Wednesday, May 18, 2011

Name and briefly describe a sick unit with which you are familiar or identify one such unit

Name and briefly describe a sick unit with which you are familiar or identify one such unit and briefly attempt the following:
a) Factors which caused sickness, including management failures and the present position.
b) Measures, if any, initiated for ensuring its healthy functioning.

Industrial sickness is easily manifested in economies characterized by the existence of the market mechanism, it may be concealed in the economies where the market mechanism does not operate. In a market economy, the competition tests and exposes the strengths and weaknesses of the business enterprises and therefore sickness becomes easily visible. 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 industry sickness at an early stage so as to take measures to prevent sickness. There are different perceptions of the symptoms and characteristics of indi sickness. Sickness is a relative concept. Further, “a given sickness manifests itself in several fonns, and at a point of time these forms may not throw unambiguous or clear-cut signals. No wonder, then, that sickness is found being understood, interpreted and measured differently be individuals and even by institutions”.’ “To a layman, a sick unit ion is not healthy. To an investor, it is one which skips dividends. To an industrialist, it is a unit which is making losses and tottering on the brink of closure. To a banker, it is a unit which has incurred cash losses in the previous year and is likely to repeat the perform once in the current and fo1lo years.” In terms of the definition evolved by the Reserve Bank of India, an industrial unit is regarded as sick f it Mg incurred cash loss for one year and in the judgment of the bank, it is likely o
continue to incur cash loss in the two following years and it has imbalance in its financial structure such as current ratio being less than 1:1 and worsening debt equity ratio. The sick Industrial Companies (Special Provisions) Act, 1985, as amended in 1993 defines a sick industrial company as an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. The definition is for the purpose of application of the Act and it covers only registered companies which have been existence for at least five years.

The number of sick units has grown considerably from 22,366 at the beginning of 1980 to 2.71 lakh at the end of March 1995 and the total bank credit blocked up in these units increased from Rs. 1,809 crores to Rs. 13,739 crores during this period. 99 per cent of the sick units were in the small-scale sector. The above figures included 476 non-SSI weak units.
Data for the recent years show that, in the large-scale sector, the incidence of sickness was high in industries like engineering, cotton textiles, jute textiles and sugar. It was also revealed that the indust advanced states accounted for a major share of the large sick units.

Causes of sickness
Industrial units may become sick at different stages and due to different reasons. Indeed, “some industries are born sick, some achieve Sickness and some have sickness thrust upon them”.

Born Sick: Industries born sick are those which arc destined,(or disaster right from their conception due to various causes. A study conducted by the Institute of Economics Hyderabad, found that 50 per cent of the dead units closed within three years of opening. This proves that these industries never had any reasonable survival prospect right from birth.

Any one or more of the following factors may cause the birth of sick units:

1. Lack of experience of the promoters, wrong Selection of the project, faulty Pmject etc., may give birth to sick units. The mushroom growth of the so-call consonance firms has been regarded as a factor contributing to these sorts of problems because the primary interest of such COflSultancy fans is to make money by selling some ideas or project reports to the aspirants who may thus be misguided or made overenthusiastic We must also think that the rosy hopes generate by the high promises and schemes including the self-employment schemes of the financial institutions and other promotion agencies of the Governments also contribute to this Unfortunate Situation.

2. Paucity of fun and faulty financial management may also cause the birth of sick units. Many new units have been found to be under utilised and the strains of undercapitaljratjon become evident when the unit becomes operational. In case of some companies, the heavy investment in non-productive capital assets likes laugh housing projects even before they commence production distorts the liquidity and causes a lot of problems. Problems also crop up due to inadequate provide for contingencies, faulty fund flow and cash flow estimate, etc.

3. Time and cost over-runs sometimes prove to be very disastrous. Particularly in case of large projects, delays in project commissioning due to delay in supply of equipment, both indigenous and imported, slippage in the schedule of civil works, creation of equipment, etc., are not uncommon. Such delays cause cost escalations leading to capital shortage, liquidity problems, hike in the production costs and break-even point etc.

4. Sickness may arise from lavational problems also. It has been observed that “hightechnology based units are established in areas without skilled labour or supporting infrastructure; industries based on imported raw materials are founded in regions without adequat transport and communicate ion system”.

