BCom Industrial Sickness Notes Study Material
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BCom Industrial Sickness Notes Study Material
MEANING OF INDUSTRIAL SICKNESS
An industrial unit is set up to earn profit, to generate adequate surplus, to pay interest and instalments on debts, provide depreciation on plant and machinery, pay dividend on equity capital and generate funds for modernisation, expansion and diversification.(BCom Industrial Sickness Notes Study Material)
Industrial sickness is a situation when there is no adequate profit to meet these obligations. There are losses year after year first shareholders is deprived of dividend, then there are defaults in payment of interest and instalment to creditors. Workers suffer for wages or salaries and supplier of raw material for his payment. Ultimately, all doors are closed, neither banks nor financial institutions extend credit beyond a limit nor suppliers supply goods on credit.
To clarify the meaning of “Sickness” in industrial units, we may refer to the Sick Industrial Companies (Special Provision) Act. 1985. In this Act, a sick industrial company defined as under: “An industrial company (being a company registered for not less than seven years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net-worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year.”
DEFINITIONS OF INDUSTRIAL SICKNESS
Industrial sickness has defined differently by individuals and even by institutions:
“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 the following year and the unit has an imbalance in its financial structure, such as current ratio is less than 1:1 and there is a worsening trend in debt equity ratio.” -Reserve Bank of India
“To a layman, a sick unit is one which is not healthy. To an investor it is one which skips dividends. To an industrialist, it is a unit which is making losses and tottering on the brink of closure. To a banker, it is a unit which has incurred cash losses in the previous year and is likely to repeat the performance in the current and the following years.” -Mr. V. N. Nadkarni
The Companies (Second Amendment) Act, 2002 defines a sick company as one:
(a) 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 current financial year; or
(b) Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors.
Normally, when a business unit turns financially sick, avenues should be explored for restricting and reviving by given a fresh injection of capital. In case this remedial measure is not expected to work, it should be allowed to close down. In India, however, the policy of the Government has been to keep these units alive through financial support from itself and from the financial institutions with the objective of protecting the jobs of the employees and workers.
CONCEPT OF WEAK UNITS AND INCIPIENT SICKNESS
The Reserve Bank of India guidelines facilitate the detection of sickness the incipient stage for large and medium units only. An industrial unit will be termed as “weak,” if at the end of any accounting year it has:
(a) accumulated losses equal to or exceeding 50 percent of its peak net worth in the immediately preceding five accounting years.
(b) a current ratio of less than 1:1.
(c) suffered a cash loss in the immediately preceding accounting year.
Incipient sickness is a stage under which following symptoms may be seen:
(a) There are continuous losses from year to year and the trend is expected to continue in future.(BCom Industrial Sickness Notes Study Material)
(b) Deterioration is expected in the current ratio in the current financial year, even though the same way have been more than one in the previous financial year.
(c) There is gradual erosion in the net worth during the previous and current financial year and is expected to continue in future also.
(d) Deterioration continues in the debt-equity position in the current financial year and subsequently also. Finally, we can say that, incipient industrial sickness is the stage where the unit incurs cash losses and there is gradual erosion in the net worth. This is the time to take remedial measures to prevent sickness and there is requirement of proper attention and follow-up programmes to check it.
CAUSES OF INDUSTRIAL SICKNESS
Industrial sickness is a situation which comes in long-run, it does not result in one day, Various factors which signify the setting in of the industrial sickness are classified into two categories external and some are internal. We explain the major ones as under:
(A) External Causes
(i) Recession in Market: Recession badly affects the whole industry. As a result of which a step decline in the demand resulting in unsold stock and losses to individual units. The availability of credit is also restricted so that purchasers are not able to purchase finance, then the demand of these products is bound to suffer. It this situation persists for quite sometime, the producing units are prone to turn sick.(BCom Industrial Sickness Notes Study Material)
(ii) Competition from Substitutes: There are many products for which new products are developed and gradually old products go out of demand. The units how were producing old products, loosing their market share. First profits are reduced and they gradually become sick.
