TURNAROUND MANAGEMENT

PROJECT ON

INDUSTRIAL SICKNESS

MADE BY:-

CAROL.D’SOUZA -51

HANIFA.SHAIKH -53

ALOK.RAI -54

SAVIKANT.GAIKWAD -55

WHAT IS INDUSTRIAL SICKNESS

Industrial sickness is a universal phenomenon.While the industrial sickness is easly manifested in market economies, it may be concealed in economies where the market mechanism does not operate.In a market ecenomy, the competition tests and exposes the strengths and weakness of firms and, therefore,sickness becomes easily visible.There has been a fear domestic and foreign, would increase sickness.Although the first several years of liberalisation did not witnessed any significant change in the magnitude of sickness,between 1998 and 1999 there was a substantial increase in industrial of sickness.

There are large number of sick units in the small scale and the non-SSI sector.There was a substantial increase in the magnitude of sickness during the pre-liberalisation period.The number of SSI sick units increased from 58,551 in 1982 to about 2.21 lakh at the end of march 31 2009 and 2.46 lakh at the end of march 2010.Many of the sick units are non-viable, they cannot be brought back to healthy existence.

INTRODUCTION 

Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act “ The sick industrial company is a company which has at the end of any financial year accumulated losses equal to or excluding its entire net worth and has also suffered cash losses in that financial year and in the financial year immediately preceding it.”

EXTENT OF SICKNESS  

    Industrial sickness is growing at an annual rate of about 28% and 13% respectively in terms of number of units and out standing number of bank credit. It is reckoned that as of today there are more than 2 lakhs sick units with an outstanding bank credit of over Rs7000crore nearly 29000 units are added to sick list every year. 

Industrial sickness especially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like

– cotton, Jute, Sugar, Textile small steel and engineering industries are being affected by this sickness problem.

CAUSES OF SICKNESS OF SSI'S 

Most of the Indian authors and researchers have classified the different types of industrial sickness under two important categories.  They are: 

1) Internal Cause for sickness: 

We can say pertaining to the factors which are within the control of management.  This sickness arises due to internal disorder in the areas justified as following:

a) Lack of Finance:  This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing & pricing, absence of planning’ and budgeting and inappropriate utilization or diversion of funds.

b) Bad Production Policies :  The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality control, lack of standard research & development and so on.

c) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI.  This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions.

d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labour

relations, lack of behavioral approach causes dissatisfaction among the employees and workers.

e) Ineffective Corporate Management:  Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control etc. 

2) EXTERNAL CAUSES FOR SICKNESS: 

a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area.

b) Marketing Constraints: The second cause for the sickness is related to marketing.  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.

c) Production Constraints:  This is another reason for the sickness which comes under external cause of sickness.  This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.

d)  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.

REASONS FOR SICKNESS IN SSI’s             

PRODUCTION RELATED REASONS:

Faulty Product Mix Acklog of Production Poor Quality of end product Delayed delivery schedule

FINANCIAL REASONS:

Low Profitability Low fund generation Poor liquidity Step Cost structure Lack of financial resources Lack of credit facility Faulty credit utilization Low share value

MARKET REASONS:

Poor marketing strategy Imbalance between production & marketing Wild market shifts Lack of awareness of consumer’s preferences Lack of specific market segmentation Poor distribution network Poor market performance 

.

SIGNALS OF SICKNESS  

 The following actions of the unit indicate that the unit is sick or going to be sick:

Continuous irregularity in cash credit accounts ; .Low capacity utilization; profit fluctuations, downward sales and fall in profits followed by

contraction in the share market; Failure to pay statutory liabilities; Larger and longer outstanding in the bills accounts; Non submission of periodical financial data /stock statement etc. in

time; financing capital expenditure out of funds provided for working

capital purposes; Rapid turn over of key personnel; Existence of large no. of law suits against a company; Rapid expansion and too much diversification within a short time; Any major change in the share holdings. 

Effect of sickness .

Industrial Sickness contributes to high cost economy. This in turn, will affect the competitiveness of the economy at home and abroad.

Dead investment is a burden on both banks and budgets and ultimately consumers should pay the high cost.

Money locked up in sick units gives no returns and effects the availability of resources to the other viable units.

REMEDIES

  Majority of sick units is retrievable in order to tackle the problem of sickness from the two angles the role of three agencies assumes significance:

a) The government  

b) Financial institutions and the industry associations.

a) The Role of Government: If the number of units in the country has increased some 10 times since independence and if we have diversified industrial structure with wide spread entrepreneurship the credit for this largely belongs to government.      

