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THE STATE FINANCIAL CORPORATIONS ACT, 1951

Title : THE STATE FINANCIAL CORPORATIONS ACT, 1951

Year : 1951



(1) The State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State under such name as may be specified in the notification.

(2) The Financial Corporation shall be a body corporate by the name notified under sub-section (1), having perpetual succession and a common seal, with power, subject to the provisions of this Act, to 2*[acquire, hold and dispose of] property and shall by the said name sue and be sued.

3A. Establishment of Joint Financial Corporations

(1) Notwithstanding anything contained in section 3, two or more States may, after consultation with the 4*[Development Bank], enter into an agreement that there shall be one Financial Corporation for the group of States participating in the agreement and if the agreement is published in the Official Gazette of each of those States, the Central Government may, by notification in the Official Gazette, establish a Joint Financial Corporation to serve the needs of those States under such name as may be specified in the notification.

(2) An inter-State agreement under sub-section (1) among the participating States may-

(a) Provide for the fixation of the authorized capital of the Joint Financial Corporation, the number of fully paid-up shares into which it shall be divided, and the allocation among the participating States of the shares to be distributed under clause (a) of sub-section (3) of section 4;

(b) Provide for the sharing of the liability for the guarantee under section 6 or section 7 1*[or section 8];

(c) Provide for the number of directors to be nominated to the Board by each participating State Government;

(d) Provide for the apportionment among the participating States of expenditure in connection with the Joint Financial Corporation;

2 * * * *

(f) Determine which of the participating State Governments shall exercise the several functions of the State Government under this Act, and references in this Act to the State Government, in relation to the Joint Financial Corporation, shall, save as otherwise expressly provided, be construed accordingly;

(g) Provide for consultation among the participating States either generally or with reference to particular matters arising under this Act;

(h) Make such incidental and consequential provisions, not inconsistent with this Act, as may be deemed necessary or expedient for giving effect to the agreement.

(3) The Joint Financial Corporation shall be a body corporate by the name notified under sub-section (1), having perpetual succession and a common seal, with power, subject to the provisions of this Act, to acquire, hold and dispose of property and shall by the said name sue and be sued.

(4) Any reference in this Act to State in relation to a Joint Financial Corporation established for two or more States, shall be construed as a reference to each such State.]

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1. Ins. by Act 6 of 1962, s. 3 (w.e.f. 16-4-1962).

2. Omitted by Act 43 of 1985, s. 3.

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(1) The authorised capital of the Financial Corporation shall be such sum as may be fixed by the State Government in this behalf, 1*[but it shall not be less than fifty lakhs of rupees or exceed fifty crores of rupees:

Provided that the Central Government may, on the recommendation of the Development Bank, by notification in the Official Gazette, increase the authorised capital up to one hundred crores of rupees.]

(2) The authorised capital shall be divided into such number of fully paid-up shares of the same face value and shall be issued to the parties mentioned in sub-section (3) at such times and in such manner as the State Government may, by notification in the Official Gazette, determine:

Provided
that no such notification shall be necessary when the shares are to be issued to the parties mentioned in clauses (a) and (ba) of sub-section (3).]

(3) The State Government shall, with the approval of the Central Government, determine the number of shares which may, respectively, be distributed among-

(a) The State Government,

(b) The Reserve Bank,

4*[(ba) The Development Bank,]

(c) Scheduled banks, insurance companies 2*[(including the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956.(31 of 1956),] investment trusts, co-operative banks 5*[other financial institutions or such other institutions as the Central Government may notify in this behalf in the Official Gazette] and

(d)Parties other than those referred to in clauses (a),(b)4*[,(ba)]and (c):

Provided that the number of shares which may be allocated to the parties referred to in clause (d) shall in no case exceed twenty-five per cent. of the total number of shares.

(4) Subject to the other provisions contained in this section, the allocation of shares among the parties referred to in clauses (c) and (d) of sub-section (3) and the allotment of such shares shall be made by the Financial Corporation in such manner as may be prescribed.

3*[(5) If any shares allocated to any of the parties referred to in clauses (c) and (d) of sub-section (3) remain unsubscribed, they shall be subscribed for equally by the State Government and the Development Bank.]

