MCom I Semester Environment Industrial Sickness in India Study Material Notes

MCom I Semester Environment Industrial Sickness in India Study Material Notes : Meaning of Industrial Sickness Symptoms of Industrial Sickness Causes of Industrial Sickness Circumstances of Industrial Sickness Result of Industrial Sickness Magnitude or Extent of Industrial Sickness Levels or Stages of Industrial sickness Long Answer Questions Short Answer Questions Objectives Questions :

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

Industrial Sickness in India

The problem of sickness in industries has became very acute in India. It has adversely affected the health of the industrial sector in particular and the economy in general. The incidence of industrial sickness in India has been growing since the last decade. Not only some of the traditional industries like cotton textile, jute and sugar are afflicted with sickness but even some other industries like engineering, chemicals, rubber, cement, electrical and paper have also been affected.

MEANING OF INDUSTRIAL SICKNESS

Sick industrial unit is a company which has incurred losses equal to 50 percent during the first four years of it commencement or during four years preceding the current financial year or has failed to repay its debts within any three consecutive quarters to its creditors.

Definitions of Industrial Sickness : Some of the important definitions of industrial sickness are as follows:

1 According to the Sick Industrial Companies (Special Provisions) Act, 1985, “As industrial company (being a company registered for not less than seven years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year.”

In December 1991, Public sector companies were also brought under the purview of the Act. The 1992 Amendment somewhat altered the criterion: firms only need to be registered for five years and the criterion of cash losses for two successive years was eliminited.

2. According to Companies (Second Amendment) Act, 2002, the definition of a sick industrial company was changed by the Companies (Second Amendment) Act, 2002. According to this Act, “Sick industrial company” means an industrial company which has (i) accumulated losses in any financial year which are euqal to 50 percent 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.

Industrial Sickness in India

Potentially Sick Industrial Company

“An Industrial company whose accumulated loss is more than fifty percent or more of its peak net worth during the immediately preceeding four financial years.”

SSI Sector :

On November 1, 2012, Reserve Bank of India issued a no sickness of micro and small enterprises (MSES) and a procedure to serve Bank of India issued a notification to define their viability. According to this notification, “An MSE is considered

Enterprises (MSEs) and a procedure for assessing any of the borrowed account of the enterprise remains NPA on this notification, “An MSE is considered sick when assest) for three months or more or the enterprise remains NPA (Non-performing accumulated losses to the exten or more or there is erosion in the net worth due to the extent of 50 percent of its net worth.” early detection of sickness and timely action for their revival. Now the a RBI, the new definition of sickness of MSEs would enable on viability of the units should be taken at the earliest but not later the months of becoming sick under any circumstances. RBI has also laid down procedure for declaring a units unviable

SYMPTOMS OF INDUSTRIAL SICKNESS

It is necessary that sickness should be detected at the early stage and preventive measures be taken immediately. If sickness is controlled in beginning, it will involve much less social costs-both in terms of displacement of labour, loss of production and its effects on other industries. Sickness in one industry affects all those industries which are concerned with it on account of backward/ forward linkage. Following are some warning signals of a sick units :

1 Demerits of capital formation: The first sign of sickness can be noticed GMO when there is fall in the valuation of unit, fall in the value of share, over capitalisation etc.

2. Less in liquidity : The second sign of sickness can be noticed when an enterprise can not pay for the purchase of raw materials, when it delays payment to its labour and when it is not in position to meet the demand of short term creditors for interest or repayment of loans.

3. Developing distrustuful bank-customer relationship : Nonpayment of interest on term loans or non-payments of loan, errors in financial statements. Overdrafting, irregularity in payment of cash credit give another warning signals of impending sickness.

4. Downward trend of working capital management: Other warning signals are gradual fall in the current ratios of the business, increase in receivables, faulty periodical schedule, growth of excesive inventories and lack of working capital.

5. Demerits of assets structure : Other symptoms of sickness are avoidance of proper maintenance of fixed assets, their repairs and replacement, faulty depreciation policy, over valuation of book value of assets and sale of essential fixed assets.

