Entrepreneurship - Industrial Sickness

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INDEX

NO SUBJECT PAGE NO

1 Industrial Sickness 1

2 Indian Scenario 2

3 Composition of Industrial Sickness 6-11

Industry wise Distribution Of Industrial Sickness 6

State-wise Distribution Of Industrial Sickness 8

4 Causes of Industrial Sickness 12-18

Internal Causes 12

External Causes 15

RBI Study on Industrial Sickness 17

5 Consequence of Industrial Sickness 19

6 Sick Industrial Companies Act (SICA) 20-26

Objectives of SICA 21

Important Provision of SICA 22

7 Symptoms of Industrial Sickness 27


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8 Rehabilitation of Sick Unit 28-32

Government measure to deal with Industrial Sickness 28

Revival Programme 30

9 Board for Industrial and Financial Reconstruction 33-38

Introduction of BIFR 33

Performance Review of BIFR 37

10 Case Study Of Mafatlal Industries Ltd (MIL) 39-45

Brief History of MIL 39

Declaration of MIL as a Sick Unit by BIFR 41

Rehabilitation Scheme for Revival of MIL by IDBI 42

Sectioned Rehabilitation Scheme of MIL 44

11 Sources Of Information 46


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INDUSTRIAL SICKNESS

In the recent years, one of the most important problems faced by the Indian companies

is the problems of growing Industrial Sickness. The incidence of Industrial Sickness is

face not only by small scale Industries but also by medium and large scale Industries.

The impact of sickness has been cause of considerable concern to Workers,

Government, Financial Institutions and Banks, and also to the Community at large.

In the simple terms Industrial Sickness is a unit or a firm which continuously making

losses and the accumulated losses equal or exceeds its assets.

The definition of Industrial sickness is given by various institutions are as follows:

The RBI defines the sickness as " An Industrial unit is regarded as sick if it

has incurred cash losses for one year, and in the judgement of financing bank is

likely to incur cash losses for the current as well as following year and/or

there is imbalance in the unit's financial structure, that is, when current ratio is

less than 1:1 and worsening debt equity ratio."

The S.B.I. defined a sick unit as As a unit which fails to generate internal

surpluss on a continuing basis and is depended for its survival on frequent

infusion of external funds.

The Companies (second amendment) Act, 2002 define a sick company as one :

A) which has accumulated losses in any financial year equal to fifty percent or

more of 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

An examination of the above definitions suggests that financial performance of a

particular company gives an idea whether a company is sick or not. Financial

performance of company reflects not only every action of company but also impact of

external factors. Company should able to meet its current obligation from its income; if

company is not able to generate sufficient cash to meet cash expenses then company is

going towards sickness.

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Industrial Sickness and Rehabilitation


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INDIAN SCENARIO OF INDUTRAIAL SICKNESS

In recent years, the incidence of Industrial Sickness is on the rise both in large scale

and small scale sectors. Industrial sickness is one of the persisting problems in India

and magnitude of Industrial Sickness has increased during the last two decades. In

India, Industrial Sickness increased at an alarming rate in the 1980's and has also

increased in the 1990's particularly in the small scale sector.

Small Scale industry in India is defined on the basis of investment in plant and

machinery. The investment limits varied over the passage of time. This limit was Rs. 35

lakhs from 1985-86 to 1990-91 and Rs. 60 lakhs from 1991-92 as of today. Similarly,

the small scale ancillary units are defined as having investment in plant & machinery

below Rs. 75 lakhs. As of today a small scale industrial (SSI) unit is one in which

investment on plant and machinery is limited to a maximum of Rs. 3 crore. A 'tiny'

industrial unit is one in which investment in plant and machinery is limited to a maximum

of Rs. 25 lacs. The incidence of sickness in the small scale sector is a matter of serious

concern in India.

In December 1980, there were 1,401 sick units in the non S.S.I sector and 23,149 sick

units in the S.S.I sector. Thus, the total number of sick units in December 1980 was24,550. Outstanding bank credit at that period amounted to Rs.1520 crore in the non

S.S.I sick units, and Rs.306 crore at the end of December 1980. SSI sick units which

accounted for 94% of the total incidence of industrial sickness in 1980 have increased

their share to 99% in the overall profile of industrial sickness in 1990. On the other side

large and medium scale sick units account for only 1% of the total incidence of

sickness. But in terms of locked up bank credit, they represent 75% of the total bank

credit outstanding from all sick units. On the other hand, the locked up bank credit in the

small scale sick units which constitute 99% of the total incidence of sickness, represent

only 25% of the total bank credit outstanding from all sick units. Again, of the identified

SSI sick units, 92% are found to be unviable.


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Industrial Sickness and RehabilitationIndustrial Sickness and Rehabilitation

A number of studies were conducted to determine the relative importance of different

factors in the causation of sickness of the industrial units in India. One study was

conducted in 1990 to examine the causes of sickness in the new SSI units. It was found

that marketing problems as a whole (resulting from highly competitive markets,

unfavourable linkage with ancillary and medium units etc.) were the most important

factor (29.6%) for sickness in the group followed by mismanagement (21.9%),

inadequacy of working capital (16.6%), time overrun (13.4%) and govt. policy (11%).

The total weight of all external causal factors for the group is 59.2 and that of internal

and that of internal causal factor 40.8. It appears that external causal factors are

dominant in causing sickness in the new SSIs than internal causal factors.

The bank finance locked up in sick units at end of march 1993 was Rs.13,134 crores

indicating an increase of about 4.97% in a period of four years. As of march 1995,

according to a report in Business Line newspaper, there were more than 2,71,000 sick

industrial units in India with outstanding bank credit of Rs.13,739 crores. Of these

,99% companies belonged to the Small Scale Industries.

These sick companies accounted for 6.7 per cent of the total bank credit and 13.3 per

cent of the total bank advances to industry. However, the ratios were significantly lower

than in the preceding two years , it adds. The share of the small-

scale industry in the list of sick units was at more than 99 %. This was despite a

positive growth rate of the small-scale sector during the year. Let this statistics however

not cloud the fact that the growth of the small-scale sector in India is usually above the

growth rates achieved by the industrial sector as a whole.

Data regards industry-wise classification of sickness and state-wise classification of

industrial sickness are available from the RBI report on currency and finance. The data

reveal that in five industries namely textile, iron and steel, engineering, electrical and

chemicals, non SSI sick units accounted for about 56% of total outstanding bank credit

at the end of march, 1997 while non SSI weak units in these industries accounted for

58% of total outstanding bank credit at the end of march,1997.

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Industrial sickness in India at the end of March 1997

Category No. sick units Total bank finance Loaned andlocked up

Rs in crore % of total

Non SSI sick units 1,848 8,614 62.5

Non SSI weak units 420 1,564 11.3

SSI sick units 2,35,032 3,609 26.2

Total 2,374,400 13,787 100

If non-SSI sick and weak units are taken together, then these five industries accounted

for 58.5% of the total outstanding bank credit at the end of March, 1997. State-wise

analysis shows that seven industrially advanced states, namely, Maharashtra, West-

Bengal, Andhra Pradesh, Gujarat, Utter Pradesh, Tamil Nadu and Karnataka taken

together accounted for 71% of the total number of non SSI sick units and 74.2% of the

total outstanding bank credit at the end of march, 1997. As regards the non SSI weak

units these states accounted for 66.4% of the total number of weak units and 71.4% of

the total outstanding bank credit at the end of March, 1997. As regards the SSI sick

units 57% of the total number of sick units and 72% of the total outstanding bank credit

of such units was concentrated in these seven industrially advanced states at the end of

March, 1997.

In march 2003 there were 29,109 sick units in the non SSI sector and 1,67,980 sick

units in the SSI sector, totaling 1,71,376. Outstanding bank credit at the end of march

2003 was Rs.29,109 crore in the non SSI sick units and Rs. 5706 crore in the SSI sick

units, totaling Rs. 34,815 crore.