5. Technological factors like selection of obsolete or improper technology or the technology becoming outdated due to innovations while the project is being executed, sub-standard machinery, wrong collaboration, etc., also cause sickness.

According to the Tiwari Committee, 14 per cent of the large sick units suffered from technical factors and faulty initial planning.

6. Wrong assessment of the market potential or faulty demand forecasting, change in the market conditions, including the change in the consumer tastes and preferences and competitive situation, etc. can also cause birth of sick units.
(ii Achieved Sickness: Industries which achieve sickness are those which fail after becoming ope ional due to internal causes. Such internal causes which are common are the following:

1. Bad management, which “covers a wide range from inexperience, inefficiency, lack of professional expertise, neglect and internal squabbles to delinquency and dishonesty” is an important cause of industrial sickness. According to the Tiwari Committee Report, 1984, “the factor most often responsible for industrial sickness can be identified as ‘management’. This may take the form ofpoorproductiommanagement, poor labour nianagement, poor resources management, lack of professionalism, dissensions within the management, or even dishonest management”. The Committee found that 65 per cent of the large sick units were affected by this problem.

2. Unwarranted expansion and diversion of resources may also result in sickness. Some concerns tend to expand beyond the resources including managerial capability. Diversions of resources to start new units or to acquire interest in other concerns without due regard to the capability of the unit to provide such funds sometimes lands the unit in trouble.
Extravagances and acquisition of unproductive fixed like company guest houses or corporate luxuries like air cars, etc., also may contribute to sickness.

3. Poor inventory management in respect of finished goods as well as inputs may land a unit in trouble.

4. Failure to modernise, the productive apparatus, change the product mix and other elements of the marketing mix to suit the changing environ ment is a very important cause of industrial sickness.

5. Poor labour-management relationship and the associated poor worker morale and low productivity, strikes, lockouts, etc., also may ruin the health of aunit to survive),

(iii) External Causes: Sickness may be caused also due to factors beyond the control of an industrial unit. Some of these common external factors are the following:

1. Energy crisis arising out of power cuts or shortage of coal, and oil have almost become a constant problem for many industrial units in India.

2. In a number of cases the units are not able to achieve optimum capacity due to shortage of raw materials due to production set-backs in the supply industries, poor agricultural output clue to natural reasons, changes in the import conditions etc.

3. Infrastructural problems like transport bottlenecks also sometimes cause serious problems.

4. It is a general complaint of the industrial circles that the credit squeeze very adversely affects the industrial sector. According to the Tiwari Committee, 24 per cent of the large sick units were affected by shortage of working capital/liquidity constraints.

5. Artificial economic constraints also make their contribution to the growing industrial sickness. Government controls on the product mix and prices are said to be causing serious problems for certain industries. Some times, it is not possible to automate or rationalize due to unfavorable government policy about attitude.

b) Measures, if any, initiated for ensuring its healthy functioning.

There has bee demand for take-over of sick units by the Government, particularly to protect the employment. However, a relevant question to be considered here is the opportunity, cost of the government decision. Should the government utilize the scarce resources to create new productive employment or should they be spent on maintaining some jobs at heavy social co Further, it is also necessary to guard against the managements, looking forward’ to the government take-over of an undertaking after fleecing and mismanaging it to the point of making it permanently sick.

However, in an economy where the government has assumed strong regulatory and promotional roles, it should take nesses steps to prevent sickness and to help cure incipient sickness.

The Companies Act, 1956, empowers the government to collect information from the companies which would enable it to assess the state of affairs of the companies and to take certain measures to prevent mismanagement. The Industries (Development and Regulation) Act, 1951 (IDRA), empowers the government to regulate the management of industrial undertakings, including the take-over of the management or the undertaking. The Sick Industrial Companies (Special Provisions) Act, 1985, is a very important law to deal with industrial sickness.

In 1981, the government announced certain policy guidelines to deal with industrial sickness. These guidelines require the ministries administratively concerned with various industries to take responsibility for rehabilitation of sick units. Banks and financial institutions are required to strengthen the monitoring arrangement for prevention of sickness.

Indeed, both Government and financial institutions have been concerned at the problem of growing sickness, and attempts have been made to devise suitable measures to tackle it. The approach followed has been to nurse sick units which are potentially viable back to health through a managed programmed of financial assistance for modernization and recovery. The Reserve Bank took the initiative in the matter of identifying sick industrial units, and coordinating the lending operations of the term lending institutions and commercial banks.