     Second area where the government can be helpful is Vis-à-vis industrial licensing. The very existence of licensing and monopoly regulation legislation implies that there is a stampede to “to get in” when ever licensing is liberalized for an industry or an economy as a whole  

  b) The Role Of Financial Institutions: The following are the ways by which sickness can be prevented by financial institutions :

a)     Continuous monitoring of unit

b)    Careful project appraisal

c)     Professional institutional response to unit’s problems

d)    Required systems at client units

e)      Incentives to units to remain healthy.

 c) The Role Of Indutry Associations : A good practical review by each industry association of installed and usable capacity in the industry , capacity utilization , growth trends , problems etc should be useful 4 the potential new entrants 4 deciding whether 2 enter the industry or not. T.he industry can have some sort of 1st aid cell this could consist of professionals who could go to the aid of a unit that is beginning to fall with the offer of managerial and technical help also.

Curative measures    

These measures include how to cure the sickness after it has crept in. There are lots of agencies which help cure Industrial sickness.   

There is Industries (Development and Regulation) Act, 1951, which provides for the takeover of a sick unit by the Government of India. Before resorting to a takeover, other alternatives like rehabilitation through the concerned state government and financial institutions or for the merger of a sick unit with a healthy unit could be explored. 

Then there is the Sick Industrial Companies (special provisions) Act, 1985, which was passed by parliament and received the assent of president in January 1986. It was amended in December 1991 so as to bring government companies within the preview of the Act.   

Further, there is the Industrial Reconstruction Bank of India (IRBI) which came into being on March 20th 1985 by converting the erstwhile Industrial Reconstruction Corporation of India. It provides assistance for reconstructions and rehabilitation of the sick industrial units by granting those loans and advances, underwriting shares and debentures etc.

For the sick units in the small scale sector, separate facilities are available. State Finance Corporations and commercial banks will be asked to devise a scheme for the rehabilitation of sick units in the small scale sector, and the assistance given by them for the revival of such units will be eligible for refinancing by the IRBI at the confessional rate of interest. 

Conclusion 

       Government should hike its spending to create more jobs and boost the manufacturing sectors in the country.

       Government should try to increase the export against the initial export.

       The way out for builders is to reduce the unrealistic prices of property to bring back the buyers into the market. And thus raise finances for the incomplete projects that they are developing.

       The falling rupees against the dollar will bring a boost in the export industry. Though the buyers in the west might become scarce.

       The oil prices decline will also have a positive impact on the importers.

  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 nor 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.

III. SICK INDUSTRIAL COMPANIES ACT, 1985

Based on the recommendation of a Committee of Experts under the

Chairmanship of Shri T.Tiwari, the Government enacted a special

legislation named as the Sick Industrial Companies (Special Provisions)

Act, 1985 commonly known as SICA. The Board of Industrial and

Financial Reconstruction (BIFR) and the Appellate Authority for

Industrial and Financial Reconstruction (AAIFR) were also established

in 1987 to look after the matters covered under the purview of SICA.

SICA was further amended in 1991 to bring government companies

under its purview and again in 1993 certain changes were brought out in

the act for the determination of industrial sickness.

Hence, in short, we can conclude that the main objective of SICA is to

determine sickness, expedite the revival of potentially viable units and

effect closure of unviable units.

A.     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.

  

B.     INDUSTRIAL SICKNESS

As per section 3(1) (o) of SICA, an industrial company is a sick

company, when its accumulated losses are equal to or exceeding entire

worth. Further as per section 23 of SICA of the accumulated losses of an

industrial company as at the end of any financial year have resulted in

erosion of 50% or more of peak net worth of immediately preceding four

financial years is considered to be a potentially sick industrial company.

To fall under the purview of SICA:

·        A company should be engaged in any scheduled industry (i.e

any industry specified in First Schedule to Industries

(Development and Regulation) Act, 1951.

·        Scheduled industries include metallurgical industries,

telecommunication, transportation, chemicals, textiles but not

financial services and software technology.

·        Criteria of ‘sickness’ – Such company should have at the end of

any financial year accumulated losses equal to or exceeding its

entire net worth.

C.     BOARD OF INDUSTRIAL AND FINANCIAL

RECONSTRUCTION

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

(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,1[7]

drawn from various fields including banking, labour, accountancy,

1

economics etc.2[8] It functions like a court and has constituted four

benches.

 

D.     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 networth positive without

any external financial assistance, or if the BIFR decides that the

company can not 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;2

    vi.)    Any other preventive or remedial measures; and

    vii.)   Incidental or consequential measures.

 

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.

E.     REHABILITATION BY GIVING FINANCIAL

ASSISTANCE

 

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 revival scheme with or without any modifications.

 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.

.