Friday, June 10, 2011

Public Financial Institutions: Effect of latest Ministry of Corporate Affair Circular

The Ministry of Corporate Affairs, Government of India (or Central Government) issued a General Circular No. 34 dated June 2nd, 2011 “Guidelines for declaring financial institution as Public Financial Institution under Section 4A of the Companies Act, 1956” which dealt with guidelines for recognizing institutions as Public Financial Institutions.

Public Financial Institution or PFI is nowhere defined under Companies Act, 1956. Its major reference is only available in Section 4A of the Act, wherein certain institutions are referred as PFI. However, the term Financial Institution is defined under two statues:

(i)                 a PFI within the meaning of Section 4A of the Companies Act, 1956;
(ii)      the securitization company or reconstruction company which has obtained a certificate of registration under Section 3(4) of SARFAESI Act, 2002;
(iii)             such other institution as the Central Government may, having regard to its business activity and the area of its operation in India by notification, specify;

(i)                 a PFI within the meaning of Section 4A of the Companies Act, 1956;
(ii)       any institution specified by the Central Government under Section 2(h)(ii) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993;
(iii)        the International Financial Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958;
(iv)         any other institution or NBFC as defined in Section 45-I(f) of Reserve Bank of India Act, 1934, which Central Government may, by notification , specify as financial institution for the purpose of this Act;

Sub-section (1) of Section 4A of the Companies Act, 1956 mentions six institutions to be regarded as PFI for the purpose of the Act. Sub-section (2) of the said section empowers Central Government to declare an institution as PFI by notification in Official Gazette provided they follow the following criteria:-

(i)                 it has been established or constituted by or under any Central Act; OR
(ii)           not less that 51% of the paid-up share capital of such ‘institution’ is held or controlled by Central Government.

Central Government, vide notifications under Section 4A(2), have added 54 institutions as PFI.

From the above, it is amply clear that the term ‘Public Financial Institution’ or PFI do not conform to a particular definition. However, it is also certain that such institution is usually a Financial Institution primarily into the field of industrial / infrastructure finance and only on it notification becomes a PFI.

Coming back to the circular, the Central Government has made it clear that the Companies (or Financial Institutions) applying for being declared as PFI has to fulfill the following criteria:-

(a)      Establishment under special Act or Companies Act being central Act (in conformity of Section 4A(2)(i))
(b)     Main business should be industrial / infrastructure financing
(c)      Net worth of Rupees one crore or more
(d)     Registered as Industrial Finance Company with RBI or as an Housing Finance Company with National Housing Bank
(e)      In case of CPSUs / SPSUs, no restriction shall apply with respect to financing specific sector(s) and networth. (in conformity with Section 4A(2)(ii) and also adding state government entities to the preview)

The effect of this circular is that is paves the way for Financial Institutions in private sector , specifically in the field of infrastructure / industrial financing, which usually have long gestation period, to get registered as a PFI.

Certain benefits which a PFI enjoys under Companies Act, 1956 are:-

(1)   Issue of Shelf Prospectus for raising monies (Section 60A)
(2)   Appointment of Auditor in a company where such PFI has significant stake,  by special resolution (Section 224A)
(3)   Relaxation in making inter-corporate loans and advances (Section 372A)
(4)   Reference to the Tribunal for Sick Industry (Section 424A)
(5)   Operating Agency for reviving Sick Industry (Section 2 (31AA))

This would certainly enable the private Financial Institutions to have a better position and say while extending loans and advances to industrial / infrastructure projects. It also provides better conditions for raising funds and monitoring investments made in these sectors where gestation period is high.

© Tarun Mitra

June 10, 2011


1.      Companies Act, 1956