October 24, REVIVAL AND RESTRUCTURING OF SICK INDUSTRIES: AN

2011 ANALYSIS

BY HILAL AHMAD MALLA

STUDENT OF LL.M 4TH SEMESTER

HIDAYATULLAH NATIONAL LAW UNIVERSITY RAIPUR

Electronic copy available at: http://ssrn.com/abstract=2006848

 October 24, REVIVAL AND RESTRUCTURING OF SICK INDUSTRIES: AN
2011 ANALYSIS

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,)
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, and 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.

HISTORICAL BACKGROUD OF INDUSTRIAL SICKNESS

 Pre-Independence Position
Before 1947, the Indian economy was predominantly agricultural in nature. The development of
producers was almost negligible and was inadequate to meet the demands of the market. Only
those industries survived who served the interests of the Britishers. There was dearth of private
players in the market. 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.

Electronic copy available at: http://ssrn.com/abstract=2006848

 October 24, REVIVAL AND RESTRUCTURING OF SICK INDUSTRIES: AN
2011 ANALYSIS

This issue was further aggravated with the lack of any proper bank or financial institutions to
finance the industrial projects. And, if at all, any help was available from the money lenders, they
charged exorbitant rates of interest along with arbitrary terms and conditions. There was also
minimal intervention of the Government in the promotion of the industries. As a result, it was
difficult for any trader to survive in the market on a long terms basis. 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.
 Post-Independence Period
After the Constitution came into force, the primary aim was to convert India from a colonial
country to a socialist welfare society, as envisaged in the Preamble and the Directive Principles
of State Policy. The Government was prompted to go for rapid industrialization of basic and
heavy industries to convert India from agricultural to industrial economy. Soon, the Government
realized that a large number of units are turning sick. In order to check the growth of the sick
units, the Government adopted strategies to takeover of the sick industrial units and restrict the
problem if unemployment, labour unrest and social unrest. 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. The Government in its aim of
preventing the growth of sickness was given support by various agencies such as RBI, IDBI etc.
Definition of sick industrial company
The concept of sick industrial concept has been embodied under section 2 (46 AA), which
defines it as follows:
Industrial company means an individual company which has
i. The accumulated losses in any financial year equal to fifty percent or more of its average
net worth during four years immediately preceding such financial year equal 50 % or more
of its average net worth during four years immediately preceding such financial year, or
ii. Failed to repay its debt within any three consecutive quarters on demand made in writing
for its repayment by a creditor or creditors of such company.
It has also been defined by Section 3(1) (O) of Sick industrial companies (special provision)
amendment Act, 1993 as follows:

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An industrial company (being a company registered for not less than 5 years) which has at the
end of any financial year accumulated losses equal to or exceeding its entire net worth.

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 October 24, REVIVAL AND RESTRUCTURING OF SICK INDUSTRIES: AN
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Chapter 1
Corporate Insolvency and Restructuring
Introduction
Generally speaking, it is almost impossible to conceive of a business that is completely
insolvency-free. Laws relating to corporate insolvency and restructuring seek to serve several
objectives, namely, to restore the debtor company to profitable trading where this is practicable;
to maximize the return to creditors as a whole where the company itself cannot be saved; to
establish a fair and equitable system for the ranking of claims and the distribution of assets
among creditors, involving a redistribution of rights; and 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.
And we all know that the legal framework for businesses to enable sustainable economic reform
having focus on emerging economic scenario, good corporate governance and protection of the
interests of the stakeholders, including investors, need efficient and speedy procedures for exit as
much as for start-up. World over, insolvency procedures help entrepreneurs close down unviable
businesses and start up new ones. 1This ensures an overall economic growth. Even though India
has made much progress on economic reform since 1991, the economy is still limping by
excessive rules and a powerful bureaucracy with broad discretionary powers which often goes
against the general interests of business. 2
Although the Indian insolvency law has been an ardent follower of the UK insolvency laws, yet,
while the UK has moved to a consolidated insolvency law, the similar well directed move is not
forthcoming. Much has been said and done to bail out corporate insolvency and restructuring
process in order to make the laws „efficient‟ and „effective‟; many a doctors have prescribed and
administered „fair‟ dose; numerous law making processes deliberated in recent years involving
law makers, professionals and different interest groups, yet, for reasons unknown, the requisite
teeth is still missing. It is wondered as to how a just less than a month is needed to register a

1
www.legalserviceindia.com
2
Prepared in the Directorate of Academics and Professional Development, the ICSI 2 J P S Sirohi, Law of
Insolvency(1985)

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business in India, but when it comes to winding up and revival of a company, it can drag as long
as 10 years or even more in „appropriate‟ case! 3
WEAKNESSES IN THE INDIAN CORPORATE INSOLVENCY &
RESTRUCTURING SYSTEM

 The Companies Act, 1956 governing liquidation has been working more of as time-
consuming machine;
 Sick Industrial Companies Act 1985 (SICA) governing restructurings has been an abject
failure being subject complete abuse by debtors seeking to delay creditors;
 Rampant asset stripping;
 Lack of machinery to provide credit bureau information to track delinquent debtors;
 Lack of sanctions against management resulting in poor corporate governance in insolvency
situations.
Another concern which cripples as to who calls the shot for regulating the companies when it
comes to corporate governance, there is a classic dichotomy in regulation. On the one hand, it is
the Ministry of Company Affairs that is largely responsible for the implementation of the
Companies Act, 1956, while it is SEBI (for listed companies) that is responsible for
implementation of the corporate governance norms, which is contained in Clause 49 of the
listing agreement. These are not mutually exclusive and there is bound to be overlap. However, a
certain amount of confusion does prevail as to the separation of powers between the Ministry of
Company Affairs and SEBI. On a different note though, according to the Reserve Bank of India's
(RBI in short) Review of the Recommendations of the Advisory Groups constituted by the
Standing Committee on International Financial Standards and Codes in 2004, considerable
progress has been made in improving bankruptcy laws in the country from the time the Standing
Committee on International Financial Standards and Codes submitted its Report in 2002. 4
Although it is far from satisfactory, when evaluated against the best practice norms, the situation
has markedly changed since then. Several legal changes have materialized. Though a
comprehensive law has not been enacted, the objectives of the same have been sought to be

