Industrial Sickness

What does Sickness imply???

Empty Treasury

Inability to repay debt installments from loans and statutory

liabilities like Provident Fund etc.

Mounting Losses, High Rejection Rate of Goods, Piling

Inventory

Inability to do Business competitively, Industrial Disputes, Low

Capacity Utilization.

Worse than Bankruptcy (which implies a debt default), as it

implies an erosion of the net worth of the company

ie. The company is Insolvent or Financially Ruined for all practical

purposes.
 What are the reasons of
becoming sick ?
Losses are due to drainage of resources on wasteful or
unnecessary expenditure. Sickness is caused by
prolonged periods of losses sustained by the company.

There are two main categories:

1. Internal Reasons

2. External Reasons
 Internal reasons
(which can be controlled by company)

Mismanagement
Underestimation of the cost of the project
Delay in the implementation of the project
Increase in cost due to delay in implementation of project
Under Utilisation of Resources
Diversion of Funds
Lack of Management depth
Bad Industrial Relations
Bureaucratic management
Inadequate working capital
Heavy Expenditure in Advertisements
 External reasons
(which cannot be controlled by the
company)
Adverse government rules and regulations
Adverse Price Control Policy
Recession Trend/economic conditions
Tough Competition
Shortage of Manpower, Raw Materials etc.
Changes in Technology
Changes in Consumer Behaviour
Shortage of Power Supply
Delay in getting any financial assistance.
 Industrial Sickness
A Sick Industrial Company implies the following:

1. It must be an industrial company which is as specified in the First

Schedule to the Industries (Development and Regulation) Act, 1951
(IDRA) but does not include an ancillary industrial undertaking or a
small scale industrial undertaking as defined under IDRA.

2. The company should have been in an existence for at least 5 years

since the date of incorporation.

3. The company should have accumulated losses equal to or

exceeding its net worth at the end of any financial year.

'Net Worth' means the sum total of paid-up capital and free reserves
 Types of Sick Units

Industrial units

Born Sick Sickness Thrust

Achieved Sickness
 1. Born sick
These units were not financially viable from the outstart and
were undertaken due to lack of foresight and business acumen.
Characterized by:
1. Lack of experience of the promoters, wrong selection of the
project.
2. Faulty project planning
3. Paucity of funds and faulty finanacial management
4. Time and cost over-runs.
5. Location related problems.
 (Continued….)
6. Technological factors
7. Wrong assessment of the market potential
8. Faulty demand forecasting
9. Change in the market conditions including the change in
the customer tastes and preferences
10. Competitive situation, etc.
 2. Achieved Sickness
These units had a viable business cycle and became sick
due to mismanagement or external reasons.

Characterized by:
1. Bad management
2. Unwarranted expansion and diversion of resources
3. Inability to modernize resulting in low efficiency
4. Too much competition by larger players, especially from
overseas
5. Product becomes obsolete
6. Changes in Government rules and regulations
 3. Sickness Thrust
These units are not yet classified as sick but are rapidly
losing profits and market share to competitors

Characterized by:
1. Increased Competition
2. Move towards Sickness
3. Inability to modernize resulting in low efficiency
4. Other factors are similar to Achieved Sickness
5. There is a scope to control the factors before achieving
sickness
6. These units are weak or potentially sick
 Weak or Potentially Sick
Companies
A Potentially Sick Industrial Company implies the following:

1. The company should be in an existence for atleast 4 years

since the date of incorporation.

2. The company should have an accumulated losses equal to or

exceeding 50% of its net worth during the immediately
preceeding 4 years.

'Net Worth' means the sum total of paid-up capital and free
reserves.
These companies are at the stage of 50 percent erosion of
their Net Worth
 Consequences of Sickness
The Sickness of a company has an immediate impact on all
the entities related to it.
Chiefly:
1. The Labour or Workforce of the Company faces
unemployment
2. The Creditors of the Company (to which it owes money) face
bad loans and losses
3. Loss of production
4. Loss of revenue to the exchequer

Sick companies must either face Restructuring or

Closure
 Corporate Restructuring
Restructuring is an attempt to revive a sick unit by reversing
negative trends through Turnaround Management.
It Involves:
Financial Reconstruction
Change in Management
Amalgamation into a larger entity
Sale or lease of a part or whole of any industrial
undertaking of such company
Rationalization and streamlining of personnel

Restructuring often generates bureaucratic tangles and

losses of money and time.
 Closure

The Closure of a company involves:

1. Sale of assets to pay off creditors
2. Issue of Compensation, if any to laid off workers

Closure may seem a drastic option but makes good

economic sense in many cases.
This is because Restructuring is not a panacea. It
involves pumping more money into a company that
may not have the potential to return to profitability.
Objectives of Insolvency Laws
Corporate insolvency law has certain overriding objectives:

1. To restore the debtor company to profitable trading

where this is practicable

2. To maximize the return to creditors as a whole where the

company itself cannot be saved

3. To establish a fair and equitable system for the ranking of

claims and the distribution of assets among creditors,
involving a redistribution of rights;
 (continued)
4. To provide a mechanism by which the causes of
failure can be identified and those guilty of
mismanagement brought to book, and where
appropriate, deprived of the right to be involved in
the management of other companies
INDUSTRIES (DEVELOPMENT AND
REGULATION) ACT
Passed to empower the government to implement its policies
relating to industry.