(iii) Erratic Supply of Inputs: Some units are still facing erratic supply of like raw material, power, manpower, finance, credit and transport etc. results in disturbing the production schedule causing losses to the unit.
(iv) W. T. 0. Agreement: As per the agreement of World Trade Organisation India is allowing free entry to Multinational Corporations (MNCs). According to this agreement there is less or nominal restrictions on imports and exports with reduced custom duty. Thus, our domestic units have suffered losses because of cut-throat competition. For example Videocon, Onida, Texla, Oscar etc. have suffered in losses because of entry of MNCs like Samsung, LG, Sony, Phillips etc.
(v) Government Policy: Excessive Government control and restrictions, sudden changes in Government policy relating to industrial licencing, ta export, import etc. can make viable units sick overnight. For example, liberal import policy for a product can create a problem for domestic units producing similar product.
(vi) Unforeseen Circumstances: Unforeseen causes are also affect industrial growth. These causes are natural calamities like drought, floods, earthquakes, lock-out, accidents, war etc. Due to these a profitable unit may turn in sick unit.
(vii) General Economic and Political Factors: When there is decling in overall economic growth or general fall in global market it is beyond the control of a single unit or a single industry. Sometimes due to political pressure supplier denied to supply of certain products or inflow of capital is restricted through sanctions, it creates problem to viable units. For example, at the time of Pokhran Nuclear test United States of America has imposed restriction for supply of industrial inputs.(BCom Industrial Sickness Notes Study Material)
(B) Internal Causes
(i) Faculty Planning: Many big or small-scale units have failed because of wrong planning. If the place where unit has been set up lacking infrastructural facilities like, transport, communication system, warehousing etc. then unit is likely to face difficulties to make it operational.
(ii) Labour Unrest: It is also a big internal problem. There are a number of units who have become sick due to labour unrest, like lock-out, violence, strikes etc., and ultimately resulting in fall in production, loss and closure of units.
(iii) Inefficient Capital Planning: Because of inefficient capital planning units are still facing financial problem. When units start with an unbalanced capital structure and under-estimated project cost then they bound to suffer losses, ultimately resulting in sick units.(BCom Industrial Sickness Notes Study Material)
(iv) Obsolete Technology: In case of adoption of obsolete technology production may be inferior quality as compared to the production units who are using modern technology. So that they are not able to carry his production and gradually become sick.(BCom Industrial Sickness Notes Study Material)
(v) Competition: In modern era our producers are still facing competition by new arrivals. Now competition technology also needs to be changed according to market condition. There are many products for which new products are developed and gradually old products go out of demand. The units producing old product not survive in market for long period.
(vi) Fall in Demand: Due to now products and cut-throat competition sometimes face demand crisis. Gradually market share of this product reduces and they not able to maintain production and becomes sick.
(vii) Failure of Big Customers: Some of the concerns depends to supply their production to one or a few units. When the buying units fail for some reason then a huge amount is blocked. Blocking of working capital is a big reason for industrial sickness.(BCom Industrial Sickness Notes Study Material)
(viii) Management Problems: The most serious internal causes of industrial sickness is the management problem. Faulty managerial decisions can ruin a business. These managerial problems are: lack of proper inventory management, absence of quality control system, lack of manpower planning and bad industrial relations, improper pricing policies, inadequate attention towards maintenance management etc.(BCom Industrial Sickness Notes Study Material)
(ix) Other Internal Causes: Other internal causes for industrial sickness are:
(a) Lack of quality control;
(b) Poor utilisation of resources;
(c) Lack of proper sales promotion;
(d) Lack of co-ordination among employees and management;
(e) Lack of market research;
(f) Poor wages and salaries;
(g) Dereservation policy of industries etc.
REMEDIAL MEASURES
To remove industrial sickness following remedial measures are taken in future:
(i) Closure and Rehabilitation of Sick Industrial Units: It is concerned with two types of remedies. In case of units which cannot be revived eighter because they have no potential to sustain themselves on their own due to longer sickness, the solution lies in closing them. On the other hands some units which were set up with no economic considerations but which are potentially viable units, efforts need to be made to revive them and to help them so as to put them on their feet. This will require provision of finance, upgradation of technologies, modernisation etc.(BCom Industrial Sickness Notes Study Material)
In the case of units which have not fallen sick but are at the stage of falling sick a close monitoring should be required and corrective measures should be taken to ensure that their working is put on the right lines.
