INDEX

NO
1 Industrial Sickness

SUBJECT

PAGE NO
1

Indian Scenario

Composition of Industrial Sickness Industry wise Distribution Of Industrial Sickness State-wise Distribution Of Industrial Sickness

6-11 6 8

Causes of Industrial Sickness Internal Causes External Causes RBI Study on Industrial Sickness

12-18 12 15 17

Consequence of Industrial Sickness

19

Sick Industrial Companies Act (SICA) Objectives of SICA Important Provision of SICA

20-26 21 22

Symptoms of Industrial Sickness

27

NO
8 Rehabilitation of Sick Unit

SUBJECT

PAGE NO
28-32 28 30

Government measure to deal with Industrial Sickness Revival Programme

Board for Industrial and Financial Reconstruction Introduction of BIFR Performance Review of BIFR

33-38 33 37

10 Case Study Of Mafatlal Industries Ltd (MIL) Brief History of MIL Declaration of MIL as a Sick Unit by BIFR Rehabilitation Scheme for Revival of MIL by IDBI Sectioned Rehabilitation Scheme of MIL

39-45 39 41 42 44

11 Sources Of Information

46

INDUSTRIAL SICKNESS
In the recent years, one of the most important problems faced by the Indian companies is the problems of growing Industrial Sickness. The incidence of Industrial Sickness is face not only by small scale Industries but also by medium and large scale Industries. The impact of sickness has been cause of considerable concern to Workers, Government, Financial Institutions and Banks, and also to the Community at large. In the simple terms Industrial Sickness is a unit or a firm which continuously making losses and the accumulated losses equal or exceeds its assets. The definition of Industrial sickness is given by various institutions are as follows: The RBI defines the sickness as " An Industrial unit is regarded as sick if it has incurred cash losses for one year, and in the judgement of financing bank is likely to incur cash losses for the current as well as following year and/or there is imbalance in the unit's financial structure, that is, when current ratio is less than 1:1 and worsening debt equity ratio." The S.B.I. defined a sick unit as As a unit which fails to generate internal surpluss on a continuing basis and is depended for its survival on frequent infusion of external funds. The Companies (second amendment) Act, 2002 define a sick company as one : A) which has accumulated losses in any financial year equal to fifty percent or more of its average net-worth during four years immediately preceding the financial year in question , or B) Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors An examination of the above definitions suggests that financial performance of a particular company gives an idea whether a company is sick or not. Financial performance of company reflects not only every action of company but also impact of external factors. Company should able to meet its current obligation from its income; if company is not able to generate sufficient cash to meet cash expenses then company is going towards sickness. 1

Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

INDIAN SCENARIO OF INDUTRAIAL SICKNESS

In recent years, the incidence of Industrial Sickness is on the rise both in large scale and small scale sectors. Industrial sickness is one of the persisting problems in India and magnitude of Industrial Sickness has increased during the last two decades. In India, Industrial Sickness increased at an alarming rate in the 1980's and has also increased in the 1990's particularly in the small scale sector. Small Scale industry in India is defined on the basis of investment in plant and machinery. The investment limits varied over the passage of time. This limit was Rs. 35 lakhs from 1985-86 to 1990-91 and Rs. 60 lakhs from 1991-92 as of today. Similarly, the small scale ancillary units are defined as having investment in plant & machinery below Rs. 75 lakhs. As of today a small scale industrial (SSI) unit is one in which investment on plant and machinery is limited to a maximum of Rs. 3 crore. A 'tiny' industrial unit is one in which investment in plant and machinery is limited to a maximum of Rs. 25 lacs. The incidence of sickness in the small scale sector is a matter of serious concern in India. In December 1980, there were 1,401 sick units in the non S.S.I sector and 23,149 sick units in the S.S.I sector. Thus, the total number of sick units in December 1980 was 24,550. Outstanding bank credit at that period amounted to Rs.1520 crore in the non S.S.I sick units, and Rs.306 crore at the end of December 1980. SSI sick units which accounted for 94% of the total incidence of industrial sickness in 1980 have increased their share to 99% in the overall profile of industrial sickness in 1990. On the other side large and medium scale sick units account for only 1% of the total incidence of sickness. But in terms of locked up bank credit, they represent 75% of the total bank credit outstanding from all sick units. On the other hand, the locked up bank credit in the small scale sick units which constitute 99% of the total incidence of sickness, represent only 25% of the total bank credit outstanding from all sick units. Again, of the identified SSI sick units, 92% are found to be unviable.

Industrial Sickness and Rehabilitation A number of studies were conducted to determine the relative importance of different factors in the causation of sickness of the industrial units in India. One study was conducted in 1990 to examine the causes of sickness in the new SSI units. It was found that marketing problems as a whole (resulting from highly competitive markets, unfavourable linkage with ancillary and medium units etc.) were the most important factor (29.6%) for sickness in the group followed by mismanagement (21.9%), inadequacy of working capital (16.6%), time overrun (13.4%) and govt. policy (11%). The total weight of all external causal factors for the group is 59.2 and that of internal and that of internal causal factor 40.8. It appears that external causal factors are dominant in causing sickness in the new SSIs than internal causal factors.

The bank finance locked up in sick units at end of march 1993 was Rs.13,134 crores indicating an increase of about 4.97% in a period of four years. As of march 1995, according to a report in Business Line newspaper, there were more than 2,71,000 sick industrial units in India with outstanding bank credit of Rs.13,739 crores. Of ,99% companies belonged to the Small Scale Industries. these

These sick companies accounted for 6.7 per cent of the total bank credit and 13.3 per cent of the total bank advances to industry. However, the ratios were significantly lower than in the preceding two years , it adds. The share of the small-

scale industry in the list of sick units was at more than 99 %. This was despite a positive growth rate of the small-scale sector during the year. Let this statistics however not cloud the fact that the growth of the small-scale sector in India is usually above the growth rates achieved by the industrial sector as a whole.

Data regards industry-wise classification of sickness and state-wise classification of industrial sickness are available from the RBI report on currency and finance. The data reveal that in five industries namely textile, iron and steel, engineering, electrical and chemicals, non SSI sick units accounted for about 56% of total outstanding bank credit at the end of march, 1997 while non SSI weak units in these industries accounted for 58% of total outstanding bank credit at the end of march,1997. 3

Industrial Sickness and Rehabilitation

Industrial sickness in India at the end of March 1997

Category No. sick units Total bank finance Loaned and locked up Rs in crore 8,614 1,564 3,609 13,787 % of total 62.5 11.3 26.2 100

Non SSI sick units Non SSI weak units SSI sick units Total

1,848 420 2,35,032 2,374,400

If non-SSI sick and weak units are taken together, then these five industries accounted for 58.5% of the total outstanding bank credit at the end of March, 1997. State-wise analysis shows that seven industrially advanced states, namely, Maharashtra, W estBengal, Andhra Pradesh, Gujarat, Utter Pradesh, Tamil Nadu and Karnataka taken together accounted for 71% of the total number of non SSI sick units and 74.2% of the total outstanding bank credit at the end of march, 1997. As regards the non SSI weak units these states accounted for 66.4% of the total number of weak units and 71.4% of the total outstanding bank credit at the end of March, 1997. As regards the SSI sick units 57% of the total number of sick units and 72% of the total outstanding bank credit of such units was concentrated in these seven industrially advanced states at the end of March, 1997. In march 2003 there were 29,109 sick units in the non SSI sector and 1,67,980 sick units in the SSI sector, totaling 1,71,376. Outstanding bank credit at the end of march 2003 was Rs.29,109 crore in the non SSI sick units and Rs. 5706 crore in the SSI sick units, totaling Rs. 34,815 crore. The main reason for the good performance of the industrial sector during the eighties was starting of the liberalisation process and a number of policy measures including changes in the areas of licensing and procedures, import of technology and capital goods coupled with a reasonable rate of public investment and almost total protection to domestic industries from international competition through quantitative restrictions on imports as well as high tariff rates. 4

Industrial Sickness and Rehabilitation With the launching of the new economic policy during the nineties, the protective barriers for the Indian industry started getting dismantled one by one. The average annual growth rate of the industrial sector including mining, manufacturing and electricity generation slumped to 0.6%in 1990-91 as a short-term response to the reform process. However, in a few years the overall rate of industrial growth gradually recovered. It increased from 2.3% in 1992-93 to 6.0% in 1993-94, 9.4% in 1994-95 and 12.1% in 1995-96. Since 1996-97, however, there was a decline in the growth rate of industrial production and it may be less than 5% during the financial year 1998-99.

