FINANCIAL MANAGEMENT OF SICK UNITS

ANURADHA DAIWADNYABHAVIN DHOLAKIARADHESHYAM GUPTAKANCHAN PARABPOOJA PARDESHIKAJAL SHAHMAMTA TIWARI

14171951

527283

GROUP MEMBERS

Introduction

The Industrial Reconstruction Corporation of India (IRCI) was established in 1980’s to provide financial assistance to sick units

In 1985 the Sick Industrial Companies (Special Provisions) Act 1985, was enacted, where interested companies were invited to takeover, lease or amalgamate the sick company into itself

Increasing number of sick, private textile mills which were nationalized became part of the National Textile Mills

During 1980s 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

The companies Act defines a “Sick Company” as one:

Which has accumulated losses in any financial year equal to 50 percent or more of its average net worth during four years immediately preceding the financial year in question,

or

Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors

Meaning

Causes of Sickness

Unfavorable external environment

Managerial deficiencies

Unfavorable External environment

Shortage of key inputs like power & raw materials

Changes in Govt policies

Development of new technology

Shift in consumer preferences

Sudden decline in the orders from the government

Reduced lending by financial institutions

Managerial deficiencies

Production-

Improper location

Wrong technology

Uneconomic plant size

Weak production and quality control

Managerial deficiencies

Finance-

Wrong Capital Structure

Bad investment decisions

Weak budgetary control

Poor management of receivables

Bad cash planning and control

Strained relationship with the suppliers of capital

Managerial deficiencies

Personnel-

Ineffective leadership

Bad labour relations

Over Staffing

Irrational compensation structure

Managerial Deficiencies

Marketing-

Inaccurate demand projection

Improper product mix

Wrong product positioning

Poor customer service

High distribution costs

Symptoms of sickness

Delay or default in payment to suppliers

Irregularity in bank A/C

Delay or default in payment to banks & FI

Non-submission of information to banks & FI

Frequent requests to banks & FI for additional credit

Decline in capacity utilization

Poor maintenance of plant & machinery

Cont…

Low turnover of assets

Accumulation of inventories

Inability to take trade discount

Excessive turnover of personnel

Extension of accounting period

Resort to ‘creative accounting’ which seeks to present a better financial picture than what it really is

Decline in the price of equity shares & debentures

Prediction of Sickness

Two types of analysis:

Univariate analysis

Multivariate analysis

Univariate Analysis

In Univariate analysis, an attempt is made to predict sickness on basis of single financial ratios

In a path-breaking study W.H.Beaver compared the financial ratios of a sample of 79 failed firms with 79 non-failed firms

His analysis suggested that many of the ratios employed by him showed the power to signal an impending failure

Multivariate analysis

Multivariate analysis seeks to predict industrial sickness using a methodology that considers combined influence of several variables

The multivariate technique is used in predicting business failure or sickness

Its a statistical technique which helps in classifying an observation into one of the several pre-specified groups on the basis of certain characteristics of the observation

It essentially involves estimating a function which discriminates best between the groups

Revival Programme in Sick Units

Settlement with creditors Provision of additional capital Divestment & disposal Reformulation of product market strategy Modernization of plant & machinery Reduction in manpower Strict control over costs Streamlining of operations Improvement in managerial systems Workers participation Change of management

CASE STUDY

About NICCO Corporation Ltd

Nicco Corporation Limited(NCL) is the flagship company of the Nicco Group

For nearly over 6 decades, NCL has been one of the pioneers in cable manufacturing industry

It produces a wide range of power, control, instrumentation & telecom cables & provides a spectrum of engineering services & executes turnkey projects

Established in 1942, the US$ 67 million Nicco Group is a widely respected Indian industrial powerhouse

NICCO’s PRODUCT

Aircraft & Air Field Cables Fire Retardant Low Smoke Cables (FRLS) Automobile CablesOil Rig CablesCopper ConductorsCables For CranesElevator Cables (lift Cables)Furnace & High Temperature CablesMarine CablesPower Cables

NICCO BATTARIES LTD(NBL) amalgamated with NICCO Corporation LTD (NCL) with effect from 1 April 1994 as per amalgamation scheme

In amalgamation scheme entire undertaking of NBL shall be transferred to NCL & transferee company i.e. NCL shall issue & allot share holder of NBL share in transferor company in proportion of 2 share of face value of Rs.10 each of the transferee company for 13 equity share of face value Rs.10

The rehabilitation Cum amalgamation scheme envisages settlement of dues of the bank & institution, payment to pressing creditors besides capital expenditure of Rs 163 lakhs

A) Cost of the scheme (Rs in lakhs) Capital expenditure 163.00 Settlement of dues of the banks 619.00 Payment of unsecured loans from 20.00 Payment of pressing creditors 18.00 Margin money for working capita 57.00

TOTAL 877.00

B) Means of finance (Rs in lakhs) Promoter’s contribution out of internal accruals of NCL 477.00 Benefit under section 72 A of IT Act,1961 400.00

TOTAL 877.00

The scheme for amalgamation of NBL, with NCL was under section 72A of the IT Act,1961 and shall be effective from 1 April ,1994

The carried forward accumulated loss of NBL is estimated at Rs 1896 lakhs as on 31 March 1994

The estimated tax set –off at the current rates of IT Act , 1961 is restricted to Rs. 400 lakhs

Benefits in the merger of sick

Synergistic operating economies

Diversification

Taxation advantages

Growth advantage

Production capacity reduction

Managerial motivate

Acquisition of specific asset

Risks in the Merger of Sick Unit

Dilution of competition in the market

Actual or a potential competitor, may get eliminated

Efficient & growing medium or small-sized undertaking

May exercise a market power to the detriment of its customers & suppliers

The rehabilitation of sick unit is an important aspect for economic growth of the country

In the above case of NCL & NBL we can say that share exchange ratio is 2 : 13 & cost of scheme is Rs 877 lakhs which is large amount for merger

From this we can conclude that merger of NBL was requirement of time & now it contributes major part of share of NCL