Industrial Sickness

Definition of a Sick Company as per Companies (2^nd Amendment) Act, 2002:

A Sick Company is 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 Industrial Sickness

• External causes
• Internal causes

External Causes

• Raw-material constraints
• Poor infrastructure
• External competition
• Dereservation

Internal Causes

• Faults and planning and construction stage
• Management problems
• Entrepreneurial incompetence
• Labor disputes
• Obsolete technology
• Credit constraints
• Lack of training and skill enhancement activities

Consequences of Industrial Sickness

• Unemployment
• Fear of industrial unrest
• Loss of government revenue
• Losses to the bank and financial institution
• Adverse impact on investors and entrepreneurs
• Adverse impact on related units
• Wastage of resources

Steps taken to address industrial sickness

Steps taken by banks

• Pardonoing or reduction in interest or part of the principal
• Grant of additional working capital facilities
• Setting up of sick industrial undertaking cell in RBI for gathering information and coordinating rehabilitation plan
• Setting up a special cell with IDBI
• Setting up state-level inter-institutional committees at all regional offices of RBI

Steps taken by the government

• Concerned ministries were asked to monitor the sickness and coordinate action for the revival and rehabilitation of sick units
• Merging sick units with healthy units
• Tieing up with financial institutions regarding rehabilitation and restructuring of units
• Excise loans under which mills discharge their excise liabilities as before. At the same time, against the excise paid, they would be entitled to borrow an equivalent amount from banks
• Concerned ministries were asked to monitor the sickness and coordinate action for the revival and rehabilitation of sick units
• Merging sick units with healthy units
• Tieing up with financial institutions regarding rehabilitation and restructuring of units
• Excise loans under which mills discharge their excise liabilities as before. At the same time, against the excise paid, they would be entitled to borrow an equivalent amount from banks
• Tax benefits to healthy units when they took over sick units
• Margin money scheme under which units were provided loans at a very subsidized interest rate to implement their revival scheme

IRBI

• Set up in 1971
• Original name IRCI
• Given statutory status in 1985 and renamed IRBI
• Reconstituted as an all-purpose DFI in 1997

BIFR

• Board for Industrial and Financial Reconstruction (BIFR) was set up under the provisions of Section 4 of the Sick Industrial Companies Act (SICA) 1985.
• BIFR was a quasi-judicial body with experts at various levels and has been empowered to make necessary inquiries and determine the sickness incidence in industrial companies.
• Under the Act, it was mandatory for the Board of Directors of a sick industrial unit to report sickness to the BIFR.
• Main functionaries with BIFR were

1. In case a unit is identified as potentially sick, the Board works to formulate various preventive, remedial, or other measures. Some of the initiatives/measures that the board may take include financial assistance (in the form of loans, grants, tax relief, concessions, and guarantees), change of management, share capital reconstruction, lease/sale of part/whole of the company or merger/amalgamation of the sick unit with a healthy company.
2. If the investigation reveals that certain individuals in management are involved in the misappropriation of funds, the Board may ask banking and lending institutions to refrain from extending financial assistance to such individuals/units for a period of next 10 years.
3. At times, the Board gives the identified sick unit time to imrpove its worth and performance.
4. If Board, after considering find that the sick unit must be winded up, the opinion is forwarded to the High Court.

Companies (Second Amendment Act), 2002

• New definition of sick units
• Establishment of NCLT which will be a single forum in place of CLB, BIFR, and High Courts
• Establishment of NCLAT where an appeal against NCLT can be filed in NCLAT within 45 days of the order
• Reference to NCLT by BOD of sick company. RBI, banks, the government can also make reference
• Three pronged strategy

1. self revival
2. prepare its own plan for quick recovery
3. recommending winding up

Govt Policy

Many firms go bankrupt; failing to pay their debts on time and the number thus becoming bankrupt may be relatively very large in India, as a result of bad industrial policies. (For instance, textile mills form a high proportion of the medium and large sick companies. This is a direct result of government policies that favoured the power loom and handloom industries, while also preventing investment in the mills that would have helped them to adapt. Again in the 1970s and the early 1980s, the government subsidized many small engineering plants that were too small to survive in a competitive market. In the public sector, the government invested in industries where India had a comparative disadvantage.

Labour Policy and Sickness

The Industrial Disputes Act (IDA) requires any firm with 100 employees or more to issue ‘a notice of change’ to any employee with a year’s service who is likely to be affected by changes in employment conditions. This is so general that any change in the pursuit of productivity is sure to be covered. An affected worker may appeal to government conciliation where the case is likely to linger for years. Thus employers find it very difficult to dismiss workers, even in clear cases of misbehavior. This results in a bias in favour of temporary workers and employment contractors. The IDA over-protects the workers, in large companies only. There is furthermore a clear need for institutional reform to expedite the resolution of disputes. The IDA also requires the company to seek the permission of government (usually the State government) to retrench workers. For political reasons, this is seldom given. In practice, illegal retrenchment is often avoided by the use of voluntary retirement schemes with the agreement of workers or their unions. Nevertheless, the introduction of the government into labour management in medium and large firms is an egregious absurdity, which reduces the flexibility of the labour market and can only be to the detriment of the whole workforce, which outnumbers those, protected by 20 times or more. Thus, for the above-mentioned reasons, State government permission, that is essential for the close down of a unit, is seldom given. For this and other reasons, it has also been almost impossible for creditors to enforce liquidation. There is no way the law can make a firm pay its workers if it has no money. Inability to close and illegal closure has often meant the disappearance of all assets other than land, which the firm is prevented from selling by Urban Land (Ceiling and Regulation) Act, 1976.(ULCRA)

Sick Industry Policy

Industrial sickness had started right from the pre-Independence days. Government had earlier tried to counter sickness with some ad-hoc measures. Nationalisation of Banks and certain other measures provided some temporary relief. RBI monitored the industrial sickness. A study group, came to be known as Tandon Committee was appointed by RBI in 1975.In 1976, H.N. Ray committee was appointed. In 1981, Tiwari Committee was appointed to suggest a comprehensive special legislation designed to deal with the problem of sickness laying down its basic objectives and parameters, remedies necessary for revival of sick Units. 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 set up.

The main objective of SICA is to determine sickness and expedite the revival of potentially viable units or closure of unviable units. It was expected that on revival, idle investments in sick units will converted into productive assests and on closure, the locked up investments in unviable units would get released for productive use elsewhere.

Primary responsibility for tackling problems of industrial sickness is vested in the Board for Industrial & Financial Reconstruction. The Appellate Authority for Industrial and Financial Reconstruction (AAIRFR) was constituted in April 1987.

Board for Reconstruction of Public Sector Enterprises

The Cabinet Committee on Economic Affairs (CCEA) in 2005 cleared the establishment of a Board for Reconstruction of Public Sector Enterprises meant to consider ways and means to revive sick public sector undertaking. The board will have seven members and a non-official member as the chairman.

Board's aim

The board’s team of reference included advising the Government on ways and means to strengthen public sector undertaking in general and making them more autonomous and professional.

Advice on Disinvestment

It will also consider restructuring-financial, organization and business (including diversification, joint ventures, mergers and acquisitions) of Central Public Sector Enterprises and suggest ways and means for funding such schemes.

It will advise the government on disinvestments, closure or sale in full or in part in respect of chronically sick or loss making companies which cannot be revived. In respect of these unviable companies, the board will also advise the government about sources of funding.