Govt. Concessions and Incentives for the SSI Sector

To reduce the cases of industrial sickness in SSI sector, The Government of India provided various concessions and incentives to the SSI sector for their sustained growth, which have briefly been outlined here as under:

Assisting new SSI units on soft terms by lending institutions, sector, Incentives related to land/shed financing, machinery and raw-materials, Provision of facilities within the Industrial Estates, and Excise duty exemption and price preference Reservation of Certain Industries for the SSI

Industrial Sickness and Rehabilitation Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

Composition of Industrial Sickness

A) Industry-wise Distribution of Sick Units:
An industry wise study showed that the composition of sickness has not changed much. Most of the sick units in the 1980s were from textiles, metals and chemicals sectors. Both IDBI and BIFR data are in general agreement regarding the top four industries on the sickness map. The shares of each industry as per the IDBI reports and BIFR records are given in Tables 1 and 2. The jute industry figured prominently in terms of its share of workers displaced, even though it accounted for very few sick units and accumulated losses. Similarly, BIFR records place the fertiliser industry in terms of accumulated losses, even though it accounts for less than 1 per cent of the total number of sick units.
Table 1 Industry Share In Total No. of Sick Units and Amount Blocked 1994-2002 Industry
Textile Metals Chemicals and Products Food Products Electricals Services Paper Transport Equipments Machinery Cement Electricity Fertiliser

% share in No. of Sick Unit

25.5 15.6 15 9.5 7.3 5.3 5.2 5 4.7 4.3 2.1 2.1

% Share in Amount Blocked

11.4 17.3 13.7 4.2 3.4 4.5 2.9 2.8 2.4 6 18.2 2.8

Sources: IDBI Report on Development Banking

IDBI reports puts power projects as the main contender in the amount blocked. In the food products division, sugar and vanaspati and vegetable oils together accounted for around 70 per cent of the amount blocked and 50 per cent of the number of units. Similarly, drugs and pharmaceuticals constitute around one-third of the total sick units 6

Industrial Sickness and Rehabilitation in the chemicals sector, proclaiming a crisis in the pharmaceuticals division marred by skewed patent regimes. A time series plot shows a sudden upsurge in 1997 in all these sectors. Besides, 85 service sector units also appeared on the sickness map given by IDBI, in 1997. Industries that figured prominently on the sickness map are those that received lesser assistance from financial institutions during the decade. Yet it cannot be stated emphatically that sickness in these industries was due to decreased flow of financial assistance, given that the composition of sick industries has not changed in the pre- and post-reform periods. The causality can be the other way round. The dismal performance of these units must have forced FIs to reduce their assistance to them in the wake of increased efforts to cut down their NPAs. If the declining D/S ratio (amount disbursed/amount sanctioned, which fell from 80 per cent in 1986 to 62 per cent in 2001) can be taken as an indicator of stricter scrutiny of investment proposals and an even stricter project follow-up, it can be said that the poor performance of these industries led to their lower share in the total assistance funds.
Table 2 Industry Share In Total No. of Sick Units and Amount Blocked 1987-2002 % share in Industry No. of Sick Unit
Textile Metals Chemicals and Products Food Products Electricals Paper and Pulp Rubber Goods Transport Jute Leather and Leather Goods Fertiliser Sources: BIFR 17.81 15.84 12.58 10.15 6.14 5.77 1.6 1.51 1.23 1.16 0.86

% Share in Net worth of sick units

13.66 14.14 12.65 7.4 5.24 2.31 0.88 1.34 0.27 1.69 5.62

% Share in Accumulated Losses

15.16 14.61 12.04 6.92 6.69 2.16 0.85 1.52 0.99 1.52 6.92

% Share Workers Displaced

26.41 8.28 5.48 4.41 323 2.81 0.5 1.62 6.7 0.47 0.85

Industrial Sickness and Rehabilitation

B) State-wise Distribution of Sick Units :

In the 1980s, Maharashtra, Gujarat and West Bengal figured prominently in terms of the number of sick units as well as amount blocked. However, the post-reform period points to the entry of Andhra Pradesh and Tamil Nadu into the top three or four positions in terms of the largest number of sick units. This is so in both BIFR and IDBI data, for all the time periods mentioned. IDBI data also establish their predominance in the amount blocked. According to IDBI records, till 2001 Andhra Pradesh had the highest figure of amount outstanding in sick units in 2002 it was pushed to the second place. Tamil Nadu comes in fourth However; BIFR records that cover the period 19872002 do not place these two states in any significant position with regard to the economic burden of sickness.
Table 3 Share of States and Regions in Distribution of Sickness 31 Dec. 2002 % of Sick Units
20 10 10 9 8 7 5 5 2 26 28 34 12

% Share in Networth of Sick Units

22 6 6 10 6 17 9 3 5 24 16 36 25

STATE

% Share in Total Losses

21 6 6 10 6 15 9 3 8 22 16 35 26

% Share Workers Displaced

12 6 9 9 7 26 3 4 12 16 20 24 40

Maharashtra Tamil Nadu Andhra Pradesh Gujarat Uttar Pradesh West Bengal NCT Delhi Karnataka Bihar Northern Region South Region Western Region Eastern Region Sources : BIFR

Apart from this, BIFR data series provides a region-wise analysis on employment, net worth and accumulated losses of failed units. Just as industrialisation was localised, 8

Industrial Sickness and Rehabilitation sickness is also localised. In the northern region, UP and Delhi accounted for around 60-63 per cent of sick units and accumulated losses. UP alone has 46 per cent of the workers displaced. The share of individual states in sickness represents an even higher concentration in other regions. For instance, in the southern region Tamil Nadu and Andhra Pradesh together accounted for 71 per cent of the total sick units and 74 per cent of accumulated losses. Andhra Pradesh alone has 35 per cent of the sick units and 36 per cent of the accumulated losses. Tamil Nadu contributes 36 per cent of sick units and 37 per cent of the accumulated losses in this region. However, 44 per cent of the workers displaced are from AP. In the eastern region, West Bengal dominates with 65 per cent of the sick units and unemployed workers and 57 per cent of losses. Next comes Bihar, which accounts for 16 per cent of units and 30 per cent of accumulated losses. This can be due to the greater presence of sick PSUs in Bihar. These two states, account for 83-86 per cent of the sickness in the eastern region. In the western region, Maharashtra leads, followed by Gujarat, with around 57 per cent and 26 per cent respectively in terms of the number of sick units. These two states were together account for 83 per cent of the sick units and 86 per cent of the accumulated losses respectively.