6. Continuous raising of short-term liabilities: Continuous raising of short term liabilities such as increase in creditors, bank overdraft, bills payable etc. are warning signals of sickness.

7. Reduction in regular sales : Another warning signal is the growth of excessive inventories of raw-materials, goods-in-process and finished goods. The failure of the firm to sell the finished goods at the pace it was doing earlier results in higher inventory accumulation.

8. Fault in fulfilling legal formalities: The industrial unit in al of legal provisions, stops meeting its statutory obligations such as contribution of provident fund, payment of excise and/or sales taxes etc. These signals foretell the development of a serious malady in future.

9. Other Symptoms : An enterprise according to RBI, is considered as sick if the ratio of current assets to current liability is less then 1:1. In other words, it indicates cash losses and declining liquidity of the firm. A declining debt-equity ratio indicates movement towards sickness. However, the financial ratios cannot be treated as true indicator of the state of health of a firm. The firms, more especially sickness-prone firms, in order to put up a better image do a lot of window-dressing.

CAUSES OF INDUSTRIAL SICKNESS

Two sets of factors are responsible for industrial sickness-internal and external

(i) Internal causes: The inherent sickness is generally developed among units within 2 to 3 years of their inception and even earlier after they commence their activities. Any one or more of the following factors are responsible for such inherent sickness :

1 Labour problems: In some cases, accute labour problems have resulted Win strikes, lock-outs and even closures of industrial units. These problem may emanate from differences with management over the issue of wages, bonus, suspensions and retrenchment, inter-union rivalry, etc. If not tackled in time satisfactorily such problems can cause sickness. Unless the principle of equal pay for employees with comparable or nearly comparable qualifications is accepted, industrial relations will remain in a state of turmoil, resulting in to industrial sickness.

2. Incompetence of entrepreneurs : Many persons setting up small-scale units are ‘incompetent entrepreneurs’ in the sense that they do not possess basic technical knowledge of the product they intend manufacturing, lack basic business acumen, do not know costing of their products, having no knowledge of business accounts, marketing etc. No wonder that then units set-up such by e people turn sick.

3. Management problems: The most important internal cause of sickness is management problems. Faulty managerial decisions in the field of production, marketing, finance, personnel management etc. can ruin a business. Insufficient sales promotion activities and improper pricing policies can create problems in the field of marketing. Inefficient use of working capital can cause financial mismanagement. Faults in personnel management include improper wage, structure, increment and promotion policies, lack of manpower planning and bad industrial relations.

4. Old and defective plants: If the plant and machinery finally selected and installed by the entrepreneurs turn out to be defective, their units are bound to suffer losses and will turn sick. Not only this, units employing obsolete and inappropriate technology are also likely to suffer a cost and price disadvantage vis-a-vis units employing modern technology.

5. Lack of finance: A number of units face acute financial problems from the stage of planning and construction to the stage of implementation and beyond. Often small-scale units borrow from banks and financial institutions but are unable to meet the repayment schedules. The burden of unpaid debt accumulates and they turn sick.

6. Faults in planning : Faults can occur at the planning Industrial Sickness in India | 97 itself. The first fault can be the wrong location of an Industrial at the planning and construction second fault can be the absence of market analysis. At times, these  Fong location of an industrial unit. The do not plan production properly. Some units start with an unbalanced capital analysis. At times, these small units structure. Some under-estimate the project cost while some spend recklessis unproductive assets. A slight disturbance in the normal functioning of the units is sufficient to disturb their ‘balance and turn them into sick.

(ii) External causes: The external causes include factors which outside the unit and therefore, are not under the control of the unit. the external causes of industrial sickness are as follows:

1 Power cuts : A large number of industrial units face power cuts from time to time. These power cuts are imposed by the State government as the generation of power is considerably below its actual requirements. Drought situation during some years in a number of states further aggravates the problem and acute power shortage resulting in power cuts.