The main reason for the good performance of the industrial sector during the eighties

was starting of the liberalisation process and a number of policy measures including

changes in the areas of licensing and procedures, import of technology and capital

goods coupled with a reasonable rate of public investment and almost total protection to

domestic industries from international competition through quantitative restrictions on

imports as well as high tariff rates.


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With the launching of the new economic policy during the nineties, the protective

barriers for the Indian industry started getting dismantled one by one. The average

annual growth rate of the industrial sector including mining, manufacturing and

electricity generation slumped to 0.6%in 1990-91 as a short-term response to the reform

process. However, in a few years the overall rate of industrial growth gradually

recovered. It increased from 2.3% in 1992-93 to 6.0% in 1993-94, 9.4% in 1994-95 and

12.1% in 1995-96. Since 1996-97, however, there was a decline in the growth rate of

industrial production and it may be less than 5% during the financial year 1998-99.

Govt. Concessions and Incentives for the SSI Sector

To reduce the cases of industrial sickness in SSI sector, The Government of India

provided various concessions and incentives to the SSI sector for their sustained

growth, which have briefly been outlined here as under:

Assisting new SSI units on soft terms by lending

institutions, Reservation of Certain Industries for the SSI

sector,

Incentives related to land/shed financing, machinery and raw-materials,

Provision of facilities within the Industrial Estates, and

Excise duty exemption and price preference


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Composition of Industrial Sickness

A)Indu st ry-wise Dist r ibut ion o f Sick Uni ts :

An industry wise study showed that the composition of sickness has not changed much.

Most of the sick units in the 1980s were from textiles, metals and chemicals sectors.

Both IDBI and BIFR data are in general agreement regarding the top four industries on

the sickness map. The shares of each industry as per the IDBI reports and BIFR

records are given in Tables 1 and 2. The jute industry figured prominently in terms of its

share of workers displaced, even though it accounted for very few sick units and

accumulated losses. Similarly, BIFR records place the fertiliser industry in terms of

accumulated losses, even though it accounts for less than 1 per cent of the total

number of sick units.

Table 1 Industry Share In Total No. of Sick Units and Amount Blocked 1994-2002

Industry % share in No. of Sick Unit % Share in Amount Blocked

Textile 25.5 11.4

Metals 15.6 17.3

Chemicals and Products 15 13.7

Food Products 9.5 4.2

Electricals 7.3 3.4

Services 5.3 4.5

Paper 5.2 2.9

Transport Equipments 5 2.8

Machinery 4.7 2.4

Cement 4.3 6

Electricity 2.1 18.2

Fertiliser 2.1 2.8

Sources: IDBI Report on Development Banking

IDBI reports puts power projects as the main contender in the amount blocked. In the

food products division, sugar and vanaspati and vegetable oils together accounted for

around 70 per cent of the amount blocked and 50 per cent of the number of units.

Similarly, drugs and pharmaceuticals constitute around one-third of the total sick units


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in the chemicals sector, proclaiming a crisis in the pharmaceuticals division marred by

skewed patent regimes. A time series plot shows a sudden upsurge in 1997 in all these

sectors. Besides, 85 service sector units also appeared on the sickness map given by

IDBI, in 1997.

Industries that figured prominently on the sickness map are those that received lesser

assistance from financial institutions during the decade. Yet it cannot be stated

emphatically that sickness in these industries was due to decreased flow of financial

assistance, given that the composition of sick industries has not changed in the pre- and

post-reform periods. The causality can be the other way round. The dismal performance

of these units must have forced FIs to reduce their assistance to them in the wake of

increased efforts to cut down their NPAs. If the declining D/S ratio (amountdisbursed/amount sanctioned, which fell from 80 per cent in 1986 to 62 per cent in

2001) can be taken as an indicator of stricter scrutiny of investment proposals and an

even stricter project follow-up, it can be said that the poor performance of these

industries led to their lower share in the total assistance funds.

Table 2 Industry Share In Total No. of Sick Units and Amount Blocked 1987-2002

Industry

% share in

No. of Sick

Unit

% Share in

Net worth of

sick units

% Share in

Accumulated

Losses

% Share Workers

Displaced

Textile 17.81 13.66 15.16 26.41

Metals 15.84 14.14 14.61 8.28

Chemicals and Products 12.58 12.65 12.04 5.48

Food Products 10.15 7.4 6.92 4.41

Electricals 6.14 5.24 6.69 323

Paper and Pulp 5.77 2.31 2.16 2.81

Rubber Goods 1.6 0.88 0.85 0.5

Transport 1.51 1.34 1.52 1.62

Jute 1.23 0.27 0.99 6.7

Leather and Leather Goods 1.16 1.69 1.52 0.47

Fertiliser 0.86 5.62 6.92 0.85

Sources: BIFR


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B)State-w ise Distr ibut ion of Sick Units :

In the 1980s, Maharashtra, Gujarat and West Bengal figured prominently in terms of

the number of sick units as well as amount blocked. However, the post-reform period

points to the entry of Andhra Pradesh and Tamil Nadu into the top three or four

positions in terms of the largest number of sick units. This is so in both BIFR and IDBI

data, for all the time periods mentioned. IDBI data also establish their predominance in

the amount blocked. According to IDBI records, till 2001 Andhra Pradesh had the

highest figure of amount outstanding in sick units in 2002 it was pushed to the second

place. Tamil Nadu comes in fourth However; BIFR records that cover the period 1987-

2002 do not place these two states in any significant position with regard to the

economic burden of sickness.

Table 3 Share of States and Regions in Distribution of Sickness 31 Dec. 2002

STATE% of Sick

Units

% Share in Net-

worth of Sick

Units

% Share in Total

Losses

% Share

Workers

Displaced

Maharashtra 20 22 21 12

Tamil Nadu 10 6 6 6

Andhra Pradesh 10 6 6 9

Gujarat 9 10 10 9

Uttar Pradesh 8 6 6 7

West Bengal 7 17 15 26

NCT Delhi 5 9 9 3

Karnataka 5 3 3 4

Bihar 2 5 8 12

Northern Region 26 24 22 16

South Region 28 16 16 20

Western Region 34 36 35 24

Eastern Region 12 25 26 40

Sources : BIFR

Apart from this, BIFR data series provides a region-wise analysis on employment, net

worth and accumulated losses of failed units. Just as industrialisation was localised,


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sickness is also localised. In the northern region, UP and Delhi accounted for around

60-63 per cent of sick units and accumulated losses. UP alone has 46 per cent of the

workers displaced. The share of individual states in sickness represents an even higher

concentration in other regions. For instance, in the southern region Tamil Nadu and

Andhra Pradesh together accounted for 71 per cent of the total sick units and 74 per

cent of accumulated losses. Andhra Pradesh alone has 35 per cent of the sick units and

36 per cent of the accumulated losses. Tamil Nadu contributes 36 per cent of sick units

and 37 per cent of the accumulated losses in this region. However, 44 per cent of the

workers displaced are from AP. In the eastern region, West Bengal dominates with 65

per cent of the sick units and unemployed workers and 57 per cent of losses. Next

comes Bihar, which accounts for 16 per cent of units and 30 per cent of accumulated

losses. This can be due to the greater presence of sick PSUs in Bihar. These two

states, account for 83-86 per cent of the sickness in the eastern region. In the western

region, Maharashtra leads, followed by Gujarat, with around 57 per cent and 26 per cent

respectively in terms of the number of sick units. These two states were together

account for 83 per cent of the sick units and 86 per cent of the accumulated losses

respectively.

Though the southern states, mainly AP and TN, had made an entry into the sickness

map in terms of the number of units, BIFR records show that their share in the

economic loss is the least for the whole of India. Surprisingly, the eastern region, with

the left-oriented, labour protective West Bengal has contributed to around 40 per cent of

the workers displaced, in spite of having only 12 per cent the total number of sick units.