Though the southern states, mainly AP and TN, had made an entry into the sickness map in terms of the number of units, BIFR records show that their share in the

economic loss is the least for the whole of India. Surprisingly, the eastern region, with the left-oriented, labour protective West Bengal has contributed to around 40 per cent of the workers displaced, in spite of having only 12 per cent the total number of sick units. This has happened because of the failure of big projects. This should be a matter of concern for the West Bengal government. The traditional seats of sickness Maharashtra, Gujarat and West Bengal figure high in BIFR data series, due to the wider time range. Also, the capital intensity of the projects (which are reflected in the net worth of companies) that have gone bust is quite high for these states, resulting in their having a larger share of accumulated losses and workers displaced. Bihar, for instance, figures in the top-five list in terms of economic 9

Industrial Sickness and Rehabilitation losses, though the numbers of units constitute just 2 per cent of the total sick units. A comparative ranking of states as per the two data set of IDBI and BIFR are given in Tables 4.

Table 4 State Ranking According to No. of Sick Units and Amount Blocked As Per IDBI and BIFR Data Number Of Units STATE BIFR 1987-2002
Maharashtra Andhra Pradesh Tamil Nadu Gujarat Uttar Pradesh West Bengal Karnataka NCT Delhi Madhya Pradesh Rajasthan Bihar Punjab low 1 2 3 4 5 6 7 8 9 10 -

Amount Wise BIFR 1994-2001

1 3 2 4 5 7 9 6 8 10 low

IDBI 1994-2002
1 2 4 3 5 8 9 N.A 6 7 Very low 10

IDBI 1994-2002
1 2 6 3 4 10 9 N.A 8 7 Very Low 5

BIFR 1987-2002
1 8 7 3 6 2 10 4 8 9 5 11

Sources : BIFR, IDBI Report on Development Banking

The growth rate of sick units over different time periods is shown in Table 5. The supremacy of the southern states in the IDBI data is due to the severe shakeout that took place in these states in association with recession, which is captured well in their time period 1994- 2002. For instance, if we look at BIFR data, among states with a significant share in the total number of sick units (Maharashtra, Andhra Pradesh, Tamil Nadu, Gujarat and Uttar Pradesh), Tamil Nadu registered an annual growth rate of 99 per cent during 1997- 2002, when the national average was just 41 per cent. Andhra Pradesh occupies third position with 52 per cent. Similarly, when there was a 140 per cent increase in 1997 from that in the previous year, at the national level, the corresponding figure for AP and TN was 300 per cent and 480 per cent. This is greater than the most industrialised state of Maharashtra. Thus, southern states were the worst 10

Industrial Sickness and Rehabilitation hit during the shakeout of 1997. When the national average of sickness was around 18 per cent, (for 1991-2002, as given by BIFR), the average annual growth rate of sickness for Tamil Nadu was 54 per cent. For AP, the corresponding figure was 20 per cent. This shows that southern states that embraced the new policy reforms in spirit and content were badly hit by the global recession.

Table 5 Average Annual Growth Rate Of Sick Units ( % ) STATE

Maharashtra Tamil Nadu Andhra Pradesh Gujarat Uttar Pradesh West Bengal NCT Delhi Karnataka Bihar All India Sources : BIFR

1987-1991
-19 -11 -3 -27 56 -28 13 -11 7 -15

1992-1996
-9 4 -13 26 1 9 -30 -14 23 -6

1997-2002
62 99 52 35 25 75 62 60 67 41

1991-2002
26 54 20 24 41 37 10 23 60 18

11

Industrial Sickness and Rehabilitation

CAU

OF

Industrial Sickness and Rehabilitation

CAUSES OF INDUSTRIAL SICKNESS

Causes of industrial sickness are broadly divided into two main categories: one is Internal factors (Endogenous Factors) and second is External factors (Exogenous Factors). Internal factors are the factor which originates within the industrial unit and therefore these factors are to a large extent under the control of the unit. On the other side, External factors originate outside the industrial units and therefore they are not under the control of the unit. Also, these factors are likely to affect all units in the industry. Obviously, state action would be most necessary to deal with industrial sickness when it is the result of External factors.

A) Internal Factors :
Internal factors are mainly arises due to managerial deficiencies. It means poor management decisions and improper control over the affair of company leads to industrial sickness. These decisions may be regarding to Production, Marketing, Finance and Personnel department of Company, which are as follows: 1. Production Decision: Production Decisions are mainly concerned with location, technology, plant & machinery, plant size etc. Inadequate decision regarding these factor are: Because of management select Improper Location, which leads to increase the Transportation cost of raw-material and finished goods. Many times location does not have good infrastructure facility as a result of that production cost increase. Proper Technology should be able to produce quality product in line with the expectation of the trends and demands of market. Against that if the company adopts the Wrong Technology than it might be leads to reduction in sales and increase in inventory. Plant and machinery should be as per the technology and climate condition. If company acquired Unsuitable Plant and Machinery than company is not able

12

Industrial Sickness and Rehabilitation to use technology efficiently, which might be increase production cost and decrease the quality of product. As trends and preferences of the consumers changes, the company needs to update the features of the product to meet the consumers expectation. If the company is not given adequate Emphasis on Research and Development, results company loose their customers.

2. Marketing Decision: Marketing Decisions are mainly concerned with Price, Place, Promotion and Product. Inadequate decision regarding these factors are The production schedule is depending on the demand projection of a product. If Demand Projection is inaccurate then it would lead to under production or over production against its actual demand. If a company produces multi products then company should meet its demand of each product in the market. If the company has Improper Product-mix then company is not able to meet demand of various products, results overall sales of the company would be lower. Price of the product should be as per the market condition. If the company sets Irrational Price then it will affect the sales, market position, and profit level of the company. Awareness of the product in the market is necessary for increasing the sales and profit level. Inadequate Sales Promotion of the product leads to lower level of demand despite of good quality of the product.

3. Financial Decision: Financial Decisions are mainly concerned with the capital budget, cost of capital, cash planning and control, capital structure etc. Inadequate decisions regarding these factors are Capital structure of company shows various sources of long-term finance. If the company has Wrong Capital Structure, then company might be face lots of problems in term of returns to investors and repayment of principal.

13

Industrial Sickness and Rehabilitation Capital Investment decision has an enormous bearing on the basic character of the firm. It has long-term effects on the company. If the company takes Bad Investment Decision then it will affect the future cash-flow of company and investment decision can not be reversed without incurring a substantial loss. One major technique of cost control is responsibility accounting. As every manager knows their responsibility they can do their task better way. But if there is Absence of Responsibility Accounting then manager can escape from bad situation and that will lead to increase in the cost of project and production. Company has to do proper cash planning so that it can manage the receipt and payment of cash properly. If the company has Bad Cash Planning and Control then company can not coordinate receipts and payments of cash. As result of that, company might be required to pay penalty on late payment of dues. To increase the sales, the company provides credit facility to their customer. As a result, company needs efficient receivables management. If company has Poor Management of Receivables then it will increase the probability of bad debt, block of working capital and increase the requirement of cash to run the business.

4. Personnel Decision: Personnel Decisions are mainly concerned with the labour relations, human resources, over staffing etc. Inadequate decisions regarding these factors are Effective leadership helps employees to achieve their personnel goals in line with companys goal. If employees face Ineffective Leadership from their leader or supervisor that will affect moral of employees and that will be shown in their work. As result, company will not able to achieve their targets. Good relationship with labour can lead company to use their resources effectively. If the company has Bad Labour Relation then it will create many problems like strikes, delay in production schedule etc. Consequently cost of production will increase and company will not fulfill their order in time. The company needs adequate human resources for execution of order in time with minimum level of cost. If company has Inadequate Human Resources then 14

Industrial Sickness and Rehabilitation company may faces problems in execution of order and it will increase the workload of existing employees. As inadequate human resources are bad for company, same way over staffing creates problem for company. Over Staffing in the unit and/or in the company increases remunerations of staff but not production, so that is one kind of burden on company. It is also restrict company to use its resources effectively.

