Description
Report on Industrial Sickeness
INDUSTRIAL SICKNESS
PROJECT REPORT
SWAPNIL KANADE MMS B ROLL NO. 123
Table of Contents
INTRODUCTION ............................................................................................................................................. 3 HISTORICAL BACKGROUD OF INDUSTRIAL SICKNESS ................................................................................... 4 SYMPTOMS OF SICKNESS .............................................................................................................................. 5 DATA ANALYSIS: ............................................................................................................................................ 6 CAUSES OF SICKNESS .................................................................................................................................... 7 SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 & BIFR .................................................... 8 OBJECTIVES OF SICA .................................................................................................................................. 8 BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR) ......................................................... 8 REVIVAL OF A SICK UNIT ............................................................................................................................... 9 VIABILITY STUDY: ...................................................................................................................................... 9 REVIVAL PROGRAMME: ............................................................................................................................ 9 PREPARATION AND SANCTION OF SCHEME FOR REVIVAL ..................................................................... 11 REHABILITATION BY GIVING FINANCIAL ASSISTANCE ............................................................................. 11 SHORTCOMINGS OF SICA ........................................................................................................................ 12 CASE STUDY: ............................................................................................................................................... 14 . CONCLUSION AND SUGGESTIONS .............................................................................................................. 15 REFERENCES ................................................................................................................................................ 15
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INDUSTRIAL SICKNESS
INTRODUCTION According to RBI, A sick unit is one which incurs cash losses for 1 year & which , in the judgment of the bank , is likely to incur losses for the current year as well as the following year, & which has imbalances in its financial structure, like worsening debt equity ratio. The Companies (Second Amendment) Act, 2002 defines a “Sick Company” as one: a) Which has accumulated losses in an financial year equal to 50 percent or more os its average net worth during four years immediately preceding the financial year in question, or b) Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors. Industrial sickness is a serious clog in the smooth functioning of the financial system as it impairs the repayment capacity of borrowers and thereby impedes the recycling of funds lent by the financial system. Banks and other financial intermediaries show reluctance in lending to industries which are gripped by actual or perceived sickness. It is, therefore, imperative that such units should be identified at the incipient stage itself so that prompt corrective measures may be taken as early as possible to minimize the drain on national resources. The RBI collects related information, on an annual basis, from all scheduled commercial banks in respect of their exposure to Non?SSI sick/weak industrial companies/units. RBI brings out the Review of these industrial units financed by scheduled commercial banks as at the end of March every year, based on the data received from these banks.
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HISTORICAL BACKGROUD OF INDUSTRIAL SICKNESS a. Pre?Independence Position Before 1947, the Indian economy was predominantly agricultural in nature. The development of producers was almost negligible and was inadequate to meet the demands of the market. Only those industries survived who served the interests of the Britishers. There was dearth of private players in the market. The market was unorganized because of the reluctant attitude of the Britishers and due to lack of proper communication facility as well as the shortage of power. This issue was further aggravated with the lack of any proper bank or financial institutions to finance the industrial projects. And, if at all, any help was available from the money lenders, they charged exorbitant rates of interest along with arbitrary terms and conditions. There was also minimal intervention of the Government in the promotion of the industries. As a result, it was difficult for any trader to survive in the market on a long terms basis. Also there were no proper implementation of any policy in regard to the efforts of the Government in the revival and rehabilitation of sick industries. b. Post?Independence Period: After the Constitution came into force, the primary aim was to convert India from a colonial country to a socialist welfare society, as envisaged in the Preamble and the Directive Principles of State Policy. The Government was prompted to go for rapid industrialization of basic and heavy industries to convert India from agricultural to industrial economy. Soon, the Government realized that a large number of units are turning sick. In order to check the growth of the sick units, the Government adopted strategies to takeover of the sick industrial units and restrict the problem if unemployment, labour unrest and social unrest. The Government also took the initiative of taking over the management of sick industrial undertakings for a brief period and returning it back to the owners once the sickness is removed. The Government in its aim of preventing the growth of sickness was given support by various agencies such as RBI, IDBI etc.
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SYMPTOMS OF SICKNESS Timely action is required for identification of sickness. For this we need to analyze the symptoms which would help us identify the sickness of the unit. This can be traced from the signals that get displayed by the sick units. The signal may be in the form of financial distress starting with short term liquidity problems, revenue losses, operating losses and moving in the direction of over use of external credit until it reaches a stage where it is overburdened with debt and not being able to generate sufficient funds to meet its obligations. In case of large units whose shares are quoted in stock exchanges, a signal of sickness is sent when dividends are skipped and share price sharply declines. This measure, therefore, will have to be used very cautiously with other identifiable symptoms to judge whether skipping dividends indicates sickness or represents a temporary downward slide in financial performance. The existence of these signals and symptoms provides a ground for suspecting that the industrial unit concerned is prone to sickness. Other symptoms are: • Delay or default in payment to suppliers • Irregularity in bank account • Non?submission of information to banks and financial institutions • Decline in capacity utilization • Poor maintenance of plant and machinery • Low turnover of assets • Accumulation of inventories • Inability to take trade discount • Extension of accounting period • Excess turnover of personnel • Decline in the price of equity shares and debentures
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DATA ANALYSIS: The total number of Non?SSI sick/weak companies/units declined from 5,252 as at end?March 2005 and 4,540 as at end?March 2006 to 3,967 as at end?March 2007 (Chart 1). Also, the aggregate outstanding bank credit to such units declined from Rs.34,427 crore as at end?March 2005 and Rs.32,988 crore as at end?March 2006 to Rs.25,066 crore as at end?March 2007 (Chart 2).