Allowed Govt. control over industries and made provisions for

intervention.

It introduced industrial licensing for proper industrial growth.

This Act, amended from time to time is one of the most

effective weapons the Government possesses.

Brought under Central control, the development and

regulation of the influential industries pertaining to economic
growth
 OBJECTIVES

Provides Central Government with the means to implement Industrial

Policy
The principal objectives are:
To take necessary steps for the development of industries.
To regulate the pattern and direction of industrial development.
To control the activities, performance and results of industries
undertakings in the public interest.

PURPOSE:
Envisages balanced growth all over India.
Optimum use of available resources and infrastructure.
Ensures industries don’t suffer from financial mismanagement,
technical inefficiency and/or operational defects.
 Need for new act
In the past, the govt. took over the management of a number of sick
undertakings under IDRA, with the objectives of reviving them by
providing management support and financial assistance through banks
and financial institutions

However in due course the govt. fell that it was a mistake to have gone
on taking over the sick units and that the govt. should not be burdened
with the mounting losses of the sick units.

While some units were nursed back to health ,a number of others

continued to suffer huge losses.

Takeover of sick units is not favourable for the government.

Only such units which are found to be potentially viable need to be taken
up for formulation of rehabilitation packages to restore them back to
health.
 The Solution -- SICA
In the wake of sickness in the country’s industrial climate
prevailing in the eighties, the Government of India set up in
1981, a Committee 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 main objective of SICA is to determine sickness and

expedite the revival of potentially viable units or closure of
unviable units (unit here in refers to a Sick Industrial
Company). It was expected that by revival, idle investments in
sick units will become productive and by closure, the locked
up investments in unviable units would get released for
productive use elsewhere.
 Sick industrial companies
act(1985)
The Act & its objective
For Industrial Companies becoming sick in India, the
Government formulated the ‘Sick Industrial Companies
(Special Provisions) Act, 1985’ (or SICA) which got
amended in the year 1993, with the following prime
objectives:
To timely detect the sick and potentially sick industrial
companies,
To speedily take preventive, ameliorative, remedial &
other measures and
To enforce the measures so determined
The objectives of this Act (SICA) as incorporated in its preamble, emphasizes
the following points:
SICA had been enacted in the public interest to deal with the problems of
industrial sickness with regard to the crucial sectors where public money is
locked up.
It contains special provisions for timely detection of sick and potentially sick
industrial companies, speedy determination and enforcement of preventive,
remedial and other measures with respect to such companies.
Those measures are to be taken by a body of experts.
The measures are mainly
(a) Legal
(b) Financial restructuring
(c) Managerial
The 1993 Amendment to the Act lays down that an inquiry shall be deemed to
have commenced upon receipt by the Board of any reference of information
or upon its own knowledge reduced to writing by the Board
Sick Industrial Company:
An industrial company (being a company registered for not less than
five years) and having at the end of any financial year accumulated
losses equal to or exceeding its entire networth.
It must be an industrial company which is as specified in the First
Schedule but does not include an ancillary industrial undertaking or
a small scale industrial undertaking as defined under IDRA.
The company should be in an existence for atleast 5 years since the
date of incorporation.

Potentially Sick Industrial Company’

It means an industrial company whose accumulated losses is more
than fifty percent or more of its peak net worth during the
immediately preceding four financial years.
 Important Provisions of SICA
Constitution of two quasi-judicial bodies – BIFR and AAIFR and their
Benches.
Procedure of the Board and the Appellate Authority.
Filing of references and criteria of sickness.
Provision of enquiry into company’s health.
Appointment of Special Directors and OAs.
Preparation of sanctioned scheme.
Provision for monitoring of schemes.
Rehabilitation by giving financial assistance.
Winding up of sick industrial companies.
Protection to safeguard the interests of the sick companies.
Provisions for dealing with potential sickness.
Provision for seeking information and giving information – Central
Govt., RBI, FIs State institutions and sick companies and in case of
amalgamation other companies.
 Important Provisions of SICA

The implementation of SICA involved setting up of two

bodies:

1. BIFR – The Board for Industrial and Financial

Reconstruction
2. AAIFR – The Appellate Authority for Industrial and
Financial Reconstruction
 BIFR
The SICA provides for the establishment by the Central
Government of a Board and Financial Reconstruction
(BIFR) to exercise the jurisdiction and powers and
discharge the functions and duties conferred or imposed
on the Board by the Act.
It consists of a chairman and not less than two and not
more than fourteen members appointed by the Central
Government.
The Board of experts named the Board for Industrial
and Financial Reconstruction (BIFR) was set up in
January, 1987 and functional with effect from 15th
May 1987.
Reference to the BIFR under the SICA
Under the Act, other than the Board of Directors of the Company,the following
authorities/institutions may refer a sick company to the BIFR:
The Central Government
The Reserve Bank of India
State Government (where all or any of the undertakings belonging to such company are situated
in such State)
Public financial institution (where it has an interest in the Company by any financial assistance or
obligation, rendered by it or undertaken by it)
A State level Institution (where it has an interest in the Company by any financial assistance or
obligation, rendered by it or undertaken by it)
A Scheduled bank (where it has an interest in the Company by any financial assistance or
obligation, rendered by it or undertaken by it)
 BIFR Procedure

