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Abhishek Kumar & Sidhartha Mahopatra INTRODUCTION "The important thing is not being afraid to take a chance. Remember, the greatest failure is to not try. Once you find something you love to do, be the best at doing it." - Debbie Fields, Founder of Mrs. Fields Cookies Industrial growth in India is guided by the Industrial Revolution of 1956. The problem of industrial sickness has been growing at an annual rate of about 28% and 13% respectively in terms of number of units and outstanding 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 Rs 7000 crore nearly 29000 units are added to sick list every year. It seems that the deterioration of the sick industries appears to be faster than the growth of sick industries. 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. Loss making industries, both in the private sector and public sector are contributing for the downfall of industrial economy. There has been an increase in industrial sickness, both in the large and small sectors, in India. By consoling that this is, to some extent, a corollary of industrial growth, one shall not belittle the seriousness of the problem. Industrial sickness affects not only the owners, employees and creditors but also causes wastage of national resources and social unrest. It is, therefore, considered very much essential to devise suitable measures for dealing with sick units as well as to make suitable arrangements for detecting symptoms of industrial sickness at an early stage so as to take measures to prevent sickness. The progress of industrial sickness has been highlighted from the period before Independence to the present prevailing condition. The Rehabilitation given to sick industrial companies is not the answer and solution for them. I. HISTORICAL BACKGROUD OF INDUSTRIAL SICKNESS
the Indian economy was predominantly agricultural in nature. There was dearth of private players in the market. they charged exorbitant rates of interest along with arbitrary terms and conditions. The development of producers was almost negligible and was inadequate to meet the demands of the market. And. it was difficult for any trader to survive in the market on a long terms basis.a. if at all. As a result. Only those industries survived who served the interests of the Britishers. Post-Independence Period: . This issue was further aggravated with the lack of any proper bank or financial institutions to finance the industrial projects. any help was available from the money lenders. Pre-Independence Position Before 1947. There was also minimal intervention of the Government in the promotion of the industries. Also there were no proper implementation of any policy in regard to the efforts of the Government in the revival and rehabilitation of sick industries. The market was unorganized because of the reluctant attitude of the Britishers and due to lack of proper communication facility as well as the shortage of power. b.
SYMPTOMS OF SICKNESS Timely action is required for identification of sickness. as envisaged in the Preamble and the Directive Principles of State Policy. For this we need to analyze the symptoms which would help us identify the sickness of the unit. the Government adopted strategies to takeover of the sick industrial units and restrict the problem if unemployment. the primary aim was to convert India from a colonial country to a socialist welfare society. The Government was prompted to go for rapid industrialization of basic and heavy industries to convert India from agricultural to industrial economy. II. This can be traced from the signals that . In order to check the growth of the sick units.After the Constitution came into force. the Government realized that a large number of units are turning sick. Soon. The Government in its aim of preventing the growth of sickness was given support by various agencies such as RBI. The Government also took the initiative of taking over the management of sick industrial undertakings for a brief period and returning it back to the owners once the sickness is removed. IDBI etc. labour unrest and social unrest.
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. 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 sickness . unit concerned is prone to .get displayed by the sick units. The signal may be in the form of financial distress starting with short term liquidity problems. revenue losses. In case of large units whose shares are quoted in stock exchanges. therefore. a signal of sickness is sent when dividends are skipped and share price sharply declines. This measure.
Hence. in short. SICK INDUSTRIAL COMPANIES ACT. 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. the Government enacted a special legislation named as the Sick Industrial Companies (Special Provisions) Act. 1985 commonly known as SICA.III. 1985 Based on the recommendation of a Committee of Experts under the Chairmanship of Shri T. 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. we can .Tiwari.
Talti vs. 1. B. if continuing them would be impossible. it was held that SICA had been enacted to safeguard the economy of the country and protect the viable sick units. To protect employment as far as possible. To stop continued drain of public and private resources for the overall economy of the country. In the case of Testeels Limited & Arvindbhai N. if the public interest so demanded and their rehabilitation was possible. INDUSTRIAL SICKNESS . A. or to close them down. expedite the revival of potentially viable units and effect closure of unviable units. 3. Radhaben Ranchhodlal Charitable Trust & Testeels Limited. 2.conclude that the main objective of SICA is to determine sickness. OBJECTIVES OF SICA To evaluate the techno-economic viability of sick industrial companies with a view to either to rehabilitate them.
e any industry specified in First Schedule to Industries (Development and Regulation) Act. chemicals. an industrial company is a sick company. textiles but not financial services and software technology.As per section 3(1) (o) of SICA. 1951. To fall under the purview of SICA: A company should be engaged in any scheduled industry (i. Criteria of „sickness‟ – Such company should have at the end of any financial year accumulated losses equal to or exceeding its entire net worth. . telecommunication. when its accumulated losses are equal to or exceeding entire worth. transportation. Scheduled industries include metallurgical industries. 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.