This has happened because of the failure of big projects. This should be a matter of

concern for the West Bengal government.

The traditional seats of sickness Maharashtra, Gujarat and West Bengal figure high

in BIFR data series, due to the wider time range. Also, the capital intensity of the

projects (which are reflected in the net worth of companies) that have gone bust is quite

high for these states, resulting in their having a larger share of accumulated losses and

workers displaced. Bihar, for instance, figures in the top-five list in terms of economic


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losses, though the numbers of units constitute just 2 per cent of the total sick units. A

comparative ranking of states as per the two data set of IDBI and BIFR are given in

Tables 4.

Table 4 State Ranking According to No. of Sick Units and Amount Blocked

As Per IDBI and BIFR Data

STATE

Number Of Units Amount Wise

BIFR IDBI BIFR IDBI BIFR

1987-2002 1994-2002 1994-2001 1994-2002 1987-2002

Maharashtra 1 1 1 1 1

Andhra Pradesh 2 2 3 2 8

Tamil Nadu 3 4 2 6 7

Gujarat 4 3 4 3 3

Uttar Pradesh 5 5 5 4 6

West Bengal 6 8 7 10 2

Karnataka 7 9 9 9 10

NCT Delhi 8 N.A 6 N.A 4

Madhya Pradesh 9 6 8 8 8

Rajasthan 10 7 10 7 9

Bihar - Very low - Very Low 5

Punjab low 10 low 5 11

Sources : BIFR, IDBI Report on Development Banking

The growth rate of sick units over different time periods is shown in Table 5. The

supremacy of the southern states in the IDBI data is due to the severe shakeout that

took place in these states in association with recession, which is captured well in their

time period 1994- 2002. For instance, if we look at BIFR data, among states with a

significant share in the total number of sick units (Maharashtra, Andhra Pradesh, Tamil

Nadu, Gujarat and Uttar Pradesh), Tamil Nadu registered an annual growth rate of 99per cent during 1997- 2002, when the national average was just 41 per cent. Andhra

Pradesh occupies third position with 52 per cent. Similarly, when there was a 140 per

cent increase in 1997 from that in the previous year, at the national level, the

corresponding figure for AP and TN was 300 per cent and 480 per cent. This is greater

than the most industrialised state of Maharashtra. Thus, southern states were the worst


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hit during the shakeout of 1997. When the national average of sickness was around 18

per cent, (for 1991-2002, as given by BIFR), the average annual growth rate of

sickness for Tamil Nadu was 54 per cent. For AP, the corresponding figure was 20 per

cent. This shows that southern states that embraced the new policy reforms in spirit

and content were badly hit by the global recession.

Table 5 Average Annual Growth Rate Of Sick Units ( % )

STATE 1987-1991 1992-1996 1997-2002 1991-2002

Maharashtra -19 -9 62 26

Tamil Nadu -11 4 99 54

Andhra Pradesh -3 -13 52 20

Gujarat -27 26 35 24

Uttar Pradesh 56 1 25 41

West Bengal -28 9 75 37

NCT Delhi 13 -30 62 10

Karnataka -11 -14 60 23

Bihar 7 23 67 60

All India -15 -6 41 18

Sources : BIFR


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CAUSES OF INDUSTRIAL SICKNESS

Causes of industrial sickness are broadly divided into two main categories: one is

Internal factors (Endogenous Factors) and second is External factors (Exogenous

Factors). Internal factors are the factor which originates within the industrial unit and

therefore these factors are to a large extent under the control of the unit. On the other

side, External factors originate outside the industrial units and therefore they are not

under the control of the unit. Also, these factors are likely to affect all units in the

industry. Obviously, state action would be most necessary to deal with industrial

sickness when it is the result of External factors.

A) Internal Factors :

Internal factors are mainly arises due to managerial deficiencies. It means poor

management decisions and improper control over the affair of company leads to

industrial sickness. These decisions may be regarding to Production, Marketing,

Finance and Personnel department of Company, which are as follows:

1. Product ion Decis ion:Production Decisions are mainly concerned with location,

technology, plant & machinery, plant size etc. Inadequate decision regarding these

factor are:

Because of management select Improper Location, which leads to increase the

Transportation cost of raw-material and finished goods. Many times location does

not have good infrastructure facility as a result of that production cost increase.

Proper Technology should be able to produce quality product in line with the

expectation of the trends and demands of market. Against that if the company

adopts the Wrong Technology than it might be leads to reduction in sales and

increase in inventory.

Plant and machinery should be as per the technology and climate condition. If

company acquired Unsuitable Plant and Machinery than company is not able


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to use technology efficiently, which might be increase production cost and

decrease the quality of product.

As trends and preferences of the consumers changes, the company needs to

update the features of the product to meet the consumers expectation. If the

company is not given adequate Emphasis on Research and Development,

results company loose their customers.

2. Market ing Decision:Marketing Decisions are mainly concerned with Price,

Place, Promotion and Product. Inadequate decision regarding these factors are

The production schedule is depending on the demand projection of a product. If

Demand Projection is inaccurate then it would lead to under production or over

production against its actual demand.

If a company produces multi products then company should meet its demand of

each product in the market. If the company has Improper Product-mix then

company is not able to meet demand of various products, results overall sales of

the company would be lower.

Price of the product should be as per the market condition. If the company sets

Irrational Price then it will affect the sales, market position, and profit level of the

company.

Awareness of the product in the market is necessary for increasing the sales and

profit level. Inadequate Sales Promotion of the product leads to lower level of

demand despite of good quality of the product.

3. Financial Decisio n:Financial Decisions are mainly concerned with the capital

budget, cost of capital, cash planning and control, capital structure etc. Inadequate

decisions regarding these factors are

Capital structure of company shows various sources of long-term finance. If the

company has Wrong Capital Structure, then company might be face lots of

problems in term of returns to investors and repayment of principal.


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Capital Investment decision has an enormous bearing on the basic character of

the firm. It has long-term effects on the company. If the company takes Bad

Investment Decision then it will affect the future cash-flow of company and

investment decision can not be reversed without incurring a substantial loss.

One major technique of cost control is responsibility accounting. As every

manager knows their responsibility they can do their task better way. But if there

is Absence of Responsibility Accounting then manager can escape from bad

situation and that will lead to increase in the cost of project and production.

Company has to do proper cash planning so that it can manage the receipt and

payment of cash properly. If the company has Bad Cash Planning and Control

then company can not coordinate receipts and payments of cash. As result of

that, company might be required to pay penalty on late payment of dues.

To increase the sales, the company provides credit facility to their customer. As a

result, company needs efficient receivables management. If company has Poor

Management of Receivables then it will increase the probability of bad debt,

block of working capital and increase the requirement of cash to run the

business.

4. Person nel Decision:Personnel Decisions are mainly concerned with the labourrelations, human resources, over staffing etc. Inadequate decisions regarding these

factors are

Effective leadership helps employees to achieve their personnel goals in line with

companys goal. If employees face Ineffective Leadership from their leader or

supervisor that will affect moral of employees and that will be shown in their work.

As result, company will not able to achieve their targets.

Good relationship with labour can lead company to use their resourceseffectively. If the company has Bad Labour Relation then it will create many

problems like strikes, delay in production schedule etc. Consequently cost of

production will increase and company will not fulfill their order in time.

The company needs adequate human resources for execution of order in time

with minimum level of cost. If company has Inadequate Human Resources then

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company may faces problems in execution of order and it will increase the

workload of existing employees.

As inadequate human resources are bad for company, same way over staffing

creates problem for company. Over Staffing in the unit and/or in the company

increases remunerations of staff but not production, so that is one kind of burden

on company. It is also restrict company to use its resources effectively.