4A. Special class of shares
 
(1) The State Government may, in consultation with the Development Bank, specify from time to time such part of the unissued capital of the Financial Corporation as shall be allocated for the issue of a special class of shares.]

(2) The special class of shares so allocated under sub-section (1), shall be,-

(a) Divided into such number of shares of the same face value as the State Government may, in consultation with the 6*[Development Bank], determine;

(b) Subscribed by the State Government and the 3*[Development Bank] and they may do so in such proportion as may be agreed upon by and between them and the Financial Corporation shall make allotment of such shares accordingly.

(3) The funds representing the capital subscribed as aforesaid shall be used only for such purposes, in such manner and for rendering assistance to such class or category of industrial concerns, as the 6*[Development Bank] may, in consultation with and after obtaining the advice of the State Government, specify in this behalf from time to time and nothing contained in section 47 or section 48 shall apply thereto.

(4) The rate of dividend declared on the special class of shares in respect of any accounting year of a Financial Corporation shall not exceed the rate of dividend in respect of its other shares.

(5) Nothing contained in sub-sections (2) to (5) of section 4, section 5, and sub-section (1) of section 6, shall apply to the special class of shares.]

4B. Transfer of share capital to Development Bank

On such date as the Central Government may, by notification in the Official Gazette, specify (hereinafter referred to as the specified date), all the shares of every Financial Corporation subscribed by the Reserve Bank as on the date immediately preceding the specified date, shall, stand transferred to, and vested in, the Development Bank.

4C. Payment of amount

The Reserve Bank shall be given by the Development Bank, in cash, for the transfer to, and vesting in, the Development Bank of the shares of every Financial Corporation which have been subscribed by the Reserve Bank, an amount equal to the face value of the shares of the Financial Corporation so subscribed.

----------------------------------------------------------------------

1. Ins. by Act 77 of 1972, s. 3.

2. Ins. by Act 6 of 1962, s. 4 (w.e.f. 16-4-1962).

3. Subs. by Act 43 of 1985, s. 4.

4. Ins. by Act 77 of 1972, s. 4.

5. Subs. by Act 52 of 1975, s. 26, for sub-section (1) (w.e.f. 16-2-1976).

6. Subs. by s. 26, ibid., for "Reserve Bank" (w.e.f. 16-2-1976).

----------------------------------------------------------------------



(1) The shares of the Financial Corporation shall not be transferable except to the State Government, the Reserve Bank, 1* 2*[the Development Bank] or any other financial institution 3*[or class of financial institutions] recognised in this behalf by the State Government 4*[or other institutions notified under clause (c) of sub-section (3) of section 4"]

5* * * * *

Provided that the shares subscribed for by the parties referred to in clause (d) of sub-section (3) of section 4 shall be freely transferable.

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1. Ins. by Act 52 of 1975, s. 27 (w.e.f. 16-2-1976).

2. Ins. by s. 28, ibid. (w.e.f. 16-2-1976).

3. Ins. by Act 56 of 1956, s. 5.

4. Ins. and omitted by Act 43 of 1985, s. 5.

5. Subs. by s. 6, ibid.

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(1) The shares of the Financial Corporation shall be guaranteed by the State Government as to the repayment of principal and the payment of annual dividend at such minimum rate as the State Government may, with the approval of the Central Government, fix by notification published in the Official Gazette at the time of issuing the shares.

(2) Notwithstanding anything contained in the Acts hereinafter mentioned in this sub-section, 2*[the shares of the Financial Corporation, and such of the bonds and debentures issued by it as are guaranteed by the State Government as to the repayment of the principal and payment of interest, and receipts issued by it for such of the deposits as are guaranteed by the State Government as to the repayment of the principal and payment of interest, shall] be deemed to be included among the securities enumerated in section 20 of the Indian Trusts Act, 1882 (2 of 1882), and also to be approved securities for the purposes of the Insurance Act, 1938 (4 of 1938), and the 1*[Banking Regulation Act, 1949 (10 of 1949)].

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1. Omitted by Act 43 of 1985, s. 7.

2. Ins. by Act 77 of1972, s. 5.

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(1) The Financial Corporation may, in consultation with 2*[the Development Bank and] the Reserve Bank, issue and sell bonds and debentures carrying interest for the purpose of increasing its working capital and such bonds and debentures 3*[shall, if so required by the Financial Corporation, be guaranteed by the State Government] as to the repayment of the principal and the payment of interest at such rate as the State Government may, on the recommendation of the Board 4*[based on the advice of the Reserve Bank], fix.