2. Decrease in demand by deflation : At times, recession in the market causes a steep decline in the demand resulting in accumulation of unsold stock and losses to industrial units. This problem can emerge in a serious way for ancillary units. If the demand of the principal buyer of the output of ancillary units falls due to any reason, these units are put in precarious position. They are bound to turn sick and may even face closure.

3. Alternation in government policies: Sudden changes in government policy relating to imports-exports, industrial licensing, taxation etc. can make viable units sick overnight. The most difficult problems are being faced by the small-scale industries who are now facing tough competition from cheap imports on one hand and from large scale industries on the other hand.

4. Credit restraints: If credit restraints are imposed so that the purchasers are not able to arrange finance for high priced product, the demand for these products is bound to suffer. This is likely to leave the manufacturers with unsold stocks inflicting them with heavy losses. If this situation persists for quite long time, the producing units are prone to turn sick. 9

5. Erratic supply of raw materials : Some units depend on scarce rawmaterial whose supply is erratic. This result in disturbing the production schedule causing losses to the unit. Insufficient availability of transport facilities can also upset the supply schedule of inputs.

CIRCUMSTANCES OF INDUSTRIAL SICKNESS

Among the following any of the circumstance may be the cause of industrial sickness :

1 Incompetency of payment of debts: If most of the units of an industry are incapable of making payments of debts, the situation is the indicator of industrial sickness.

2. Reduction in sales and profit: Gradual decline in sales and profits is the situation of sickness.

3. Financial imbalance: A unit is sick if current ratio is less than one. It indicates cash losses and declining liquidity of the firm. flegal liabilities: When the industrial unit is

4. Failure in fulfilment of legal liabilities: When the inal unable to meet the legal obligations, it is the situation of sir

5. Failure in payment : Continuous non-payment of four half-yearly instalments of interest or principal or fault in payment of loan instalments etc. In the aforesaid circumstances, a unit is considered to be sick.

Circumstances OF INDUSTRIAL SICKNESS

The level or stages of industrial sickness can be classified in the following groups:

1 Healthy Stage : After meeting its costs, a production unit should be able to make an adequate provisions for depreciation. Besides this, the unit after making payment of interest on borrowed capital from creditors, should be able to generate reasonable figure of net profits for the enterprise. A comparison of the rate of return with the prevailing rate of interest is indicative of the health of the enterprise. A healthy unit has the following qualities :

(i) Cash profit should be sufficient. (ii) Value of net assets should be positive. (iii) Debt-equity ratio should be satisfactory. (iv) Production, marketing, finance and employees are functioning properly. (v) Net working capital and current assets ratio should be more than one.

2. Forwarding towards sickness : Some shortcomings are visible in the units forwarding towards sickness such as non-availability of external loans and debts, declining net profits, cash losses in current year, negative net working capital etc. Banks and other financial institution declare them as sick units.

3. Primary sickness: According to the Reserve Bank of India, “a unit is considered sick if it has incurred cash losses for one year and in the judgement of the financing bank, is likely to incur cash losses for the current as well as the following years and/or there is an imbalance in the unit’s financial structure. From this, it follows that in the early stage of sickness, the unit is not able to meet its costs and depreciation. As a consequence, its net profits start declining.

4. Sickness Position: A stage comes when the losses mount further and unit start eating its capital and reserves. According to Mr. Sudershan Lal, “A unit can be considered as sick if it is operating at less than break-even point, that is where it is unable to meet its costs and depreciation; the unit which has eroded its capital and reserves, should be considered to have reached an advanced stage of sickness.” An industrial unit can be declared as sick when,

(i) It fails to repay instalments. (ii) There is 50 percent fall in the value of net asset of the unit. (in) The unit has been shut down for six or more months.

A survey of industrial sickness in India reveals that the State did not take preventive action before the enterprise closed down or became so seriously sick that they had to be admitted to ’emergency ward.’ But it must be clarified that but for reasons of accidents, natural calamity or some other very powerful external factor, sickness does not develop all of sudden. The fact of the matter is that we do not pay any heed to the danger signals till the day comes when the enterprise collapses. It is, therefore necessary that sickness should be detected at an early stage and preventive measures to be taken immediately.

