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FINANCIAL MANAGEMENT OF SICK UNITS

GROUP MEMBERS ANURADHA DAIWADNYA BHAVIN DHOLAKIA RADHESHYAM GUPTA KANCHAN PARAB POOJA PARDESHI KAJAL SHAH MAMTA TIWARI

14 17 19 51 52 72 83

IntroductionThe Industrial Reconstruction Corporation of India (IRCI) was established in 1980s 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 structureLater it was converted to The Industrial Reconstruction Bank of India (IRBI), to carry the same function under a different mould

MeaningThe 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

Causes of Sickness

Unfavorable external environment Managerial deficiencies

Unfavorable External environmentShortage of key inputs like power & raw materials Changes in Govt policies Development of new technology

Shift in consumer preferencesSudden decline in the orders from the government

Reduced lending by financial institutions

Managerial deficienciesProductionImproper locationWrong technology

Uneconomic plant sizeWeak production and quality control

Managerial deficiencies FinanceWrong 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 PersonnelIneffective leadership Bad labour relations Over Staffing Irrational compensation structure

Managerial Deficiencies MarketingInaccurate demand projection Improper product mix Wrong product positioning Poor customer service High distribution costs

Symptoms of sicknessDelay 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

ContLow 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 SicknessTwo types of analysis:

Univariate analysis

Multivariate analysis

Univariate AnalysisIn 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 analysisMultivariate 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 sicknessIts 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 UnitsSettlement 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 LtdNicco 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 industryIt 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

NICCOs PRODUCTAircraft & Air Field Cables Fire Retardant Low Smoke Cables (FRLS) Automobile Cables Oil Rig Cables Copper Conductors Cables For Cranes Elevator Cables (lift Cables) Furnace & High Temperature Cables Marine Cables Power 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 Capital expenditure Settlement of dues of the banks Payment of unsecured loans from Payment of pressing creditors Margin money for working capita TOTAL B) Means of finance Promoters contribution out of internal accruals of NCL Benefit under section 72 A of IT Act,1961 TOTAL

(Rs in lakhs) 163.00 619.00 20.00 18.00 57.00 877.00 (Rs in lakhs) 477.00 400.00 877.00

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 sickSynergistic 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