Introduction to Public Financial Institution

Vijaya Malik| Lloyd Law College| 10th June 2020  

Introduction

Public financial institutions play a very vital role in our economy. It is also known as lending institutions and development banks. These institutions were set up to provide financial assistance to industries as well as individuals because commercial banks were not enough to do so. Assisting individuals these institutions are focusing more on providing financial assistance to industrial units to empower them. Companies Act, 1956 was upgraded by the Companies Act, 2013. But some of the provisions of the old Act remained the same.

Why there is a need for a public financial institution?

1. It provides long term as well as medium-term loans at a reasonable rate of interest.
2. It provides managerial and financial advice on various matters.
3. It also provides a loan guarantee to every type of industrial unit form other banks and financial institutions.
4. Financial institutions provide loans also in foreign currency for import purposes not only this it also provides a guarantee to purchase capital goods from foreign countries. 
5. It often acquiesces to the shares and debentures of the company and underwrites the public issue of shares and debentures by the company.

Limitations of Public Financial Institution

It requires to fulfill too many formalities for taking loans from these institutions and also it puts certain restrictions like on dividend payment, etc. sometimes it nominates Board Of Directors by itself to restricts the powers of a company.

Important provisions

Section 4A (1) of the Companies Act, 1956 specifies that following financial institutions shall be regarded as a Public Financial Institution:-

1. The Industrial Credit and Investment Corporations of India Ltd (ICICI). It was a company formed and registered under the Indian Companies Act, 1913;
2. The Industrial Finance Corporation of India, (IFCI). This was established under section 3 of the Industrial Finance Corporation Act, 1948;
3. The Industrial Development Bank of India, (IDBI). This was established under section 3 of the Industrial Development Bank of India Act,1964;
4. The life Insurance Corporation of India, (LIC). This was established under the Life Insurance Corporation Act, 1956;
5. The Unit Trust of India, (UTI).  This was established under section 3 of the Unit Trust of India Act, 1963;
6. The Infrastructure Development Finance Company Limited, (IDFC). It was a company which was formed and registered under this Act.

Section 4A (2) of the Companies Act, 1956 says that the Central Government of India is empowered to specify any financial institution as a Public Financial Institution (PFI) if it qualifies any of these criteria

1. It is established or regulated by or under any Central Government Act;
2. At least 51% of paid-up share capital of that institution is held or controlled by the Central Government.

Other than this, the Central Government has specified approx 58 financial institutions as a public financial institution like; National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), National Cooperative Development Corporation (NCDC),  the General Insurance Corporation of India (GIC), the Shipping Credit and Investment Company of India Ltd. (SCICI), Export-Import Bank of India, Tourism Finance Corporation of India Ltd. (TFCI), etc

The Central Government has reframed the Criteria for declaring any financial institution as PFI under section 4 of the Companies Act, 1956 by providing a circular on 2nd June 2011 (MCA general circular no. 34/2011). 

1. A company or corporation must be established under a special Act of the companies Act being the Central Act;
2. Industrial or infrastructural financing must be the main business of the company;
3. The company must be in existence form 3 years and also their annual financial statement;
4. And, the net worth of their company should be rupees One Thousand Crore;
5. The company should be registered with RBI or as HFC with National Housing Bank as an Infrastructure Finance Company (IFC). No registration shall be applied concerning financing specific sector and net-worth in case of CPSUs/SPSUs.

Conclusion 

Public Financial Institutions are notified by the government to provide financial assistance and it has upgraded our economic condition. It assists individuals but its main aim is to support industries for the betterment of economy and society. It provides financial stability to industries so that they can expand themselves.