MAGNITUDE OR EXTENT OF INDUSTRIAL SICKNESS

The extent of the problem of sickness of Indian industry has been growing, in serious proportions. Table shows the relative position of the sick industrial units :

Industrial Sickness in India

RESULT OF INDUSTRIAL SICKNESS

In a planned and underdeveloped labour surplus economy like India, industrial sickness can have serious consequences as would be clear from the points given below:

1 Wastage of resources : Resources are scarce in an underdeveloped economy and if an industrial unit turns sick and is closed down on this account, resources invested in that unit are wasted, stoppage of production in these units not only results in a decline in production of industry as a whole, as it implies the blocking up of valuable savings and capital equipement. ”

2. Losses incurred to resources of financial institutions : Closure of industrial units causes substantial financial losses to banks and financial institutions which had granted loans to those units to set up their plant and machinery and commence production.

3. Developing of industrial unrest : Closure of a sick industrial unit not only causes substantial unemployment, it also causes wide spread labour unrest. Trade unions of other industries are likely to oppose retrenchment of labour of the closed unit and resort to wide spread industrial strikes. The peace and tranquality of the industrial environment will be threatened resulting in industrial losses and setback to production in a number of units.

4. Increase in problem of unemployment: Closure of an industrial unit is likely to render workers unemployed. The implications are likely to be particularly serious if the sick industrial unit is a large one employing a large number of people.

5. Adverse effect on investors of capital : Closure or liquidation of a large sick unit creates a psychology of despair amongst investors. Failure of a unit acts as a disincentive to other entrepreneurs who were planning to launch production in the same line of products. Such industrial climate is not conductive for industrial development.

6. Loss of revenue to government : The Central, State and local governments raise sustantial revenue from industrial units by way of various levies. Therefore, sickness in industrial unit results in loss of revenue to those levels of government.

7. Adverse impact on related industries : An industrial unit is linked with a number of other industrial units through backward and forward linkage Therefore, sickness in one unit is likely to affect adversely a number of other units.

8. Effect on economies management of country and State: Indust sickness affects the economy as a whole and it disturbs the economic equilibrium of the nation. As a result, whole economy falls and comes under the grip of sickness.

9. Effect on normal consumers : Non-availabiltiy of certain and discomforts the consumers and increases disatisfaction amongst consumers.

Industrial Sickness in India

REMEDIAL MEASURES FOR INDUSTRIAL SICKNESS

On account of above consequences of industrial sickness, it was for long regarded as a ‘social problem’ in our country. Accordingly various concessions and incentives were offered to sick units to help them regain their ‘health’ and stand on their feet once again. Some of measures were undertaken for the survival and rehabilitation of sick industrial units were as follows:

1 Checking of the viability of structure of new units : The first sten to prevent sickness, is that the entrepreneur must be convinced of the viabilitu of the project. It is therefore, proper to get the assistance of an expert before the starts.

2. Correct valuation of problems : The causes of sickness should be detected properly. The correct valuation of the accute problems likely to come up is also necessary.

3. Helping in solving of short-term problems : The government can accord priority with the assistance of financing institutions in solving shortterm problems like allocation of scarce raw materials, supply of electricity etc.

4. Swift government help : The government can provide priority in extending marketing assistance and granting certain rebates and concessions to sick units and more to such units which show better record of performance.

5. Proper inspection management: In a majority of undertakings, mismanagement and misconduct have been responsible for sickness. The government should make available the services of professional managers to sick units to help their recovery back to health.

6. Merger of sick units with healthy units : One of the important measures for the rehabilitation of sick unit is the merger of a sick unit with a healthy company. Every often amalgamation is not prefered by healthy units. In rehabilitation of a sick unit, it is appropriate that a sound unit should take it over.