B) External Factors :
External factors arise from outside of the units. These factors are generally affects all the units of particular industry and/or affect all the units of the Economy. The management of company can not control these factors. As a result many times, company can not implement long term project as per their planning. These factor mainly divides into four broad category, which are as follows:

1.

INDUSTRY SPECIFIC FACTORS:

These factors are related to stagnation or recession in the industry (e.g.: the textile industry), competition faced by the unit (e.g.: small units, rayon grade, pulp unit) and excess capacity in the industry (e.g.: the type of industry). Entry of MNCs and strict quality and hygiene specifications prescribed and enforced by them has contributed to the sickness of several firms, particularly in the SSI sector.

2. GOVERNMENT RELATED FACTOR:

These include tax burden on the unit , especially import duties and sales tax ; legal restrictions on the units ; expansion/diversification ; frequent changes in government policies effecting the unit ; liberal imports that compete with the units products ; the Government or its agencies going back on its promises made to the unit ; poor law and order situation etc

15

Industrial Sickness and Rehabilitation

3. FINANCIAL INSTITUTIONS RELATED FACTORS:

These include harshness in dealing with the unit; delay in providing finance to the unit; inadequate working and / or long term capital provided by them and their inexpert assessment of the clients finance proposal. Apart from these changes in interest Rate pattern as per norms of RBI affect the company.

4. OTHERS:
Other external factors include customer resistance to the units products; erratic availability of raw materials / components to the units e.g.; paper and sugar industries; inadequate transport, .facilities available to the unit (e.g.: for transporting coal), etc

13 16

Industrial Sickness and Rehabilitation

RBI STUDY ON CAUSES OF INDUSTRIAL SICKNESS

A study conducted by Reserve Bank of India, which covered 378 units, on the cause of industrial sickness revealed the following picture: Number No. CAUSE 1 2 3 4 5 Management and Managerial Deficiencies Faulty Initial Planning and other technical drawback Labour Trouble Market Recession Others (infrastructures, Raw Material Shortage etc) Total of Units 197 52 9 86 34 378 Percentage 52 14 2 23 9 100

RBI Study Of Causes of Sickness

9% 23%

52% 2% 14%

Management and Managerial Deficiencies Faulty Initial Planning and other technical drawback Labour Trou\bule Market Recession Others (infrastructute, Raw Material Shortage etc)

The Reserve Bank of India on 378 medium and large sized sick industrial enterprises enjoying credit limits of Rs. 1.00 crore and above revealed that 52% of the units fell sick 17

Industrial Sickness and Rehabilitation due to management problem, 23% of the units went sick because of market recession, 14% for initial faulty planning, 9% for power-cuts, shortage of raw-materials, etc. and the rest 2% became sick due to labour trouble.

The RBI study summed up the thrust of its findings as follows: A broad generalisation regarding important causes of industrial sickness emerges. It is observed that the factor most often responsible for industrial sickness can be defined as 'management'. This may take the form of poor production management, poor labour management, lack of professionalism, dissensions within the management, or even dishonest management.

13 18

Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

CONSEQUENCE OF INDUSTRIAL SICKNESS

The basic deficiency of such a system is that industrial sickness is treated as a financial problem where the concerns of labour are by and large ignored. However, the impact of industrial sickness on workers is outrageous. The immediate fallout of sickness is default in payment of dues including those of workers. As a result of accumulating losses and liquidity constraints, the workers are compelled to go through a process of "belt-tightening" and are called upon to make sacrifices in order to improve the viability and financial health of the enterprise. These sacrifices can be in the form of exemption from wage awards existing as well as prospective, non-payment of bonus, reduction in wages, postponement of annual increments, modification of service conditions, lay off without seeking court permission, retrenchment and lock-out of units. It has several adverse consequences on the economy as a whole. Some of which may be enumerated as follows:

It leads to loss of substantial revenue to the Government and enhances its public expenditure;

It locks up necessary resources and funds in the sick unit. This also increases the non-performing assets (NPAs) of banks and financial institutions;

It leads to loss of production and productivity in the economy; It aggravates the problem of unemployment in the economy; It vitiates the industrial atmosphere and leads to worker-management disputes, strikes ,lockouts, etc;

It undermines the public confidence in the functioning of the Organised sector in the country which in turn affects the overall investment climate of the economy.

19

Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

Sick Industrial Companies Act (SICA)

In the wake of sickness in the countrys industrial climate prevailing in the eighties, the Government of India set up in 1981, a Committee of Experts under the Chairmanship of Shri T.Tiwari to examine the matter and recommend suitable remedies therefore. Based on the recommendations of the Committee, the Government of India enacted a special legislation namely, the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) commonly known as the SICA. The Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called the Act) was enacted with a view to securing the timely detection of sick and potential sick companies owning industrial undertakings, the speedy determination by a body of experts of the preventive, ameliorative, remedial and other measure which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto. Sick industrial unit is defined as a unit or a company (having been in existence for not less than five years) which is found at the end of any financial year to have incurred accumulated losses equal to or exceeding its entire net worth. The net worth is calculated as sum total of paid up capital and free reserves of a company less the provisions and expenses, as may be prescribed. An industrial unit is also regarded as potentially sick or weak unit if at the end of any financial year, it has accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on demand made in writing for such repayment. In the light of the consequences of sickness and its growing incidence by size, region and industry followed by its far-reaching adverse socio-economic effects, the Government has been taking many steps and remedial measures in order to tackle this problem in India. The most significant measure has been the enactment of the Sick Industrial Companies (Special Provisions) Act,1985 (SICA).

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Industrial Sickness and Rehabilitation

Sick Industrial Companies (Special Provisions) Act, 1985

The most important piece of legislation dealing with industrial sickness was the Sick Industrial Companies (Special Provisions) Act,1985 (SICA). It applies to industrial undertakings both in the public and private sectors. SICA pertains to the industries specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, (IDR Act) subject to the exceptions specified in the Act. SICA, including any rules or schemes made there under, had overriding provisions over other laws except the provisions of the Foreign Exchange Regulation Act,1973 and the Urban Land (Ceiling and Regulation) Act, 1976. The basic rationale of enacting SICA was to determine sickness in the industrial units. It also aimed at expediting the revival of potentially viable units so as to make the investments in such units profitable. At the same time, to ensure the closure of unviable units so as to release the investments locked up in such units for productive use elsewhere.

OBJECTIVES OF SICA
The basic objective of Sick Industrial Companies (Special Provision) Act, 1985 are as follows:

Timely detection of sick and potentially sick companies. Speedy determination by a body of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies.

The expeditious enforcement of the measures so determined and for all matters connected therewith or incidental thereto.

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Industrial Sickness and Rehabilitation

IMPORTMANT PROVISION OF SICA

The basic important provision of Sick Industrial Companies (Special Provision) Act, 1985 are as follows: 1. It provided for the constitution of two quasi-judicial bodies, that is, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR was set up as an apex board to tackle industrial sickness and was entrusted with the work of taking appropriate measures for revival and rehabilitation of potentially sick undertakings and for liquidation of non-viable companies. While, AAIFR was constituted for hearing the appeals against the orders of the BIFR.