B) External Factors :

External factors arise from outside of the units. These factors are generally affects all

the units of particular industry and/or affect all the units of the Economy. The

management of company can not control these factors. As a result many times,

company can not implement long term project as per their planning. These factor mainly

divides into four broad category, which are as follows:

1. INDUSTRY SPECIFIC FACTORS:

These factors are related to stagnation or recession in the industry (e.g.: the textile

industry), competition faced by the unit (e.g.: small units, rayon grade, pulp unit) and

excess capacity in the industry (e.g.: the type of industry). Entry of MNC s and strict

quality and hygiene specifications prescribed and enforced by them has contributed to

the sickness of several firms, particularly in the SSI sector.

2. GOVERNMENT RELATED FACTOR:

These include tax burden on the unit , especially import duties and sales tax ; legal

restrictions on the units ; expansion/diversification ; frequent changes in government

policies effecting the unit ; liberal imports that compete with the units products ; the

Government or its agencies going back on its promises made to the unit ; poor law and

order situation etc


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3. FINANCIAL INSTITUTIONS RELATED FACTORS:

These include harshness in dealing with the unit; delay in providing finance to the unit;

inadequate working and / or long term capital provided by them and their inexpert

assessment of the clients finance proposal. Apart from these changes in interest Rate

pattern as per norms of RBI affect the company.

4. OTHERS:

Other external factors include customer resistance to the units products; erratic

availability of raw materials / components to the units e.g.; paper and sugar industries;

inadequate transport, .facilities available to the unit (e.g.: for transporting coal), etc

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RBI STUDY ON CAUSES OF INDUSTRIAL SICKNESS

A study conducted by Reserve Bank of India, which covered 378 units, on the cause of

industrial sickness revealed the following picture:

No. CAUSE

Number

of Units Percentage

1 Management and Managerial Deficiencies 197 52

2 Faulty Initial Planning and other technical drawback 52 14

3 Labour Trouble 9 2

4 Market Recession 86 23

5 Others (infrastructures, Raw Material Shortage etc) 34 9

Total 378 100

RBI Study Of Causes of Sickness

9%

23%

2%

14%

52%

Management and Managerial Deficiencies

Faulty Initial Planning and other technical drawback

Labour Trou\bule

Market Recession

Others (infrastructute, Raw Material Shortage etc)

The Reserve Bank of India on 378 medium and large sized sick industrial enterprises

enjoying credit limits of Rs. 1.00 crore and above revealed that 52% of the units fell sick


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due to management problem, 23% of the units went sick because of market recession,

14% for initial faulty planning, 9% for power-cuts, shortage of raw-materials, etc. and the

rest 2% became sick due to labour trouble.

The RBI study summed up the thrust of its findings as follows:

A broad generalisation regarding important causes of industrial sickness emerges. It is

observed that the factor most often responsible for industrial sickness can be defined as

'management'. This may take the form of poor production management, poor labour

management, lack of professionalism, dissensions within the management, or even

dishonest management.

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CONSEQUENCE OF INDUSTRIAL SICKNESS

The basic deficiency of such a system is that industrial sickness is treated as a financial

problem where the concerns of labour are by and large ignored.

However, the impact of industrial sickness on workers is outrageous. The immediate

fallout of sickness is default in payment of dues including those of workers. As a result

of accumulating losses and liquidity constraints, the workers are compelled to go

through a process of "belt-tightening" and are called upon to make sacrifices in order to

improve the viability and financial health of the enterprise. These sacrifices can be in the

form of exemption from wage awards existing as well as prospective, non-payment of

bonus, reduction in wages, postponement of annual increments, modification of serviceconditions, lay off without seeking court permission, retrenchment and lock-out of units.

It has several adverse consequences on the economy as a whole. Some of which may

be enumerated as follows:-

It leads to loss of substantial revenue to the Government and enhances its public

expenditure;

It locks up necessary resources and funds in the sick unit. This also increasesthe non-performing assets (NPAs) of banks and financial institutions;

It leads to loss of production and productivity in the economy;

It aggravates the problem of unemployment in the economy;

It vitiates the industrial atmosphere and leads to worker-management disputes,

strikes ,lockouts, etc;

It undermines the public confidence in the functioning of the Organised sector in

the country which in turn affects the overall investment climate of the economy.

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Sick Industrial Companies Act (SICA)

In the wake of sickness in the countrys industrial climate prevailing in the eighties, the

Government of India set up in 1981, a Committee of Experts under the Chairmanship of

Shri T.Tiwari to examine the matter and recommend suitable remedies therefore. Based

on the recommendations of the Committee, the Government of India enacted a special

legislation namely, the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of

1986) commonly known as the SICA. The Sick Industrial Companies (Special

Provisions) Act, 1985 (hereinafter called the Act) was enacted with a view to securing

the timely detection of sick and potential sick companies owning industrial undertakings,

the speedy determination by a body of experts of the preventive, ameliorative, remedial

and other measure which need to be taken with respect to such companies and the

expeditious enforcement of the measures so determined and for matters connected

therewith or incidental thereto.

Sick industrial unit is defined as a unit or a company (having been in existence for not

less than five years) which is found at the end of any financial year to have incurred

accumulated losses equal to or exceeding its entire net worth. The net worth is

calculated as sum total of paid up capital and free reserves of a company less the

provisions and expenses, as may be prescribed. An industrial unit is also regarded as

potentially sick or weak unit if at the end of any financial year, it has accumulated losses

equal to or exceeding 50 per cent of its average net worth in the immediately preceding

four financial years and has failed to repay debts to its creditor(s) in three consecutive

quarters on demand made in writing for such repayment.

In the light of the consequences of sickness and its growing incidence by size, region

and industry followed by its far-reaching adverse socio-economic effects, theGovernment has been taking many steps and remedial measures in order to tackle this

problem in India. The most significant measure has been the enactment of the Sick

Industrial Companies (Special Provisions) Act,1985 (SICA).

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Sick Industrial Companies (Special Provisions) Act, 1985

The most important piece of legislation dealing with industrial sickness was the Sick

Industrial Companies (Special Provisions) Act,1985 (SICA). It applies to industrial

undertakings both in the public and private sectors. SICA pertains to the industries

specified in the First Schedule to the Industries (Development and Regulation) Act,

1951, (IDR Act) subject to the exceptions specified in the Act. SICA, including any rules

or schemes made there under, had overriding provisions over other laws except the

provisions of the Foreign Exchange Regulation Act,1973 and the Urban Land (Ceiling

and Regulation) Act, 1976.

The basic rationale of enacting SICA was to determine sickness in the industrial units. It

also aimed at expediting the revival of potentially viable units so as to make the

investments in such units profitable. At the same time, to ensure the closure of unviable

units so as to release the investments locked up in such units for productive use

elsewhere.

OBJECTIVES OF SICA

The basic objective of Sick Industrial Companies (Special Provision) Act, 1985 are asfollows:

Timely detection of sick and potentially sick companies.

Speedy determination by a body of experts of the preventive, ameliorative, remedial

and other measures which need to be taken with respect to such companies.

The expeditious enforcement of the measures so determined and for all matters

connected therewith or incidental thereto.

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IMPORTMANT PROVISION OF SICA

The basic important provision of Sick Industrial Companies (Special Provision) Act,

1985 are as follows:

1. 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. While, AAIFR was constituted for hearing the appeals

against the orders of the BIFR.

2. BIFR would make an inquiry as it may deem fit for determining whether any

industrial company had become sick, under the following conditions:-

A. If the Board of Directors of a sick industrial company made a reference to the

BIFR for determination of the remedial measures with respect to their company.