The number of weak units increased from 774 at end?March 2005 to 1,132 at end?March 2006 and declined to 1,010 at end?March 2007. On the other hand, the number of sick companies declined over the period and stood at 2,957 as at end?March 2007, compared with 3,408 and 4,478 as at end?March 2006 and 2005, respectively. In respect of bank credit to Non?SSI sick/weak companies/units, the share of sick companies declined over the period and, correspondingly, the share of weak units increased.
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CAUSES OF SICKNESS Some industries are born sick; sickness is thrust upon some, while others become sick due to a number of causes. The general belief is that the incidence of sickness results from the changing economic factors and the external influence, which tilt the economic viability. The causes of sickness may vary from one unit to another. But the most common causes of sickness can be grouped under two heads – internal and external. In India, the Tiwari Committee in its report outlined the causes of sickness into several heads. They can be classified as: A. Internal Causes ? These are those factors which are within the internal control of the management. Sickness arises because of the disorder of the following concerns: 1. Planning a. Technical feasibility: Inadequate technical know?how, locational disadvantage, outdated production process. b. Economic Viability: High Cost of Inputs, uneconomic size of project, under estimation of financial requirements, unduly large investment in fixed assets, over?estimation of demand. 2. Implementation: a. Cost over?runs resulting from delays in getting licences/sanctions etc., inadequate mobilization of finance. 3. Production a. Production management: Inappropriate product mix, poor quality control, high cost of production, lack of adequate timely and adequate modernization, high wastage, poor capacity utilization. b. Labour management: Excessive high wage structure, inefficient handling of labour problems, excessive manpower, lack of trained/skilled component personnel. c. Marketing management: Dependence on limited number of customers, poor sales realization, defective pricing policy, weak market organization, lack of market feedback and market research, lack of knowledge of marketing techniques. d. Financial Management: Poor resource management and financial planning, liberal dividend policy, application of funds for unauthorized purposes, deficiency of funds, over?trading, inadequate working capital, lack of effective collection machinery. e. Administrative Management: Over centralization, lack of professionalism, lack of feedback to management ( management information system), lack of adequate controls, lack of timely diversification, excessive expenditure on R&D, incompetent and dishonest management. B. External Causes: a. Infrastructural bottlenecks – Non?availability/irregular supply of critical raw materials or other inputs, chronic power shortage, transport bottlenecks. b. Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization. c. Government control, policies, etc. – Government price controls, fiscal duties, abrupt changes
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in Government policies, procedural delays on the part of the financial/licensing/other controlling or regulating authorities (banks, RBI, financial institutions, Government departments, licensing authorities, MRTP Board). d. Marketing Constraints: The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession. e. Extraneous factors: Natural calamities, political situation (domestic as well as international), war, sympathetic strike, multiplicity of labour unions. The Government taking into consideration all the factors resulting into industrial sickness, accepted the recommendations of the Tiwari Committee with some modification, and thus, the Sick Industrial Companies (Special Provisions) Act, 1985 was, accordingly enacted. SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 & BIFR Following the Tiwari Committee recommendations (1981), the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was passed and the Board for Industrial and Financial Reconstruction (BIFR) was established in 1987 for determining the preventive, ameliorative, remedial and other measures which need to be taken in respect of Non?SSI sick industrial companies and the expeditious enforcement of the measures so determined. However, no special Act has been enacted in respect of revival of sick SSI units. OBJECTIVES OF SICA 1. To evaluate the techno?economic viability of sick industrial companies with a view to either to rehabilitate them, if the public interest so demanded and their rehabilitation was possible, or to close them down, if continuing them would be impossible. 2. To stop continued drain of public and private resources for the overall economy of the country. 3. To protect employment as far as possible. In the case of Testeels Limited & Arvindbhai N. Talti vs. Radhaben Ranchhodlal Charitable Trust & Testeels Limited, it was held that SICA had been enacted to safeguard the economy of the country and protect the viable sick units. BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR) Board of industrial and Financial Reconstruction (BIFR) was established by the Central Government, under section 3 of the Sick Industrial Companies (Special provisions) Act, 1985 and it became fully operational in May, 1987. BIFR deals with issues like revival and rehabilitation on sick companies, winding up of sick companies, institutional finance to sick companies, amalgamation of companies etc. BIFR is a quasi judicial body. The role of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is: (a)Securing the timely detection of sick and potentially sick companies
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(b) Speedy determination by a group of experts of the various measures to be taken in respect of the sick company (c)Expeditious enforcement of such measures BIFR has a chairman and may have a maximum of 14 members, drawn from various fields including banking, labour, accountancy, economics etc. It functions like a court and has constituted four benches. REVIVAL OF A SICK UNIT The revival package may vary from case to case depending on the nature of the problem and may include additional financial assistance, postponement of recovery of loan already lent by banks and financial institutions, change in management, amalgamation, sale of redundant assets, lease of assets or any other suitable measure. The revival package should be submitted to the BIFR within a time limit of 90 days or such extended period as may be granted by the BIFR. VIABILITY STUDY: A reasonably comprehensive assessment of the various aspects of the working of a unit, a viability study should cover the following: • • • • • Market Operations Finance Human resources Environment
The viability study may suggest one of the following: a) The unit can be revived by adopting one or more of the following measures: debt restructuring, infusion of funds, correction of functional deficiencies, granting of special reliefs and concessions by the government, replacement of existing management because of its incompetence and/or dishonesty. b) The unit is not potentially viable? This essentially implies that the benefits expected from remedial measures are less than the cost of such remedial measures. REVIVAL PROGRAMME: The revival programme usually involves the following: Settlement with Creditors: A sick unit is normally in straitened financial circumstances and is not able to honour its commitments to its creditors (financial institutions, debenture holders, commercial banks, suppliers, and governmental authorities). To alleviate its financial distress, a settlement scheme has to be worked out which may involve one or more of the following: rescheduling of principal and interest payment; waiver of interest; conversion of debt into equity; payment of arrears in installments. Provision of Additional Capital: Typically, a revival programme entails provision of additional capital. This may be required for modernization and repair of plant and machinery, for purchase