2. BIFR would make an inquiry as it may deem fit for determining whether any industrial company had become sick, under the following conditions:A. If the Board of Directors of a sick industrial company made a reference to the BIFR for determination of the remedial measures with respect to their company. Such reference was to be made within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year at the end of which the company had become sick. For filing the reference, the Board of Directors must have sufficient reasons to form the opinion that the company had become sick; or B. On receiving such information (reference) with respect to a sick company or upon its own knowledge as to the financial condition of a company. Such a reference to the board may be made by:- (i) The Central Government; (ii) The Reserve Bank of India; (iii) State Governments; (iv) Public financial institutions; (v) State level institutions; or (vi) Scheduled banks. C. However, such a reference shall not be made in respect of any industrial company by :- (i) the Government of any State, unless all or any of the industrial undertakings (belonging to such a company) were situated in that State; (ii) a public financial institution or a State level institution or a scheduled bank, unless it 22

Industrial Sickness and Rehabilitation had, by reason of any financial assistance or obligation rendered by it or undertaken by it, interest in such a company. The Board may order any operating agency to enquire into the matter and complete the inquiry as expeditiously as possible.

3. If the Board deems it fit to make an inquiry or to cause an inquiry to be made into any industrial company, it may appoint one or more persons as special director(s) of the company for safeguarding the financial and other interests of the company. The appointment of a special director shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956 or in any other law for the time being in force or in the memorandum and articles of association or any other instrument relating to the industrial company. Any special director so appointed shall :- (i) hold office during the pleasure of the Board and may be removed or substituted by any person by order in writing by the Board; (ii) not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto; (iii) not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement; (iv) not be liable to be prosecuted under any law for anything, done or omitted to be done in good faith in the discharge of his duties in relation to the sick industrial company.

4. If after making an inquiry, the Board is satisfied that the company has become sick, it shall, after considering all the relevant facts and circumstances of the case, may take either of the following decisions:A. If the Board decides that it is practicable, it shall, by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make its net worth exceed the accumulated losses. 23

Industrial Sickness and Rehabilitation B. If the Board decides that it is not practicable for the sick company to make its net worth exceed the accumulated losses within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures in relation to the said company, it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare a scheme providing for such measures in relation to that company. The measures may include:i. The financial reconstruction of the sick industrial company; ii. The proper management of the sick industrial company by change in or take over of the management of the company; iii. The amalgamation of the sick industrial company with any other company (transferee company), or any other company with the sick industrial company (transferee company); iv. The sale or lease of a part or whole of the sick industrial company; v. Such other preventive, ameliorative and remedial measures as may be appropriate; vi. Such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified above. C. If the Board is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the concerned High Court. The High Court shall, on the basis of the opinion of the Board, order winding-up of the sick industrial company in accordance with the provisions of the Companies Act, 1956.

5. Where in respect of an industrial company, an inquiry is pending, or any scheme referred is under preparation or consideration or a sanctioned scheme is under implementation, then no proceedings for the winding-up of the industrial company or 24

Industrial Sickness and Rehabilitation for execution, distress or the like against any of the properties of the industrial company shall be made. Also, no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority. A. Also with respect to the above conditions, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising there under before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board. B. However, such declaration shall not be made for a period exceeding two years, which may be extended by one year at a time so that the total period shall not exceed seven years in the aggregate.

6. Under the Act, whosoever violates its provisions or any scheme or any order of the Board or of the Appellate Authority, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine. No court shall take cognizance of any offence mentioned except on a complaint in writing of the secretary or any such other officer of the Board or the Appellate Authority or any such officer of an operating agency as may be authorised in this behalf by the Board or the Appellate Authority. Sick Industrial Companies (Special Provisions) Act,1985 (SICA) was repealed and replaced by Sick Industrial Companies (Special Provisions) Repeal Act,2003. The new Act diluted some of the provisions of SICA and plugged certain loopholes. It aimed not only to combat industrial sickness but also to reduce the same by ensuring that 25

Industrial Sickness and Rehabilitation companies do not view declaration of sickness as an escapist route from legal provisions after the failure of the project or similar other reasons and thereby gain access to various benefits or concessions from financial institutions. Under it, the Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) were dissolved and replaced by National Company Law Tribunal (NCLT) and National Law Appellate Tribunal (NCLAT) respectively.

26

Industrial Sickness and Rehabilitation Industrial Sickness and Rehabilitation

SYMPTOMS OF INDUSTRIAL SICKNESS

Sickness does not occur overnight, but develops gradually overtime. A firm which is becoming sick shows symptoms which indicate that trouble lies ahead of it. Some of the common symptoms are: Delay or default in payment to suppliers Irregularity in the bank account Continuous irregularity in cash credit accounts Delay or default in payment to banks and financial institutions Non-submission of information to banks and financial institutions. Frequent requests to banks and financial institutions for additional credit. Decline in capacity utilisation. Poor maintenance of plant and machinery Low turnover of assets profit fluctuations, downward sales and fall in profits followed by contraction in the share market Accumulation of inventories Inability to take trade discount Excessive turnover of personnel Extention of accounting period Decline in the price of equity shares and debentures

27

Industrial Sickness and Rehabilitation Industrial Sickness and Rehabilitation

REHABILITATION OF SICK UNITS

As a company declares a sick unit, it will affects society and economy of country. Many times due to managerial deficiencies company unable to perform as per its capacity and as a result it becomes sick units. Some of the sick unit can be revive by taking some necessary step. The company can be from any of following option Company can revive from Government Measure which provide by Government to deal with Problems of Sickness Company can Use various REVIVAL PROGRAMME which will help company to revive by its own effort. The company can take help of Board for Industrial and Financial Reconstruction (BIFR) for the turn around of bad situation.

Govt. Measures to deal with the Problem of Industrial Sickness:

As increase in no. of sick units in SSI and Non-SSI sectors in India, Government of India realised to take steps to prevent the problem of Industrial Sickness. Various measures have been initiated by the Govt. of India in order to deal with the problem of sickness in industries briefly described here. The RBI set up a Sick Industrial Undertaking Cell to monitor the performance of the banks in identifying the sick units and initiating appropriate remedial measures, and to co-ordinate the efforts of banks, financial institutions, Govt. and other agencies involved. RBI advised banks to take urgent measures to set up Special Sick Unit Cells to carryout periodical inspection and to undertake diagnostic studies for technoeconomic viability.

28

Industrial Sickness and Rehabilitation The Ministry of Finance of the Govt. of India and RBI provides supportive measures for rehabilitation of viable sick units in terms of relief in excise arrears, reduction in interest rate on term loans and waiver of penalty applied to cash credit facility. The Industrial Reconstruction Corporation of India (IRCI) was set up by the Govt. of India for industrial revival and rehabilitation of sick and closed industrial units. Sick Industrial Companies (Special Provisions) Act (1985), was enacted in 1987 as a landmark in Govt. Policy to combat the problem of sickness. Under this Act, the Board for Industrial and financial Reconstruction (BIFR) came into being with vast powers aimed at assessment and implementation of revival plans for the sick industrial companies. However, this Act has no applicability for the sick SSI units. However, different studies revealed that in some cases liberal policies for the growth of the small industry sector were counter-productive in terms of affecting the viability through unhealthy growth and inefficiency of the units. On the other hand, the

measures aimed at revival of sick industries could not achieve a desired breakthrough in curbing the magnitude of sickness due to their inadequacies and implementation bottlenecks.

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Industrial Sickness and Rehabilitation

REVIVAL PROGRAMME
When an Industrial unit is identified as sick, a viability study should be conducted to assess weather the unit can be revived/ rehabilitated within a reasonable period. If the viability study suggests that the unit can be rehabilitated, the following revival programme should be conducted by the Industry.