On the receipt of a reference or on receipt of information

or kits own knowledge as to the financial condition of the
company, the Board is authorized to make an inquiry for
determining whether the industrial company has become
sick.
The Board also has the power to require any operating
agency to inquire into and make a report on such matter
as the BIFR may specify.
 BIFR Procedure (contd)

If after such enquiry the BIFR is satisfied that the

company has become a sick industrial company, it may
decide:
1. If it is practicable for the company to make its net worth
exceed the accumulated losses within a reasonable
time, it may give the company such time as it deems fit
to make its networth exceed the accumulated losses. A
Rehab scheme may also be sanctioned

2. If it is necessary in public interest to close the company,

it is recommended for closure, provided it is not
practicable to turnaround the company from Industrial
Sickness.
 Measures Taken By BIFR
The measures that are prescribed for rehabilitation under Section 18 of
the Act are
financial reconstruction of the sick industrial company
the proper management of the sick industrial company by change in
or take over of the management of the sick industrial company
the amalgamation of the sick industrial company with any other
company or vice versa
the sale or lease of part/whole of any industrial undertaking of the
sick industrial company
rationalization of managerial personnel, supervisory staff and
workmen in accordance with law
Other measures as may be necessary in connection with the
measures specified above.
 BIFR PROCEDURE
References received

Registered Reg. declined

Inquiry

Rehab
Recommended scheme
for closure
Dismissed
sanctioned

Monitoring

Failed & Discharged on

reopened Revival
 AAIFR
The SICA also provides for the establishment of an
appellate authority called the The Appellate Authority
for Industrial and Financial Reconstruction
consisting of a chairman and not more than three
members.
The AAIFR was setup for hearing appeals against
the orders of the BIFR.
 BIFR--- Problems
BIFR either identifies extremely sick firms or mistakenly
declares non-sick companies as sick
Asymmetry between lender and borrower -- at the
expense of lender
– Lender: NPA after 180-days default
– Borrower: NPA after net worth ≤ 0
SICA definition – Problems for
BIFR
Either SICA Net worth

catches it too Default starts

here
late…
SICA
Or, companies catches
here
fudge accounts Years
to get shelter
under BIFR
Reference
mandatory
BIFR delays: Jan 97 to Mar 98
1825

1460
1664
Days lost
1468
1095

730

365

0
Sanctioned Winding-up

Jul 87 to Jul 92:- Mean delay: 851 days

Jan 97 to Mar 98:- Mean delay : 1664
days
 Pending cases at BIFR

180 166
160
140
120
100
80
60
27 33
40 15 14 20 25
20 10 11 9 10
0
87

88

89

90

91

92

93

95

96
94

97
19

19

19

19

19

19

19

19

19

19

19
 Where does BIFR stand?

No. of references to BIFR shooting up since 1996

450 400
400 370
350
Refereces

300
233
250
200
150 97
100
50
0
1996 1997 1998 1999
Years
 Reasons For Delays
There are a number of reasons why the process of
restructuring and liquidation of sick firms is not only slow,
but extremely difficult.
1) At every level of mediation and decision-making,
BIFR uses a consensus approach implying thereby that
all parties i.e., the management, workers, creditors, and
shareholders must agree to a restructuring plan before
any restructuring or liquidation can begin.
2) Hostile trade unions with strong union practices have
systematically opposed restructuring in various degrees.
Reasons For Delays contd…

3) State governments have followed very rigid practices

4) The slow moving judicial process have all created
strong barriers to restructuring and liquidation.
 The National Renewal Fund,
1992
The National Renewal Fund (NRF) was established in 1992 and
became operational only in early 1993 to:
1) Provide assistance to cover the costs of retraining and
redeployment of employees arising as a result of modernization,
technology up gradation and industrial restructuring.
2) Provide funds, where necessary, for compensation of
employees affected by restructuring or closure of industrial units,
both in the public and private sectors.
3) Provide funds for employment generation schemes both in the
organized and unorganized sectors in order to provide a social
safety net for labor .
 National Equity Fund
National Equity Fund was established in 1986-87, with
the contribution of Rs.5 cr each by the Central Govr. and
the IDBI.
Aims at small entrepreneurs for setting up new projects
in tiny / small scale sector and rehabilitation of potentially
viable sick SSI units irrespective of the location.
Under this scheme, assistance will be provided in the
form of loans to eligible small and tiny units with the
project cost not exceeding 5 lac., irrespective of
locations.