equal value which are taken by the respective State Governments, the
Reserve Bank of India, scheduled banks, co-operative banks, other financial institutions such as
insurance companies and investment trusts and private parties. The shares are guaranteed by
the State Government. A State Financial Corporation can augment its funds through issue and
sale of bonds and debentures.
All types of industrial concerns can get accommodation from State Financial Corporations. A State
Financial Corporation can:
(a) guarantee loans raised by industrial concerns which are repayable within a period not exceeding
20 years and which are floated in the public market; (b) underwrite the issue of stocks, shares, bonds
or debentures of industrial concerns; (c) grant loans or advances to industrial concerns repayable
within a period not exceedingly 20 years; and (d) subscribe to debentures floated by industrial concerns.

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