Managing Industrial Sickness-SICA and BIFR

Several important changes have been brought about in the government policy

relating to sick units in recent years. Emphasis has now been placed on the need to select

only such units for revival which are viable on strictly commercial considerations. An

important change in the policy has been a shift from ad hoc nursing of sick units in the past

towards making available assistance under well integrated packages to remove the causes of

sickness .This policy lays stress on various relief and concessions to be extended not only by

banks and term lending institutions but also by the promoters, government and labour

.Another development has been a shift in emphasis in favour of prevention of sickness rather

than undertaking remedial measures at a later stage. Who realized the need for a selective

and systematic approach towards rehabilitation of sick units; guidelines were issued to banks

in November, 1985 to ensure coordination between banks and term-lending institutions of

assessing the viability of a unit identified as sick and for framing the suitable rehabilitation

package for it. Measures have also been suggested to overcome delays in the formulation

and implementation of packages and of remedial measures.

As recommended by the Tiwari committee, a significant new initiative was taken

through the enactment of Sick Industrial Companies Act, 1985 in order to handle industrial

sickness effectively. The act provided for the setting up of board for industrial and financial

reconstructions (BIFR).The board which is quasi – judicial body ,has been vested with

extensive powers .Under the act it is mandatory for a unit which has become sick(as per the

definition of the act) to report to the BIFR . The BIFR, while acting through operative

agencies (term lending institutions such as IDBI, IFCI, ICICI and IRBI), would verify the fact
of sickness; ascertain its viability and, .where necessary, get a package of rehabilitation

prepared for the unit.

Since its inception and up to the end of December, 1995, the BIFR has received

2497 references under sick industrial companies act (SICA) both in respect of private

companies and public sector undertakings. Of the 1756 references registered, 383 cases

were dismissed as non maintainable, revival schemes have been sanctioned/approved in

530 cases and 407 cases have been recommended to the concerned high court for winding

up. Sale has been ordered in one case. In addition to the above, draft schemes were

formulated and circulated in 57 cases and show cause notices issued for winding up 54

companies. The proportion of cases effectively decided to those registered by the BIFR till

the end of Dec, 2005 is 74%.

With the economic liberalization and the new industrial policy announced in 1991, it

is believed that there is a need to reexamine the role of government in tackling the problem

of industrial sickness. Meddling with operation of inexorable economic loss in the name of

reviving sick units may prove counterproductive and detrimental to the effective working of

the industrial economy of the country.

RBI GUIDELINES FOR REHABILITATION OF SICK INDUSTRIAL UNITS

a) If the industrial unit remain substandard for more than six months i.e. principal or

interest, in respect of any of its borrowal accounts has remained over due for period

exceeding one year. The requirement of overdue period exceeding one year will

remain unchanged even if the present period for classification of an account as sub-

standard, is reduced in due course.

Or
 b) There is erosion in the net worth due to accumulated cash losses to the extent of fifty

percent of its net worth during the previous accounting year.

And

c) The unit has been in commercial production for at least 2 years.

This would enable banks to take action at early stage for revival of the units.

 Banks/Financial Institutions will have to identify the units showing symptoms of

sickness by effective monitoring and provide additional finance, if warranted, so as to

bring back the units to a healthy track.

 When an advance slips into the sub-standard category, as per norms, the financial

institution should make full enquiry into the financial health of the unit, its operation,

etc...And take remedial action.

 The financial institution officials who are familiar with the day-to-day operations in the

borrowal accounts should be under obligation to identify the early warning signals and

initiate corrective steps promptly. Such steps may include providing timely financial

assistance depending on establish need, if it is within the powers of the branch

manager, and an early reference to the controlling office where the relief required are

beyond his delegated powers.

 The manager of financial institution may also help the unit, in sorting out difficulties

which are non-financial in nature and required assistance from outside agencies like

government departments/ undertakings, Electricity Boards, etc…He should also keep

the term lending institutions informed about the position of the units wherever they

also keep involved.

  Banks/Financial Institutions are to setup sells at all regional centers, besides at Head

Office, to deal with sick industrial units and also provide expert staffs including

technical personnel to such cells.

Viability of Sick Units:

 A unit may be regarded as potentially viable if it would be in a position, after

implementing a relief package spread over a period not exceeding five years from the

commencement of the package from banks, financial institutions,govt(central or

state) and other concerned agencies, as may be necessary, to continue to service its

repayment obligations as agreed upon including those forming part of the package

,without the help of concessions after the aforesaid period

 Repayment period for restructured (past) debts should not exceed seven years from

the date of implementation of the package.

 Based on the norms specified above, it will be for the banks/financial institutions to

decide whether a sick unit is potentially viable or not.

 Viability identified as sick, should be decided quickly and made known to the unit and

others concerned at the earliest.

 The rehabilitation package should be fully implemented 56 months from the date the

unit is declared as ‘potentially viable ‘/’viable’,

 While identifying and implementing the rehabilitation package, banks/FIs are advised

to do ‘holding operation’ for a period of 6 months.

 This will allow units to draw funds from the cash credit a/c at least to the extent of

their deposit of sale proceeds during the period of such ‘holding operations’.

Rehabilitation of Potentially Viable Units.

 It is emphasized that only those units which are considered to be potentially viable

should be taken up for rehabilitation.

 The reliefs and concessions specified are not to be given in a routine manner and

have to be decided by concerned bank /FIs based on the commercial judgment and

merits of each case.

 Banks have also the freedom to extend relief and concessions beyond the parameters

in the deserving cases. Only in exceptional cases, reliefs /concessions beyond the

parameters should be given.

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