(ii) Efficiency-Oriented Environment: It is also necessary to create conducive environment for development of healthy units. Competition and substitute products are two big challenges in front of running industries.
To face these challenges following steps has to be taken:
(a) Lowering the barriers against foreign competition through reduction in custom duties.(BCom Industrial Sickness Notes Study Material)
(b) Removal of quantitative restrictions on imports and exports.
(c) Technological improvements on a continuing basis.
(d) To increase resources for research and development of technologies.
(e) An increase in FDI into the country.
(f) To promote merger, amalgamation or taking over of sick units.
(g) To reduce cost of production through implementation of various techniques of cost control.(BCom Industrial Sickness Notes Study Material)
(h) To grant loans to sick units at concessional rates etc.
(i) Promoting delicensing and decontrol.
(iii) Redeployment of Resources and Labour: It is essential to redeployment of resources to minimized the wastage of resources and labour towards alternative avenues. This requires that new opportunities are created through Government’s appropriate policies. The transfer of resources from the dying industries to new industries need to be made least-cost and smooth. For this purpose, labour also need to be retrained so as to make it fit for new opportunities. It is also necessary that funds should be made available for research and development activities and labour welfare programmes in order to facilitate efficient growth and satisfied labour force.(BCom Industrial Sickness Notes Study Material)
(iv) Measures taken by Government: The Government of India and State Governments have taken a number of steps for the removal of industrial sickness are as given below:
(a) In 1985, a legislative measure was undertaken in the form of the Sick Industrial Companies (Special Provision) Act, 1985. In terms of this Act, the Government has set up the Board of Industrial and Financial Reconstruction (BIFR) in Jan. 1987. BIFR is a statutory body having a chairman and not less than two and not more than 14 members to be appointed by Central Government. It has both administrative and quasi-judicial powers.
For revival of sick industries BIFR does different activities like, Amalgamation of sick industrial units with any other healthy units, to appoint a special director in sick unit for faulty management, take-over of management of sick industrial unit etc. In case of sick industrial unit which is not become viable in future, the BIFR will forward its opinion for winding up of this unit to the concerned High Court for final decision regarding winding up of such unit.
(b) The Government has issued important guidelines to the State Government and Financial Institution with regard to sick industrial units. In 1984, the Industrial Reconstruction Corporation of India (IRCI) was converted into Industrial Reconstruction Bank of India (IRBI). It acts as the apex credit consultant and reconstruction agency for industrial revival.
(c) In December, 2002 Sick Industrial Companies (Second Amendment) Act, 2002 was passed by Parliament in place of Sick Industrial Companies (Special Provisions) Act (SICA), 1985 for determining preventive, remedial and other measures which are required to be taken in respect of sick industrial units.
(d) Under the provision of Industries Development and Regulation Act (IRDA), 1951, Government may take over the management of sick unit when he feels that the main cause of industrial sickness is mismanagement.
(e) In 1995, IRBI was given a new name Industrial Investment Bank of India (IIBI) to give financial, managerial and technical assistance to sick industrial unit. It also works as co-ordinating body among Government and other Financial Institution. On the other hand, it provides merchant and consultancy services regarding amalgamation and merger to sick industrial units.
(f) The RBI also closely monitors certain categories of industries where the incidence of sickness is high. The Reserve Bank has issued certain guidelines to commercial banks to grant various concession to sick industrial units in a bid to rehabilitate them and grant additional working capital at reduced rates of interest.
BCom Industrial Sickness Notes Study Material
BCom Industrial Sickness Notes Study Material
Bcom 1st Year Sample Model Practice Mock Test Question Answer Papers
BCom Industrial Sickness Notes Study Material
BCom Industrial Sickness Notes Study Material