3
See, Balan K, Managing Industrial Sickness, 1st edition, Mittal Publications, 1996
4
the ICSI 2 J P S Sirohi, Law of Insolvency(1985)

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achieved through the changes to the Companies Act, 1956 by repeated amendment. In general,
there has been an improvement in the corporate insolvency and restructuring regime. 5
LAWS, LAW-MAKING INITIATIVES AND THEIR EFFECTS
In certain specified industries are covered under the Sick Industrial Companies (Special
Provisions) Act 1985 (SICA). The Securitization, Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 (SARFAESI) provides for the establishment of asset
reconstruction companies (ARC), 6which would undertake the management/realization of non-
performing loans acquired from secured creditors by taking over, change the management. While
winding-up and schemes of arrangement are carried out under the aegis of the Courts, the Board
for Industrial and Financial Reconstruction (BIFR in short) has been set up (under SICA) for the
restructuring/rescue of sick companies.
There are other categories of companies incorporated under various specific statutes, including
public sector banks and insurance companies are to go by liquidation and reconstruction process
in accordance with government regulatory process and such are more of administrative in nature.
In 1981, the RBI appointed T. Tiwari Committee to examine the legal and other problems faced
by the banks and financial institutions in rehabilitation of sick industrial units and to suggest
remedial measures for effectively tackling the problem of sickness. Following the
recommendations of the Tiwari Committee, the Government of India enacted the Sick
Industrial Companies (Special Provisions) Act, 1985, (SICA) in order to provide for timely
detection of sickness in industrial companies and for expeditious determination of the preventive,
ameliorative, remedial and other measures and for enforcement of the measures. Although, the
object of the Act was laudable, the Act was factually misused by the erring promoters' to defeat
the object of the Act, the most notable of such provisions was the protection under Section 22 of
the Act. Due to such inherent defects of SICA and again, for some unexplained reasons, BIFR
failed to fulfill the purpose and mandate as envisaged therein.
Then came Justice V.B. Balakrishna Eradi Committee Report in 1999 recommending, inter
alia, setting up of a National Company Law Tribunal (NCLT) to be vested with the functions and

5
See, Bhaskar Amit, A Study Of Restructuring Of Sick Industrial Companies Under Par Via Of The Companies Act
Vis-A Vis Sick Industrial Companies (Special Provisions) Act, 1985. The article can be viewed at :
http://employment.indlaw.com/search/articles/?3c5970ff-a184-4025-a14a-5de6182c55ee,last accessed on 18th
October, 2009.

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power with regard to rehabilitation and revival of sick industrial companies, a mandate presently
entrusted with BIFR under SICA and forming of a liquidation committee consisting of creditors
of the company in the lines of Section 141 of the Insolvency Act, 1986 of UK to assist the
Liquidator and by adopting the necessary principles enunciated under International Monetary
Fund‟s propagated norms for „Orderly and Effective‟ insolvency procedures. The statement
(financial) of affair, which took the most time, is now to be filed, in case of voluntary winding
up, along with the winding up application, and in case of an involuntary proceeding, at the time
of the first defense. The liquidation program is bound to be time bound. 7
In 2001 came the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra
Committee appointed by the RBI which made several recommendations on bankruptcy law
reforms, the first among which was consolidation of bankruptcy laws into a separate code.
However, no legislative steps have still been taken in this regard. In line with the Eradi Report
and long felt need and widespread criticism from different quarters, we saw the Companies
(Amendment) Act, 2002 and repeal of SICA proposed to the new regime of tackling corporate
rescue and insolvency procedures in India with a view to creating confidence in the minds of
investors, creditors, labour and shareholders. The amended Act has suggested for change by
combining the powers of the Courts, the BIFR and the CLB in one specialized NCLT in respect
of liquidation of companies, schemes of arrangement/compromises and restructuring of sick
companies, thus streamlining the regime. However, six years on, the intended Tribunal is yet to
be constituted.
Then we saw JJ Irani Committee Report 20058 formulated to review the laws concerning
liquidation and restructuring of the companies recommended several revisions to the Companies
Act, more particularly for a transparent and globally acceptable insolvency and restructuring
procedures, in short. According to the report, “it is important that the basic principles guiding the
operation of corporate entities from registration to winding up or liquidation should be available
in a single, comprehensive, centrally administered framework”. Having recognized the need for a
single centre of control, the report goes off on a tangent on this issue. For instance, about the
need to demarcate the respective jurisdictions of the MCA and SEBI, the Irani Report states that

7
See Mulla Law of Insolvency in India(1958), P.16
8
See, Prof (Dr.) Sreerenganadhan K, Miss Varghese Roshna, Management of Industrial Sickness
http://www.mgu.ernet.in/DLR/DLArchive/sre06.pdf, last accessed on 18th October, 2009

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“this perception is misplaced”. More importantly, the report does not recommend which
government or regulatory agency should be held principally accountable if there is gross
incompetence or worse in the management of companies. Almost three years have passed since
the Irani Report was finalized and submitted, companies law currently being revamped, yet to be
put in place.
In the meanwhile, tireless efforts of the RBI need to be noted. The RBI approval is given to asset
reconstruction companies under SARFAESI Act. Amongst approved, Asset Reconstruction
Company India Limited (ARCIL), a loan player, thereby, has been very active in assets
reconstruction of the sick or potentially sick companies who are in default of repayment of loans.
Recent changes in foreign investment policy allowing foreign direct investment in asset
reconstruction companies is expected that pending license applications will be processed
expeditiously. According to the guidelines issued by the RBI, Indian banks excepting foreign
banks and financial institutions have entered into contractual arrangements for the Corporate
Debt Restructuring (CDR) of companies with multi-lender involvement. The RBI has recently
issued a revised set of CDR guidelines. The RBI recently issued separate guidelines for the
restructuring of small to medium-sized enterprises (with less than Rs100 million in plants and
machinery).9
Lastly, the new Credit Information Companies Act of 2005 covers the rights and responsibilities
of credit bureaus to both maintain accurate credit reporting and safeguard customer confidence.