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of balancing equipment, for sustaining a new marketing drive, and for enhanced working capital needed to support a higher level of operations. The additional capital has to be provided on concessional terms, at least for the initial years, so that the financial burden on the unit is not high. Divestment and Disposal: The revival programme may involve divestment of unprofitable plants and operations and disposal of slow moving and obsolete stocks. The thrust of these actions should be to strengthen the liquidity of the unit and facilitate reallocation of resources for enhancing the profitability of the unit. Reformulation of Product?market strategy: Many a business failures can be traced to an ill? conceived product?market strategy. For reviving a sick unit, its product?market strategy may have to be significantly reformulated to improve the prospects of its profitable recovery. This, of course, calls for a great deal of imagination and penetrating analysis. Modernization of Plant and Machinery: In order to improve manufacturing efficiency, plant and machinery may have to be modernized, renovated, and repaired. This may be essential for attaining certain cost standards and quality norms for competing effectively in the market place. Reduction in Manpower: Generally, sick firms tend to be over?staffed. The revival programme must seek to reduce superfluous manpower. Strict control over costs: A profitable organization can afford wastefulness and laxity in its expenditures. A tottering firm, seeking to regain its health and vigour, has to exercise strict control over its costs, particularly over its discretionary expenses. A zero?base review of all the discretionary expenses may be undertaken to eliminate programmes and activities which are a drain on the finances of the firm. Streaming of Operations: Manufacturing, purchasing, and selling operations have to be meticulously examined so that they can be streamlines. Value engineering, standardization, simplification, cost?benefit analysis, and other approached should be exploited fully to improve the efficiency of the operations. Improvement in Managerial Systems: The managerial systems in the unit must be strengthened. In this exercise, greater attention may have to be paid to the following: • • • • • Environmental monitoring Organizational structure Responsibility accounting Management information system Budgetary control
Workers’ Participation: In general, workers’ participation in management enhances employee commitment, motivation, and morale. Further, the suggestions offered by the workers result in improvements that lead to higher manufacturing efficiency and productivity. A sick organization, which is being revived, can perhaps benefit even more from workers’ participation in management. During the revival phase, the dedication, commitment, and support of workers is indispensable and meaningful workers’ participation and involvement goes a long way in ensuring this.
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Change in Management: A change in management may be necessary where the present management is dishonest and/or incompetent. It has been observed that a new chief executive, who is incompetent, committed, and up righteous, can often bring about dramatic results. Merger with a Healthy Company: If a sick firm cannot pull itself by its own bootstraps, the option of merger with a healthy firm must be seriously explored. The healthy firm can leverage its resources to revive the sick firm. PREPARATION AND SANCTION OF SCHEME FOR REVIVAL Once a company has been found sick, the BIFR may grant time to the sick company to enable it to make its net worth positive and bring the company out of sickness, without any external financial assistance. If it is found infeasible for company to make its net worth positive without any external financial assistance, or if the BIFR decides that the company cannot make its net worth positive within a reasonable time, then the Board appoints an operating agency under section 17(3) of the Act, then the operating agency is required to prepare and submit a schedule in respect of the referred company by providing any or more of the following measures: i. Financial Reconstruction of the sick industrial company; ii. The proper management of the sick industrial company by change in, or takeover of, the management of the sick industrial company; iii. Amalgamation with another company or vice?versa; iv. Sale or lease of its undertaking; v. Rationalization of its staff; vi. Any other preventive or remedial measures; and vii. Incidental or consequential measures. REHABILITATION BY GIVING FINANCIAL ASSISTANCE When an industrial unit is identified as sick, a viability study should be conducted to assess whether the unit can be revived/rehabilitated within a reasonable period. If the viability study suggests that the unit can be rehabilitated, a suitable plan for rehabilitation must be formulated. If the viability study indicated that the unit is “better dead than alive”, steps must be taken to liquidate it expeditiously On submission of the revival package by the operating agency, the BIFR sends the revival package in a draft form to all the interested parties (i.e., the sick industrial company, the banks/ financial institutions who have given financial assistance to the sick company, the operating agency, the transferee company (if there is a recommendation in the revival package for amalgamation) etc., eliciting their views/suggestions on the revival package. The BIFR will also publish particulars of the draft revival package in newspapers inviting suggestions/objections, if any, from the shareholders of the sick company, creditors and employees of the sick company, transferee company and any other interested party. On receipt of views/suggestions/objections on the draft revival scheme, the BIFR may, if deemed fit; afford an opportunity to the interested parties to be heard. After careful examination of all the aspects, the BIFR will sanction the
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revival scheme with or without any modifications. Measures Taken by Government for Revival • • • • • Takeover of the Management Amalgamation with Healthy Units Excise Loans Setting up of Industrial Investment Bank of India (IIBI) Margin Money Scheme: In June 1987, government introduced a scheme known as Margin Money Scheme. Under this scheme, liberal financial assistance was granted to small sick industrial units, at low rate of interest and at lesser security. Establishment of National Company Law Tribunal
•
Measures Taken by Banks for Revival • • • • • • Recovery of interest at reduced rates. Grant of additional working capital to overcome the shortage of working capital. Writing off the whole or the part of accrued interest. Setting up a Sick Industrial Undertakings Cell in Reserve Bank of India to obtain timely information regarding sick units. Setting up a special cell in Industrial Development Bank of India (IDBI) to identify and solve the problem areas of sick units. Reserve Bank issued guidelines to the banks with a view to ensure that the potentially viable sick units in small scale industries sector get due attention and timely support.