1. Settlement with Creditors :

A sick unit is normally in straitened financial circumstances and is not able to honour its commitments to its creditors like financial institutions, debenture holders, commercial banks, suppliers and governmental authorities. To alleviate its financial distress. A settlement scheme has to be worked out which may involve one or more of the following: rescheduling of principle and interest payment, waiver of interest, conversion of debt into equity, payment of arrears in installments.

2. Provision of Additional Capital :

Typically, a revival programme entails provision of additional capital. This may be required for modernisation and repair of plant and machinery, for purchase of balancing equipment, for sustaining new marketing drive, and for enhanced working capital needed to support a higher level of operations. The additional capital has to be provided on concessional terms, at least for the initial years. So that the financial burden on the unit is not high.

3. Divestment and Disposal :

The revival programme may involve divestment of unprofitable plants and operations and disposal of slow moving and obsolete stocks. The thrust of these actions should be to strengthen the liquidity of the unit and facilitate reallocation of resources for enhancing the profitability of the unit.

30

Industrial Sickness and Rehabilitation

4. Modernisation of Plant and Machinery :

In order to improve manufacturing efficiency, plant and machinery may have to modernised, renovated, and repaired. This may be essential for attaining certain cost standards and quality norms for completing effectively in the market place.

5. Reduction in Manpower :
Generally, sick firms tend to be over staffed. The revival programme must seek to reduce superfluous manpower. Remember an old managerial saw: " the leaner the organisation, the greater are its chances of survival." Often a ' golden handshake involving paying significant retrenchment compensation is a better preposition than carrying redundant manpower on the payroll of the unit. 6. Strict Control over Cost : A profitable organisation can afford wastefulness and laxity in its expenditures. A tottering firm, seeking to regain its health and vigour, has to exercise strict control over its costs, particularly over its discretionary expenses. A zero base review of all the discretionary expenses may be undertaken to eliminate progrmmes and activities which are a drain on the finances of the firm. 7. Improvement in Managerial Systems : The managerial systems in the unit must be strengthened. In this exercise, greater attention may have to be paid to the following: Environmental monitoring Organisational structure Responsibility accounting Management Information system Budgetary control

Industrial Sickness and Rehabilitation 8. Change of Management : A change in management may be necessary where the present management is dishonest and/or incompetent. It has been observed that a new chief executive, who is competent, committed, and uprighteous, can often bring about dramatic results. The classic example of this phenomenon was the dramatic turnaround of Chrysler Corporation under the stewardship of Lee Iacocca.

31 32

Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION

The Government of India, in order to tackle the problem of industrial sickness, had set up a Board for Industrial and Financial Reconstruction (BIFR), under the purview of Sick Industrial Companies (Special Provisions) Act,1985 (SICA). It had been established as a quasi-judicial body in the Department of Economic Affairs, Ministry of Finance, for revival and rehabilitation of potentially sick undertakings and for closure/liquidation of non-viable and sick industrial companies. The Industrial Finance Division of the ministry dealt with the appointment of the Chairman and the Members of BIFR and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) as well as with all the other matters relating to industrial sickness. The Board of experts named the Board for Industrial and Financial Reconstruction (BIFR) was set up in January, 1987 and functional with effect from 15 th May 1987. The Appellate Authority for Industrial and Financial Reconstruction (AAIRFR) was constituted in April 1987. Government companies were brought under the purview of SICA in 1991 when extensive changes were made in the Act including, inter-alia, changes in the criteria for determining industrial sickness. Under SICA, it is mandatory for the Board of Directors of a sick industrial company to make a reference and report to BIFR for formulation of revival and rehabilitation schemes and other remedial measures to be adopted with respect to such a company. BIFR, since its inception in May 1987 till the end of September 2006, has received 6,991 references. As on 30th September 2006 BIFR declares their references with respect to status of various applications received from private company, central psu and state psu are shown in following table.

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Industrial Sickness and Rehabilitation

No. Status Private Central PSUs 108 17 0 91 State PSUs 188 66 0 122 Total PSUs 296 83 0 213 Total

1. References received 2. Registration declined 3. Under Scrutiny A References registered (=1-2-3) 5. DISPOSALS Dismissed (i) as non-maintainable (ii) as multiple registered

6,695 1,484 12 5,199

6,991 1,567 12 5,412

1,660 218

11 0

36 0

47 0

1,707 218

6. Rehabilitation schemes approved/sanctioned (i) by BIFR 695 (ii) by AAIFR/SC 11 7. Declared on longer sick out of SI No. 6 462

27 1 9 29

26 0 14 40

53 1 23 69

748 12 485 1,303

8. Winding up recommended to the concerned 1,234 high courts 9. Dropped now B Total (5+6+8+9) C Pending 10. Draft schemes circulated 11. Winding up notice issued 12. Pending for sickness determination 13. Declared sick 14. Schemes failed and reopened 15. Pending cases remanded by AAIFR 16. Stay ordered by courts 42 85 357 678 8 43 46 119 3,937

5 73

3 105

8 178

127 4,115

2 1 2 11 1 1 0

0 4 1 10 0 2 3 17

2 5 3 21 1 3 3 35

44 90 360 699 9 46 49 1,297

1,262 18 Total (C=A-B) Source: BIFR, Department of Economic Affairs, Ministry of Finance

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Industrial Sickness and Rehabilitation On receipt of such a reference, BIFR will conduct an inquiry and ascertain whether the company is indeed sick or not. For this purpose, the Board may, through any operating agency, cause to prepare with respect to the sick company: A complete inventory of that company which includes all assets and liabilities as well as all books of accounts, registers, maps, plans, records, documents of title or ownership of property and all other documents of whatsoever nature relating thereto; A list of shareholders and of creditors (showing separately the list of secured creditors and unsecured creditors); A valuation report in respect of the shares and assets of the company; An estimate of its reserve price, lease rent or share exchange ratio; and Performa accounts, where no up-to-date audited accounts are available. On the basis of such an enquiry, if BIFR is convinced that the company has become sick, it will either give reasonable time to the company concerned to make its net worth positive or it will appoint an operating agency consisting of certain banks and financial institutions to prepare a package for the revival of such sick industrial units. The package may consist of any one or more of the following measures:

Restructuring the capital base of the company. Inducting more capital to improve its resource position. Merger and amalgamation of the sick company with a healthy unit. Providing soft loans to the company. Bringing about technological changes and modernisation in the company. Bringing about a change in its management Writing off the interest burden of the company. Rescheduling its loans. Providing fiscal concessions like tax rebate, tax exemptions or tax reliefs to it.

If BIFR is of the opinion that the sick industrial company is not likely to make its net worth exceed its accumulated losses within a reasonable time and that it is not likely to 35

Industrial Sickness and Rehabilitation become viable in future and also it is just and equitable that the company should wound up, it could imitate proceedings with the High Court, for winding up of the company. The decision of the BIFR is binding on all the concerned parties. The entire responsibility for diagnosing, identifying, investigating, rehabilitating, reviving and ultimately recommending the winding of such a sick unit lies with the BIFR. Along with it, certain measures may also be initiated by the Reserve Bank of India (RBI) by instructing banks to keep a constant track of borrower's profile and try to identify sickness at the initial stages, that is, when a unit has started becoming weak. It has issued detailed guidelines for rehabilitation of these units and matters relating to better coordination between commercial banks and term-lending institutions for formulation and implementation of rehabilitation programmes. But, under the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, which replaced Sick Industrial Companies (Special Provisions) Act,1985 (SICA), the Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) stand dissolved. The work of revival and rehabilitation has been entrusted to National Company Law Tribunal (NCLT) in place of BIFR and any appeal against the order of the NCLT will be made to the National Law Appellate Tribunal (NCLAT) instead of AAIFR.