Such reference was to be made within sixty days from the date of finalisation of

the duly audited accounts of the company for the financial year at the end of

which the company had become sick. For filing the reference, the Board of

Directors must have sufficient reasons to form the opinion that the company had

become sick; or

B. On receiving such information (reference) with respect to a sick company or upon

its own knowledge as to the financial condition of a company. Such a reference

to the board may be made by:- (i) The Central Government; (ii) The Reserve

Bank of India; (iii) State Governments; (iv) Public financial institutions; (v) State

level institutions; or (vi) Scheduled banks.

C. However, such a reference shall not be made in respect of any industrial

company by :- (i) the Government of any State, unless all or any of the industrial

undertakings (belonging to such a company) were situated in that State; (ii) a

public financial institution or a State level institution or a scheduled bank, unless it

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had, by reason of any financial assistance or obligation rendered by it or

undertaken by it, interest in such a company. The Board may order any operating

agency to enquire into the matter and complete the inquiry as expeditiously as

possible.

3. If the Board deems it fit to make an inquiry or to cause an inquiry to be made into

any industrial company, it may appoint one or more persons as special director(s) of

the company for safeguarding the financial and other interests of the company. The

appointment of a special director shall be valid and effective notwithstanding

anything to the contrary contained in the Companies Act, 1956 or in any other law

for the time being in force or in the memorandum and articles of association or any

other instrument relating to the industrial company.

Any special director so appointed shall :- (i) hold office during the pleasure of the

Board and may be removed or substituted by any person by order in writing by the

Board; (ii) not incur any obligation or liability by reason only of his being a director or

for anything done or omitted to be done in good faith in the discharge of his duties

as a director or anything in relation thereto; (iii) not be liable to retirement by rotation

and shall not be taken into account for computing the number of directors liable tosuch retirement; (iv) not be liable to be prosecuted under any law for anything, done

or omitted to be done in good faith in the discharge of his duties in relation to the

sick industrial company.

4. If after making an inquiry, the Board is satisfied that the company has become sick,

it shall, after considering all the relevant facts and circumstances of the case, may

take either of the following decisions:-

A. If the Board decides that it is practicable, it shall, by order in writing and subject

to such restrictions or conditions as may be specified in the order, give such time

to the company as it may deem fit to make its net worth exceed the accumulated

losses.

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B. If the Board decides that it is not practicable for the sick company to make its net

worth exceed the accumulated losses within a reasonable time and that it is

necessary or expedient in the public interest to adopt all or any of the measures

in relation to the said company, it may, as soon as may be, by order in writing,

direct any operating agency specified in the order to prepare a scheme providing

for such measures in relation to that company. The measures may include:-

i. The financial reconstruction of the sick industrial company;

ii. The proper management of the sick industrial company by change in or take

over of the management of the company;

iii. The amalgamation of the sick industrial company with any other company

(transferee company), or any other company with the sick industrial company

(transferee company);

iv. The sale or lease of a part or whole of the sick industrial company;

v. Such other preventive, ameliorative and remedial measures as may be

appropriate;

vi. Such incidental, consequential or supplemental measures as may be

necessary or expedient in connection with or for the purposes of the

measures specified above.

C. If the Board is of the opinion that the sick industrial company is not likely to make

its net worth exceed the accumulated losses within a reasonable time while

meeting all its financial obligations and that the company as a result thereof is not

likely to become viable in future and that it is just and equitable that the company

should be wound up, it may record and forward its opinion to the concerned High

Court. The High Court shall, on the basis of the opinion of the Board, order

winding-up of the sick industrial company in accordance with the provisions of the

Companies Act, 1956.

5. Where in respect of an industrial company, an inquiry is pending, or any scheme

referred is under preparation or consideration or a sanctioned scheme is under

implementation, then no proceedings for the winding-up of the industrial company or

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for execution, distress or the like against any of the properties of the industrial

company shall be made. Also, no suit for the recovery of money or for the

enforcement of any security against the industrial company or of any guarantee in

respect of any loans, or advance granted to the industrial company shall lie or be

proceeded with further, except with the consent of the Board or, as the case may

be, the Appellate Authority.

A. Also with respect to the above conditions, the Board may by order declare with

respect to the sick industrial company concerned that the operation of all or any

of the contracts, assurances of property, agreements, settlements, awards,

standing orders or other instruments in force, to which such sick industrial

company is a party or which may be applicable to such sick industrial company

immediately before the date of such order, shall remain suspended or that all or

any of the rights, privileges, obligations and liabilities accruing or arising there

under before the said date, shall remain suspended or shall be enforceable with

such adaptations and in such manner as may be specified by the Board.

B. However, such declaration shall not be made for a period exceeding two years,

which may be extended by one year at a time so that the total period shall not

exceed seven years in the aggregate.

6. 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. No court

shall take cognizance of any offence mentioned except on a complaint in writing of

the secretary or any such other officer of the Board or the Appellate Authority or any

such officer of an operating agency as may be authorised in this behalf by the

Board or the Appellate Authority.

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 and plugged certain loopholes. It aimed not

only to combat industrial sickness but also to reduce the same by ensuring that

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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.

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SYMPTOMS OF INDUSTRIAL SICKNESS

Sickness does not occur overnight, but develops gradually overtime. A firm which is

becoming sick shows symptoms which indicate that trouble lies ahead of it. Some of thecommon symptoms are:

Delay or default in payment to suppliers

Irregularity in the bank account

Continuous irregularity in cash credit accounts

Delay or default in payment to banks and financial institutions

Non-submission of information to banks and financial institutions.

Frequent requests to banks and financial institutions for additional credit.

Decline in capacity utilisation.

Poor maintenance of plant and machinery

Low turnover of assets

profit fluctuations, downward sales and fall in profits followed by contraction in

the share market

Accumulation of inventories

Inability to take trade discount

Excessive turnover of personnel

Extention of accounting period

Decline in the price of equity shares and debentures

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REHABILITATION OF SICK UNITS

As a company declares a sick unit, it will affects society and economy of country. Many

times due to managerial deficiencies company unable to perform as per its capacity and

as a result it becomes sick units. Some of the sick unit can be revive by taking some

necessary step. The company can be from any of following option

Company can revive from Government Measure which provide by Government

to deal with Problems of Sickness

Company can Use various REVIVAL PROGRAMME which will help company to

revive by its own effort.

The company can take help of Board for Industrial and Financial

Reconstruction (BIFR) for the turn around of bad situation.

Govt. Measures to deal with the Problem of Industrial Sickness:

As increase in no. of sick units in SSI and Non-SSI sectors in India, Government of

India realised to take steps to prevent the problem of Industrial Sickness. Various

measures have been initiated by the Govt. of India in order to deal with the problem of

sickness in industries briefly described here.

The RBI set up a Sick Industrial Undertaking Cell to monitor the performance of the

banks in identifying the sick units and initiating appropriate remedial measures, and

to co-ordinate the efforts of banks, financial institutions, Govt. and other agencies

involved.

RBI advised banks to take urgent measures to set up Special Sick Unit Cells tocarryout periodical inspection and to undertake diagnostic studies for techno-

economic viability.

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The Ministry of Finance of the Govt. of India and RBI provides supportive measures

for rehabilitation of viable sick units in terms of relief in excise arrears, reduction in

interest rate on term loans and waiver of penalty applied to cash credit facility.

The Industrial Reconstruction Corporation of India (IRCI) was set up by the Govt. of

India for industrial revival and rehabilitation of sick and closed industrial units.

Sick Industrial Companies (Special Provisions) Act (1985), was enacted in 1987 as a

landmark in Govt. Policy to combat the problem of sickness. Under this Act, the

Board for Industrial and financial Reconstruction (BIFR) came into being with vast

powers aimed at assessment and implementation of revival plans for the sick

industrial companies. However, this Act has no applicability for the sick SSI units.