BIFR is a quasi judicial body.C. winding up of sick companies. institutional finance to sick companies. amalgamation of companies etc. 1987. BIFR deals with issues like revival and rehabilitation on sick companies. 1985 and it became fully operational in May. under section 3 of the Sick Industrial Companies (Special provisions) Act. BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION Board of industrial and Financial Reconstruction (BIFR) was established by the Central Government. 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 .
then the Board appoints an operating agency under section 17(3) of the Act. without any external financial assistance. 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. It functions like a court and has constituted four benches. drawn from various fields including banking. or if the BIFR decides that the company can not make its net worth positive within a reasonable time. Financial Reconstruction of the sick industrial . company.BIFR has a chairman and may have a maximum of 14 members. 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. PREPARATION AND SANCTION OF SCHEME FOR REVIVAL Once a company has been found sick. accountancy. economics etc. labour. D. If it is found infeasible for company to make its networth positive without any external financial assistance.
the management of the sick industrial company. iii. 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. or takeover of. and Incidental or consequential measures. Any other preventive or remedial measures. The proper management of the sick industrial company by change in. . Amalgamation with another company or vice- The revival package may vary from case to case depending on the nature of the problem and may include additional financial assistance. lease of assets or any other suitable measure. vi. v. postponement of recovery of loan already lent by banks and financial institutions. versa. iv. Sale or lease of its undertaking. amalgamation.ii. sale of redundant assets. change in management. Rationalization of its staff. vii.
The BIFR will also publish particulars of the draft revival package in newspapers inviting suggestions/objections. creditors and employees of the sick company. the BIFR may. REHABILITATION ASSISTANCE BY GIVING FINANCIAL On submission of the revival package by the operating agency.E. transferee company and any other interested party.. On receipt of views/suggestions/objections on the draft revival scheme. the BIFR sends the revival package in a draft form to all the interested parties (i. if any. from the shareholders of the sick company. the BIFR will sanction the revival scheme with or without any modifications. the transferee company (if there is a recommendation in the revival package for amalgamation) etc.. afford an opportunity to the interested parties to be heard. the banks/ financial institutions who have given financial assistance to the sick company.e. eliciting their views/suggestions on the revival package. IV. the sick industrial company. After careful examination of all the aspects. the operating agency. CAUSES OF SICKNESS . if deemed fit.
uneconomic size of project. But the most common causes of sickness can be grouped under two heads – internal and external. b. Technical feasibility: Inadequate technical know-how.Some industries are born sick. under estimation of financial requirements. Internal Causes . the Tiwari Committee in its report outlined the causes of sickness into several heads. In India. They can be classified as: A. . The causes of sickness may vary from one unit to another. locational disadvantage. while others become sick due to a number of causes. Economic Viability: High Cost of Inputs. Sickness arises because of the disorder of the following concerns: 1. unduly large investment in fixed assets. sickness is thrust upon some. which tilt the economic viability. The general belief is that the incidence of sickness results from the changing economic factors and the external influence.These are those factors which are within the internal control of the management. over-estimation of demand. outdated production process. Planning a.
poor capacity utilization. d. c. excessive manpower. Production Production management: Inappropriate product mix. high wastage. defective pricing policy. weak market organization. lack of knowledge of marketing techniques. Marketing management: Dependence on limited number of customers. inadequate mobilization of finance. over- . 3. Implementation: Cost over-runs resulting from delays in getting licences/sanctions etc. lack of trained/skilled component personnel. poor sales realization. a. lack of adequate timely and adequate modernization. a. liberal dividend policy. Labour management: Excessive high wage structure. high cost of production. poor quality control. b. inefficient handling of labour problems. deficiency of funds.2. Financial Management: Poor resource management and financial planning. application of funds for unauthorized purposes. lack of market feedback and market research..
lack of effective collection machinery. lack of adequate controls. lack of professionalism. fiscal duties. This arises due to credit restrains policy. incompetent and dishonest management. excessive expenditure on R&D. inadequate working capital. fear of nationalization. policies. transport bottlenecks. lack of timely diversification. etc. unfavorable investments. lack of feedback to management ( management information system). chronic power shortage. e.trading.. Government control. Administrative Management: Over centralization. procedural delays on the part of the financial/licensing/other . Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. B. b. a. c. delay in disbursement of loan by govt. abrupt changes in Government policies. External Causes: Infrastructural bottlenecks – Non-availability/irregular supply of critical raw materials or other inputs. – Government price controls.
