Special
Financial Institutions
After independence a large number of financial institutions
have been established in India with the primary objective of providing
long-term financial assistance to industrial enterprises. Some of these
institutions have been set up on the initiative of the Central Government,
while others have been set up in different states on the initiative of the
concerned State Governments. Thus, there are all-India institutions like
Industrial Finance Corporation of India (IFCI), Industrial Credit and
Investment Corporation of India (ICIC1), Industrial Development Bank of India
(IDBI), and Industrial Reconstruction Corporation of India (IRCI). They mainly
provide long-term finance for large companies. On the other hand, at the state
level there are State Financial Corporations (SFCs) and Industrial Development
Corporations (SIDCs). These state level institutions mainly provide long-term
finance to relatively smaller companies. These institutions (both national
level and state level) are known as 'Development Banks' because
their main objective is to provide financial assistance to industrial
enterprises for investment projects, expansion or modernisation of plants in
accordance with the priorities laid down in the Five-Year Plans.
Besides the development banks, there are several other
institutions known as investment companies or investment trusts which subscribe
to the shares and debentures offered to the public by companies. For example,
the Life Insurance Corporation of India (LIC), General Insurance Corporation of
India (GIC), the Unit Trust of India (UTI), etc., come under this category A
brief account of the functions of some of these institutions is given in a
subsequent section.
Now let us discuss about the functions of some of the major
development banks and investment companies.
Development Banks
1-
Industrial Finance Corporation of India (IFCI): This was set up in
1948 under the Industrial Finance Corporation Act, 1948. Its primary objective
is to provide long-term and medium-term finance to large-scale industrial
concerns particularly when bank loans were not suitable or funds could not be
raised from the capital market by issue of shares. The IFCI deals only with
industrial enterprises registered as limited companies or cooperative
societies. Non-manufacturing concerns, private limited companies, partnership
or sole traders cannot get assistance from this institution. It considers loan
applications for amounts in execs, of Rs. 30 lakh. It provides financial
assistance for long-term investment in new industries or expansion or
diversification of existing activities, or modernisation and renovation of
plant and equipment. The IFCI can grant loans or subscribe to debentures issued
by companies repayable in not- more than 25 years. It can also guarantee loans
raised from other sources or debentures issued to the public. Further,
companies can secure loans in foreign currency from the IFCI or get such loans
guaranteed by the Corporation. IFCI takes up the underwriting of the public
issue of shares and debentures by companies.
2-
Industrial Credit and Investment Corporation of India (ICICI): It
was incorporated under the Indian Companies Act in 1955. It provides financial
assistance to companies in two ways: i) by providing long-term loans for a
period upto 15 years, and ii) by subscribing to the shares and debentures
issued by companies. However, proprietory and partnership concerns are also
entitled to secure loans
from the ICICI. Loans are granted against proper securities.
like the IFC1, the ICICI also guarantees loans raised by companies from other
sources, besides underwriting the issue of shares and debentures by companies.
Foreign Currency Loans can also be secured by companies from the ICICI.
3-
Industrial Development Bank of India (IDBI): This was set up by
Government of India in 1964 and is a subsidiary of the Reserve Bank of India.
It seeks to cover the gaps left by the various institutions in the field of
industrial finance. The IDBI can provide financial assistance to all types of
industrial enterprises which are registered under the Companies Act or any
other law. There is no restriction on the types of finance and the amount of
funds that may be available from this institution. It has the unique role of
not only providing financial assistance directly to industrial units, but also
to refinance loans granted by other financial institutions. Further, it is
required to coordinate the functions of all development banks, scheduled
commercial banks and state cooperative banks as regards industrial financing.
Thus, the functions of the IDBI include the following:
i)
It refinances (a) term-loans to industrial
concerns granted by IFCI and other financial institutions repayable between 3
and 25 years; (b) loans repayable between 3 and 10 years given by scheduled
banks or state cooperative banks; (c) export credit granted by specified
financial institutions maturing between 6 months and 10 years.
ii)
It subscribes directly to the issue of shares
and debentures made by industrial concerns.
iii)
It grants loans and advances to companies
repayable between 8 to 10 years.
iv)
It guarantees loans raised by industrial
concerns from the capital market or scheduled banks.
v)
It accepts, discounts and rediscounts commercial
bills of exchange and promissory notes of industrial enterprises.
vi)
It undertakes underwriting of the public issue
of shares and debentures made by companies.
vii)
To meet the financial requirements of large
enterprises, the 1DBI also arranges joint financing by two or more financial
institutions, particularly when the amount and the risk involved happen to be
too heavy for any single institution to bear alone.