However, different studies revealed that in some cases liberal policies for the growthof the small industry sector were counter-productive in terms of affecting the viability

through unhealthy growth and inefficiency of the units. On the other hand, the

measures aimed at revival of sick industries could not achieve a desired

breakthrough in curbing the magnitude of sickness due to their inadequacies and

implementation bottlenecks.

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REVIVAL PROGRAMME

When an Industrial unit is identified as sick, a viability study should be conducted to

assess weather the unit can be revived/ rehabilitated within a reasonable period. If the

viability study suggests that the unit can be rehabilitated, the following revival

programme should be conducted by the Industry.

1. Settlement with Creditors :

A sick unit is normally in straitened financial circumstances and is not able to honour

its commitments to its creditors like financial institutions, debenture holders,

commercial banks, suppliers and governmental authorities. To alleviate its financialdistress. A settlement scheme has to be worked out which may involve one or more of

the following: rescheduling of principle and interest payment, waiver of interest,

conversion of debt into equity, payment of arrears in installments.

2. Provision of Additional Capital :

Typically, a revival programme entails provision of additional capital. This may be

required for modernisation and repair of plant and machinery, for purchase of

balancing equipment, for sustaining 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.

3. 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.

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4. Modernisation of Plant and Machinery :

In order to improve manufacturing efficiency, plant and machinery may have to

modernised, renovated, and repaired. This may be essential for attaining certain cost

standards and quality norms for completing effectively in the market place.

5. Reduction in Manpower :

Generally, sick firms tend to be over staffed. The revival programme must seek to

reduce superfluous manpower. Remember an old managerial saw: " the leaner the

organisation, the greater are its chances of survival." Often a ' golden handshake

involving paying significant retrenchment compensation is a better preposition than

carrying redundant manpower on the payroll of the unit.

6. Strict Control over Cost :

A profitable organisation 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 progrmmes and activities

which are a drain on the finances of the firm.

7. 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

Organisational structure

Responsibility accounting

Management Information system

Budgetary control


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8. Change of 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

competent, committed, and uprighteous, can often bring about dramatic results. The

classic example of this phenomenon was the dramatic turnaround of Chrysler

Corporation under the stewardship of Lee Iacocca.

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BOARD FOR INDUSTRIAL AND FINANCIAL

RECONSTRUCTION

The Government of India, in order to tackle the problem of industrial sickness, had set

up a Board for Industrial and Financial Reconstruction (BIFR), under the purview of Sick

Industrial Companies (Special Provisions) Act,1985 (SICA). It had been established as

a quasi-judicial body in the Department of Economic Affairs, Ministry of Finance, for

revival and rehabilitation of potentially sick undertakings and for closure/liquidation of

non-viable and sick industrial companies. The Industrial Finance Division of the ministry

dealt with the appointment of the Chairman and the Members of BIFR and Appellate

Authority for Industrial and Financial Reconstruction (AAIFR) as well as with all theother matters relating to industrial sickness.

The Board of experts named the Board for Industrial and Financial Reconstruction

(BIFR) was set up in January, 1987 and functional with effect from 15 th May 1987. The

Appellate Authority for Industrial and Financial Reconstruction (AAIRFR) was

constituted in April 1987. Government companies were brought under the purview of

SICA in 1991 when extensive changes were made in the Act including, inter-alia,

changes in the criteria for determining industrial sickness.

Under SICA, it is mandatory for the Board of Directors of a sick industrial company to

make a reference and report to BIFR for formulation of revival and rehabilitation

schemes and other remedial measures to be adopted with respect to such a company.

BIFR, since its inception in May 1987 till the end of September 2006, has received

6,991 references.

As on 30th September 2006 BIFR declares their references with respect to status of

various applications received from private company, central psu and state psu are

shown in following table.

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No. Status Private CentralPSUs

StatePSUs

TotalPSUs

Total

1. References received 6,695 108 188 296 6,991

2. Registration declined 1,484 17 66 83 1,567

3. Under Scrutiny 12 0 0 0 12

A References registered (=1-2-3) 5,199 91 122 213 5,412

5. DISPOSALS Dismissed

(i) as non-maintainable 1,660 11 36 47 1,707

(ii) as multiple registered 218 0 0 0 218

Rehabilitation schemes approved/sanctioned

(i) by BIFR 695 27 26 53 748

(ii) by AAIFR/SC 11 1 0 1 12

Declared on longer sick out of SI No. 6 462 9 14 23 485

Winding up recommended to the concerned 1,234 29 40 69 1,303high courts

Dropped now 119 5 3 8 127

Total (5+6+8+9) 3,937 73 105 178 4,115

Pending

6.

7.

8.

9.

B

C

10. Draft schemes circulated

Winding up notice issued

Pending for sickness determination

Declared sick

Schemes failed and reopened

Pending cases remanded by AAIFR

Stay ordered by courts

Total (C=A-B)

42

85

357

678

8

43

46

1,262

2

1

2

11

1

1

0

18

0

4

1

10

0

2

3

17

2

5

3

21

1

3

3

35

44

90

360

699

9

46

49

1,297

11.

12.

13.

14.

15.

16.

Source: BIFR, Department of Economic Affairs, Ministry of Finance


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On receipt of such a reference, BIFR will conduct an inquiry and ascertain whether the

company is indeed sick or not. For this purpose, the Board may, through any operating

agency, cause to prepare with respect to the sick company:-

A complete inventory of that company which includes all assets and liabilities as

well as all books of accounts, registers, maps, plans, records, documents of title or

ownership of property and all other documents of whatsoever nature relating

thereto;

A list of shareholders and of creditors (showing separately the list of secured

creditors and unsecured creditors);

A valuation report in respect of the shares and assets of thecompany;

An estimate of its reserve price, lease rent or share exchange ratio; and Performa

accounts, where no up-to-date audited accounts are available.

On the basis of such an enquiry, if BIFR is convinced that the company has become

sick, it will either give reasonable time to the company concerned to make its net worth

positive or it will appoint an operating agency consisting of certain banks and financial

institutions to prepare a package for the revival of such sick industrial units. The

package may consist of any one or more of the following measures:-

Restructuring the capital base of the company.

Inducting more capital to improve its resource position.

Merger and amalgamation of the sick company with a healthy unit.

Providing soft loans to the company.

Bringing about technological changes and modernisation in the company.

Bringing about a change in its management

Writing off the interest burden of the company.

Rescheduling its loans.

Providing fiscal concessions like tax rebate, tax exemptions or tax reliefs to it.

If BIFR is of the opinion that the sick industrial company is not likely to make its net

worth exceed its accumulated losses within a reasonable time and that it is not likely to


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become viable in future and also it is just and equitable that the company should wound

up, it could imitate proceedings with the High Court, for winding up of the company.

The decision of the BIFR is binding on all the concerned parties. The entire

responsibility for diagnosing, identifying, investigating, rehabilitating, reviving and

ultimately recommending the winding of such a sick unit lies with the BIFR. Along with it,

certain measures may also be initiated by the Reserve Bank of India (RBI) by instructing

banks to keep a constant track of borrower's profile and try to identify sickness at the

initial stages, that is, when a unit has started becoming weak. It has issued detailed

guidelines for rehabilitation of these units and matters relating to better coordination

between commercial banks and term-lending institutions for formulation and

implementation of rehabilitation programmes.

But, under the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, which

replaced Sick Industrial Companies (Special Provisions) Act,1985 (SICA), the Board for

Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and

Financial Reconstruction (AAIFR) stand dissolved. The work of revival and rehabilitation

has been entrusted to National Company Law Tribunal (NCLT) in place of BIFR and any

appeal against the order of the NCLT will be made to the National Law Appellate

Tribunal (NCLAT) instead of AAIFR.
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PERFORMANCE REVIEW OF BIFR

BIFR was set up primarily to provide support to sick units through the speedy disposal

of cases for winding up or rehabilitation. But BIFRs performance had come under

heavy criticism almost since its inception. The Goswamy Committee, set up in 1993,

criticised the preference of the board for rehabilitation rather than winding up, which

resulted in undue delay without results. Even after the setting up of the debt recovery

tribunals for the speeding up of the process, things have not improved at BIFR. Now

steps have taken to wind up the organisation. The year-wise performance of BIFR is

given in Table 9. Of the total 4,318 cases registered, hardly 9 per cent were revived by

the end of December 2002. Winding-up order was served for 25 per cent of the cases.