ENFORCEMENT OF SECURITY INTEREST AND EQUITY

Corporate insolvency and restructuring proceedings are based on equity and it may be an
arguable issue as to whether a non-judicial body as the NCLT can deliver equitable justice.
Despite welcome changes by Eradi and Irani Committee Reports, there is still a need for a
thorough overview, from viewpoint of consistency, of at least two significant related fields:
As far as reorganization proceedings are concerned, the provisions inserted in the Companies Act
are substantially a restatement of the existing provisions of the SICA. First of all, there is no
delineation of the circumstances in which reorganization under Section 424A will be applicable,

9
See, Dholakia H Bakul, Industrial Sickness in India: Weed for Comprehensive Identification Criteria. The article can
be viewed at http://www.vikalpa.com/pdf/articles/1989/1989_apr_jun_19_24.pdf, last accessed on 18th October,
2009.

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and those under which a winding up order may be passed under Section 433. For example,
inability to pay a debt is a ground for winding up, which is also a ground for treating a company
as a sick company. A creditor may possibly make reference/application under either provision,
and since the adjudicating body is the same under both the provisions, there ought to be clear
guidelines as to cases where revival should be the first consideration and those where liquidation
shall be ordered. For instance, under the US Bankruptcy law, the Court must be satisfied that the
recoveries under a reorganization plan will not be worse than those in case of liquidation.
Secondly, enforcement of security interests, and enforcement of claims of special creditors is
dealt with by several statues in India, including the SARFAESI Act in case of secured creditors
being banks, Recovery of Debts due to Banks & Financial Institutions Act 1993 in case creditors
being banks or financial institutions, and State Finance Corporations Act in case of creditors
being State Finance Corporations, etc. So often it is found that enforcement overlaps with each
other, thus creating confusion. 10
Most of these laws provide for sweeping security enforcement provisions, without regard to the
equities and interests that corporate insolvency and restructuring laws seek to preserve.
Enforcement of security interests by the secured creditor is a global norm, but in India, a special
position has been conferred on the workers by proviso to Section 529, and Section 529A of the
Companies Act. Workers have been put at par with the interests of the secured creditor: if this is
true for winding up, it is difficult to understand why this should not be true in cases which will
certainly lead to winding up. For instance, if floating charge-holders were allowed to enforce
security interests under the SARFAESI by declaring a default, there would be no assets left with
the company. While this is sure to lead to bankruptcy of the company, the interests of workers
that Section 529/529A seeks to preserve are completely frustrated.11
We have seen that genuine efforts have been made to formulate laws through recommendations,
enactment etc. Yet, like any other branches of law, corporate insolvency and restructuring laws
in India lacks teething. Authorities concerned need courage of conviction with clear mindset and
will at heart in order to make the current laws more efficient and effective with an element of a
definitive and predictable time frame. And the judicial process ought to take commercial
approach towards revival of the sick companies. All supporting pillars i.e., accounting and

10
1988 INDLAW GUJ 54
11
See Mulla Law of Insolvency in India(1958), P.16

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auditing, statutory & legal framework, monitoring & enforcement, education & training, need to
be strengthened and disciplined.

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Chapter 2nd

REVIVAL AND

RESTRUCTURING OF SICK INDUTRIES

Introduction
Sickness in Industry in our country is a phenomenon, which has existed along with healthy
industrial enterprises. Sickness has registered a quantum jump with the onset of the new
economic order, ushered in by liberalisation and globalization. The approach to handle sickness
in the industry has undergone a gradual change. While earlier when the socialist approach was
pre-dominant, the view towards sick companies was that no sick company should be allowed to
die or close down, as employment shall be lost. In those times, efficiency of capital deployment,
whether labour, financial capital or any other resource was not the prime concern, but providing
employment was the main objective of our planners. Such regime existed upto 1985 or so, when
a number of sick private companies were nationalized. An increasing number of sick, private
textile mills which were nationalized became part of the National Textile Mills (NTC).
During the 1980s, the Govt of India had set up The Industrial Reconstruction Corporation of
India (IRCI) to provide financial assistance to Sick Units, to enable them to revive under their
then existing structure. Later it was converted to The Industrial Reconstruction Bank of India
(IRBI), to carry the same function under a different mould. Now this has undergone further
metamorphosis and has been re-christened as The Industrial Investment Bank of India (IIBI),
with no obligation to fund the sick industries. In 1985, The Govt of India realized that the policy
of indiscriminate nationalization and fund support to sick companies cannot be pursued and there
is a need of assessment of viability of such sick companies in the private sector and with that
objective The Sick Industrial Companies (Special Provisions) Act 1985 was enacted.

In case the existing management could not revive the company, anybody interested could be
invited to takeover, lease or amalgamate the sick company into itself. Later, in 1993, the Act was
amended to bring the public sector companies under the purview of The BIFR and facilitate
privatization of sick public sector units. Proceedings under the BIFR clearly conveyed the
message that viability of operation was a pre-requisite for taking any measures for rehabilitation
of a sick company. If the operations of the company were likely to remain un-viable, no measure

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of nationalization or amalgamation with a healthy company could revive the sick company.
Indirectly, this approach introduced the efficiency of capital/profit earning capacity of any
business enterprise as the key for deciding the future course of action. This also introduced the
idea of winding up of sick companies to re-deploy capital invested in them to a better productive
use. This concept is being taken forward under the proposed amendment to the Companies Act
1956 by the Amendment/Second Amendment Act 2002 in that a viable unit may be allowed to
revive while an inherently sick company should be wound up and should not be a drag up on the
national resources.

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
12
and not 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.13The existence of
these signals and symptoms provides a ground for suspecting that the industrial unit concerned is
prone to sickness

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

12
Prof (Dr.) Sreerenganadhan K, Miss Varghese Roshna, Management of Industrial Sickness
13
Dholakia H Bakul, Industrial Sickness in India: Weed for Comprehensive Identification Criteria. The article can be
viewed at http://www.vikalpa.com/pdf/articles/1989/1989_apr_jun_19_24.pdf,

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(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.

OBJECTIVES OF SICA

 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.
 To stop continued drain of public and private resources for the overall economy of the
country.
 To protect employment as far as possible. In the case of Testeels Limited & Arvindbhai N.
Talti vs. Radhaben Ranchhodlal Charitable Trust & Testeels Limited,14 it was held that
SICA had been enacted to safeguard the economy of the country and protect the viable sick
units.

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:

 Securing the timely detection of sick and potentially sick companies

 Speedy determination by a group of experts of the various measures to be taken in respect of
The sick company
 Expeditious enforcement of such measures.

