Industrial Sickness
DEFINITION
BY SICK
INDUSTRIAL COMPANIES(SPECIAL PROVISIONS) ACT, 1985, SEC 3(1) (0)
“Industrial
company(being a company registered for not less than five years) which has at
the end of any financial year accumulated loss equal to or exceeding its entire
net worth and which has also suffered cash losses in such a financial year
immediately preceding such financial year”.
BY THE
COMPANIES(SECOND AMENDMENT) ACT, 2002
Defines a
sick company as one:
Which has
accumulated losses in any financial year to 50 percent or more of its average
net worth during four years immediately preceding the financial year in
question, or
Which has
failed to repay its debts within any three consecutive quarters on demand for
repayment by its creditors.
STAGES OF
INDUSTRIALSICKNESS
CRITERIA
TO IDENTIFY INDUSTRIAL SICKNESS
Continuous decline in gross output compared to the
previous two financial years. Delays in repayment of institutional loan, for
more than 12 months.
Erosion in the net worth to the extent of 50 percent of the net worth
during the previous accounting year.
SIGNALS OF INDUSTRIAL SICKNESS
Decline
In Capacity Utilization Shortage Of Liquid Funds
Inventories
In Excessive Quantities
Irregularity
In Maintaining The Bank Accounts Frequent Break Downs In Plant & Equipments
Decline In The Quality Of Products
Frequent
Turnover Of Personnel Technical Deficiency
EXTERNAL
CAUSES
Improper
Credit Facilities
Delay In
Advancing Of Funds
Unfavourable
Investment Climate Shortage Of Inputs
Import
Restrictions On Essential Inputs
Liberal
Licensing Of Projects
Change In
International Marketing Scene Excessive Taxation Policy Of Government Market
Recession
INTERNAL
CAUSES
(FINANCIAL
CONSTRAINTS)
Inappropriate
Financial Structure Poor Utilization Of Assets
Inefficient
Working Capital Management Lack Of Proper Costing And Pricing
Absence
Of Financing, Planning & Budgeting Improper Utilization Or Diversion Of
Funds
Consequences
Huge financial losses to the banks & financial
institutions Loss to employment opportunities
Emergence
of industrial unrest
Adverse
effect on perspective investors and entrepreneurs
Wastages of scarce resources Loss of revenue to
government
Governmental
measures to combat industrial sickness
The Industrial Finance
Corporation of India (IFCI) in 1948 - to
provide medium & long-term credits
to the public sector limited companies in order to facilitate post-war
rehabilitation & development.
2. The State Financial Corporations (SFC)
were established at state level in 1951 to supplement the work of
IFCI by
financing medium and small-scale industrial concerns.
3. Industrial Reconstruction
Corporation of India or (IRCI) was set up with its head quarters at Calcutta in
1971
•
to revive and revitalise the closed and sick
industrial concerns by removing the shortcomings.
•
to reconstruct and restructure the financial base
as well as the management of the assisted units, besides providing financial
assistance and technical/managerial guidance.
The
control measures adopted by IRCI included :
i.
transfer of major shares in the name of IRCI;
ii.
appointment of IRCI nominees in the Board of
Directors of the sick unit;
iii.
appointment of personnel and nominees in key
managerial post and purchase/sales committees;
iv.
frequent plant and factory inspections and so on.
4. Industries (Development &
Regulation) Act, 1951 was further amended in 1971 -empowering the Central Government to take over
industrial undertakings which special emphasis on sick units.
5. By
Amendments in the relevant Act the IFCI
with effect from 1972 was empowered to extend its assistance to Pvt Ltd
Cos.
6 Foreign Exchange Regulation Act (FERA)
1973 – limited the share of foreign companies to 40% of the total
capital.
Governmental
measures to combat industrial sickness
7. The Reserve Bank of India set up
Tandon Committee, in 1975- guideline
was laid down governing the
participation of banks in the management of various sick industries.
8. The RBI
in 1979 conducted a study to identify the causes of sickness in 378 such large
industrial units
9. Further
the government came up with several industrial policies in order to revive the
sick units
These
policies were:
i.
Soft loan
scheme-
•
introduced in 1976 to provide financial assistance
to five selected industries (jute, cotton, cement, textile and sugar) on
concessional terms for modernization & rehabilitation of their old
machineries.
•
Was Being operated by the IDBI in collaboration
with IFCI & ICICI.
•
In 1984 this scheme was modified into soft loan
scheme for modernization –all categories of industries are eligible for financial
assistance for up gradation of process/technologies/product, export
orientation/import substitution,energy saving, anti-pollution measures and
improvement in productivity.
ii.
Merger
policy of 1977 –
•
For merger of sick units with the healthy ones
•
Healthy was allowed to carry forward and set off
the accumulated losses & unabsorbed depreciation of the sick unit against
its own tax incidence.
•
Sick units to be eligible for merger should have
>100 employees & assets worth >50 lakh. Governmental measures to
combat industrial sickness
iii.
