Wednesday, June 8, 2011

Public Financial Institutions under Section 4A of the Companies Act, 1956: MCA Circular


(This post is contributed by Vaibhav Modi)
Section 4A of the Companies Act, 1956 (the “Act”) lays down what institutions shall be regarded as public financial institutions for the purposes of the Act. Section 4A(2) empowers the central government to specify other institutions as a public financial institution by a gazetted notification. This sub-section is 4A(2) has a proviso which lays down the following criteria for an ‘institution’ to be specified as a public financial institution by the central government:
(i)     the institution should have been established/constituted by or under any Central Act, or,
(ii)     not less than fifty-one percent of the paid up share capital of such institution must be held or controlled by the central government.
The Ministry of Corporate Affairs vide a circular dated 2 June 2011 has prescribed some additional conditions for an institution to be declared as a Public Financial Institution under Section 4A of the Act. These additional conditions are produced below from the said circular:
(a)  A company or corporation should be established under a special Act or the companies Act being Central Act;
(b)  Main business of the company should be industrial/infrastructural financing;
(c)  The company must be in existence for at least 3 years and their financial statement should show that their income from industrial/infrastructural financing exceeds 50% of their income;
(d)  The net-worth of the company should be Rs. one thousand crore;
(e)  Company is registered as Infrastructure Finance Company (IFC) with RBI or as an Housing Finance Company (HFC) with National Housing Bank;
(f)   In the case of CPSUs/SPSUs, no restriction shall apply with respect to financing specific sector(s) and net-worth.
Henceforth, for any financial institution to be declared as a public financial institution, it will have to fulfill these additional conditions, apart from the requirements under the proviso to Section 4A(2) of the Act. These additional conditions inter alia prescribe that a financial institution to be declared as a public financial institution must be having industrial/infrastructural financing as its main business and having a net worth of Rs. 1000 crores.
While the Act uses the word ‘institution’ in the proviso to Section 4A(2), the circular uses the word ‘company’ in the conditions (a) to (e). The wording of condition (a) above appears to be confusing and suggestive of the first criteria under the proviso to Section 4A(2) of the Act.
The use of the phrase ‘special Act’ in condition (a) may also be interpreted to be a ‘special Act’ of a state legislature, for it is not clear if the qualification in the later part ‘being central Act’ applies to the phrase ‘special Act’.  This further gains support from
condition (f) which exempts a state public sector undertaking (and also a central public sector undertaking) from conditions on financing specific sectors and net worth, thereby indicating that a state public sector undertaking can be a public financial institution.
- Vaibhav Modi

2 comments:

Anonymous said...

an example of faulty drafting.. thanks for bringing this to notice.i believe no one even cared to read it!

Anonymous said...

I agree that the drafting of the circular was poor.

However, the circular is to be read in light of Section 4A which clearly states that the FI should be constituted under a central act.

When read in conjunction, it would mean special act being a central act or companies act being a central act.

Other views solicited.