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Industrial Sickness and Rehabilitation

PERFORMANCE REVIEW OF BIFR

BIFR was set up primarily to provide support to sick units through the speedy disposal of cases for winding up or rehabilitation. But BIFRs performance had come under heavy criticism almost since its inception. The Goswamy Committee, set up in 1993, criticised the preference of the board for rehabilitation rather than winding up, which resulted in undue delay without results. Even after the setting up of the debt recovery tribunals for the speeding up of the process, things have not improved at BIFR. Now steps have taken to wind up the organisation. The year-wise performance of BIFR is given in Table 9. Of the total 4,318 cases registered, hardly 9 per cent were revived by the end of December 2002. Winding-up order was served for 25 per cent of the cases. Another 24 per cent were dismissed as non-maintainable.
Total No. of Registered case during year 311 298 202 151 155 177 152 193 115 97 233 370 413 429 463 559 4318 Percent of Total Growth rate over the Privious Year -4.18 -32.21 -25.25 2.65 14.19 -14.12 26.97 -40.41 -15.65 140.21 58.80 11.62 3.87 7.93 20.73 Causes Disposed of During the Year Cases Under Revival 0 0 0 3 4 8 9 10 22 29 13 13 13 10 50 74 258 5.97 Cases Revised 0 1 1 3 4 7 13 37 25 93 36 21 10 37 47 34 369 8.55 Wending up Recommended 0 12 31 43 47 30 64 79 64 85 85 50 65 153 133 143 1084 25.10 Dismissed 8 29 78 44 28 42 59 48 29 25 22 36 70 158 118 252 1046 24.22

Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total

The remaining cases are awaiting a decision. CMIE has pointed out that around 36 per cent of the cases were pending in 2001, and a mere 1.06 per cent could actually turn around. This gives credibility to the argument that BIFR only served to delay the liquidation process. In business circles the board came to be known as the board for 37

Industrial Sickness and Rehabilitation industrial funeral rites. A proposal was made in budget 2001-02 to repeal SICA and amend the Companies Act in order to set up a national company law tribunal to which may be assigned the disputes now handled by Company Law Board, BIFR, AAIFR and the high court. The Companies Amendment Act 2003 came into effect on January 3, based on the recommendations of the Balakrishna Eradi committee, which was set up to examine the law relating to insolvencies and winding up of companies. With this BIFR and its appellate authority, AAIFR, lost the rationale for their existence. Coupled with this comes the new ordinance, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance promulgated in June 2002 (and regularised into an act in November 2002), which gives creditors the power to takeover the assets/management of the defaulting company without the intervention of the court. These firefighting policies indicate a marked shift in the responsibility of industrial restructuring from secured creditors and financial institutions to the defaulting debtor firms.

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Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

Brief History of Mafatlal Industries Ltd

In India, Mafatlal Industries Ltd (MIL) is a renowned name across India, providing Quality fabrics, with latest fashion trends and in the finest tradition, catering to broad product spectrum consisting of Shirting's, Bottom Weights, Children Wear, Uniforms, Voiles, Lawns and sleepwear as well as specialty fabrics. The story of Mafatlal Group is a stirring saga of a blend of traditional values and modern technology triumphing over odd circumstances. His roots may have been simple, but it was an environment that nurtured his ambitions. Mr. Mafatlal Gagalbhai was born in a in 1873, to a weaver of Ahmedabad. His father, who was neither educated nor prosperous, made a living by doing odd jobs. It wasn't long before a young Mafatlal, who was still in his early teens, had to leave school to help his father peddle textile products. With goods hanging from their shoulders, both father and son would scour the countryside in search of buyers. Some of the buyers proved to be Mafatlal's benefactors in later years, when he metamorphosed into an industrialist. They not only provided him with capital, but also gave it at low rates of interest. Driven by curiosity and ambition, he took up a job as a mill-hand. He wanted to understand the entire gamut of operations, but his real breakthrough came only at the age of 31. Alongwith Chandulal Mahadevia, a friend, and Arthur Shorrock, an Englishman who knew some British textile-machinery manufacturers in Lancashire, he took over the management of a small mill in Ahmedabad, and named it the Shorrock Mill. Of the initial equity capital of Rs 3.25 lakhs, Mafatlal picked up 30 shares of Rs 1,000 each while his father picked up another 30 shares. Mafatlal and his partners evolved an innovative scheme to muster the rest of the funds. In those days, business concerns were run by managing agencies. So, the enterprising partners promised investors a share in the managing agency. The first mill did extremely well, and Mafatlal developed an appetite for expansion. Six years later, in 1912, he bought a mill in neighbouring Nadiad for Rs 6.26 lakhs. The second mill was aptly called New Shorrock. For Mafatlal and the others in the textile 39

Industrial Sickness and Rehabilitation business, the War years were the years of prosperity and expansion. Although the partnership was doing well, Mafatlal wanted to do something on his own. So, in 1916, he bought Jaffer Ali Mill, which was founded by the Nawab of Surat and renamed it as Surat Cotton Spinning & Weaving Mills. Three years later, Mafatlal came to Mumbai, taking over the China Mill, which had been set up by a Parsi family in 1887. It is in the 1970's and 1980's that the existing business was consolidated. The Group also diversified into Information Technology, Chemicals, and Engineering Industry. The late 1980's saw the Group further diversifying into the Financial Service Industry, Gas Distribution and later into Healthcare business. From 1995 onwards, the strategy has been to focus on the Core Competence viz. Textiles and Chemicals and divest from other businesses. MIL produces a complete range of products in 100% Cotton and in Polyester/ Cotton Blends, consisting of Yarn Dyed and Piece Dyed Shirtings, Poplins, Bottomwear fabrics, Cambrics, fine Lawns and Voiles. In addition to these, the mills also have the capacity to produce printed Voiles and dress materials. Mafatlal Industries Ltd has two operating plant, out of which one is at Nadiad and second is at Navsari. Nadiad plant was started in 1913. This plant is one of the largest composite textile mills in the country. It produces some of the finest fabrics, in a count range of 12's to 105's, which are exported to the most demanding buyers of Europe, U.K. , U.S.A. and Middle East. It has an installed capacity of 100,000 Spindles, 816 Rotors and 492 Looms and a capability to process 60,000 meters of fabrics per day. Navsari plant was started in 1931. This plant has installed capacity of 63,000 Spindles and 210 Looms. This plant is Produces Cotton and Polyester/ Cotton Fabrics in Yarn Dyed and Piece Dyed varieties, mostly in Polyester/ Cotton Blends. Mafatlal Industry also exports its product to various Countries. Export markets of Mafatlal Industries Ltd include U.S.A., Canada, U.K., France, European Country, U.A.E., Saudi Arabia, Oman, Yemen, South East Asian Countries, Australia and New Zealand. 40