(2) The Financial Corporation may, for the purposes of carrying out its functions under this Act, borrow money from the Reserve Bank--

(a) Repayable on demand or on the expiry of a fixed period not exceeding ninety days from the date on which the money is so borrowed against the security of-

(i) Stocks, funds and securities (other than immovable property) in which a trustee is authorised to invest trust money by any law for the time being in force in India, or

(ii) Such bills of exchange and promissory notes as are eligible for purchase or rediscount by the Reserve Bank or as are fully guaranteed as to the repayment of the principal and payment of interest by a State Government;

(b) Repayable on the expiry of a fixed period not exceeding eighteen months from the date on which the money is so borrowed, against securities of the Central Government or of any State Government of any maturity, 4*[or subject to the previous approval of the State Government, against bonds and debentures issued by the Financial Corporation] and maturing within a period not exceeding eighteen months from the date on which the money is so borrowed 6*[and every such bond and debenture shall be guaranteed by the State Government]:

Provided that the amount borrowed by the Financial Corporation under clause (b) shall not at any time exceed in the aggregate 1*[twice] the paid-up share capital thereof.

(2A) No money shall be borrowed by the Financial Corporation from the Reserve Bank under sub section (2), except with the previous approval of the Development Bank.]

(3) The Financial Corporation may, for the purposes of carrying out its functions under this Act, borrow money from the State Government in consultation with 2*[the Development Bank and] the Reserve Bank on such terms and conditions as may be agreed upon.

(4) The Financial Corporation may, with the prior approval of the
3*[Development Bank], also borrow money from any financial institution notified in this behalf by the Central Government on such terms and conditions as may be agreed upon.

(5) The total amount of bonds and debentures issued and outstanding, the amounts borrowed by the Financial Corporation under clause (b) of sub-section (2), sub-section (3) and sub-section (4) and of the contingent liabilities of the Financial Corporation in the form of guarantees given by it or underwriting agreements entered into by it shall not 4*** exceed ten times the amount of the paid-up share capital and the reserve fund of the Financial Corporation:

5*["Provided that the Financial Corporation may, with the prior approval of the Development Bank, exceed the aforesaid limit up to thirty times the amount of the paid-up share capital and reserve fund of the Financial Corporation."]

7A.  Power to transfer rights

The rights and interests of the Financial Corporation (including any other rights incidental thereto)in relation to any loan or advance granted or any amount recoverable by it, may be transferred by the Financial Corporation either in whole or in part, by the execution or issue of any instrument or by transfer of any instrument by endorsement or in any other manner in which the rights and interests in relation to such loan or advance may be law-fully transferred, and the Financial Corporation may, notwithstanding such transfer, act as the trustee for the transferee.]

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1. Subs. by Act 43 of 1985, s. 7.

2. Ins. by Act 52 of 1975, s. 29 (w.e.f. 16-2-1976).

3 Subs. by s. 29, ibid., for "Reserve Bank" (w.e.f. 16-2-1976).

4. Omitted by Act 43 of 1985, s. 7.

5. Added by s. 7, ibid.

6. Ins. by Act 77 of 1972, s. 6.76.

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(1) The Financial Corporation may accept from the State Government or, with the prior approval of 1*[the State Government, the Development Bank and the Reserve Bank], a local authority or any other person deposits repayable after the expiry of a period which shall not be less than twelve months from the date of the making of the deposit and on such other terms as it thinks fit :

(2) Provided that the total amount of such deposits shall not exceed twice the paid-up share capital of the Financial Corporation:

Provided further that the Central Government may permit the Financial Corporation to accept deposits up to a higher limit not exceeding ten times the paid-up share capital of the Financial Corporation.

2*[(2) Any deposit accepted under sub-section (1), other than a deposit from the State Government shall, if so required by the Financial Corporation, be guaranteed by the State Government as to the repayment of the principal and the payment of interest.]

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1. Subs. by Act 52 of 1975, s. 30, for certain words (w.e.f. 16-2-
1976).