SHORTCOMINGS OF SICA • The functioning of SICA proved inadequate to cater to the needs of the sick units. The reasons of sickness can be outlined as poor and slow functioning of BIFR, abuse of Section 22, delay in Winding up Procedure and defective Policy and inadequate strength of BIFR.
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COMPANIES BILL, 2009 • Certain changes were proposed to be made for the rehabilitation and revival of the sick units as from the proposed Companies Amendment Act, 1956.The criteria of sickness was changed to include ‘inability to pay debts’ due to secured creditors representing 50% or more of the outstanding debt. Further the scope of the filing for the determination of sickness which was restricted to the Board now included the creditor or the company. Even powers were granted to the creditors to decide on the issue of winding up or the revival of the company by passing a special majority among the creditors. Moreover, the greater powers have been conferred on the creditors to supervise a rescue plan and restrict the powers of management in the rehabilitation of a sick company. RECOMMENDATIONS OF THE JJ IRANI COMMITTEE ON COMPANY LAW (2005) JJ Irani Committee wanted to omit the term ‘sick industrial company’ and replace it with ‘insolvent company’ and thereby erase the sickness test on the basis of erosion of net worth with that of the liquidity test. Moreover, it recommended that CA/CS/CWA/law professionals should play an active role in the insolvency process so that there would be expertise persons dealing with the specialized, commercial and technical characteristics of insolvency law. It also recommended the establishment of the National Company Law Tribunal on a speedy basis. Further, it enunciated that the rehabilitation by cess to be replaced by the ‘Insolvency Fund” with optional contribution by companies. It also allowed the debtors to approach the Tribunal with the rehabilitation scheme. Power was also given to the creditors to oppose the scheme of rehabilitation
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CASE STUDY: ANDHRA PRADESH PAPER MILLS In the late 1980s, Andhra Pradesh Paper mills was in straitened circumstances. Thanks to power cuts and others problems, its production was low and it was incurring losses of nearly Rs. 5 million every month in 1988. Somanis, the controlling group, brought M.V.G. Rao who had a successful stint with Tamil Nadu Newsprint. Reputed for his turn around skills, M.V.G, Rao took a series of steps to rehabilitate the company. The key elements of the turnaround strategy were as follows: • • • • • Accumulated inventories were disposed to generate Rs. 30 million. Two more diesel generators, each having a capacity of 1000 KVA, were purchased. This helped in raising production from 3,000 tonnes to 7,500 tonnes per month. Bamboo, an expensive raw material, was substantially replaced by hardwood, a cheaper raw material. A number of highly skilled employees were inducted from Tamil Nadu Newsprint Project. The workers union was taken into confidence by open and plain speaking.
These actions paid off. Andhra Pradesh Paper Mills, regarded by many observers as a hopeless case, emerged from the shadows of bankruptcy. By 1990?91 the company was turned around. A turnaround situation represents an unusual phase in the life history of a firm and requires a very different approach to management as compared to a normal situation. The key elements found commonly in turnarounds are: • • • •
A change in top management A substantial involvement of top management in the day?to?day operations An emphasis on projects that have a quick payoff. Opportunistic action, improvisation, crisis management, and short?term expediency.
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CONCLUSION AND SUGGESTIONS Industrial sickness is a problem all economies big and small have to face. What is important is to evolve a proper regulatory and institutional mechanism to deal with the situation. While there should be a mechanism to safeguard the interests of workers, a suitable exit policy for the non? viable units should form an integral part of the new approach. A stringent mechanism should also be devised so that the directors of the company should not play fraud on the unit to bring it within the purview of sickness. NCLT should also be made to come into force to ensure speedy disposal of cases looking into the sluggishness of the disposal of cases by BIFR. The approach of the government towards rehabilitation of a sick unit being very selective, the government is now convinced that there is no point in throwing away further resources in support of the units which are irretrievably sick. Only such units which are found to be potentially viable need to be taken up for formulation of rehabilitation packages to restore them to health. Package consisting of concessions from banks, financial institutions, government (Central/State), government agencies, shareholders, labour, and suppliers of goods should be provided to those units where chances are subsisting for the revival of the sick unit. The enactment instead of fruitful it proved burdensome on the healthy companies. The rehabilitation fund are created by imposing tax on the good working companies which puts additional burden on them without their own fault. The Parliament itself is not sure whether rehabilitation should be given to the sick company which is evident from the act of the parliament itself. Parliament repealed the very first enactment of SICA after seventeen years just because it did not confirmed the purposes set out in the enactment and inserted few sections in the companies Act, 1956. Sick industrial company should be left on their own condition and let the market forces to decide the fate of the company. Government should refrain itself from intervention. If at all government wants to do fruitful help for the industrial company, it should help taking the affairs of the industrial company in its own hand for a particular period of time. REFERENCES 1. Financial Management by Prasanna Chandra – Chap. 38 2. http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=10523 3. http://www.taxmann.com
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doc_394780574.pdf
Report on Industrial Sickeness
INDUSTRIAL SICKNESS
PROJECT REPORT
SWAPNIL KANADE MMS B ROLL NO. 123
Table of Contents