14
1988 INDLAW GUJ 54

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BIFR has a chairman and may have a maximum of 14 members, 15 drawn from various fields
including banking, labour, accountancy, economics etc.16 it functions like a court and has
constituted four benches.

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 net worth positive without
any external financial assistance, or if the BIFR decides that the company cannot 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:

 Financial Reconstruction of the sick industrial company;

 The proper management of the sick industrial company by change in, or takeover of, the
management of the sick industrial company;
 Amalgamation with another company or vice-versa;
 Sale or lease of its undertaking;
 Rationalization of its staff;
 Any other preventive or remedial measures; and
 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, and 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.

REHABILITATION BY GIVING FINANCIAL ASSISTANCE

15
Section 4(2) of SICA,, 1985
16
Section 4(3) of SICA, 1985

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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.

CAUSES OF SICKNESS

Some industries are born sick; sickness is thrust upon some,17 while others become sick due to a
number of causes. The general belief is that the incidence of sickness results from the changing
economic factors and the external influence, which tilt the economic viability. 18The causes of
sickness may vary from one unit to another. But the most common causes of sickness can be
grouped under two heads internal and external. In India, the Tiwari Committee in its report
outlined the causes of sickness into several heads. They can be classified as:

A. Internal Causes - These are those factors which are within the internal control of the
management. Sickness arises because of the disorder of the following concerns:
Planning
19
a. Technical feasibility: Inadequate technical know-how, locational disadvantage,
outdated production process.
b. Economic Viability: High Cost of Inputs, uneconomic size of project, under estimation of
financial requirements, unduly large investment in fixed assets, over-estimation of
demand.
17
This happens due to change in Government policy, over-spending on essentials, absence of control on
borrowings, dishonest practices on the part of the management, etc.
18
See, Balan K, Managing Industrial Sickness, 1st edition, Mittal Publications, 1996
19
According to the Tiwari Committee, 14 per cent of the large sick units suffered from technical factors and faulty
initial planning.

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Implementation
a) Cost over-runs resulting from delays in getting licenses/sanctions etc., inadequate
mobilization of finance.
Production

a. Production management: Inappropriate product mix, poor quality control, high cost of
production, lack of adequate timely and adequate modernization, high wastage, poor capacity
utilization.

b. Labour management: Excessive high wage structure, inefficient handling of labour

problems, excessive manpower, lack of trained/skilled component personnel.

c. Marketing management: Dependence on limited number of customers, poor sales

realization, defective pricing policy, weak market organization, lack of market feedback and
market research, lack of knowledge of marketing techniques.

d. Financial Management: Poor resource management and financial planning, liberal dividend
policy, application of funds for unauthorized purposes, deficiency of funds, over-trading,
inadequate working capital, lack of effective collection machinery.

e. Administrative Management: Over centralization, lack of professionalism, lack of feedback

to management ( management information system), lack of adequate controls, lack of timely
diversification, excessive expenditure on R&D, incompetent and dishonest management.

B. External Causes:

a. Infrastructural bottlenecks: Non-availability/irregular supply of critical raw materials or

other inputs, chronic power shortage, transport bottlenecks.

b. 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.

c. Government control, policies, etc. Government price controls, fiscal duties, abrupt changes
in Government policies, procedural delays on the part of the financial/licensing/other controlling
or regulating authorities (banks, RBI, financial institutions, Government departments, licensing
authorities, MRTP Board).

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d. Marketing Constraints: 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.

e. Extraneous factors: Natural calamities, political situation (domestic as well as international),

war, sympathetic strike, multiplicity of labour unions.

The Government taking into consideration all the factors resulting into industrial sickness,
accepted the recommendations of the Tiwari Committee with some modification, and thus, the
Sick Industrial Companies (Special Provisions) Act, 1985 was, accordingly enacted.

COMPANIES BILL, 2009

Certain changes were proposed to be made for the rehabilitation and revival of the sick units as
from the proposed Companies Amendment Act, 1956.The criteria of sickness was changed to
include „inability to pay debts‟ due to secured creditors representing 50% or more of the
20
outstanding debt. Further the scope of the filing for the determination of sickness which was
restricted to the Board now included the creditor or the company. 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.21 Moreover, 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.

RECOMMENDATIONS OF THE JJ IRANI COMMITTEE ON

COMPANY LAW22
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 net worth with
that of the liquidity test. 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, commercial and technical characteristics of insolvency law. It also

20
See, Section 229(1) of the Companies Bill, 2009
21
See, Section 237(2) of the Companies Bill, 2009
22
(2005)[17]

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 October 24, REVIVAL AND RESTRUCTURING OF SICK INDUSTRIES: AN
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recommended the establishment of the National Company Law Tribunal on a speedy basis.
Further, it enunciated that the rehabilitation by cess to be replaced by the „Insolvency Fund” with
optional contribution by companies. It also allowed the debtors to approach the Tribunal with the
rehabilitation scheme. Power was also given to the creditors to oppose the scheme of
rehabilitation.

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CHAPTER 3RD

CORPORATE REHABILITATION:
A PERMANENT SOLUTION FOR THE SICK INDUSTRIES

Introduction
India started her quest for industrial development after independence in 1947. The industrial
policy resolution of 1948 marked the beginning of the evolution of the Indian Industrial Policy;
and thereafter with the economic and social development there has been shift in the industrial
policy from the directed and regulated economy in the 1948 and 1956 Policy Resolution, to the
free market economy in 1991. During the initial years, there was also the problem of industrial
sickness entailing social costs in terms of loss of production and un-employment and waste of
capital assets. The problem of industrial sickness and its consequential fall out on the nation‟s
economy and also the problem faced by financial institutions (which have invested much of the
public funds in such industries) in the matter of recovery of their dues and the rehabilitation of
the sick industrial company led to enactment of the Sick Industrial Companies (Special
Provisions) Act, 1985. 23

ISSUES ARISING OUT OF IMPLEMENTATION OF SICA

The functioning of SICA has not been found to be satisfactory as many issues have been
identified during its implementation. Some of the deficiencies were restrictive definition of
“sickness” under the Act and belated cognizance thereof by BIFR, slow pace of BIFR
intervention, excessive protection to sick industries under Section 22 of the Act providing for
automatic stay of all legal proceedings, necessity of consensus amongst secured creditors before
finalization of revival scheme, lack of monitoring of sanctioned revival schemes, and delay in
winding up of sick companies. Apart from these, frequent appeal to High Courts against the
decisions/ orders of the BIFR was also one of the factors responsible for delay in timely disposal
of the cases. 24