An important limitation on the ability to tackle sickness arises from the fact that commercial banks may legitimately consider sick units as poor security risks. Government policy towards the prevention and treatment of industrial sickness is guided by the following considerations:

On the preventive side, it is considered that closer and more vigilant involvement of the financial institutions in the units with management of doubtful competence or integrity is essential. Financial institutions have jointly set up a group of professional directors who are full-time employees of the institutions and who could be nominated on the Board of Directors of companies with doubtful management and in which the institutions have a substantial stake. These directors report to the institutions on the measures that should be taken to prevent sickness. If any such director comes across features of a company’s operation which give cause to suspect malpractice or gross incompetence, he would report to the financial institutions for further investigation. The concerned institution will then report the matter to an inter-institutional group under the Chairmanship of Industrial Development Bank of India. If this group comes to the conclusion that the management has acted in a patently incompetent manner or has indulged in malpractice, all the institutions and the commercial banks should take a decision that this unit or any other unit under the same management will not be extended financial assistance until the management is changed.

The rehabilitation scheme for a sick unit will depend on the extent of sickness of the unit, its future prospects and the management. Financial institutions have realised that the usual methods of rehabilitation are not quite adequate for acute cases of sickness. Such cases may require extraordinary efforts and measures including leasing out an undertaking, merger and amalgamation restructure of capital and liabilities, selling a unit on block basis, etc. In such cases, the cooperation of all concerned agencies is of utmost importance and invariably workers are called upon to extent greater co operation. It has been agreed that the lead financial institution and the lead bank will jointly ensure that a scheme is prepared within a time limit of 90 lays as fixed under the Sick Industrial Companies (Special Provisions) Act. Some of the State Governments have also started taking preventive measures by announcing certain reliefs and concessions in advance even for units which do not attract the definition of industrial sickness. The Government has recently specified the economic size of units in many industries. This measure is expected to help check sickness arising out of uneconomic size of
industrial units.

The RBI has been closely monitoring certain specific industries where the incidence of sicknes is high. Standing Committees have been set up in the RBI for the jute and sugar industries to consider the specific problems of these sectors. Another significant policy initiative has been the introduction of liberaiised margin money scheme for supplementing the efforts of the State Governments in reducing
sickness in the small-scale sector in June 1987. Under this scheme, the State Governments are to make a matching contribution on a 50:50 basis in providing assistance to sick small-scale units in their rehabilitation. In the revised scheme, the maximum quantum of assistance has been enhanced from Rs.20,000 to Rs.50,000 per unit.


The Industries (Development and Regulation) Act, 1951, empowers the Central Government to take over an undertaking or its management in certain cases. In the case of industrial units that are already sick the following options will first be explored before the question of the take-over of management under the Industries (Development and Regulation) Act is considered:

(i) Rehabilitation through State Governments and financial institutions who would provide both fmancial an I managerial support with suitable restructuring of management wherever necessary. In cases where co-ordinated action is necessary for the revival of the unit outside the framework of the Industries (Development and Regulations) Act, the concerned Administrative Ministry will take the initiative to co-ordinate the arrangements.
(ii) Proposals, if any, for the merger of the sick unit with a healthy unit in the private sector will be examined by the Specified Authority under the Income -Tax Act, 1961, with reference to the guidelines on the subject. It is only where neither of the above alternative course of action is feasible or desirable that action under the Industries (Development and Itegulation) Act would be considered.

In the past, the Government took over, selectively, the management of a number of sick industrial undertakings under the IDRA. For example, a large number of sick textile mills were taken over and brought under the National Textiles Corporation (NTC). The objective was to revive these units by providing management support and financial assistance through banks and other financial institutions. While some units were nursed back to health, a number of others continued to suffer huge losses. The Government do not now favour takeover of sick units. Now the approach of the government towards rehabilitation of a sick unit is very selective because the government is 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. The package consists of concessions from banks, financial institutions, government (Central/State), government agencies, sharehold ers, labour, suppliers of goods as viable it if would be in a position, after implementing a package of concessions spread over a period not exceeding seven years from the commencement of the package, to continue to service its repayment obligations, as agreed upon, including those forming part of the package, without the help of any further concessions after the aforesaid period. The repayment period for restructured debts sho not exceed 10 years from the date of implementation of the package.

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