Another 24 per cent were dismissed as non-maintainable.

YearTotal No. ofRegistered caseduring year

Growth rateover thePriviousYear

Causes Disposed of During the Year

CasesUnderRevival

CasesRevised

Wending upRecommended

Dismissed

1987 311 - 0 0 0 8

1988 298 -4.18 0 1 12 29

1989 202 -32.21 0 1 31 78

1990 151 -25.25 3 3 43 44

1991 155 2.65 4 4 47 28

1992 177 14.19 8 7 30 42

1993 152 -14.12 9 13 64 59

1994 193 26.97 10 37 79 48

1995 115 -40.41 22 25 64 29

1996 97 -15.65 29 93 85 25

1997 233 140.21 13 36 85 22

1998 370 58.80 13 21 50 36

1999 413 11.62 13 10 65 70

2000 429 3.87 10 37 153 158

2001 463 7.93 50 47 133 118

2002 559 20.73 74 34 143 252

Total 4318 258 369 1084 1046

Percent of Total 5.97 8.55 25.10 24.22

The remaining cases are awaiting a decision. CMIE has pointed out that around 36 per

cent of the cases were pending in 2001, and a mere 1.06 per cent could actually turn

around. This gives credibility to the argument that BIFR only served to delay the

liquidation process. In business circles the board came to be known as the board for


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industrial funeral rites. A proposal was made in budget 2001-02 to repeal SICA and

amend the Companies Act in order to set up a national company law tribunal to which

may be assigned the disputes now handled by Company Law Board, BIFR, AAIFR and

the high court.

The Companies Amendment Act 2003 came into effect on January 3, based on the

recommendations of the Balakrishna Eradi committee, which was set up to examine the

law relating to insolvencies and winding up of companies. With this BIFR and its

appellate authority, AAIFR, lost the rationale for their existence. Coupled with this

comes the new ordinance, the Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Ordinance promulgated in June 2002 (and

regularised into an act in November 2002), which gives creditors the power to takeoverthe assets/management of the defaulting company without the intervention of the court.

These firefighting policies indicate a marked shift in the responsibility of industrial

restructuring from secured creditors and financial institutions to the defaulting debtor

firms.

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Brief History of Mafatlal Industries Ltd

In India, Mafatlal Industries Ltd (MIL) is a renowned name across India, providing

Quality fabrics, with latest fashion trends and in the finest tradition, catering to broad

product spectrum consisting of Shirting's, Bottom Weights, Children Wear, Uniforms,

Voiles, Lawns and sleepwear as well as specialty fabrics.

The story of Mafatlal Group is a stirring saga of a blend of traditional values and modern

technology triumphing over odd circumstances. His roots may have been simple, but it

was an environment that nurtured his ambitions. Mr. Mafatlal Gagalbhai was born in a in

1873, to a weaver of Ahmedabad. His father, who was neither educated nor

prosperous, made a living by doing odd jobs. It wasn't long before a young Mafatlal,who was still in his early teens, had to leave school to help his father peddle textile

products. With goods hanging from their shoulders, both father and son would scour the

countryside in search of buyers. Some of the buyers proved to be Mafatlal's benefactors

in later years, when he metamorphosed into an industrialist. They not only provided him

with capital, but also gave it at low rates of interest.

Driven by curiosity and ambition, he took up a job as a mill-hand. He wanted to

understand the entire gamut of operations, but his real breakthrough came only at the

age of 31. Alongwith Chandulal Mahadevia, a friend, and Arthur Shorrock, an

Englishman who knew some British textile-machinery manufacturers in Lancashire, he

took over the management of a small mill in Ahmedabad, and named it the Shorrock

Mill. Of the initial equity capital of Rs 3.25 lakhs, Mafatlal picked up 30 shares of Rs

1,000 each while his father picked up another 30 shares. Mafatlal and his partners

evolved an innovative scheme to muster the rest of the funds. In those days, business

concerns were run by managing agencies. So, the enterprising partners promised

investors a share in the managing agency.

The first mill did extremely well, and Mafatlal developed an appetite for expansion. Six

years later, in 1912, he bought a mill in neighbouring Nadiad for Rs 6.26 lakhs. The

second mill was aptly called New Shorrock. For Mafatlal and the others in the textile

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business, the War years were the years of prosperity and expansion. Although the

partnership was doing well, Mafatlal wanted to do something on his own. So, in 1916,

he bought Jaffer Ali Mill, which was founded by the Nawab of Surat and renamed it as

Surat Cotton Spinning & Weaving Mills. Three years later, Mafatlal came to Mumbai,

taking over the China Mill, which had been set up by a Parsi family in 1887.

It is in the 1970's and 1980's that the existing business was consolidated. The Group

also diversified into Information Technology, Chemicals, and Engineering Industry. The

late 1980's saw the Group further diversifying into the Financial Service Industry, Gas

Distribution and later into Healthcare business. From 1995 onwards, the strategy has

been to focus on the Core Competence viz. Textiles and Chemicals and divest from

other businesses.

MIL produces a complete range of products in 100% Cotton and in Polyester/ Cotton

Blends, consisting of Yarn Dyed and Piece Dyed Shirtings, Poplins, Bottomwear fabrics,

Cambrics, fine Lawns and Voiles. In addition to these, the mills also have the capacity

to produce printed Voiles and dress materials.

Mafatlal Industries Ltd has two operating plant, out of which one is at Nadiad and

second is at Navsari.

Nadiad plant was started in 1913. This plant is one of the largest composite textile

mills in the country. It produces some of the finest fabrics, in a count range of 12's to

105's, which are exported to the most demanding buyers of Europe, U.K. , U.S.A.

and Middle East. It has an installed capacity of 100,000 Spindles, 816 Rotors and

492 Looms and a capability to process 60,000 meters of fabrics per day.

Navsari plant was started in 1931. This plant has installed capacity of 63,000

Spindles and 210 Looms. This plant is Produces Cotton and Polyester/ Cotton

Fabrics in Yarn Dyed and Piece Dyed varieties, mostly in Polyester/ Cotton Blends.

Mafatlal Industry also exports its product to various Countries. Export markets of

Mafatlal Industries Ltd include U.S.A., Canada, U.K., France, European Country,

U.A.E., Saudi Arabia, Oman, Yemen, South East Asian Countries, Australia and New

Zealand.


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DECLARATION OF MIL AS A SICK INDUSTRY BY BIFR

Mafatlal Industries Ltd. posted a loss of Rs. 326.49 crore during financial year ended on

September 1999. As the companys net worth stood at Rs. 268.38 crore during the year

ended on September 1999. As unable to cope with mounting losses, MIL submits a

recast proposal to the lead institution, ICICI in September 1998. After delaying over a

year ICICI had rejected the proposal of the company.

The company had loans of Rs 301.44 crore on cash credit accounts and Rs 25.89 crore

on term loan accounts. Other loans and advances include Rs 100.47 crore to ICICI, Rs

30.47 crore to IDBI, Rs 31.24 crore to IFCI, Rs 10.94 crore to ILFS and around Rs

22.39 crore from others. The aggregate quoted investments stood at Rs 21.69 crore,

while the aggregate unquoted investments were Rs 200.41 crore.

To repayment of the outstanding of the company, the company had option to sell its

land, building, plant, machinery and other fixed assets, which valued at Rs. 208.30

crore. As a result company had only one option for the revival of company to approach

BIFR to declare a sick unit, as per the provision of SICA 1985.

