Industrial Sickness

Prepared By-Nidhi Rajdev

Definition:

According to RBI, 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.

As per the definition by the Sick Industrial Companies Act, 1985. “A sick industrial unit is an industrial company (being a company registered for not less than seven years) which has at the end of any financial year accumulated losses in that financial year and in the financial year immediately preceding it

Actual Sickness:Erosion of net worth by 50% or more.Units being closed for a total period of six months and more during the last yearDefault in the payment of loan installments

Causes of sickness:Born Sick:Lack of experience on the part of the promoters,

wrong selection of the project, faulty project planning may give birth to sick units.

Paucity of funds and faulty financial management.

Time and cost overruns prove to be disastrous. Delay in supply of equipment, slippage in the schedule of civil works etc. Such delays cause cost escalations leading to liquidity issues and capital shortages.

Causes of sickness……..Locational problems: High technology based projects being based in areas without skilled labor or supporting infrastructure.

Technological factors like selection of obsolete or improper technology or outdated technology due to innovations while project is being executed, wrong collaboration etc.

Incorrect assessment of the market potential or faulty demand forecasting, change in market conditions etc.

Causes of sicknessAchieved Sickness:

Bad management ie inexperience, inefficiency, lack of professional expertise, neglect and internal squabbles. Bad management could be poor production management, poor labor management, poor resources management etc. The Tiwari Committee report found that 65% of the large sick units were affected by this problem.

Unwarranted expansion and diversion of resources

Poor inventory management of finished goods as well as inputs.

Failure to modernize the productive apparatus, change the product mix to suit the changing environment.

Poor labor management relationship and the associated poor worker morale and low productivity.

External Causes:

Energy crisis arising out of power cuts or shortage of coal and oil have been a serious problem for many industrial units

Inability of the units to achieve optimum capacity due to shortage of raw materials, poor agricultural output due to natural reasons etc.

Infrastructural problems like transport bottlenecks

Shortage of working capital / liquidity constraints

Artificial economic constraints eg. Government control of product mix and prices, competition faced by the unit and excess capacity in the industry.

Preventive and Corrective MeasuresThere are laws which enable the Government to monitor and control the functioning of industrial undertakings and to deal with the problem of sickness.

The Companies Act, 1956 empowers the government to collect information from the companies and take certain measures to prevent mismanagement.

The IDRA empowers the Government to regulate

the management of industrial undertakings, including take over of the management of the undertaking.

The Sick Industrial Companies Act, 1985 deals with the problem of industrial sickness.

INDUSTRIAL SICKNESS

schemes for rehabilitation of sick SSI and the Government required the ministries to take over the responsibility of rehabilitation of sick units.

In June 1987, as per policy introduced, the State Governments were to make a matching contribution in providing assistance to sick small scale units in their rehabilitation.

The Industrial Reconstruction Corporation was formed to assist in rehabilitation of non SSI sick units

Some State Governments like that of Gujarat have introduced specific

Sick Industrial Companies Act, 1985:

Objectives of the Act:

Timely detection of sick and potentially sick companies owning industrial undertaking

Speedy determination by experts of the preventive, remedial and other measures for sick units.

Expeditions enforcement of the measures so determined and for matters connected therewith or incidental.

The financial reconstruction of the company

The proper management of the company by change or takeover

The amalgamation of the sick industrial company with any other company.

The sale or lease of a part or whole of the industrial undertaking.