23
Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition
24
Reference taken from mergers and acquisition by sampath, 2008

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2011 ANALYSIS

PROCEDURAL DELAYS

There are inherent defects both, procedural and legal in proceedings before BIFR. The BIFR
takes substantial time to determine whether a company is sick and thereafter, to formulate a
revival strategy. Consideration of the same also takes substantial time since banks and financial
institutions have their own hierarchy in decision making, leading to avoidable delays. The
decisions by the banks are also neither transparent, nor subject to judicial review. By the time
decisions are taken and communicated, the plan, which had been conceived, loses its viability
resulting in failure of revival schemes even after sanction. 25

LACK OF TIMELY COMMENCEMENT OF PROCEEDINGS

Under the existing law, a company can approach the BIFR for adopting steps for its revival, on
erosion of its entire net worth. The erosion of entire net worth is too late a stage to attempt
restructuring as by the time the net worth is completely eroded the company is too sick to be
revived and loses its resilience to restructure and revival. 26

MISUSE OF PROTECTION AGAINST RECOVERY PROCEEDINGS

Under SICA, an automatic stay operates against all kind of recovery and distress proceedings
against all creditors once the reference filed by the company is registered. This is the principal
drawback of the existing legislation as this has led the BIFR to become a haven for defaulting
companies. Erring debtors have misused SICA to seek protection and moratorium from recovery
proceedings. The companies are able to enter easily into the reference, sometimes by
manipulating their accounts to reflect net worth erosion and then able to attract immunity against
the recovery action by the creditors and this benefit is then attempted to be perpetuated.

This problem arises due to the fact that unscrupulous promoters enter into the process of
rehabilitation by manipulating sickness; take undue benefits arising out of delay in decision
making of BIFR. If the reference is rejected, a fresh reference is filled with respect to accounts

25
ICSI Module on Economic and Labour Laws.
26
Sourced from: http://www.dnb.co.in/Arcil2008/SARFAESI.asp

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for the next year and the cycle goes on endlessly. There is no fear of reprisal or punitive action
against the companies indulging in this malpractice.27

BAD EFFECTS OF INDUSTRIAL SICKNESS

Industries that have gone sick have far-reaching consequences on the economy of the nation. The
following are the bad effects of industrial sickness.

 There is under utilization of capital assets. Though under utilization of capital assets is a
drain on the capital of any nation, it very much affects the capital formation process of less
developed and developing countries.
 The entrepreneurship level declines. In economics land, labour and capital are referred to as
the factors of production. It is only entrepreneurship of project promoters that brings together
the factors of production for accomplishing the task of nation building. Increase in industrial
sickness discourages entrepreneurship.
 The investor confidence reaches lower ebb. Thus, capital is not put to productive use.
 Industrial sickness results in large scale unemployment and industrial unrest.
 Profitability of banks and financial institutions gets affected since they don‟t get back their
funds invested in projects that have gone sick. Nor do they earn interest on their invested
funds. Since their funds get blocked in sick units banks/financial institutions could not
recycle their funds with the result that even a good project cannot be funded by them.
Therefore, prevention of sickness and rehabilitating sick projects assume greater importance.

BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION

(BIFR)

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.

27
http://www.legalservicesindia.com/articles/corin.htm

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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, drawn from various fields including banking, labour, accountancy, economics
etc. It functions like a court and has constituted four benches.

Reporting to the BIFR

The Board of Directors of a sick industrial company is required, by law, to report the sickness to
the BIFR within 60 days of finalization of audited accounts, for the financial year at the end of
which the company has become sick. BIFR has prescribed a format for this report. While
reporting by a company of its sickness to the BIFR is mandatory as per the provisions of law,
any other interested person/party can also report the fact of sickness of a company to the BIFR.
Such interested parties may be the financial institution/bank that has lent loan to the company,
the RBI, the Central/State Governments. The BIFR has prescribed a different format for the
report to be submitted by such interested parties. When a company has been financed by a
consortium of banks, it is the Lead Bank that should report to the BIFR about the sickness under
advice to other participating banks in the consortium. 28

ENQUIRY BY THE BIFR

When a case is referred to the BIFR, it is verified by the Registrar of the BIFR as to whether the
facts of the case fall within the provisions of the Sick Industrial (Special provisions) Act, 1985. If
so, the BIFR accepts the case and notifies a date for hearing the case. For rehabilitating a sick
unit, cooperation of various connected agencies is a must. This co-ordination is achieved by the
BIFR. The BIFR invites the representatives of the informant sick company, the representatives of
concerned financial institutions and commercial banks, representatives of the Central/State
Governments, trade union representatives etc, to the hearing and inquiry is made under section
16 of the Act.

28
Sourced from: http://bankdrt.net

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2011 ANALYSIS

After the hearing, the BIFR itself may conduct a study or entrust the work to an „operating
agency‟ appointed by it to determine whether the company is in fact sick. Normally, the lead
financial institution (IDBI, ICICI, IFCI, and SFC) or the lead public sector bank that has
financed the company is nominated as the operating agency. Lead institution is one that has
major financial stake in the sick company. The enquiry is to be completed within 60 days. On
completion of the enquiry, the BIFR will declare whether the company is sick or not.

REVIVAL PACKAGE

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 net worth positive without
any external financial assistance or if the BIFR decides that the company cannot make its net
worth positive within a reasonable time, the BIFR will direct the operating agency to prepare a
suitable revival package for the restoration of the health of the company. The operating agency
prepares a suitable revival package. 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, and 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.

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

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parties to be heard. After careful examination of all the aspects, the BIFR will sanction the
revival scheme with or without any modifications.