Industrial Sickness and Rehabilitation

DECLARATION OF MIL AS A SICK INDUSTRY BY BIFR

Mafatlal Industries Ltd. posted a loss of Rs. 326.49 crore during financial year ended on September 1999. As the companys net worth stood at Rs. 268.38 crore during the year ended on September 1999. As unable to cope with mounting losses, MIL submits a recast proposal to the lead institution, ICICI in September 1998. After delaying over a year ICICI had rejected the proposal of the company. The company had loans of Rs 301.44 crore on cash credit accounts and Rs 25.89 crore on term loan accounts. Other loans and advances include Rs 100.47 crore to ICICI, Rs 30.47 crore to IDBI, Rs 31.24 crore to IFCI, Rs 10.94 crore to ILFS and around Rs 22.39 crore from others. The aggregate quoted investments stood at Rs 21.69 crore, while the aggregate unquoted investments were Rs 200.41 crore. To repayment of the outstanding of the company, the company had option to sell its land, building, plant, machinery and other fixed assets, which valued at Rs. 208.30 crore. As a result company had only one option for the revival of company to approach BIFR to declare a sick unit, as per the provision of SICA 1985. The MIL has interest in Textile, IT, Fine Chemicals, and Chemicals Intermediary was at one time one of the most profitable business houses in India, but MIL has perhaps the longest spell of bad luck faced by an Indian company. The company had closed to around 15000 workers at its five Textile units in Mumbai and Gujarat in early 1980s. The Textile strike by Datta Samants union in 1982 could be called the beginning of chain of problems for the company. As the government had increased the Import duty on imported raw materials, results increase in cost of production, which would lead to export losses to the company. And this would lead to mounting debt. There were some personal tragedies in the lives of promoters which affect the business of MIL very badly. MIL remains a high profile company up to mid 1990s, but before the year 2000 arrived, the company declared as a sick unit on 19 September 2000. 41

Industrial Sickness and Rehabilitation

REHABILITATION SCHEME FOR REVIVAL OF MIL BY IDBI

The Board for Industrial and Financial Reconstruction had direct the Industrial Development Bank of India (IDBI) to submit a revised rehabilitation proposal for the ailing Mafatlal Industries Ltd. incorporating its response to concern raised by board, workers, and consortium of bank. IDBI, had submitted the status report vide its letter dated November 8, 2001 forwarding therewith a draft rehabilitation scheme (DRS), the Bench noted. The DRS formulated by the OA, based on the rehabilitation scheme submitted by the company, envisaged creation of a special purpose vehicle (SPV) and hiving off of chemical units into a separate company without giving any adequate explanation for the creation of SPV and a separate company for chemicals, the Bench observed. The Bench, at the recent hearing, noted that the company had not submitted justification for creation of a SPV and the reasons of special treatment given to the financial institutions (FIs) by giving them exclusive charge on the assets of SPV, discussing what were the alternatives of SPV, and as to why the banks could not be given second charge on the fixed assets of the company. IDBI had also not discussed in its report the status of various charges in the event of the failure of the scheme, the Bench noted. These assets/SPV would be outside purview of the board once the scheme was declared as failed, it observed. Further, it was also not provided that the assets of SPV would be sold through an assets sale committee (ASC) and the other secured creditors and workers would have second charge on the assets of the SPV for their dues in case the scheme was declared failed, the Bench noted. The reasons as to why Navin Flourine Chemicals Ltd (NFCL) was being created and also the reasons for non-provision of Central excise and other dues in the DRS had not been explained. 42 the

Industrial Sickness and Rehabilitation While there was no right of recourse available to the workers, such right of recourse was available to the secured term lenders on the assets of NFCL. The company and the secured creditors had agreed in the hearing that such right could be given to the workers, the bench noted. The Bench also noted that the company had submitted that it would be negotiating with the lenders, who were not agreeable to the DRS. Though most of the working capital bankers had conveyed their refusal to accept additional exposure, they had not clarified whether they would take any more exposure in percentage terms or amount wise.

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Industrial Sickness and Rehabilitation

SANCTIONED REHABILITATION SCHEME OF MAFATLAL INDUSTRIES LTD

The Board for Industrial & Financial Reconstruction (BIFR) had sanctioned the Rehabilitation Scheme of the Mafatlal Industry Ltd under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. Vide its Order dated 30th October, 2002. Necessary steps have been taken by the Mafatlal Industry Ltd to implement the said Sanctioned Scheme which are briefly enumerated herein below 1. The Company was demerged into three companies; One is Navin Fluorine International Limited, Second is Sulakshana Securities Limited and Third is Mafatlal Industries Ltd 2. The Chemicals Division was Demerged and vested in Navin Fluorine International Limited (NFIL) (formerly known as Polyolefins Rubber Chemicals Limited) with the appointed date of 1st March, 2002. 3. Surplus/Non-productive assets/ investments together with liabilities of Secured Term Lenders were demerged and vested into Special Purpose Vehicle i.e.. Sulakshana Securities Limited (SSL) with effect from 1st April, 2002. 4. The remaining Textiles Business continued with the Company i.e. Mafatlal Industries Ltd (MIL) 5. Share Capital of the Company was written down by reducing the face value of the equity shares by 90 % i.e. from Rs.100/- to Rs. 10/- per Share. 6. NFIL issued and allotted 49,99,999 equity shares of Rs.10/each to the shareholders of the Company in the ratio of 1:1 which were listed on Mumbai and Ahmedabad Stock Exchanges. 7. NFIL contributed to the Company Rs.90 Crores for the rehabilitation of the Company. 8. The operations of Ahmedabad Unit and Lower Parel Unit in Mumbai were discontinued. 9. VRS has been fully paid to the workers of Ahmedabad Unit. VRS to the workers of Nadiad and Navsari Units are being paid as per the Memorandum of

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Industrial Sickness and Rehabilitation Understanding/ Agreement with the Labour Union. The workers of Mazgaon and Lower Parel Units in Mumbai are being paid VRS compensation in installments. 10. On 22-09-2004, the Company had entered into an arrangement for joint

development of land at Lower Parel Unit with M/s. Marathon Realty Ltd., on the terms of percentage sharing of sale proceeds at the rate of 56.50 % to the Company and 43.50 % to the said Developer. The period of completion of the Project was fixed as 30 months. 11. The Company entered into an arrangement on 03-01-2007 with the Developer and third party viz., M/s. Parmeka Pvt. Ltd., for outright sale of the Company's share of 56.50% in the said development agreement and executing a perpetual lease for the said developable land. Under the above arrangement, the Company will receive gross realization of Rs.158.48 Crores. The advance of Rs.28.48 Crores received from Marathon Realty Ltd. will be adjusted against the said amount. 12. The Company has entered into an Agreement for Sale with Annapurna Polymers Pvt. Ltd., (APPL) for the sale of Ahmedabad Unit at an aggregate consideration of Rs.6.77 Crores to finance the VRS cost of the Unit. The Conveyance Deed is yet to be executed. Meanwhile, to utilize the idle facilities, the Company has entered into arrangement of Conducting Agreement of Ahmedabad Unit of the Company with APPL permitting them to run the said Unit at their entire cost and risk w.e.f. 1st June, 2003. Restructured Dues of Consortium Banks After the end of the year, the Company arrived at One Time Settlement (OTS) with Bank of India under which the Bank has agreed to receive Rs.1730 Lacs against their dues of Rs. 9091 Lacs. As regards the restructured dues of the other Working Capital Banks, the Company has already submitted to them the One Time Settlement (OTS) proposal.

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Industrial Sickness and Rehabilitation

Industrial Sickness and Rehabilitation

SOURCES OF INFORMATION
We collected information from following sites www.bifr.nic.in www.nic.in www.mafatlals.com www.thehindubusinessline.com www.google.com www.netashare.com www.managementparadise.com www.pib.nic.in

BIBLOGRAPHY
Financial Management by Prasanna Chandra - 6th editionPublication : Tata McGraw-hill Growth and Structure of Industry Publication : Mahajan Publication Growth and Structure of Industry Publication : B.S. SHAH Publication

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