INTRODUCTION ............................................................................................................................................. 3 HISTORICAL BACKGROUD OF INDUSTRIAL SICKNESS ................................................................................... 4 SYMPTOMS OF SICKNESS .............................................................................................................................. 5 DATA ANALYSIS: ............................................................................................................................................ 6 CAUSES OF SICKNESS .................................................................................................................................... 7 SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 & BIFR .................................................... 8 OBJECTIVES OF SICA .................................................................................................................................. 8 BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR) ......................................................... 8 REVIVAL OF A SICK UNIT ............................................................................................................................... 9 VIABILITY STUDY: ...................................................................................................................................... 9 REVIVAL PROGRAMME: ............................................................................................................................ 9 PREPARATION AND SANCTION OF SCHEME FOR REVIVAL ..................................................................... 11 REHABILITATION BY GIVING FINANCIAL ASSISTANCE ............................................................................. 11 SHORTCOMINGS OF SICA ........................................................................................................................ 12 CASE STUDY: ............................................................................................................................................... 14 . CONCLUSION AND SUGGESTIONS .............................................................................................................. 15 REFERENCES ................................................................................................................................................ 15
INDUSTRIAL SICKNESS
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INDUSTRIAL SICKNESS
INTRODUCTION According to RBI, A sick unit is one which incurs cash losses for 1 year & which , in the judgment of the bank , is likely to incur losses for the current year as well as the following year, & which has imbalances in its financial structure, like worsening debt equity ratio. The Companies (Second Amendment) Act, 2002 defines a “Sick Company” as one: a) Which has accumulated losses in an financial year equal to 50 percent or more os its average net worth during four years immediately preceding the financial year in question, or b) Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors. Industrial sickness is a serious clog in the smooth functioning of the financial system as it impairs the repayment capacity of borrowers and thereby impedes the recycling of funds lent by the financial system. Banks and other financial intermediaries show reluctance in lending to industries which are gripped by actual or perceived sickness. It is, therefore, imperative that such units should be identified at the incipient stage itself so that prompt corrective measures may be taken as early as possible to minimize the drain on national resources. The RBI collects related information, on an annual basis, from all scheduled commercial banks in respect of their exposure to Non?SSI sick/weak industrial companies/units. RBI brings out the Review of these industrial units financed by scheduled commercial banks as at the end of March every year, based on the data received from these banks.
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HISTORICAL BACKGROUD OF INDUSTRIAL SICKNESS a. Pre?Independence Position Before 1947, the Indian economy was predominantly agricultural in nature. The development of producers was almost negligible and was inadequate to meet the demands of the market. Only those industries survived who served the interests of the Britishers. There was dearth of private players in the market. The market was unorganized because of the reluctant attitude of the Britishers and due to lack of proper communication facility as well as the shortage of power. This issue was further aggravated with the lack of any proper bank or financial institutions to finance the industrial projects. And, if at all, any help was available from the money lenders, they charged exorbitant rates of interest along with arbitrary terms and conditions. There was also minimal intervention of the Government in the promotion of the industries. As a result, it was difficult for any trader to survive in the market on a long terms basis. Also there were no proper implementation of any policy in regard to the efforts of the Government in the revival and rehabilitation of sick industries. b. Post?Independence Period: After the Constitution came into force, the primary aim was to convert India from a colonial country to a socialist welfare society, as envisaged in the Preamble and the Directive Principles of State Policy. The Government was prompted to go for rapid industrialization of basic and heavy industries to convert India from agricultural to industrial economy. Soon, the Government realized that a large number of units are turning sick. In order to check the growth of the sick units, the Government adopted strategies to takeover of the sick industrial units and restrict the problem if unemployment, labour unrest and social unrest. The Government also took the initiative of taking over the management of sick industrial undertakings for a brief period and returning it back to the owners once the sickness is removed. The Government in its aim of preventing the growth of sickness was given support by various agencies such as RBI, IDBI etc.
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SYMPTOMS OF SICKNESS Timely action is required for identification of sickness. For this we need to analyze the symptoms which would help us identify the sickness of the unit. This can be traced from the signals that get displayed by the sick units. The signal may be in the form of financial distress starting with short term liquidity problems, revenue losses, operating losses and moving in the direction of over use of external credit until it reaches a stage where it is overburdened with debt and not being able to generate sufficient funds to meet its obligations. In case of large units whose shares are quoted in stock exchanges, a signal of sickness is sent when dividends are skipped and share price sharply declines. This measure, therefore, will have to be used very cautiously with other identifiable symptoms to judge whether skipping dividends indicates sickness or represents a temporary downward slide in financial performance. The existence of these signals and symptoms provides a ground for suspecting that the industrial unit concerned is prone to sickness. Other symptoms are: • Delay or default in payment to suppliers • Irregularity in bank account • Non?submission of information to banks and financial institutions • Decline in capacity utilization • Poor maintenance of plant and machinery • Low turnover of assets • Accumulation of inventories • Inability to take trade discount • Extension of accounting period • Excess turnover of personnel • Decline in the price of equity shares and debentures
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DATA ANALYSIS: The total number of Non?SSI sick/weak companies/units declined from 5,252 as at end?March 2005 and 4,540 as at end?March 2006 to 3,967 as at end?March 2007 (Chart 1). Also, the aggregate outstanding bank credit to such units declined from Rs.34,427 crore as at end?March 2005 and Rs.32,988 crore as at end?March 2006 to Rs.25,066 crore as at end?March 2007 (Chart 2).