Policy
guidelines on sick units-1978
•
Made it clear that financial institutes should
involve themselves in the management of the sick units in which they have
substantial stake by setting up group of professional directors to look after
the management of these units.
• These
directors will be nominated to the board of the sick units and they will be
required to report to the financial institutes regularly regarding the various
measures required to be incorporated.
• Further
the respective state government in collaboration with the financial institutes
should provide financial & managerial assistance for the restructuring and
rehabilitation of the sick units.
iv.
New
strategy 1981-
•
Aimed at preventing industrial sickness, quick
rehabilitation, & early decisions on the future of such units.
•
Units employing >1000employees of having an
investment of 9 crore or more should be nationalised if
The line
of production is critical to the nation‟s economy
Its a
mother unit with large ancillaries
Its
closure would cause dislocation and unemployment of such a large number of
people that allocation of alternative jobs is not possible.
v. Different committees and
industrial sickness-
Government
has from time to time formulated several committees like the Standing Committee
On Industrial Sickness, State Level Inter-Institutional Committee, Guidance
Committee & others to examine the problems of growing industrial Sickness
vi. Legal framework-
Various
provisions for the revival of the sick industries were introduced like The
Relief Undertaking Act,
Sec 72(a)
Of The Income Tax Act, IRBI Act Of 1984,SICA 1985, and others.
The
important provisions of SICA were:-
It
provided for the constitution of two quasi-judicial bodies, that is, Board for
Industrial and Financial Reconstruction (BIFR)
and Appellate Authority for Industrial and Financial Reconstruction (AAIFR).
BIFR was
set up as an apex board to tackle industrial sickness and was entrusted with
the work of taking appropriate measures for revival and rehabilitation of
potentially sick undertakings
and for
liquidation of non-viable companies.
AAIFR was
constituted for hearing the appeals against the orders of the BIFR.
BIFR
would make an inquiry as it may deem fit for determining whether any industrial
company had become sick.
BIFR may
appoint one or more persons as special director(s) of the company for
safeguarding the financial and other interests of the company.
The measures include:-
The financial reconstruction
The
proper management by change in or take over of the management of the company;
The amalgamation of the sick industrial
The sale
or lease of a part or whole of the sick industrial company;
Such
other preventive, ameliorative and remedial measures as may be appropriate;
Such
incidental, consequential or supplemental measures as may be necessary or
expedient in connection with or for the purposes of the measures specified
above.
The
important provisions of SICA were:-
Under the
Act, whosoever violates its provisions or any scheme or any order of the Board
or of the Appellate Authority, shall be punishable with imprisonment for a term
which may extend to three years and shall also be liable to a fine.
Sick
Industrial Companies (Special Provisions) Act,1985 (SICA) was repealed and
replaced by Sick Industrial Companies (Special Provisions) Repeal Act,2003.
The new
Act diluted some of the provisions of SICA & aimed to combat industrial
sickness ,reduce the same by ensuring that companies do not view declaration of
sickness as an escapist route from legal provisions after the failure of the
project or similar other reasons and thereby gain access to various benefits or
concessions from financial institutions.
Under it,
the Board for Industrial and Financial Reconstruction (BIFR) and Appellate
Authority for Industrial and Financial Reconstruction (AAIFR) were dissolved
and replaced by National Company Law Tribunal (NCLT) and National Law Appellate
Tribunal (NCLAT) respectively.
RBI guide
lines…
•
RBI has constituted a standing coordination
committee to consider issues relating to coordination between commercial banks
and lending institutions.
•
A special cell has been set up within the
rehabilitation finance division of IDBI to attend the case of sickness.
•
RBI has issued suitable guidelines to the banks to
ensure the potentially viable sick units receive attention and timely support
from banks.
•
RBI has clarified that units becoming sick on
account of wilful mis-management, wilful
default
should not be considered for rehabilitation.
Rehabilitation
Programme:
a) Change
management
b) Development
of a suitable management information system
c) A
settlement with the creditors for payment of their dues in a phased manner,
taking into account the expected cash generation as per viability study
d) Determination
of the sources of additional funds needed to refinance.
e) Modernization
of plant and equipment or expansion of an existing programme or even
diversification of the products being manufactured.
f) Concession
or reliefs or assistance to be allowed by the state level corporation
,financial institutions and central government.
RECOMMENDATIONS:
I.
A
Financial reorganisation may involve some sacrifices by the creditors
and shareholders of the undertaking
which can be in several forms:-
1.
Reduction of the par value of shares.
2.
Reduction in rates of interest.
3.
Postponement of maturity of debt.
4.
Conversion of debt into equity.
5.
Change in the nature of claim or obligation such as
from secured to unsecured.
6.
Concession by the Government in the form of reduction
or waiving of indirect taxes, electricity dues etc.
II.
Monitoring and nursing the sick units during
infancy
III.
Incentives should be provided to professional
managers helping in reviving sick units
IV. Issuing guidelines on major aspects that
affect the image of the company
V.
Brain storm with a select group to get creative
ideas for improvement
VI. Adopt
better practices, right technology, better work culture and professional
management so that the sick industries can improve their health as well as the
economy.
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