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 a profit, generate an adequate surplus, pay interest and installments on debts, provide depreciation on plant and machinery, pay dividends on equity capital and generate funds for modernization, expansion, and diversification.
Industrial sickness is a situation when there is no adequate profit to meet these obligations. There are losses year after year first shareholders are deprived of dividends, then there are defaults in payment of interest and instalments to creditors. Workers suffer for wages or salaries and suppliers of raw materials for their payment. Ultimately, all doors are closed, neither banks nor financial institutions extend credit beyond a limit nor do suppliers supply goods on credit. (BCom Industrial Sickness Notes Study Material)
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 is defined as: “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 the such financial year and the financial year immediately preceding such financial year.”
DEFINITIONS OF INDUSTRIAL SICKNESS
Industrial sickness has been 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 the 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 that skips dividends. To an industrialist, it is a unit that 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 and be 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. (BCom Industrial Sickness Notes Study Material)
CONCEPT OF WEAK UNITS AND INCIPIENT SICKNESS
The Reserve Bank of India guidelines facilitate the detection of sickness in 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 the following symptoms may be seen:
(a) There are continuous losses from year to year and the trend is expected to continue in the future.
(b) Deterioration is expected in the current ratio in the current financial year, even though the same way has 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 the 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 a requirement for proper attention and follow-up programs to check it.
CAUSES OF INDUSTRIAL SICKNESS
Industrial sickness is a situation that comes in the 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 steep decline in the demand resulted 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 for these products is bound to suffer. If this situation persists for quite some time, the producing units are prone to turn sick.
(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, losing 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 materials, power, manpower, finance, credit, transport, etc. resulting in disturbing the production schedule and causing losses to the unit.
(iv) W. T. 0. Agreement: As per the agreement of the World Trade Organisation India is allowing free entry to Multinational Corporations (MNCs). According to this agreement, there are fewer 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 losses because of the entry of MNCs like Samsung, LG, Sony, Phillips, etc. (BCom Industrial Sickness Notes Study Material)
(v) Government Policy: Excessive Government control and restrictions, sudden changes in Government policy relating to industrial licensing, ta export, import, etc. can make viable units sick overnight. For example, a liberal import policy for a product can create a problem for domestic units producing a similar product.
(vi) Unforeseen Circumstances: Unforeseen causes 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 into a sick unit.
(vii) General Economic and Political Factors: When there is declining in overall economic growth or a general fall in the global market it is beyond the control of a single unit or a single industry. Sometimes due to political pressure suppliers are denied to supply of certain products or the inflow of capital is restricted through sanctions, which creates problems for viable units. For example, at the time of the Pokhran Nuclear test United States of America imposed restrictions on the supply of industrial inputs.
(B) Internal Causes
(i) Faculty Planning: Many big or small-scale units have failed because of wrong planning. If the place where the unit has been set up lacks infrastructural facilities like transport, communication system, warehousing, etc. then the 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 that have become sick due to labor unrest, like lock-out, violence, strikes, etc., ultimately resulting in a fall in production, loss, and closure of units. (BCom Industrial Sickness Notes Study Material)
(iii) Inefficient Capital Planning: Because of inefficient capital planning units are still facing financial problems. When units start with an unbalanced capital structure and under-estimated project cost then they are bound to suffer losses, ultimately resulting in sick units.
(iv) Obsolete Technology: In the case of adoption of obsolete technology products may be of inferior quality as compared to the production units that are using modern technology. So that they are not able to carry his production and gradually become sick.
(v) Competition: In the modern era, our producers are still facing competition from new arrivals. Now competition technology also needs to be changed according to market conditions. There are many products for which new products are developed and gradually old products go out of demand. The units producing old products do not survive in the market for a long period.
(vi) Fall in Demand: Now products and cut-throat competition sometimes face a demand crisis. Gradually market share of this product reduces and they are not able to maintain production and becomes sick. (BCom Industrial Sickness Notes Study Material)
(vii) Failure of Big Customers: Some of the concerns depend 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.
(viii) Management Problems: The most serious internal cause 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.
(ix) Other Internal Causes: Other internal causes of 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.
To remove industrial sickness following remedial measures are taken in the future:
(i) Closure and Rehabilitation of Sick Industrial Units: It is concerned with two types of remedies. In the case of units that 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 hand, for 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 the provision of finance, upgradation of technologies, modernization, etc. (BCom Industrial Sickness Notes Study Material)
In the case of units that have not fallen sick but are at the stage of falling sick close monitoring should be required and corrective measures should be taken to ensure that their working is put on the right lines. (BCom Industrial Sickness Notes Study Material)
(ii) Efficiency-Oriented Environment: It is also necessary to create a conducive environment for the development of healthy units. Competition and substitute products are two big challenges in front of running industries.
To face these challenges following steps have to be taken:
(a) Lowering the barriers against foreign competition through a reduction in customs duties.
(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 the cost of production through the implementation of various techniques of cost control.
(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 minimize the wastage of resources and labor 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 needs to be made the least cost and smooth. For this purpose, labor also needs 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 labor welfare programmes in order to facilitate efficient growth and a satisfied labor force.
(iv) Measures taken by Government: The Government of India and State Governments have taken a number of steps the removal of industrial sickness 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 the revival of sick industries, BIFR does different activities like Amalgamation of sick industrial units with any other healthy units, appointing a special director in a sick unit for faulty management, take-over of management of sick industrial units, etc. In case of a sick industrial unit that does not become viable in the future, the BIFR will forward its opinion for winding up of this unit to the concerned High Court for a final decision regarding winding up of such unit. (BCom Industrial Sickness Notes Study Material)
(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 the Industrial Reconstruction Bank of India (IRBI). It acts as the apex credit consultant and reconstruction agency for industrial revival. (BCom Industrial Sickness Notes Study Material)
(c) In December 2002 Sick Industrial Companies (Second Amendment) Act, 2002 was passed by Parliament in place of the 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 the Industries Development and Regulation Act (IRDA), 1951, Government may take over the management of sick units when it feels that the main cause of industrial sickness is mismanagement. (BCom Industrial Sickness Notes Study Material)
(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 units. It also works as a coordinating body among Government and other Financial institutions. On the other hand, it provides merchant and consultancy services regarding amalgamation and mergers 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 concessions 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