The number of weak units increased from 774 at end?March 2005 to 1,132 at end?March 2006 and declined to 1,010 at end?March 2007. On the other hand, the number of sick companies declined over the period and stood at 2,957 as at end?March 2007, compared with 3,408 and 4,478 as at end?March 2006 and 2005, respectively. In respect of bank credit to Non?SSI sick/weak companies/units, the share of sick companies declined over the period and, correspondingly, the share of weak units increased.
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CAUSES OF SICKNESS Some industries are born sick; sickness is thrust upon some, while others become sick due to a number of causes. The general belief is that the incidence of sickness results from the changing economic factors and the external influence, which tilt the economic viability. The causes of sickness may vary from one unit to another. But the most common causes of sickness can be grouped under two heads – internal and external. In India, the Tiwari Committee in its report outlined the causes of sickness into several heads. They can be classified as: A. Internal Causes ? These are those factors which are within the internal control of the management. Sickness arises because of the disorder of the following concerns: 1. Planning a. Technical feasibility: Inadequate technical know?how, locational disadvantage, outdated production process. b. Economic Viability: High Cost of Inputs, uneconomic size of project, under estimation of financial requirements, unduly large investment in fixed assets, over?estimation of demand. 2. Implementation: a. Cost over?runs resulting from delays in getting licences/sanctions etc., inadequate mobilization of finance. 3. Production a. Production management: Inappropriate product mix, poor quality control, high cost of production, lack of adequate timely and adequate modernization, high wastage, poor capacity utilization. b. Labour management: Excessive high wage structure, inefficient handling of labour problems, excessive manpower, lack of trained/skilled component personnel. c. Marketing management: Dependence on limited number of customers, poor sales realization, defective pricing policy, weak market organization, lack of market feedback and market research, lack of knowledge of marketing techniques. d. Financial Management: Poor resource management and financial planning, liberal dividend policy, application of funds for unauthorized purposes, deficiency of funds, over?trading, inadequate working capital, lack of effective collection machinery. e. Administrative Management: Over centralization, lack of professionalism, lack of feedback to management ( management information system), lack of adequate controls, lack of timely diversification, excessive expenditure on R&D, incompetent and dishonest management. B. External Causes: a. Infrastructural bottlenecks – Non?availability/irregular supply of critical raw materials or other inputs, chronic power shortage, transport bottlenecks. b. Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization. c. Government control, policies, etc. – Government price controls, fiscal duties, abrupt changes
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in Government policies, procedural delays on the part of the financial/licensing/other controlling or regulating authorities (banks, RBI, financial institutions, Government departments, licensing authorities, MRTP Board). d. Marketing Constraints: The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and market recession. e. Extraneous factors: Natural calamities, political situation (domestic as well as international), war, sympathetic strike, multiplicity of labour unions. The Government taking into consideration all the factors resulting into industrial sickness, accepted the recommendations of the Tiwari Committee with some modification, and thus, the Sick Industrial Companies (Special Provisions) Act, 1985 was, accordingly enacted. SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 & BIFR Following the Tiwari Committee recommendations (1981), the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was passed and the Board for Industrial and Financial Reconstruction (BIFR) was established in 1987 for determining the preventive, ameliorative, remedial and other measures which need to be taken in respect of Non?SSI sick industrial companies and the expeditious enforcement of the measures so determined. However, no special Act has been enacted in respect of revival of sick SSI units. OBJECTIVES OF SICA 1. To evaluate the techno?economic viability of sick industrial companies with a view to either to rehabilitate them, if the public interest so demanded and their rehabilitation was possible, or to close them down, if continuing them would be impossible. 2. To stop continued drain of public and private resources for the overall economy of the country. 3. To protect employment as far as possible. In the case of Testeels Limited & Arvindbhai N. Talti vs. Radhaben Ranchhodlal Charitable Trust & Testeels Limited, it was held that SICA had been enacted to safeguard the economy of the country and protect the viable sick units. BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR) Board of industrial and Financial Reconstruction (BIFR) was established by the Central Government, under section 3 of the Sick Industrial Companies (Special provisions) Act, 1985 and it became fully operational in May, 1987. BIFR deals with issues like revival and rehabilitation on sick companies, winding up of sick companies, institutional finance to sick companies, amalgamation of companies etc. BIFR is a quasi judicial body. The role of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is: (a)Securing the timely detection of sick and potentially sick companies
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(b) Speedy determination by a group of experts of the various measures to be taken in respect of the sick company (c)Expeditious enforcement of such measures BIFR has a chairman and may have a maximum of 14 members, drawn from various fields including banking, labour, accountancy, economics etc. It functions like a court and has constituted four benches. REVIVAL OF A SICK UNIT The revival package may vary from case to case depending on the nature of the problem and may include additional financial assistance, postponement of recovery of loan already lent by banks and financial institutions, change in management, amalgamation, sale of redundant assets, lease of assets or any other suitable measure. The revival package should be submitted to the BIFR within a time limit of 90 days or such extended period as may be granted by the BIFR. VIABILITY STUDY: A reasonably comprehensive assessment of the various aspects of the working of a unit, a viability study should cover the following: • • • • • Market Operations Finance Human resources Environment
The viability study may suggest one of the following: a) The unit can be revived by adopting one or more of the following measures: debt restructuring, infusion of funds, correction of functional deficiencies, granting of special reliefs and concessions by the government, replacement of existing management because of its incompetence and/or dishonesty. b) The unit is not potentially viable? This essentially implies that the benefits expected from remedial measures are less than the cost of such remedial measures. REVIVAL PROGRAMME: The revival programme usually involves the following: Settlement with Creditors: A sick unit is normally in straitened financial circumstances and is not able to honour its commitments to its creditors (financial institutions, debenture holders, commercial banks, suppliers, and governmental authorities). To alleviate its financial distress, a settlement scheme has to be worked out which may involve one or more of the following: rescheduling of principal and interest payment; waiver of interest; conversion of debt into equity; payment of arrears in installments. Provision of Additional Capital: Typically, a revival programme entails provision of additional capital. This may be required for modernization and repair of plant and machinery, for purchase