The scheme, as sanctioned, will come into force from the specified date and all the concerned
parties are required to abide by the provisions of the revival scheme. The BIFR may also order
the operating agency to implement the sanctioned revival scheme. When the revival package as
finalized by the BIFR contains further financial assistance or reliefs, concessions, sacrifices etc.
(for example, sanctioning of additional financial assistance for the purchase of certain balancing
equipments, waiving of penal interest/compound interest charged, waiving of interest in part or
full, waiver from sales tax etc.) the scheme will be circulated to the concerned agencies for their
consent to be received within a period of 60 days. Once the various agencies involved in the
revival scheme give their consent to the scheme, it will become binding on the consenting parties
to implement the recommendations contained in the revival scheme. However, when any of the
involved agencies does not give its consent to the scheme, the BIFR has no powers to force the
agency to accord its consent. If in the opinion of the BIFR, the revival package cannot be
successful without the consent from one or more of the agencies involved, the BIFR has no other
option but to recommend for winding up of the company. In fact, the threat of actual winding up
of the company is the only weapon in the hands of the BIFR to make the various agencies to
extend suitable reliefs and concessions as may be deemed necessary by the BIFR. BIFR itself
cannot initiate the winding up proceedings. It can only forward its opinion to the concerned High
Court and the High Court will initiate the winding up proceedings.

CAUSES OF SICKNESS

„Prevention is better than cure‟ is the proverb that reflects the need for knowing the likely causes
of industrial sickness so that one can plan to avoid the same. Just as human beings fall sick by
two ways, viz., and either born sick or acquiring sickness during growth, an industry can either
run into trouble even during the implementation stage itself or develop sickness during its
lifetime.

The causes of sickness can be categorized into two viz., internal causes and external causes.
Internal causes are those that are internal to the organization over which the management of the
organization has control. Sickness due to internal causes can be avoided if the management is

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2011 ANALYSIS

shrewd enough to identify the causes and eliminate them at their initial stage itself. External
causes are those that are external to the organization over which the management of the
organization has little control. Government‟s plans and actions, failure of monsoon which affects
agriculture and allied industries, emergence of strong competitors etc., are some of the external
factors. Though sickness may be caused either by internal or external factors, sometimes, the
management may be able to revamp its organization, plan suitable strategies and take on the
external factors to reduce their impact.

The areas/stages in which these causes may exist, their effects can be studied under the following
heads.

 Project formulation.
 Project implementation.
 Production.
 Marketing.
 Finance.
 General and personnel administration.

PROJECT FORMULATION: 29Most of sickness is attributed to ill-conceived projects.

A project that may, prima-facie present a rosy picture may have many hidden pitfalls. Irrational,
hasty, over-optimistic decisions may result in choosing projects that may have inherent
weaknesses. A project that has an inherent weakness is very unlikely to be a successful project.
The existence of a few players in the chosen field, who are doing well, is not always a sound
proof that the project will be a success. The existing players may have their own special
advantages due to which they could have overcome the hurdles and pitfalls that are present in the
project. A thorough investigation of the project during the identification and formulation stage is
the sine qua- none of any project proposal. “Think before you act” is the proverb that is worth
practicing. Any amount of time and efforts spent at this stage is worth it as any hasty decision
made at this stage will be very costly. External factors play a major role in project formulation
stage. The present stage of and the future course of the external environment are to be carefully
studied for their influence on the project.
29
Http://www.linkedin.com/companies/asset-reconstruction-company-india-ltd. 18 http://

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PROJECT IMPLEMENTATION

Unnecessarily, long time taken for project implementation results in time-overrun; which is
invariably followed by cost- overrun. Cost-overrun has the ill effect of affecting the financial
viability of the project since a project that is viable at a capital cost of say Rs. 100.00 lakhs may
prove to be unviable when the cost raises to, say Rs. 150.00 lakhs due to cost-overrun. The
problem of cost-overrun will get more compounded if the finance necessary to meet the
increased cost cannot be arranged in time. Any delay in arranging for the finance needed to meet
the cost overrun will only further tend to increase the cost and this may land the project in
trouble leading eventually to the death of the project and the project may not take off.

The following are some of the problem areas in implementation stage.

 The promoters may not be in a position to bring in funds to the required extent in time. In
general, Banks/Financial institutions, of late, insist that the promoters shall bring in their
capital contribution to the project upfront before release of loan. Any delay in bringing the
stipulated capital by the promoters will delay the drawal of loan, which will lead to delay in
implementation.
 The loan disbursement may be delayed if the promoters are not able to comply with major
terms and conditions of the loan agreement. For example, the loan agreement, inter-alia, May
stipulate that collateral security to cover, say 25% of the loan amount shall be offered. The
value of the property that the promoters offer as collateral security to the bank/financial
institution may be short of the requirement. Or, when the value of the property meets the
requirement, there may be other impediments like legal hurdles for clear, unencumbered title
to the property etc.
 The cost of different components of project-cost may increase due to price escalation. The
cost provided for some of the elements of project-cost might have been underestimated. It is
also likely that some elements which are essential might have been left out. These factors
lead to cost-overrun which may delay the project implementation. There may be delay in
getting power connection, water connection, approval from local bodies, approval from
pollution control authorities etc., which may postpone project implementation/
commencement of production.

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 When more than one institution is involved in funding a project, there may be delay in tying
up the financial arrangements with the different institutions. This is more so when term loan
and working capital loan are provided by two different institutions. The institution that is to
lend working capital loan may wish to see that the project comes through successfully and
reaches a ready-to-start stage before committing sanction of working capital finance. There is
likelihood of the capital investment on the project having been fully made and the project
waiting for sanction/release of working capital finance to commence commercial operations.
Any delay in release of working capital finance due to procedural formalities involved will
harm the project heavily, as the capital investment will be lying idle, without earning any
return.
 „Rethinking‟ of the project during the course of implementation, like changes in production
process, use of alternate raw material, changes in technology etc., may hold up project
implementation.
 Over spending on travel, entertainment and non-productive assets like guest houses,
compound walls, staff quarters etc., may result in cost-overrun, which in turn may delay
project implementation.
 Adverse foreign currency exchange rate fluctuations may affect projects involving imported
plant and machinery and may result in cost-overrun. This is an external factor over which the
management has no control. However, a prudent management can guard against adverse
foreign currency movement by entering into forward contracts etc.,30

PRODUCTION:

The major aspects of production that may lead to sickness are

 Increase in the cost of production.

 Decrease in the quantity of production.
 Quality of product not meeting the standards/customer expectation.
 Producing more quantity than can be sold, leading to accumulation of stock.