1985 was. political situation (domestic as well as international). Extraneous factors: Natural calamities. and thus. The reasons of sickness can be outlined as poor . restrain of purchase by bulk purchasers. e. and market recession. multiplicity of labour unions. licensing authorities. V. sympathetic strike. RBI. the Sick Industrial Companies (Special Provisions) Act. Marketing Constraints: The sickness arrives due to liberal licensing policies. war. changes in global marketing scenario. accepted the recommendations of the Tiwari Committee with some modification. excessive tax policies by govt. Government departments. financial institutions. accordingly enacted. SHORTCOMINGS OF SICA The functioning of SICA proved inadequate to cater to the needs of the sick units.controlling or regulating authorities (banks. The Government taking into consideration all the factors resulting into industrial sickness. d. MRTP Board).
2009 Certain changes were proposed to be made for the rehabilitation and revival of the sick units as from the proposed Companies Amendment Act.The criteria of sickness was changed to include „inability to pay debts‟ due to secured creditors representing 50% or more of the outstanding debt. COMPANIES BILL. the greater powers have been conferred on the creditors to supervise a rescue plan and restrict the powers of management in the rehabilitation of a sick company. abuse of Section 22.and slow functioning of BIFR. Moreover. 1956. RECOMMENDATIONS OF THE JJ IRANI COMMITTEE ON COMPANY LAW (2005) . Even powers were granted to the creditors to decide on the issue of winding up or the revival of the company by passing a special majority among the creditors. VII. delay in Winding up Procedure and defective Policy and inadequate strength of BIFR VI. Further the scope of the filing for the determination of sickness which was restricted to the Board now included the creditor or the company.
It also allowed the debtors to approach the Tribunal with the rehabilitation scheme. It should be closed down as it is undue exercise and puts additional burden upon the government to take care of them. It also recommended the establishment of the National Company Law Tribunal on a speedy basis. commercial and technical characteristics of insolvency law. In addition.JJ Irani Committee wanted to omit the term „sick industrial company‟ and replace it with „insolvent company‟ and thereby erase the sickness test on the basis of erosion of networth with that of the liquidity test. it enunciated that the rehabilitation by cess to be replaced by the „Insolvency Fund” with optional contribution by companies. VIII. Power was also given to the creditors to oppose the scheme of rehabilitation. Further. it is not the answer and solution for sick industrial companies. it also places burden upon all the . IS REHABILITATION THE ANSWER? No Rehabilitation. Moreover. it recommended that CA/CS/CWA/law professionals should play an active role in the insolvency process so that there would be expertise persons dealing with the specialized.
existing well running industrial units SICA impose cess on companies to build up a fund for rehabilitation of the assets of the sick companies. it says competition for survival or predominance and “survival of those who are better equipped for surviving”. The theory of survival of the fittest should be applied in this particular realm. It should leave the industrial company on its own condition and should afford an opportunity to the company to decide its own fate in this era of cut throat competition. The government should segregate itself from the affairs of the industrial company and should do its own job. whether company can be run or not. It is opposed by the Federation of Indian Chambers of Commerce & Industry of India (FICCI) on the ground that healthy and sound companies should not suffer for faults of others. What is important is to evolve a proper regulatory . CONCLUSION AND SUGGESTIONS Industrial sickness is a problem all economies big and small have to face. The government should not intervene into the affairs of the industrial company and let the market forces decide it.
and suppliers of goods should be provided to those units where chances are subsisting for the revival of the sick unit. government agencies. 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. government (Central/State). 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. . financial institutions.and institutional mechanism to deal with the situation. shareholders. While there should be a mechanism to safeguard the interests of workers. Package consisting of concessions from banks. a suitable exit policy for the non-viable units should form an integral part of the new approach. labour. The approach of the government towards rehabilitation of a sick unit being very selective. 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.
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. 1956.The enactment instead of fruitful it proved burdensome on the healthy companies. 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. it should help taking the affairs of the industrial company in its own hand for a particular period of time. . The rehabilitation fund are created by imposing tax on the good working companies which puts additional burden on them without their own fault. 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. If at all government wants to do fruitful help for the industrial company.
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