7. Necessity of management training : The professional management expertise should be made available for the training of managers. The management expertise should acquaint them with the need for a better equity base, prescribe norms for allocation of their surplus to minimise depreciation, retained profits and expansion programmes should be properly planned so as to build their internal financial strength.

8. Take over by the government: If the government feels that the main cause of industrial sickness is mismangement and the unit can be revived, the government can take over the management of sick unit.

9. Financial attempts : The government should grant loans only to these units at concessional rate of interest and reduced margins. The government should exempt the sick units from the payment of excise duty, sales tax, etc. 10 some period time to enable them to recover. The past liabilities of units should be reduced.

To tackle the problems of industrial sickness, the government has established specific institutions. These institutions are:

1 Establishment of Industrial Investment Bank of India Limited The Government established the Industrial Reconstruction Corporation of India CIRCI) which was renamed as Industrial Reconstruction Bank of India (RBI). IRBI was reconstituted into a full-fledged all purpose development financial institution with effect from March, 27, 1997 and its new name is Industrial Investment Bank of India Ltd. (IIBIL). Functions assigned to IIBIL are as follows:

(i) to provide financial assistance to sick industrial units.

(ii) to provide managerial and technical assistance to sick industrial units

(iii) to secure assistance of other financial institutions and government agencies for ensuring the revival and rehabilitation of sick industrial units.

(iv) to provide merchants banking service for amalgamation, merger etc.

(v) to provide consultancy services to banks in matters relating to sick industrial units.

2. Board for Industrial and Finance Reconstruction (BIFR): In 1985, Tiwari Committee was appointed to probe into the problems of industrial sickness. On the basis of recommendations given by the Committee, government introduced Sick Industrial Companies Act (SICA). And later on in January 1987, a statutory institution named Board for Industrial and Financial Reconstruction (BIFR) was setup.

(i) Organization : The BIFR shall consists of a chairman and not less than two and not more than 14 members to be appointed by the Central Government.

(ii) Power: It has both administrative and quasi-judicial powers.

(iii) Course of Action :

(a) To appoint special director in the sick unit in case of mismanagement, (b) Sale of a part or whole of sick unit,

(c) Amalgamation of sick industrial unit with any other healty unit,

(d) Takeover of management of sick industrial unit.

Winding up of Sick Unit: Where the BIFR is of the opinion that the sick industrial unit is not likely to become viable in future and it is just and equitable that the company should be wound up, the BIFR will forward its opinion for winding up of unit to the concerned High Court. Now the High Court will take final decision regarding winding up of such unit.

Since the inception of BIFR and upto December, 2007, BIFR has received 7,158 references. On the basic of enquiry, revival schemes were sanctioned in 825 cases and 1,337 cases were recommended to the concerned High Court for winding up.

3. Steps taken by the Reserve Bank of India : Importance of detecting sickness at the incipient stage is crucial as corrective steps can then be taken early and well in time. With the end in view, the RBI advised banks to take necessary steps in respect of industrial units which do not come under the purview of Sick Industrial Companies (Special Provisions) Act, 1985, at the stage of 50 percent erosion of their net worth. The Reserve Bank also closely monitored certain specific industries where sickness is more widespread.

4. Discount by Government: Certain concessions were also provided by the government to assist revival of sick units without intervention. For instance the Income Tax Act was amended in 1977 for addition of Section 72 A which provided for the grant of tax benefit to healthy units when they took over the units by amalgamations with a view to reviving them. On January 1, 1982, a scheme for provision of margin money to sick units in the small-scale sector at soft terms was introduced to enable them to obtain necessary funds from banks and financial institutions to implement their revival scheme. This was followed by the introduction of a liberalized margin money scheme in June 1987 to supplement the efforts of the state governments in reducing sickness in small. scale sector. In October, 1989, the government announced a scheme for the grant of excise loan to sick/weak industrial units, under the scheme, selected sick units were eligible for excise loan not exceeding 50 percent of the excise duty actually paid for 5 years.