2. Subs. by Act 43 of 1985, s. 8.

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The general superintendence, direction and management of the affairs and business of the Financial Corporation shall vest in a Board of directors which, with the assistance of an Executive Committee and a managing director may exercise all the powers and discharge all the functions which may be exercised or discharged by the Financial Corporation.



The Board of directors shall consist of the following, namely:-

(a) 3*[four] directors nominated by the State Government 4*[of whom one director shall be a person who has special knowledge of or experience in small-scale industries] :

9*[Provided that in the case of a Joint Financial Corporation, the number of directors shall be such as the State Governments of the participating States may, by agreement among themselves, think fit to nominate, each participating State Government nominating not more than two directors] :

4*[Provided further that in the case of a Joint Financial Corporation, the director, who shall have special knowledge

(b) One director nominated by 1*** the Reserve Bank;

2*[(c)3*[Two directors] nominated by the Development Bank;]

(d) Three directors elected in the prescribed manner 4***by the parties referred to in clause (c) of sub-section (3) of section 4, one of whom shall be elected to represent scheduled banks, another to represent co-operative banks and the third to represent the remaining 5*[financial institutions and other institutions.]

(e) One director elected in the prescribed manner from among themselves by the parties referred to in clause (d) of sub-section (3) of section 4 who are shareholders of the Financial Corporation;

6*[(f) A managing director appointed by the State Government in consultation with 7*[and after obtaining the advice of] the 8*[Development Bank] and, except in the case of first appointment, also with the Board :]

Provided that on the first constitution of the Board the directors referred to in clauses (d) and (e) shall be nominated by the State Government and the directors so nominated shall, for the purposes of this Act, be deemed to be elected directors:

Provided further
that all directors of the Board first constituted other than the managing director shall retire at the end of the first year.

10A. Vacation of office by an elected director
 
The office of a director elected under clause (d) of section 10 shall become vacant if he ceases to hold any office in the scheduled bank, insurance company, investment trust, co-operative bank, financial or other institution in which he held any office at the time of his election as such director.of, or experience in, small-scale industries, shall be nominated by that participating State which, according to the terms of agreement between the participating States, is entitled to make such nomination;

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1. The words "the Central Board of" omitted by Act 6 of 1962, s. 6.(w.e.f. 16-4-1962).

2. Subs. by Act 77 of 1972, s. 7, for cl. (c).

3. Subs. by Act 52 of 1975, s. 31, for "one director" (w.e.f. 16-2-
1976).

4. The words "from among themselves" omitted by Act 56 of 1956, s.7.

5. Subs. by Act 43 of 1985, s. 9.

6. Subs. by Act 6 of 1962, s. 6, for cl. (f) (w.e.f. 16-4-1962).

7. Ins. by Act 77 of 1972, s. 7.

8. Subs. by Act 52 of 1975, s. 31, for "Reserve Bank" (w.e.f. 16-2-
1976).

9 Ins. by Act 43 of1985 s. 10.

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(1) A nominated director shall hold office during the pleasure of the authority nominating him.

(2) An elected director other than a director deemed to be elected under the first proviso to section 10 shall hold office for four years :

Provided that two out of the four directors so elected shall retire at the end of two years after the first election and the other two at the end of four years after such election, the directors so to retire being determined by lot.

(3) Notwithstanding anything contained in sub-section (2), an elected director shall continue in office until his successor is elected and shall also be eligible for re-election 1*[so, however, that no person elected as director shall hold office for a continuous period exceeding eight years] after the rotation of elected directors has begun.

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1. Subs. by Act 77 of 1972, s. 8, for "for not more than two full consecutive terms".

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No person shall be a director who:

(a) Except in the case of a managing director is a salaried official of the Financial Corporation; or

(b) Is or at any time has been adjudged insolvent or has suspended payment of his debts or has compounded with his creditors; or

(c) Is found to be a lunatic or becomes of unsound mind; or

(d) Is or has been convicted of any offence involving moral turpitude



The State Government may remove from office any director who-

(a) Is, or has become, subject to any of the disqualifications mentioned in section 12; or

(b) Without excuse sufficient in the opinion of the State Government to exonerate it, is absent without leave of the Board from more than three consecutive meetings of the Board.



