CORPORATE FINANCECORPORATE FINANCE

REHABILITATION FOR REHABILITATION FOR SICK UNITSSICK UNITS

PRESENTED BYPRESENTED BY

ANGSHUMAN CHOUDHURYANGSHUMAN CHOUDHURY

INTRODUCTIONINTRODUCTION Sick industries have far-reaching consequences on the economy of Sick industries have far-reaching consequences on the economy of

the nation. the nation. The following are the bad effects of Industrial The following are the bad effects of Industrial Sickness--Sickness--

1.There is under utilization of capital assets.1.There is under utilization of capital assets.

2.The entrepreneurship level declines.. Increase in industrial2.The entrepreneurship level declines.. Increase in industrial sickness discourages entrepreneurship.sickness discourages entrepreneurship.

3.The investor confidence reaches a lower ebb. Thus, capital is not 3.The investor confidence reaches a lower ebb. Thus, capital is not put to productive use.put to productive use.

4.Industrial sickness results in large scale unemployment and 4.Industrial sickness results in large scale unemployment and industrial unrest.industrial unrest.

5.Profitability of banks and financial institutions gets affected since 5.Profitability of banks and financial institutions gets affected since they don’t get back their funds invested in projects that have gone they don’t get back their funds invested in projects that have gone sick..sick..

DEFINITION OF SICKNESSDEFINITION OF SICKNESS

The sick industrial companies (Special The sick industrial companies (Special provisions) Act, 1985, as amended in 1993 provisions) Act, 1985, as amended in 1993 defines –defines –

Sick Industrial CompanySick Industrial Company as an as an industrial company (being a company industrial company (being a company registered for not less than five years) which registered for not less than five years) which has at the end of any financial year has at the end of any financial year accumulated losses equal to or exceeding its accumulated losses equal to or exceeding its entire net worth.entire net worth.

BOARD OF INDUSTRIAL AND BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR)FINANCIAL RECONSTRUCTION (BIFR)

(BIFR) was established by the Central Government, under section (BIFR) was established by the Central Government, under section 3 of the Sick Industrial Companies (Special provisions) Act, 1985 3 of the Sick Industrial Companies (Special provisions) Act, 1985 and it became fully operational in May, 1987. and it became fully operational in May, 1987.

RRole of BIFR as envisaged in the SICA (Sick Industrial ole of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is:Companies Act) is:

(a) Securing the timely detection of sick and potentially (a) Securing the timely detection of sick and potentially sick companies.sick companies.

(b) Speedy determination by a group of experts of the (b) Speedy determination by a group of experts of the various measures to be taken in respect of the sick various measures to be taken in respect of the sick company.company.

(c) Expeditious enforcement of such measures.(c) Expeditious enforcement of such measures.

Reporting to the BIFRReporting to the BIFR

To report the sickness to the BIFR within 60 days of finalisation of To report the sickness to the BIFR within 60 days of finalisation of audited accounts, for the financial year at the end of which theaudited accounts, for the financial year at the end of which the

company has become sick.company has become sick.

The BIFR prescribes a different format for the report to be The BIFR prescribes a different format for the report to be submitted by any interested parties regarding the sickness.For submitted by any interested parties regarding the sickness.For eg’s – Banks , other financial institutions.eg’s – Banks , other financial institutions.

When a company has been financed by a consortium of banks,it When a company has been financed by a consortium of banks,it is the Lead Bank that should report to BIFR about the sickness is the Lead Bank that should report to BIFR about the sickness

under advice to other participating banks in the consortiumunder advice to other participating banks in the consortium..

Enquiry by the BIFREnquiry by the BIFRWhen a case is referred to the BIFR, it is verified by the When a case is referred to the BIFR, it is verified by the Registrar of the BIFR as to whether the company is SICK.Registrar of the BIFR as to whether the company is SICK.

BIFR accepts the case and notifies a date for hearing the case.BIFR accepts the case and notifies a date for hearing the case.

Co-ordination of connected agencies is achieved by BIFR.Co-ordination of connected agencies is achieved by BIFR.

Invites the informant Sick Company to come to negotiation with Invites the informant Sick Company to come to negotiation with the concerned financial institutions.the concerned financial institutions.

After the Survey and hearing, the court summons the rehab to After the Survey and hearing, the court summons the rehab to an operating agency.an operating agency.

Revival PackageRevival PackageOnce a company has been found sick, the BIFR may grant time Once a company has been found sick, the BIFR may grant time to the sick company to enable it to make its networth positive and to the sick company to enable it to make its networth positive and bring the company out of sickness, bring the company out of sickness, without any external without any external financial assistance.financial assistance.

The BIFR will direct the operating agency to prepare a suitable The BIFR will direct the operating agency to prepare a suitable revival package for the restoration of the health of the company.revival package for the restoration of the health of the company.

Revival PackageRevival Package includes- includes- additional financial assistance,additional financial assistance,

postponement of recovery of loan already lent by banks, change postponement of recovery of loan already lent by banks, change in management, amalgamation, sale of redundant assets, lease in management, amalgamation, sale of redundant assets, lease of assets or any other suitable measure. of assets or any other suitable measure.

Need for revival/rehabilitation Need for revival/rehabilitation programmeprogramme

A sick company has already swallowed huge scarce resources. In A sick company has already swallowed huge scarce resources. In order to utilize the assets and infrastructure already created for order to utilize the assets and infrastructure already created for the project, the project is to be revived from sickness.the project, the project is to be revived from sickness.

Revival of a sick unit may be necessitated, because – Revival of a sick unit may be necessitated, because –

1. The project may be in a sector that is vital to the economy1. The project may be in a sector that is vital to the economy. .

2.2. Many ancillary units may be dependent on the unit that Many ancillary units may be dependent on the unit that has gone sick. Unless the sick unit is revived, it will have a chain has gone sick. Unless the sick unit is revived, it will have a chain effect of all such dependent ancillary units becoming sick.effect of all such dependent ancillary units becoming sick.

3. Banks and financial institutions would have locked up their 3. Banks and financial institutions would have locked up their money in sick ventures.money in sick ventures.

Causes of SicknessCauses of Sickness

Internal Causes-Internal Causes-

1.1. Project formulation.Project formulation.2.2. Project implementation.Project implementation.3.3. Production.Production.4.4. Marketing.Marketing.5.5. Finance.Finance.6.6. General and personnel General and personnel

administrationadministration

External CausesExternal Causes

1.1. Government’s plans and actions.Government’s plans and actions.

2.2. Failure of monsoon which affects Failure of monsoon which affects agriculture and allied industries.agriculture and allied industries.

3.3. Emergence of strong competitors etcEmergence of strong competitors etc

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