Department of Business Administration Maharaja Krishnakumarsinhji Bhavnagar university Meaning • Industrial sickness usually refers to a situation when an industrial firm performs poorly, incurs losses for several years and often defaults in its debt repayment obligations.
• A sick industrial unit may be defined as one
when it fails to generate surplus on a continuous basis and depends on frequent infusion of external funds for its survival. Meaning continued.. An industrial unit tends to show signs of financial distress starting with : Short term liquidity problems Revenue losses Operating losses Moving in the direction of over use ofexternal credit. According to Reserve Bank of India • A sick unit is that which has incurred a cash loss for one year and is likely to continue incurring losses for the current year as well as in the following year and • The unit has an imbalance in its financial structure. such as, current ratio is less than 1: 1 and there is worsening trend in debt-equity ratio According to Companies Act, 2002 Sick Industrial Company means an industrial company which has i)The Accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year or ii)Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company. According to the Development Commissioner, a small scale industrial unit (SSI) becomes sick if its: a) Capacity utilisation is less than 50 per cent of the highest achieved during the preceding five years , b) Net worth has been eroded by more than 50 per cent c) The unit has remained closed for a period more than six months The Sick Industrial Companies Act 1985 identifies sickness in terms of cash losses for two consecutive financial years and accumulated losses equalling or exceeding the net worth of the second financial year.
The State Bank of India has defined a sick unit asone
“which fails to generate an internal surplus on a continuous basis and depends for its survival upon frequent infusion of funds.” Causes of Industrial Sickness Internal Causes External Causes 1. Technical feasibility: a) Inadequate Technical know-how b) Outdated production process c) Locational disadvantage 2. Economic viability: a) High cost of inputs b) Break even point too high c) Unduly large investment in fixedassets d) Under-estimation of financial requirements e) Uneconomic size of project f) Overestimation of demand g) Cost over runs resulting from delays in getting licenses/ sanctions etc h) Inadequate mobilization of finance 3. Production management: a) Poor capacity utilisation b) High wastage c) Inappropriate product-mix d) Inadequate maintenance and replacement e) Poor quality control f) Poor inventory management g) High cost of production h) Lack of timely & adequate modernization 4. Labour management: a) Poor labour productivity b) Excessive manpower c) Lack of trained/skilled labour d) Excessively high wage structure e) Inefficient handling of labour problems f) Poor labour relations 5. Marketing management: a) Lack of market research and market feedback b) Defective pricing policy c) Dependence on limited number ofcustomers d) Dependence on limited number of products e) Poor sales realization f) Booking large order at fixed price during inflation g) Weak market organization h) Lack of knowledge of marketing techniques 6. Financial management: a) Inadequate working capital b) Deficiency of funds c) Poor resources management & financial planning d) Faulty costing e) Liberal dividend policy f) General financial indiscipline g) Applicaion of funds for unauthorized purposes h) Overtrading i) Unfavourable gearing j) Absence of cost consciousness k) Lack of effective collection machinery Internal Causes 7. Administrative management: a) Excessive expenditure on research & development b) Incompetent management c) Lack of timely diversification d) Over centralization e) Lack of professionalism f) Lack of feedback of management g) Lack of proper management information systems h) Lack of controls i) Divided loyalties j) Dishonest management 1. Infrastructural bottlenecks: a) Irregular supply of critical rawmaterials b) Transport bottlenecks c) Chronic power shortage 2. Government controls and policies: a) Government price controls b) Abrupt change in government policies c) Improper Fiscal duties External Causes 3. Market Constraints: a) Market saturation b) Technological obsolescence c) Recession d) Fall in domestic / export demand 4. Extraneous factors: a) Natural calamities b) Political situation c) Sympathetic strikes d) War External Causes 5. Financial Bottlenecks a) Non availability of adequate finance at the right time b) Non cooperation from banks and financial institutions Symtoms of Sickness
a) Delay or default in payment to
suppliers b) Irregularity in the bank account c) Delay or default in payment to bank and financial institutions d) Non-submission of information to banks and financial institutions e) Frequent request to banks and financial institutions for additional credits f) Decline in capacity utilization g) Poor maintenance of plant & machinery h) Low turn over of assets i) Accumulation of inventories j) Inability to take trade discount k) Excessive turnover of personnel l) Extention of accounting period m) Resort to creative accounting which seeks to present a better financial picture than what it really is n) Decline in price of equity shares & debentures Financial indicator Persisting shortage ofcash Frequent request to banks and financial institutions for loans
Frequent turnover of personnel in the
industry Continuous tumble in the prices of the shares Deteriorating financial ratios. REMEDIES
STEPS TAKEN BY FINANCIAL REVIVAL PROGRAMME INSTITUTIONS Remedies 1. Steps taken by commercial banks:
Provide working capital assistance
Recovery of interest atreduced rates Suitable moratorium on payment ofinterest Freezing a portion of outstanding in theaccounts No. of organizations or agencies were set up: - sick industrial undertaking cell - state level inter-institutional committees - standing coordination committee - special cell – rehabilitation finance division of IDBI 2. Policy framework for the government
Ministry were given moreresponsibility
They were responsible in detection of sickness at the early stage Policy frame work was framed in 1981 & reviewed in 1982
3. Concessions by the government :
No. of concessions was given by the govt.
Margin money scheme was introduced Excise loan were provided 4. The Indusrial Investment Bank of India: Establishment of Reconstruction Corporation of India to provide all kinds of assistance IRCI converted to IRBI (industrial reconstruction bank of India)
5. Board For Industrial &
Financial Reconstruction Rehabilitation package Operating agencies will designed the scheme 6. Companies act : Charted accountant oppointed for revival of that companies Only fellow CA can become revival officer Sr no. Name of the Declared sick Revival company measures 1 Bengal chemical and The company was formally Revival was approved pharmaceuticals declared sick by BIFR on 14th by BIFR on 4th april January,1993 ,1995 2 Fertilizer corporation Corporation was declared sick in Revival was approved of India November,1992 by BIFR by BIFR on 24th august,2009
3 Hindustan fertilizer Referred by BIFR in 1992 Include sick units in
corporation limited FCIL
4 NEPA ltd The company was formally On 23rd august,2007
declared sick by BIFR in may,1998 Cabinate approved revival of NEPA through joint venture in private sector in disinvestment of government of india equity
5 Scooters india limited Declared as a sick company on Revival scheme was
august 11th ,1992 by BIFR sanctioned on 9th September ,1996 REVIVAL PROGRAMME
VIABILITY STUDY a) MARKET b) OPERATIONS c) FINANCE d) HUMAN RESOURCES e) ENVIRONMENT Revival programme:
1. Settlement with creditors
2. Provision of additional capital 3. Divestment & disposal 4. Reformulation of product strategy 5. Modernisation of plant & machinery 6. Reduction in manpower 7. Strict control over costs 8. Streamling of operations 9. Improvement in managerial systems 10. Workers participation 11. Change of management 12. Merger with healthy company List of Number of Large Scale Companies register under BIFR to declare Sick: Source: BIFR Website S.No Years No of companies 1 1991 155 2 1992 177 3 1993 152 4 1994 193 5 1995 115 6 1996 97 7 1997 233 8 1998 370 9 1999 413 10 2000 429 11 2001 463 12 2002 559 13 2003 430 14 2004 399 15 2005 180 16 2006 118 17 2007 78 18 2008 57 19 2009 64 20 2010 72 21 2011 73 22 2012 80 23 2013 92 24 2014 91 25 2015 175 Source : Thebusinessline