When the economy was in the rudimentary stage, self-financing was the one method of financing. With the growth of economy, a tendency to rely less and less on self-financing and more and more on external financing began to gain importance. Growth of capital has been the normal feature of economic expansion. The State has always been in an advantageous position to mobilize resources and place them, to some extent at the disposal of private sector through industrial financing institutions. Such institutions play a major role in pooling the resources and placing them for investment. Almost all the developed and developing countries of the world have established special institutions to mobilize their capital resources and put them into productive economy. In the last four decades Governments of under-developed countries have established and encouraged institutions such as development corporations, development banks or development finance companies. India is also not lagging behind, various financial institutions have been established. The Industrial Finance Corporation of India was the first to be established under the Industrial Finance Corporation Act. 1948. On the lines of the Industrial Finance Corporation Act, 1948 the State Financial Corporation Act. 1951 has been enacted to finance medium and small scale industries, which fall outside the ambit of operation of the Industrial Finance Corporation of India.

Statement Of Objects And Reasons

In order to provide medium and long term credit to industrial undertakings, which fall outside the normal activities of Commercial Banks, a Central Industrial Finance Corporation was set up under the Industrial Finance Corporation Act. 1948 (XV of 1948). The State Government wish that similar Corporations should also be set up in States to supplement the work of the Industrial Finance Corporation. The intention is that the State Corporation will confine their activities to financing medium and small scale industries and will, as far as possible, consider only such cases as are outside the scope of the Industrial Finance Corporation. The State Governments also consider that the State Corporations should be established under a special Stature in order to make it possible to incorporate in the Constitution necessary provisions in regard to majority control by the Government, guaranteed by the State Government in regard to the repayment of principal, and payment of a minimum rate of dividend on the shares, restriction on distribution of profits and special powers for the enforcement of its claims and recovery of dues. Since the incorporation, regulation and winding up of such Corporations fall within the purview of Parliament vide Entry No. 43 of the Union List. The State Government have requested the Government of India to enact the necessary enabling legislation, which is sought to be effected by this Bill.


  • The Bill provides that the State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State.
  • The share capital shall be fixed by the State Government but shall not exceed Rs. 2 crores. the issue of the shares to the public will be limited to 25 percent of the share capital and the rest will be held by the State Government, the Reserve Bank, Scheduled Banks, Insurance Companies, Investment Trusts, Co-operative Banks and other Financial Institutions.
  • Shares of the Corporation will be guaranteed by the Government as to the re-payment of principal and the payment of a minimum divided to be prescribed consultation with the Central Government.
  • The Corporation will be authorized to issue bonds and debentures for amounts which together with the contingent liabilities of the Corporation shall not exceed five-times the amount of the paid-up share capital and the reserve fund of the Corporation. These bonds and debentures will be guaranteed as to the payment of the principal and the payment of interest at such rate as may be fixed by the State Government.
  • The Corporation accept deposits from the public repayable after not less than five years, subject to the maximum not exceeding the paid-up capital.
  • The corporation will be managed by a Board consisting of majority of Directors nominated by the State Government, the Reserve Bank and the Industrial Finance Corporation of India.
  • The Corporation will be authorized to make long-term loans to industrial concerns and to guarantee loans raised by industrial concerns which are repayable within a period not exceeding 25 years. The Corporation will be further authorized to underwriting the issue of stocks, shares, bonds or debentures by industrial concerns, subject to the provision that the Corporation will by required to dispose of any shares, etc., acquired by it in fulfilment of its underwriting liability with a period of 7 years.
  • Until a reserve fund is created equal to the paid-up share capital of the Corporation and until the State Government has been repaid all amounts paid by them, if any, in fulfilment of the guarantee liability, the rate of dividend shall not exceed the rate guaranteed by the State Government. Under no circumstances shall the dividend exceed 5 percent per annum and surplus profits will be re-payable to the State Government.
  • The Corporation will have special privileges in the matter of enforcement of its claims against borrowers.
ACT 63 OF 1951

The State Financial Corporation Bill was passed by both the Houses of Parliament and assent of the President was accorded on 31st October, 1951. It came on the Statute Book with the title the State Financial Corporation Act, 1951 (63 of 1951)


  • The Repealing and Amending Act, 1952 (48 of 1952) 
  • The Industrial and State Financial Corporations (Amendment) Act, 1955 (28 of    1955) 
  • The State Financial Corporations (Amendment) Act, 1956 (56 of 1956) 
  • The Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956) 
  • The State Financial Corporation (Amendment) Act, 1962 (6 of 1962) 
  • The State Financial Corporation (Amendment) Act, 1972 (77 of 1972) 
  • The Public Financial Institutions Laws (Amendment) Act, 1975 (52 of 1975) 
  • The Public Financial Institutions (Obligation as to Fidelity and Secrecy) Act, 1983 (48 of 1983) 
  • The State Financial Corporation (Amendment) Act, 1985 (43 of 1985) 
  • The Delegated Legislation Provisions (Amendment) Act, 1985 (4 of 1986)