INDUSTRIAL SICKNESS

Guide : Prof. Aroop Mukherjee

Presented by Prashant Bhagat (18)Frank Russel Felix (19)Sumit Kumar (20)

WHAT IS INDUSTRIAL SICKNESS? According to the criteria accepted by the Reserve Bank of India “a sick unit is one which has reported cash loss for the year of its operation and in the judgment of the financing bank is likely to incur cash loss for the current year as also in the following year.”

AS SICA Amendment Act, 1994:An industrial company would be considered a sick industrial company once its net worth is completely eroded and has been regis tered for not less than five years.

TYPES OF SICKNESS

Born Sick• Ill conceived project• Poor appraisal • Bad planning• Inadequate Market

Survey• False fixed

investment decisions

• One customer one product

Become Sick• Poor

management• Poor

diversification of funds

• Wrong recruitment

• Faulty management policies

Made Sick• Sudden change

in government policies

• Technological changes

• Macro political social economic problems

PROCESS OF INDUSTRIAL SICKNESS

Stage1

• Perfectly healthy company• Generating cash profit• Positive networth• Positive working capital• Positive debt equity ratio

Stage2

• Company is trending towards sickness and showing symptoms of being sick

• Losses in preceding year • Prediction of losses in the current year

PROCESS OF INDUSTRIAL SICKNESS

Stage 3

• Enters into Incipient stage• Cash losses incurred last year• Estimated cash losses in the current year• Deterioration anticipated in the debt equity ratio

Stage 4

• Final stage of sickness• Erosion of networth of 50% or more• Units being closed for a total period of 6 months or

more• Defaults in the payment of loan installments

CAUSES The external causes of industrial sickness include:(a) Scarcity of raw materials and other inputs.(b) Recession in the market.(c) Frequent changes in the government policy.(d)Power cuts imposed by the state governments.

CAUSESThe internal causes which include various factors related to the industrial units itself include:(a) Faulty location of industrial unit;(b) Faulty planning of the production(c) Defective selection of plants and machineries and adoption of obsolete technology.(d) Acute financial problem(e) Incompetent entrepreneurs having no knowledge about costing, marketing, Accounts.(f) Labour problems like strikes and lock-outs arising from strained industrial relation(g) Management problems resulting from managerial decisions.

CONSEQUENCES These consequences of industrial sickness include:(a) Unemployment problem through the closure of industrial units;(b) Widespread labour unrest due to closure, threatening industrial environment .(c) Wastage of huge resources invested in these sick units;(d) Creating disincentive among the entrepreneurs and investors.(e) Creating adverse impact on the other related units(f) Causing huge financial losses to banks and other term lending institutions(g) Resulting huge loss of revenue to both Centre, State and Local government

GOVERNMENT POLICIES• Concessions : (a) amendment of Income Tax Act in

1977(b) margin money scheme

• Establishment of BIFR: It was set up in January 1987 under the Sick Industrial Companies Act, 1985 (SICA)

• Establishment of IRCI: This was set up for providing financial assistance,

managerial and technical assistance to the sick units directly and also

for securing financial assistance

GOVERNMENT POLICIES• Excise Loan : In October 1989, the

Government introduced a scheme for the grant of excise loan to sick industries.

• Modernisation Fund:The Government has set up two funds, namely the Textile Modernisa tion Fund and the Jute Modernisation Fund, for modernisation of the textiles and jute industries.

REMEDIAL MEASURES BY BANKS In order to revive and rehabilitate the sick industrial units, the commercial banks granted various concessions of these units which include:(a) granting additional working capital;(b) recovering proper moratorium on payment of interest and(c) freezing a part of the understanding in the accounts of these units.Besides, banks have also taken various steps on the organisational front by setting up sick industrial undertaking cell, state-level inter-institutional committees, a standing coordinating committee (constituted by RBI) from coordinating various issues related to commercial banks and term-lending institutions and a special cell within rehabilitation finance division of IDBI.

INCIDENCE OF SICKNESS IN SSI

Sl.No. Name of Companies

Year of Negative Working Capital

Year of Cash Loss

Year of 50% Erosion of Net Worth

Year of 100% Erosion of Net Worth

1.Mysore Spinning and Manufacturing Co. Ltd. 1964 1965 1971 1972

2.The Elphistone Spinning and Weaving Mills Ltd. 1963 1967 1975 1976

3.

The Ahmedabad Jupiter Spinning, Weaving and Manufacturing Co. Ltd. 1963 1967 1970 1971

4. The Aurangabad Mills Ltd. 1962 1963 1970 19715. The Azam-Jahi Mills Ltd. 1962 1963 1968 1969

6.The Himabai Manufacturing Co. Ltd. 1962 1965 1967 1968

7.The Jahangir Vakil Mills Co. Ltd. 1961 1966 1969 1978

8. The Tata Mills Ltd. 1963 1968 1977 1980

9.The Indore Malwa United Mills Ltd. 1963 1965 1968 1969

10.The Cannanore Spinning and Weaving Mill Ltd. 1964 1966 1969 1971

11. India Paper Pulp Co. Ltd. 1968 1967 1970 1973′

Time Gap Between 1st Appearance Of Sickness And 100% Erosion Of Networth:

•

SYMPTOMS APPEARED IN 1991THE CARRIED FORWARD ACCUMULATED LOSS OF NBL IS ESTIMATED AT RS 1896 LAKHS AS ON 31 MARCH 1994.

NICCO BATTERIES A CASE OF A SICK UNIT

NICCO BATTERIES A CASE OF A SICK UNIT

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

• The rehabilitation –Cum-amalgamation scheme envisages settlement of dues of the bank and the institution, payment to pressing

creditors besides capital expenditure of Rs 163 lakhs.

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

TOTAL 877.00B 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 (set off during the next 5 years)400.00 TOTAL 877.00

Nicco Batteries A Case Of A Sick Unit

Benefits in the merger of sick:• Synergistic operating economies

• Diversification

• Taxation advantages

• Growth advantage

• Managerial motivate

• Acquisition of specific asset 

Nicco Batteries A Case Of A Sick Unit

CONCLUSION:• Many countries are facing problem with the

industrial sickness. If gives a lot of pressure to the Governments to overcome it. Recognition of sickness symptoms gives way to solve the problem of the nations. Banks, business people, government and other financial institution must be careful to deal with the concept of industrial sickness.

• some unscrupulous entrepreneurs are trying to turn their units; sick deliberately for extracting various concessions and reliefs.

• The BIFR was recently under fire from the Parliamentary Standing Committee on Industry for “having failed to serve the purpose for which it was created.” It has called for immediate restructuring of the BIFR as well as National Renewal Fund (NRF) so both could deal with growing industrial sickness in an effective manner.

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