Corruption
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This article is written by Aashna Nahar from Amity Law School, Delhi. This article highlights the important provisions in the Act and critically analyses the Act in respect of its earlier counterpart and the reforms it requires.

Introduction

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 was enacted with the aim of repealing and replacing, the earlier act i.e the Industrial Finance Corporation Act, 1948. This act converted the Industrial Finance Corporation of India (IFCI) which was earlier a statutory corporation, to Industrial Finance Corporation of India ltd thus a public limited company. Thus, this act sought to transfer, on an appointed day, all assets, liabilities and staff of the corporation to the newly incorporated company under the Companies Act.

Objective and scope of the Act

The objective that the act seeks to achieve is that it is able to promote new enterprises, encourage co-operatives and provide support to small enterprises by extending technical consultancy and raising finance. 

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The arrangement laid down in the Industrial Finance Act, 1948 was unable to achieve this objective. This was because of their lack of qualified technical support staff, improper financial structure, and too much government interference.

To achieve the objective, greater flexibility was needed to adapt to the rapidly changing financial sector. This was why the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 was enacted. Becoming a public limited company, ensured greater autonomy and less dependence on the Government and the freedom to raise funds from the market without the requirement of Government Guarantees.

Enactment of the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Ordinance, 1992 was passed by the President. Thereafter, the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Bill, 1992 was introduced in the Lok Sabha in the winter session of the Parliament, however, the same could not be passed. The President then promulgated as a replacement to the said Ordinance, the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Ordinance of 1993. This was passed by both the houses of the Parliament and came into force as the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 on the 1st of October, 1993. 

Date of enactment of Act

2 April 1993

Date of Incorporation 

2 May 1993

Certificate of Commencement of Business

24 June 1993

Date of issue of notification by Ministry of Finance regarding “appointed date”

7 June 1993

Date of transfer to and vesting in company

1 July 1993

Important provisions of the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 

Section 3

Section 3 of the Act states that the Central Government will, by notifying in the Official Gazette, announce an “appointed date” on which the undertaking of the corporation will be transferred to and vest in the company. 

Section 4

Section 4, sub-section (1) of the Act states that all shareholders of the corporation will automatically become shareholders of the company as per the value of their shares. 

Sub-section (2) of the Act discusses what all is included in the “undertaking of the corporation” as mentioned in Section 3. It includes:

  1. The business, assets, rights, authority and privileges of the company
  2. Property whether movable or immovable, corporeal or incorporeal, personal or real. This means building, land, cash, foreign exchange, etc
  3. Reserves, disclosed or undisclosed, benevolent reserves, special reserves, etc.
  4. Shares, stocks, debentures, liabilities, advances, loans, etc.

All of which were recorded in the books of the corporation, as in their possession or ownership. 

Sub-section (3) of the Act states that all contracts, bonds, guarantees, or other arrangements entered into by the corporation before the date of transfer and vesting in the company, shall cease to exist in favour of the corporation and shall automatically exist in the name of the company. This means that the company will replace the corporation as a party to the contract. These will be legally enforceable against the company.

Sub-section (4) says that any action or suit pending against the corporation shall now be said to be pending against the company with no change as to the facts or merits whatsoever.

Section 5

Section 5 states that all benefits, exemptions, concessions, etc granted to the corporation will be said to have been granted to the company. The company can thus fully enjoy the benefits of the same.

For example: Benefits or exemptions may include certain income tax exemptions granted.

Section 6

Section 6 states that if there is any exemption or benefit granted to the corporation under the Income Tax Act, the same shall be extended to the Company as well. 

This may include even exemptions such as tax deductions at source. For assessing capital gains, this will not be deemed to be a transfer as given under the Income Tax Act, 1961.

Section 7

Under Section 7, any guarantee extended by or in favour of the corporation as lease finance or loan will be treated as operational in the name of the company.

Section 8

Section 8 of the Act states that all employees of the corporation right before its undertaking is transferred to the company, shall continue to be the employees of the company as if the transfer has not taken place. The following shall remain the same concerning their employment:

  • Their remuneration, tenure, conditions of working, rights and privileges, medical benefits, retirement, gratuity, etc. All of these will continue to be the same for all employees or until six months if the employee decides not to work with the company. Such employees, unwilling to work for the company, will be deemed to have resigned.
  • Section 8 does not apply to the Managing Director, Chairman and Board Director. These office holders shall not be awarded any compensation for the loss of their office or premature repudiation of their contract with the corporation. 
  • Sub-section (3) of the Act states that no officer or employee of the company shall be entitled to any compensation as a result of the transfer. No court is supposed to entertain any matter in this regard. 
  • Sub-section (4) of the Act states that all employees who have retired from the corporation will continue to get retirement benefits/ pension from the company.
  • Sub-section (5), The reserve funds or trusts created for the benefit of the employees shall continue to operate as they were. The company shall continue to avail of any tax benefits or exemptions granted to the corporation concerning the same. 