(1) 1*[The managing director may, by giving notice in writing to the State Government, and any director elected under clause (d) or clause (e) of section 10 may, by giving notice in writing to the Chairman of the Board, resign his office] and, on such resignation being accepted, shall be deemed to have vacated his office.

(1A) If the managing director is by infirmity or otherwise rendered incapable of carrying out his duties or is absent on leave or otherwise in circumstances not involving the vacation of his appointment, the State Government may, after consultation with the Board, appoint another person to act in his place during his absence.]

(2) 2* A casual vacancy in the office of an elected director shall be filled by election and a director so elected shall hold office for the unexpired portion of the term of his predecessor.

(3) No act or proceeding of the Board shall be questioned on the ground merely of the existence of any vacancy in,or any defect in the constitution of, the Board.

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1. Subs. by Act 77 of 1972, s. 9, for certain words.

2. Ins. by Act 56 of 1956, s. 8.

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(1) The Chairman of the Board shall be one of the directors.1*** nominated by the State Government, after considering, except in the case of the nomination of the first Chairman, the recommendation of the Board:

Provided
that the nomination of the Chairman for any period other than the first period shall be made only after the vacancies in the office of directors occurring by efflux of time in that period have been filled by nomination or election as the case may be:

2*["Provided further that the same person may be appointed to function both as Chairman and as managing director."]

(2) The Chairman shall hold office for two years or until his successor is nominated :

3* Provided that a Chairman shall so long as he remains a director be eligible for re-nomination as Chairman.

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1. Ins. by s. 11, ibid.

2. Omitted by Act 43 of 1985, s. 11.

3. Subs. by Act 6 of 1962, s. 7, for s. 16 (w.e.f. 16-4-1962).

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The directors other than the managing director and not being servants of the Government shall be paid such fees as may be prescribed for attending meetings of the Board and, if they are members of the Executive Committee, or any other committee appointed by the Financial Corporation, for attending meetings of such Committee.



1*[(1)] The managing director shall--

(a) be a whole-time officer of the Financial Corporation :

2*[Provided that the Board may, if in its opinion it is necessary in the public interest so to do, permit the managing director to undertake, at the request of the Central Government or the State Government 3*[or the Development Bank] or the Reserve Bank, such part-time honorary work as is not likely to interfere with his duties as managing director;]

(b) Perform such duties as the Board may, by regulations, entrust or delegate to him;

4*[(c) Hold office for such term not exceeding four years as the State Government may specify and be eligible for re-appointment;]

(d) Receive such salary and allowances 2*[and be subject to other terms and conditions of service] as the Board, with the previous approval of the State Government, may determine:

Provided
that the first managing director 5*** shall receive such salary and allowances 2*[and be subject to other terms and conditions of service] as the State
Government may fix.

6*[(2) The State Government may, after consulting the Board, remove the managing director from office:

Provided that no managing director shall be so removed unless he has been given an opportunity of showing cause against his removal.]

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1. S. 17 renumbered as sub-section (1) of that section by Act 56 of
1956, s. 9.

2. Ins. by Act 77 of 1972, s. 10.

3. Ins. by Act 52 of 1975, s. 32 (w.e.f. 16-2-1976).

4. Subs. by Act 6 of 1962, s. 8, for cl. (c) (w.e.f. 16-4-1962).

5. The words "shall hold office for such term and" omitted by Act 6.of 1962. s. 8 (w.e.f. 16-4-1962).

6. Ins. by Act 56 of 1956, s. 9.81.

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(1) The Executive Committee shall consist of the managing director who shall be the Chairman of the Committee, and 1*[the following] other directors, chosen as follows :-

(a) 2*[four directors elected by the nominated directors, of whom two shall be from among the directors nominated by the State Government and two] from among the directors nominated by the Reserve Bank and 3*[the Development Bank] :

4*[Provided that in the case of a Joint Financial Corporation, in addition to the 2*[two directors elected] from among the directors nominated by the Reserve Bank and 3*[the Development Bank], as many directors as there are participating States shall be elected by the nominated directors, one each from among the directors nominated by each of the participating State Governments;]

(b) One director elected by the elected directors.

(2) A director elected to be a member of the Executive Committee shall hold office as such for the rest of his term of office as director.

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1. Subs. by Act 56 of 1956, s. 10, for "three".