4- State
Financial Corporations (SFCs): These institutions are set up in
different states by the respective state governments under the provisions of
the State Financial Corporation Act, 1951. All types of enterprises —
proprietary and partnership concerns as well as limited companies — can seek
financial assistance from the SFCs. The primary objective of these corporations
is to accelerate the pace of industrial development in their respective states.
SFCs provide finances in the form of long-term loans or
advances or through subscription of debenture issues repayable within 20 years:
But the maximum amount of loan or advance granted to any single enterprise is
not to exceed 10% of the paid-up capital of the SFC or Rs. 10 lakhs; whichever
is less. Loans raised by industrial concerns from other sources and repayable
within 20 years can be guaranteed by the SFCs. SFCs also take up underwriting
public issue of shares and debentures made by companies. They cannot directly
subscribe to the shares issued by companies. if shares are required to be taken
up as a result of the underwriting obligation, the same must be disposed of in
the market within 7 years.
Investment Institutions
We have mentioned earlier about another category of
institutions known as `investment corporations' or 'investment
trusts' or ‘investment companies' which provide long-term finance. These
institutions promote the savings habit among individuals and households with an
assurance that the amount of savings entrusted to them would be invested in
profitable channels and help in earning adequate return for the savers.
Investment Corporations:
The most important investment corporations in India are i)
Life Insurance Corporation of India, and ii) General Insurance Corporation of India.
The Life Insurance Corporation of India (LIC) which undertakes life insurance
business, guarantees payment that amount of policy on the death insured person
or on the expiry of a certain period.
The amount of premium received from the policy-holders are invested by the LIC
in different types of securities, e.g. Government bonds, shares and debentures
of public limited companies, etc. Similarly, the General Insurance Corporation
of India (GIC) its funds in Government securities, and shares and debentures of
companies. As you know, the GIC undertakes general insurance business including
fire, marine, accident, burglary and so on. Thus, the LIC and GIC may be
regarded as sources of long-term finance for industrial enterprises.
Investment Companies:
A number of investment companies registered under the
Companies Act have been engaged in financing industrial concerns by subscribing
to the shares and debentures of other companies. These investment companies
issue their own shares and debentures to individuals, and borrow money from
other institutions. The funds so raised are invested in the shares and
debentures of other companies. Besides providing long term finance to
industrial concerns, the investment companies also underwrite the issue of
shares and debentures of other companies. However, financing of industrial
companies by the investment companies is regulated by law (the Companies Act).
They can invest in the shares of another company upto 10% of the subscribed
capital of that other company, and the aggregate of investments made in all
other companies should not exceed 30% of the subscribed capital of the
investing company. Some of the well-known investment companies in India are
Investment Corporation of India Ltd., Sri Ram Investment Co. Ltd., Eastern
Investment Ltd., Shree Sun Investment and Trading Co. Ltd. Shree Rishav
Investment Co. Ltd., etc.
Investment Trusts:
Another category of investment institutions which provide
lung-term finance to companies is investment trusts. Investment trusts
specifically refer to those investment companies which are established for the
investment of funds obtained from individuals and institutions. The investors
receive shares (or units) issued by the investment trusts. These investment
trusts are also known as Unit Trusts. The Unit Trust of India (UTI) is
the largest organisation of this type in our country. The UTI was set up under
the Unit Trust Act of 1962, and started its operation in 1964. Its initial
capital was subscribed by the Reserve Bank of India, LIC, State Bank of India
and other financial institutions. Let us try to understand the working of the
UTI in some more detail.
Briefly speaking, the UT1 invests its funds in shares and
debentures of different companies. The securities (shares and debentures) arc
held in trust by the management. Based on the value of the securities, the
management offers 'units' to the public. Each unit having a specified face
value is a kind of certificate of participation in the 'unit scheme'.
Individuals can buy and sell units at any time. The management receives
interest and dividend on the debentures and shares held by them. The income so
realised is distributed among the unit-holders in proportion to the value of
their holdings. Thus, small savers find it convenient to buy units with an
assurance that the UT1 will invest the savings in profitable companies, and
give them a reasonable return by way of dividend on value of units. On the
other hand, the investible funds of the UTI are available to industrial
enterprises. You will study the working of financial institutions in detail in
another course.
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