30
21Sourced from: http://www.drat.tn.nic.in/Docu/RDDBFI-Act.pdf

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The increase in cost of production may be due to external factors like increase in the cost of raw
materials, increase in the cost of consumables, power, etc., or due to internal factors like
improper choice of raw material/raw material-source, wrong choice of production process etc.
Decrease in quantity of production may be due to defects/under performance of plant and
machinery, defects in production process etc. Defects in quality of products may be due to
defects in raw material used, or due to unsatisfactory performance of machinery or due to
ineffective supervision. Inspite of the raw material, machinery and supervision being good, the
advent of new technology may bring in product-obsolescence and the product may lose customer
preference. Lack of proper planning of product mix and lack of co-ordination between
productions and marketing departments may lead to piling up of inventory, which will only add
to the cost of the product.

Marketing: Marketing occupies an important position in the organization of any business unit.
The prime objective of marketing is the satisfaction of customer‟s needs. Marketing functions
include all functions necessary to satisfy the customers. Marketing includes all activities starting
with the idea of producing a product to satisfy the needs of the consumers and ending with the
satisfaction of the consumer even after the product is sold. Thus, it involves planning and
producing to meet the customer needs and also servicing the customers after selling the product.
In the present day situation where buyer‟s market has come to stay almost for all products, any
organization that does not give due importance to marketing is bound to find its sales turnover
taking a downward trend.

The problem areas may be summarized as under.

 Introduction of better substitute products by competitors.

 Absence of product innovation and new product development.
 Failure to maximize the potential of existing products.
 Poor and inadequate distribution system.
 Failure to meet the agreed delivery schedules.
 Absence of correct costing and correct pricing system for the products.

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 October 24, REVIVAL AND RESTRUCTURING OF SICK INDUSTRIES: AN
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Finance: Finance is the lifeblood of business. It links and passes through all areas of a business
unit. The problem areas may be summarized as under

 The promoters might have chosen a project which is beyond their financial capacity. This
often happens due to over ambitious approach of entrepreneurs. A bigger project needs a
bigger investment and accordingly a higher promoter‟s contribution in absolute terms. If the
promoters are not able to mobilize their contribution, with the sole idea of implementing the
project, they often resort to borrowings, invariably at higher interest rates with the hope of
clearing the high cost borrowings once the project takes off (a hope that rarely comes
through!).
 Funding a project with a higher debt component than that it can safety bear is another reason
for sickness, since such projects will not be able to service the high interest charges. On the
other hand, inadequate long-term debt component will also be detrimental since the project
will either not take off due to the promoter‟s inability to raise the required capital or will be
funded by high cost short term borrowings which is harmful.
 Using shorter funds for acquiring fixed assets is an area of concern. This will put the liquidity
position of the business in strain when the shorter obligations become due for repayment.
 Improper inventory management policy will lead to holding huge stock of finished products,
late realization of debts from sundry debtors, lack of proper planning to pay to creditors of
raw materials, etc., which will all have telling effects on the operation of a business unit.

General and personnel administration:

The problem areas are summarized as under:

 Dispute/difference of opinion among the promoters/directors.

 Poor industrial relations leading to labour unrest.
 Lack of motivation and co-ordination
 Lack of manpower planning.
 Lack of assigning equal importance to all areas of business. It is generally observed that the
main promoter takes more interest in the area of his specialization and ignores other aspects
of the business. For example, technocrat entrepreneurs, by their nature are more inclined to

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improving the technical aspects of the product. The result may be that the product will not
be a commercial success though it may have technical excellence.
 Projects that solely depend upon the skills of a key promoter may find it difficult to sail
through in the event of death or ill-health of the key person.

LEADING INDICATORS OF SICKNESS: Just as diseases are identified by certain

symptoms, industrial sickness can be identified by the following symptoms. These symptoms act
as leading indicators of sickness, and if immediate remedial actions are not taken, the sickness
will grow to the extent that the organization will find its natural death.

 Continuous reduction in turnover.

 Piling up of inventory.
 Continuous reduction of net profit to sales ratio.
 Short term borrowings at high interest rate.
 Continuous cash losses leading to erosion of tangible net worth.
 Default in payment of interest on borrowings and default in repayment of term loan
installments.
 The „sundry debtors‟ as well as the „sundry creditors‟ keep growing and reaching a
disproportionately high level.
 Approaching the banker for temporary over draft at frequent intervals.
 High turnover of personnel, especially at senior levels.
 Change in accounting procedure with to view to window dressing.
 Delay in finalization of accounts.

NEED FOR REVIVAL/REHABILITATION PROGRAMME:

A project that has gone sick would have already swallowed huge scarce resources. In order to
utilize the assets and infrastructure already created for the project, the project is to be revived
from sickness. There is no doubt that the project would have had some weak areas which could
have been the cause for the sickness. Inspite of this, rehabilitating the sick project is worth
considering since the cost of setting up a new unit might be substantially higher as compared to
the cost of rehabilitating a viable sick unit. Of course, having known the factors that were

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responsible for leading the unit to sickness, they can be properly addressed in the revival
package.

Revival of a sick unit may be necessitated or justified in view of the under lying socio-economic
objectives such as the following.

 The project may be in a sector that is vital to the economy. Abandoning the project may lead
to other socio-economic ill effects.
 Many ancillary units may be dependent on the unit that has gone sick. Unless the sick unit is
revived, it will have a chain effect of all such dependent ancillary units becoming sick.
 Banks and financial institutions would have locked up their money in sick ventures.

In order to get back the investment of banks and financial institutions, the project is to be revived
and made to work again and generate surpluses. Though banks and financial institutions that
support a revival programme for the sick unit may be required to fund the project again, they will
be prepared to implement revival packages if they are convinced that they will, apart from
getting back their present investment with interest, also get back their earlier investments that are
locked up. Viability study for rehabilitation proposal: Once bitten, twice shy! Before attempting
to rehabilitate a sick unit, a detailed and thorough viability study is to be undertaken to ensure
that the revival programme will really bear fruits. It is not advisable to venture upon any revival
programme if there are gray areas that need further study. The viability study shall enquire into
the technical, commercial, managerial and financial aspects.