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of balancing equipment, for sustaining a new marketing drive, and for enhanced working capital needed to support a higher level of operations. The additional capital has to be provided on concessional terms, at least for the initial years, so that the financial burden on the unit is not high. Divestment and Disposal: The revival programme may involve divestment of unprofitable plants and operations and disposal of slow moving and obsolete stocks. The thrust of these actions should be to strengthen the liquidity of the unit and facilitate reallocation of resources for enhancing the profitability of the unit. Reformulation of Product?market strategy: Many a business failures can be traced to an ill? conceived product?market strategy. For reviving a sick unit, its product?market strategy may have to be significantly reformulated to improve the prospects of its profitable recovery. This, of course, calls for a great deal of imagination and penetrating analysis. Modernization of Plant and Machinery: In order to improve manufacturing efficiency, plant and machinery may have to be modernized, renovated, and repaired. This may be essential for attaining certain cost standards and quality norms for competing effectively in the market place. Reduction in Manpower: Generally, sick firms tend to be over?staffed. The revival programme must seek to reduce superfluous manpower. Strict control over costs: A profitable organization can afford wastefulness and laxity in its expenditures. A tottering firm, seeking to regain its health and vigour, has to exercise strict control over its costs, particularly over its discretionary expenses. A zero?base review of all the discretionary expenses may be undertaken to eliminate programmes and activities which are a drain on the finances of the firm. Streaming of Operations: Manufacturing, purchasing, and selling operations have to be meticulously examined so that they can be streamlines. Value engineering, standardization, simplification, cost?benefit analysis, and other approached should be exploited fully to improve the efficiency of the operations. Improvement in Managerial Systems: The managerial systems in the unit must be strengthened. In this exercise, greater attention may have to be paid to the following: • • • • • Environmental monitoring Organizational structure Responsibility accounting Management information system Budgetary control
Workers’ Participation: In general, workers’ participation in management enhances employee commitment, motivation, and morale. Further, the suggestions offered by the workers result in improvements that lead to higher manufacturing efficiency and productivity. A sick organization, which is being revived, can perhaps benefit even more from workers’ participation in management. During the revival phase, the dedication, commitment, and support of workers is indispensable and meaningful workers’ participation and involvement goes a long way in ensuring this.
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Change in Management: A change in management may be necessary where the present management is dishonest and/or incompetent. It has been observed that a new chief executive, who is incompetent, committed, and up righteous, can often bring about dramatic results. Merger with a Healthy Company: If a sick firm cannot pull itself by its own bootstraps, the option of merger with a healthy firm must be seriously explored. The healthy firm can leverage its resources to revive the sick firm. PREPARATION AND SANCTION OF SCHEME FOR REVIVAL Once a company has been found sick, the BIFR may grant time to the sick company to enable it to make its net worth positive and bring the company out of sickness, without any external financial assistance. If it is found infeasible for company to make its net worth positive without any external financial assistance, or if the BIFR decides that the company cannot make its net worth positive within a reasonable time, then the Board appoints an operating agency under section 17(3) of the Act, then the operating agency is required to prepare and submit a schedule in respect of the referred company by providing any or more of the following measures: i. Financial Reconstruction of the sick industrial company; ii. The proper management of the sick industrial company by change in, or takeover of, the management of the sick industrial company; iii. Amalgamation with another company or vice?versa; iv. Sale or lease of its undertaking; v. Rationalization of its staff; vi. Any other preventive or remedial measures; and vii. Incidental or consequential measures. REHABILITATION BY GIVING FINANCIAL ASSISTANCE When an industrial unit is identified as sick, a viability study should be conducted to assess whether the unit can be revived/rehabilitated within a reasonable period. If the viability study suggests that the unit can be rehabilitated, a suitable plan for rehabilitation must be formulated. If the viability study indicated that the unit is “better dead than alive”, steps must be taken to liquidate it expeditiously On submission of the revival package by the operating agency, the BIFR sends the revival package in a draft form to all the interested parties (i.e., the sick industrial company, the banks/ financial institutions who have given financial assistance to the sick company, the operating agency, the transferee company (if there is a recommendation in the revival package for amalgamation) etc., eliciting their views/suggestions on the revival package. The BIFR will also publish particulars of the draft revival package in newspapers inviting suggestions/objections, if any, from the shareholders of the sick company, creditors and employees of the sick company, transferee company and any other interested party. On receipt of views/suggestions/objections on the draft revival scheme, the BIFR may, if deemed fit; afford an opportunity to the interested parties to be heard. After careful examination of all the aspects, the BIFR will sanction the
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revival scheme with or without any modifications. Measures Taken by Government for Revival • • • • • Takeover of the Management Amalgamation with Healthy Units Excise Loans Setting up of Industrial Investment Bank of India (IIBI) Margin Money Scheme: In June 1987, government introduced a scheme known as Margin Money Scheme. Under this scheme, liberal financial assistance was granted to small sick industrial units, at low rate of interest and at lesser security. Establishment of National Company Law Tribunal
•
Measures Taken by Banks for Revival • • • • • • Recovery of interest at reduced rates. Grant of additional working capital to overcome the shortage of working capital. Writing off the whole or the part of accrued interest. Setting up a Sick Industrial Undertakings Cell in Reserve Bank of India to obtain timely information regarding sick units. Setting up a special cell in Industrial Development Bank of India (IDBI) to identify and solve the problem areas of sick units. Reserve Bank issued guidelines to the banks with a view to ensure that the potentially viable sick units in small scale industries sector get due attention and timely support.