2. Subs. by Act 52 of 1975, s. 33, for certain words (w.e.f. 16-2-
1976).

3. Subs. by Act 77 of 1972, s. 11, for certain words.

4. Ins. by Act 56 of 1956, s. 10.

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(1) The Board and the Executive Committee shall meet at such times and places and shall observe such rules of procedure in regard to transaction of business at its meetings as may be provided by regulations made under this Act.

(2) All questions at a meeting shall be decided by a majority of votes of the members present, and, in the case of equality of votes, the Chairman or in his absence, any other person presiding, shall have a second or casting vote.

(3) No director shall vote on any matter in which he is interested.

1*[(3A) If, for any reason, a director nominated under clause (a)or clause (b) or clause (c) of section 10 is unable to attend any meeting of the Board, the State Government, 2*[the Reserve Bank or 3*[the Development Bank]], as the case may be, may depute any other person to attend the said meeting and such person shall, for all purposes of the said meeting, be deemed to be a director nominated under clause (a) or clause (b) or clause (c), as the case may be, of the said section.]

4*[(4) If for any reason a director nominated under clause (a) or clause (b) or clause (c) of section 10 who is a member of the Executive Committee or any other committee is unable to attend any meeting of the Executive Committee or other committee, the State Government, the Reserve Bank or 3*[the Development Bank], as the case may be, may depute any other person to attend the said meeting and such person shall, for the purposes of the said meeting, be deemed to be a member of such committee.

(5) If for any reason the Chairman of the Board or the Chairman of the Executive Committee is unable to attend any meeting of the Board or, as the case may be, of the Executive Committee,-

(a) In the case of the meeting of the Board, a director 5*** authorised by the Chairman of the Board in writing shall preside at such meeting, but if the director so authorised is absent or if no such authorisation has been made, the Board may elect a director to preside at that meeting; and

(b) In the case of the meeting of the Executive Committee, a member authorised in writing by the Chairman of that Committee shall preside at that meeting, but if the member so authorised is absent or if no such authorisation has been made, the Committee may elect any of its members to preside at that meeting.]

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1. Ins. by Act 56 of 1956, s. 11.

2. Subs. by Act 6 of 1962, s. 9, for certain words (w.e.f. 16-4-
1962).

3. Subs. by Act 77 of 1972, s. 12, for certain words.

4. Subs. by Act 6 of 1962, s. 9, for sub-section (4) (w.e.f. 16-4-
1962).

5. Omitted by Act 43 of 1985, s. 12.

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(1) Subject to such general or special directions as the Board may from time to time give, the Executive Committee may deal with any matter within the competence of the Board.

(2) The minutes of every meeting of the Executive Committee

1*["shall, after confirmation thereof at the next meeting of the Executive Committee, be laid"] before the Board at the next following meeting of the Board.

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1. Ins. by s. 20, ibid.

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The Financial Corporation may appoint 2*["one or more committee or committees consisting wholly of directors or wholly of other persons or partly of directors and partly of other persons"] for the purpose of assisting the Financial Corporation in the efficient discharge of its functions and, in particular, for the purpose of securing that those functions are exercised with due regard to the circumstances and conditions prevailing in, and the requirements of, particular areas or industries.

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1. Ins. by Act 43 of 1985, s. 20.

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1*[The Financial Corporation shall establish its head office and other offices and agencies at such places as the State Government may, from time to time, specify and save as aforesaid, the Financial Corporation may establish additional offices or agencies in such other places within the State as it may consider necessary.]

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1. Ins. by Act 56 of 1956, s. 16.

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The Financial Corporation may appoint such officers, advisers and employees as it considers necessary for the efficient performance of its functions, and determine, by regulations, their conditions of appointment and service and the remuneration payable to them :

1*[Provided that the State Government may, in consultation with and after obtaining the advice of the 2*[Development Bank], specify the class or categories of posts in respect of which appointments may be made by the Board on such remuneration and other conditions of service as the Board may determine, and no regulation made under this Act shall apply to such posts in respect of matters so determined by the Board.

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1. Subs. by Act 43 of 1985, s. 20.

2. Subs. by Act 6 of 1962, s. 15, for sub-section (11) (w.e.f. 16-4-1962).

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Last updated on September, 2016

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