TECHNICAL APPRAISAL

 Study the manufacturing process used by the unit. Ascertain if any new process has since
been developed. Explore the necessity of switching over to the latest manufacturing process
and study the cost, benefit aspects of such switchover.
 Study the production capacity of different production sections and checkup if the production
capacity of different sections is perfectly balanced. If there is any production section, which
has a lower capacity than that required for perfect balancing, the overall capacity of the plant
can be significantly increased without huge investments, by adding the required balancing
machinery.

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 Explore the possibilities of adding additional/special features to the products that will add
competitive edge to the product. Also examine the need for changing the product-mix that is
in tune with the market requirement.
 Find out if any plant/equipment need major repair/overhauling to improve its operating
efficiency.
 If the locational disadvantages outweigh all other factors, the scope for shifting the location
to an advantageous place may be examined and the consequent cost-benefit analysis studied.
This may be possible if the firm is functioning in leased premises and owns only the plant
and machinery. If the unit is located in own building, the proposal for shifting the plant and
machinery to a leased building in an advantages location may also be studied. The building
owned by the firm can be leased out to some other firms. The long-term cost benefit analysis
will give lead to the acceptability or otherwise of such a proposal.
 Study the modifications required, if any in the plant layout so that the material handling time
can be reduced which may improve the efficiency of operations and improve the output.
 Examine if any of the manufacturing operations that are done in house can be entrusted to
outside agencies, which may result in cost reduction.

COMMERCIAL APPRAISAL

 Commercial failure of a project will be mainly due to problems relating to the product itself
viz., defects/imperfections in product design which may lead to consumer resistance.

Such situations indicate that the products offered by competitors have better features that attract
consumers. Hence, the scope for product improvement and the cost involved are to be studied.

 In spite of consumer acceptance of the product, if the project has gone sick, it is likely that
the profit margins might be low. Minor modifications in designing and packing the product
with upward revision in price may be accepted by the market which may bring better returns
to the company. This aspect may be studied by carrying out test marketing for the improved
product.
 Every product follows a life cycle which passes through four stages viz.,
 Introduction.

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 Rapid expansion.
 Maturity.
 And Decline.

Profit margins shrink and signs of sickness appear when the product is in its „decline‟ stage.
Product innovation can only sustain the product at this stage. The decline once started cannot be
contained for long Inspite of product innovations. Product diversification may prove to be a
feasible solution. Hence for rehabilitating a unit whose product has already reached its „decline‟
stage, the feasibility of switching over to diversified products making use of the existing
production facilities is to be studied. The cost-benefit analyses of additional investments needed
for product diversification and additional benefits that may accrue are to be analyzed.

MANAGEMENT APPRAISAL: A good project in the hands of an ineffective

management turns the project bad. Similarly a good management is capable making a not-so-
good project, a success. Hence the first thing under management appraisal is to study whether the
sickness is due to reasons beyond the control of the present management or due to ineffective
management. If the sickness is due to reasons beyond the control of the management, for any
revival package to come out successful, it should be first ascertained if the management is still
committed to the project and is serious about reviving the unit. The management‟s commitment
and seriousness may be indicated by,

 Its readiness to inject additional funds to revive the unit.

 Its readiness to strengthen the existing management by agreeing to induct professionals as
directors at various functional areas like technical/finance/marketing/research and
development etc.

The managerial appraisal shall suggest the required changes in the existing organizational set up
of the unit and also shall study the possible reduction in the man power that can be achieved
without affecting the organizational efficiency, the likely compensation payable for retrenchment
etc.

FINANCIAL APPRAISAL: Since appraisal of all other areas have a financial

commitment in one form or the other, financial appraisal assumes greater importance. All aspects

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of financial reconstruction need to be considered and analyzed. When a project that has long
term debt component in its capital structure becomes sick, it becomes necessary to ease the
burden of debt to enable the sick unit to recover from its sickness. This necessitates restructuring
of the debts. In general, banks and financial institutions offer the following concessions in their
package of rehabilitation assistance.

 Reduction in interest rate of existing loans.

 Conversion of short-term loans in to long-term loans. (This gives the unit under revival the
much-needed leeway to repay short term borrowings.)
 Conversion of part of long term loans into equity.
 Funding of the overdue interest (un-paid interest) and making it repayable in easy
installments.

The funded interest component may carry concessional rate of interest or even at times bears no
interest.

 Offering a revised schedule of repayment for the principal components of term loan.
 Sanction of additional loan to meet the additional capital expenditure.
 Enhancement of working capital limits and regularizing the irregular portion of working
capital finance already availed.

If any asset is found not useful, the wise choice would be to dispose of the asset and use the
amount realized to support the rehabilitation programme.

MONITORING OF NURSING PROGRAMME:

For the growth of a healthy person, it is enough if ordinary care is taken, while a sick person who
is in convalescent stage needs critical attention. He is prone to getting sick again if proper care is
not taken to monitor his health and to administer medicine at the required intervals. A sick unit
that is under a nursing programme is similar to a sick person who is in convalescent stage and
needs continuous monitoring. A simple and practical monitoring mechanism shall be devised.

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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.
Though SICA was conceived well, unfortunately it has not only failed to reduce sickness, but
also the spread of industrial sickness. Really, it is an accepted fact that some corporate deaths are
inevitable aspects of market-oriented economy. In the above background, when we analyze the
existing laws, we note that while SICA meets with and incorporates most of the essential features
required in restructuring laws, it has proved to be not very effective and has also lent itself to
misuse.
With the introduction of the Companies (Amendment) Bill, 2001 and the Sick Industrial
Companies (Special Provisions) Repeal Bill, 2001 the Government has presented to the country
its panacea for relief from the multifarious ills faced by the socio-economic fabric of the country
arising out of industrial sickness. Further, based on major recommendation of Narasimham
Committee and as per advice of Expert Committee under chairmanship of Shri T.R.
Andhyarujina the Government enacted Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESIA). By amendment in SICA, it is
provided that on enforcing security interest under SARFAESIA sick companies is barred from
filing reference.

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SICA has been repealed and work of rehabilitation of sick industrial companies is being
entrusted to the National Company Law Tribunal (NCLT) constituted under Companies Act.
Many of the provisions of SICA have been incorporated in Part VIA of the Companies Act
(Sections 424A to 424L) in a considerably diluted form. On repeal of SICA the reference before
BIFR will get abated. So long as NCLT are not constituted, BIFR and AAIFR continue to
function and deal with sick industrial companies.

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