SHORTCOMINGS OF SICA • The functioning of SICA proved inadequate to cater to the needs of the sick units. The reasons of sickness can be outlined as poor and slow functioning of BIFR, abuse of Section 22, delay in Winding up Procedure and defective Policy and inadequate strength of BIFR.
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COMPANIES BILL, 2009 • Certain changes were proposed to be made for the rehabilitation and revival of the sick units as from the proposed Companies Amendment Act, 1956.The criteria of sickness was changed to include ‘inability to pay debts’ due to secured creditors representing 50% or more of the outstanding debt. Further the scope of the filing for the determination of sickness which was restricted to the Board now included the creditor or the company. Even powers were granted to the creditors to decide on the issue of winding up or the revival of the company by passing a special majority among the creditors. Moreover, the greater powers have been conferred on the creditors to supervise a rescue plan and restrict the powers of management in the rehabilitation of a sick company. RECOMMENDATIONS OF THE JJ IRANI COMMITTEE ON COMPANY LAW (2005) JJ Irani Committee wanted to omit the term ‘sick industrial company’ and replace it with ‘insolvent company’ and thereby erase the sickness test on the basis of erosion of net worth with that of the liquidity test. Moreover, it recommended that CA/CS/CWA/law professionals should play an active role in the insolvency process so that there would be expertise persons dealing with the specialized, commercial and technical characteristics of insolvency law. It also recommended the establishment of the National Company Law Tribunal on a speedy basis. Further, it enunciated that the rehabilitation by cess to be replaced by the ‘Insolvency Fund” with optional contribution by companies. It also allowed the debtors to approach the Tribunal with the rehabilitation scheme. Power was also given to the creditors to oppose the scheme of rehabilitation
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CASE STUDY: ANDHRA PRADESH PAPER MILLS In the late 1980s, Andhra Pradesh Paper mills was in straitened circumstances. Thanks to power cuts and others problems, its production was low and it was incurring losses of nearly Rs. 5 million every month in 1988. Somanis, the controlling group, brought M.V.G. Rao who had a successful stint with Tamil Nadu Newsprint. Reputed for his turn around skills, M.V.G, Rao took a series of steps to rehabilitate the company. The key elements of the turnaround strategy were as follows: • • • • • Accumulated inventories were disposed to generate Rs. 30 million. Two more diesel generators, each having a capacity of 1000 KVA, were purchased. This helped in raising production from 3,000 tonnes to 7,500 tonnes per month. Bamboo, an expensive raw material, was substantially replaced by hardwood, a cheaper raw material. A number of highly skilled employees were inducted from Tamil Nadu Newsprint Project. The workers union was taken into confidence by open and plain speaking.
These actions paid off. Andhra Pradesh Paper Mills, regarded by many observers as a hopeless case, emerged from the shadows of bankruptcy. By 1990?91 the company was turned around. A turnaround situation represents an unusual phase in the life history of a firm and requires a very different approach to management as compared to a normal situation. The key elements found commonly in turnarounds are: • • • •
A change in top management A substantial involvement of top management in the day?to?day operations An emphasis on projects that have a quick payoff. Opportunistic action, improvisation, crisis management, and short?term expediency.
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CONCLUSION AND SUGGESTIONS Industrial sickness is a problem all economies big and small have to face. What is important is to evolve a proper regulatory and institutional mechanism to deal with the situation. While there should be a mechanism to safeguard the interests of workers, a suitable exit policy for the non? viable units should form an integral part of the new approach. A stringent mechanism should also be devised so that the directors of the company should not play fraud on the unit to bring it within the purview of sickness. NCLT should also be made to come into force to ensure speedy disposal of cases looking into the sluggishness of the disposal of cases by BIFR. The approach of the government towards rehabilitation of a sick unit being very selective, the government is now convinced that there is no point in throwing away further resources in support of the units which are irretrievably sick. Only such units which are found to be potentially viable need to be taken up for formulation of rehabilitation packages to restore them to health. Package consisting of concessions from banks, financial institutions, government (Central/State), government agencies, shareholders, labour, and suppliers of goods should be provided to those units where chances are subsisting for the revival of the sick unit. The enactment instead of fruitful it proved burdensome on the healthy companies. The rehabilitation fund are created by imposing tax on the good working companies which puts additional burden on them without their own fault. The Parliament itself is not sure whether rehabilitation should be given to the sick company which is evident from the act of the parliament itself. Parliament repealed the very first enactment of SICA after seventeen years just because it did not confirmed the purposes set out in the enactment and inserted few sections in the companies Act, 1956. Sick industrial company should be left on their own condition and let the market forces to decide the fate of the company. Government should refrain itself from intervention. If at all government wants to do fruitful help for the industrial company, it should help taking the affairs of the industrial company in its own hand for a particular period of time. REFERENCES 1. Financial Management by Prasanna Chandra – Chap. 38 2. http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=10523 3. http://www.taxmann.com
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