The MIL has interest in Textile, IT, Fine Chemicals, and Chemicals Intermediary was at

one time one of the most profitable business houses in India, but MIL has perhaps the

longest spell of bad luck faced by an Indian company.

The company had closed to around 15000 workers at its five Textile units in Mumbai

and Gujarat in early 1980s. The Textile strike by Datta Samants union in 1982 could be

called the beginning of chain of problems for the company. As the government had

increased the Import duty on imported raw materials, results increase in cost of

production, which would lead to export losses to the company. And this would lead to

mounting debt. There were some personal tragedies in the lives of promoters which

affect the business of MIL very badly.

MIL remains a high profile company up to mid 1990s, but before the year 2000 arrived,

the company declared as a sick unit on 19 September 2000.

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REHABILITATION SCHEME FOR REVIVAL OF MIL BY IDBI

The Board for Industrial and Financial Reconstruction had direct the Industrial

Development Bank of India (IDBI) to submit a revised rehabilitation proposal for the

ailing Mafatlal Industries Ltd. incorporating its response to concern raised by board,

workers, and consortium of bank.

IDBI, had submitted the status report vide its letter dated November 8, 2001 forwarding

therewith a draft rehabilitation scheme (DRS), the Bench noted.

The DRS formulated by the OA, based on the rehabilitation scheme submitted by the

company, envisaged creation of a special purpose vehicle (SPV) and hiving off of

chemical units into a separate company without giving any adequate explanation for the

creation of SPV and a separate company for chemicals, the Bench observed.

The Bench, at the recent hearing, noted that the company had not submitted

justification for creation of a SPV and the reasons of special treatment given to the

financial institutions (FIs) by giving them exclusive charge on the assets of SPV,

discussing what were the alternatives of SPV, and as to why the banks could not be

given second charge on the fixed assets of the company.

IDBI had also not discussed in its report the status of various charges in the event of the

failure of the scheme, the Bench noted. These assets/SPV would be outside the

purview of the board once the scheme was declared as failed, it observed.

Further, it was also not provided that the assets of SPV would be sold through an

assets sale committee (ASC) and the other secured creditors and workers would have

second charge on the assets of the SPV for their dues in case the scheme wasdeclared failed, the Bench noted.

The reasons as to why Navin Flourine Chemicals Ltd (NFCL) was being created and

also the reasons for non-provision of Central excise and other dues in the DRS had not

been explained.

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While there was no right of recourse available to the workers, such right of recourse

was available to the secured term lenders on the assets of NFCL. The company and the

secured creditors had agreed in the hearing that such right could be given to the

workers, the bench noted.

The Bench also noted that the company had submitted that it would be negotiating with

the lenders, who were not agreeable to the DRS. Though most of the working capital

bankers had conveyed their refusal to accept additional exposure, they had not clarified

whether they would take any more exposure in percentage terms or amount wise.

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SANCTIONED REHABILITATION SCHEME OF

MAFATLAL INDUSTRIES LTD

The Board for Industrial & Financial Reconstruction (BIFR) had sanctioned the

Rehabilitation Scheme of the Mafatlal Industry Ltd under the provisions of the Sick

Industrial Companies (Special Provisions) Act, 1985. Vide its Order dated 30th October,

2002. Necessary steps have been taken by the Mafatlal Industry Ltd to implement the

said Sanctioned Scheme which are briefly enumerated herein below

1. The Company was demerged into three companies; One is Navin Fluorine

International Limited, Second is Sulakshana Securities Limited and Third is Mafatlal

Industries Ltd2. The Chemicals Division was Demerged and vested in Navin Fluorine International

Limited (NFIL) (formerly known as Polyolefins Rubber Chemicals Limited) with the

appointed date of 1st March, 2002.

3. Surplus/Non-productive assets/ investments together with liabilities of Secured

Term Lenders were demerged and vested into Special Purpose Vehicle i.e..

Sulakshana Securities Limited (SSL) with effect from 1st April, 2002.

4. The remaining Textiles Business continued with the Company i.e. Mafatlal

Industries Ltd (MIL)

5. Share Capital of the Company was written down by reducing the face value of the

equity shares by 90 % i.e. from Rs.100/- to Rs. 10/- per Share.

6. NFIL issued and allotted 49,99,999 equity shares of Rs.10/each to the shareholders

of the Company in the ratio of 1:1 which were listed on Mumbai and Ahmedabad

Stock Exchanges.

7. NFIL contributed to the Company Rs.90 Crores for the rehabilitation of the

Company.

8. The operations of Ahmedabad Unit and Lower Parel Unit in Mumbai were

discontinued.

9. VRS has been fully paid to the workers of Ahmedabad Unit. VRS to the workers of

Nadiad and Navsari Units are being paid as per the Memorandum of

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Understanding/ Agreement with the Labour Union. The workers of Mazgaon and

Lower Parel Units in Mumbai are being paid VRS compensation in installments.

10. On 22-09-2004, the Company had entered into an arrangement for joint

development of land at Lower Parel Unit with M/s. Marathon Realty Ltd., on the

terms of percentage sharing of sale proceeds at the rate of 56.50 % to the

Company and 43.50 % to the said Developer. The period of completion of the

Project was fixed as 30 months.

11. The Company entered into an arrangement on 03-01-2007 with the Developer and

third party viz., M/s. Parmeka Pvt. Ltd., for outright sale of the Company's share of

56.50% in the said development agreement and executing a perpetual lease for the

said developable land. Under the above arrangement, the Company will receive

gross realization of Rs.158.48 Crores. The advance of Rs.28.48 Crores received

from Marathon Realty Ltd. will be adjusted against the said amount.

12. The Company has entered into an Agreement for Sale with Annapurna Polymers

Pvt. Ltd., (APPL) for the sale of Ahmedabad Unit at an aggregate consideration of

Rs.6.77 Crores to finance the VRS cost of the Unit. The Conveyance Deed is yet to

be executed. Meanwhile, to utilize the idle facilities, the Company has entered into

arrangement of Conducting Agreement of Ahmedabad Unit of the Company with

APPL permitting them to run the said Unit at their entire cost and risk w.e.f. 1stJune, 2003.

Restructured Dues of Consortium Banks

After the end of the year, the Company arrived at One Time Settlement (OTS) with

Bank of India under which the Bank has agreed to receive Rs.1730 Lacs against

their dues of Rs. 9091 Lacs.

As regards the restructured dues of the other Working Capital Banks, the Companyhas already submitted to them the One Time Settlement (OTS) proposal.

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SOURCES OF INFORMATION

We collected information from following sites

www.bifr.nic.in

www.nic.in

www.mafatlals.com

www.thehindubusinessline.com

www.google.com

www.netashare.com

www.managementparadise.com

www.pib.nic.in

BIBLOGRAPHY

Financial Management by Prasanna Chandra - 6th edition-

Publication : Tata McGraw-hill

Growth and Structure of Industry

Publication : Mahajan Publication

Growth and Structure of Industry

Publication : B.S. SHAH Publication
http://www.bifr.nic.in/http://www.bifr.nic.in/http://www.nic.in/http://www.nic.in/http://www.mafatlals.com/http://www.mafatlals.com/http://www.thehindubusinessline.com/http://www.thehindubusinessline.com/http://www.google.com/http://www.google.com/http://www.netashare.com/http://www.netashare.com/http://www.managementparadise.com/http://www.managementparadise.com/http://www.pib.nic.in/http://www.pib.nic.in/http://www.pib.nic.in/http://www.managementparadise.com/http://www.netashare.com/http://www.google.com/http://www.thehindubusinessline.com/http://www.mafatlals.com/http://www.nic.in/http://www.bifr.nic.in/

Documents

Entrepreneurship - Industrial Sickness