5. Steps taken by Commercial Banks: The commercial banks granted various concessions to sick industrial units like:

(i) grant of additional working capital facilities to overcome the shortage of working capital faced by such units;

(ii) recovery of interest at reduced rates;

(iii) suitable moratorium on payment of interest;

(iv) freezing a portion of the outstanding in the account etc.

A number of steps were also undertaken on the organisational front like:

(i) setting up a sick industrial undertakings cell in RBI to function as a clearing house for information relating to sick units and to act as a co-ordinating agency between the government, banks, financial institutions and other agencies for tackling the various related issues;

(ii) setting up of state-level inter-institutional committees at all the regional offices of the department of banking operations and development of the RBI for ensuring better co-ordination between the banks, state government, central and state level financial institutions and other agencies;

(iii) setting up of a special cell within the rehabilitation finance division of industrial bank of India for attending to references from banks in respect of their sick and problem areas. As regard the small-scale industries, Reserve Bank issued guidelines to the banks with a view to ensuring that the potentially viable sick units in small scale industries sector receive due attention and timely support.

Industrial Sickness in India

RECOMMENDATIONS OF GOSWAMI AND BAL KRISHNAN

ERADI COMMITTEE

The Committee, in the report, recommended for change in the definition of sickness. It recommended for the changing role of Sick Industrial Companies Act and Board for Industrial and Financial Reconstruction. For the rapid rehabilitee tion of sick industrial units, the Committee recommended for the construction of insolvency fund and national tribunal. Accordingly, laws are being modified to make this easier. The definition of a sick industrial company has been considerably changed. Now, if an industrial unit has accumulated losses exceeding 50 percent of its net worth during the last four years or if it fails to repay its debts to the creditors (s) within a period of a months of the demand made by the later, it will be classified as sick.

EXERCISE QUESTIONS

Long Answer Questions

1 What do you understand by industrial sickness ? Explain the causes and characteristics of industrial sickness.

2. Give the definition of industrial sickness and throw light on its positions and levels.

3. Define the industrial sickness and describe its measures for reforms and size.

4 What is industrial sickness ? Explain the main remedial measures for industrial sickness.

Industrial Sickness in India

Short Answer Questions

1 What is industrial sickness?

2. Write the causes of industrial sickness.

3. Write the main characteristics of indsutrial sickness.

4. Write the present position of industrial sickness.

5. Write the main stages of industrial sickness.

6. Write any four consequences of industrial sickness.

7. Write three measures for preventing industrial sickness.

8. Explain the role of Industrial Investment Bank of India Ltd.

Objective Questions

(I) Select the Correct Alternatives :

1 The Board for Industrial and Fiancial Reconstruction was established on:

(a) 12th January, 1985

(b) 12th January, 1987

(c) 12th January, 1991

(d) 12th January, 1980.

2. Goswami Committee was constituted on:

(a) May, 1993

(b) July 1993

(c) July 2001

(d) July 1985.

3. Percentage of total bank loan blocked in non-small sector of all sick units is:

(a) 16%

(b) 84%

(c) 90%

(d) 61%.

4. BIFR was established on the recommendations of:

(a) Goswami Committee

(b) Tiwari Committee

(c) Rangrajan Committee

(d) Manmohan Committee.

5. The cause of industrial sickness is:

(a) mismanagement

(b) increased foreign competition

(c) underutilisation of resources (d) all of above.

[Ans.(1) b, (2) a, (3) b, (4) b, (5) d.)

Industrial Sickness in India

(II) Write True or False :

1 Mismanagements is the main internal cause of industrial sickness.

2. Industrial disputes are the main result of industrial sickness.

[Ans. (1) True (2) True.]

(III) Fill in the Blanks :

1 …………… of industrial unit occurs in the form of cash losses.

2. When many industrial units of nation are sick, the plants, equipments and other resources become………….

3. Reserve Bank has issued directive principles regarding…………. from time to time.

Ans. (1) Initial Sickness (2) Unproductive (3) Sick units.]

Industrial Sickness in India