The finance ministry has sent a proposal to this effect to the cabinet.

Under the act's existing provisions, the authorised capital of a state financial corporation (SFC) cannot be more than Rs 100 crore. Some SFCs have already reached the upper limit of Rs 100 crore, while others are close to reaching this figure.

The ministry has proposed major changes in SFCs' shareholding pattern to make them competitive in a liberalised economy. Under the existing shareholding pattern, public shares cannot exceed 25 per cent. It has been recommended that it be raised to 49 per cent. The remaining shares could be held by state governments and financial institutions (FIs).

It has been argued that some of the SFCs are in a bad financial state. They are unable tomeet capital-adequacy norms and need further capital infusion. Such SFCs cannot raise resources by resorting to public issues unless the capital is reduced to reflect the true asset condition.

It has been proposed that a SFC should be allowed to pass a resolution in shareholders' general body meeting reducing its share capital. Besides, the amendment proposal also seeks to allow SFCs to issue redeemable preference shares for enabling them to resort to capital restructuring.

The shares of the SFCs are proposed to be made freely transferable, subject to a suitable mechanism being built into the act to maintain a minimum holding of 51 per cent of the issued capital by the state government and FIs.

In line with market reforms, it has been proposed that the shares of SFCs could be held by a depository.

To make the SFCs compete with other financial institutions, the ministry has proposed that the provisions regarding state government guarantee in respect of the corporations' shares be dispensed with, andthey be allowed to declare dividend at a rate based on performance as in the case of other corporations and companies.

The amendment proposal also seeks to transfer the share capital held by the Industrial Development Bank of India (IDBI) in SFCs to the Small Industries Development Bank of India (Sidbi). At present, IDBI is the second-largest shareholder of SFCs, next to the state government. Besides, IDBI has also provided loans to SFCs in lieu of capital.

Sidbi was set up in 1990 to provide financial assistance to the small-scale sector and coordinate the functions of institutions engaged in the promotion, financing and development of industry in the sector. Sidbi is providing more than two-thirds of the refinance requirements of SFCs. In comparison, IDBI normally finances medium- and large-scale industries where SFCs have a limited role. It has been argued by the finance ministry to justify the share transfer.

At present, there are 18 SFCs, which have been in existence for about 40 years and operateas regional development banks. On a cumulative basis, till last year, sanctions by SFCs aggregated to Rs 26,306 crore and disbursements to Rs 20,896 crore.