Section 9

As per Section 9, the company will be considered as a bank for the purpose of the Bankers Books Evidence Act.

Section 10

Section 10 states that the bonds, debentures and shares of the company will be considered as approved securities with respect to the Banking Regulation Act, the Indian Trusts Act and the Insurance Act. 

Need for the Act

  • There was a decrease in the availability of concessional funds from the Reserve Bank of India (RBI) and the Government. 
  • Many new changes were brought about in the financial sector. Thus, it was imperative that the Industrial Finance Corporation needed to raise funds directly from the market. 
  • The Industrial Finance Corporation Act, 1948 prohibited it from raising funds directly from the market at competitive rates. It mandatorily required the existence of a government guarantee. 
  • Besides, it required a large role to be played by the Industrial Development Bank of India in the working of the Industrial Finance Corporation of India. This seemed to be problematic as the two enterprises were against each other. 
  • In addition to an increased amount of flexibility as well as for countering all the above-mentioned problems, the IFCI was converted from a statutory corporation to a public limited company which could raise finance from the public. This ensured it kept pace with the rapidly changing financial sector.
  • Also, converting to a public limited company ensured a greater amount of equity, increased autonomy to make decisions, restructuring of its strategies and placed it on equal footing as compared to other financial institutions.

Limitations of industrial finance in India 

The following are the limitations of industrial finance in India:

Underdeveloped financial system

The finance sector is unable to keep up with the large needs of the industries. The availability of venture capital is far lesser as compared to demand. This capital usually goes for high risks in return for higher rewards. Also, there is an inadequate presence of financial intermediaries that are non-banking institutions. 

Shortage of funds

Large scale, as well as small scale industries, are facing a shortage of funds. The financial system is ill-equipped to keep up with their financial requirements. Besides, foreign funds are inaccessible and expensive. This is causing problems in the expansion of the industrial sector.

Haphazard interest structure

The loans offered by financial institutions for various periods i.e long term, medium-term and short term are inconsistent with one another. They are not appropriate for industries as they lack a proper structure. Besides, the local lenders also charge very high-interest rates for loans which puts the industrialists in a tough spot.

Insufficient capital formation

There is a lack of sufficient capital formation. It is difficult to access funds from rural areas which could be used to fuel rural sector industries.

Problems faced by SSIs

Many problems are faced by small scale industries (SSIs), especially with respect to raising finance. This is because there are not many financial institutions that provide finance to SSIs. They do not have a presence in many Indian states. Other than that, many banking institutions require SSIs to produce large securities to prove their creditworthiness. This makes loans inaccessible for many of these industries.

In addition to this, it is seen that small industries are not preferred while extending long-term credit. Thus they have to turn to sources like local lenders which again charge very high rates of interest making it infeasible for them. 

Recommendations

The industrial finance system in India suffers from many drawbacks, a few of which have been mentioned above. There is a need to introduce remedial measures, of which the following are a few:

Taking the needs of SSIs into consideration

The institutions providing credit often have a bias against small scale industries. Measures should be introduced which ensure that credit is as easily available to small scale enterprises as it is to other enterprises. 

Improve domestic sources of finance

The domestic sources of finance need to be strengthened and made available at competitive rates. This will reduce the dependence on untrustworthy foreign capital. 

Developing NBFIs

Non-banking financial institutions must be strengthened. A proper legal framework with a supervisory mechanism must be developed. This will also reduce the burden of the banking sector.

Improving the banking system

The banking system in India needs to be improved. The quality and upgrade their services as well as their internal working. This requires reforms to be introduced in the banking sector which will increase the efficiency of the management as well as the personnel. 

                   

Critical Analysis

It seems that though the Industrial Finance Act, 1948 was enacted to support enterprises, it was unable to do so because of the various reasons mentioned above. Thus, the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 which changed the statutory corporation of IFCI to a public limited company, proved to be key in reaching the primary goals that were kept in mind while enacting the 1948 Act. 

Greater flexibility meant less government interference which allowed for the restructuring of business strategies thus ensuring the quality of services to clients. In addition, doing away with the compulsion of government guarantees meant the ability to raise finance at competitive rates through the market. As a public limited company, it can do so by issuing shares, debentures and other securities. 

However, this being said there are many drawbacks to the existing financial system in India. The current financial institutions including IFCI remain inadequate in meeting the financial requirements of the existing industries. Their needs are growing and the Indian financial system lacks the resources and framework to keep up with the changing economy. 

Conclusion

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 discusses the effect that the transfer to and vesting in the company will have. Although IFCI Ltd is responding better to the needs of the industry than the statutory corporation, reforms in the financial sector remain the need of the hour to extend the requisite support to the industries in India. 

References

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