STRATEGIC FINANCIAL MANAGEMENT

Presented by: Munira Vohra

semester III (MBA )

Submitted to : Dr. Vedant Pandya

Department of Business Administration
Maharaja Krishnakumarsinhji Bhavnagar university
Meaning
• Industrial sickness usually refers to a situation
when an industrial firm performs poorly, incurs
losses for several years and often defaults in its
debt repayment obligations.

• A sick industrial unit may be defined as one

when it fails to generate surplus on a continuous
basis and depends on frequent infusion of
external funds for its survival.
Meaning continued..
An industrial unit tends to show signs of financial
distress starting with :
Short term liquidity problems
Revenue losses
Operating losses
Moving in the direction of over use ofexternal
credit.
According to Reserve Bank of India
• 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 in 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 worsening trend in debt-equity ratio
According to Companies Act, 2002
Sick Industrial Company means an industrial
company which has
i)The Accumulated losses in any financial year
equal to 50 per cent or more of its average net
worth during four years immediately preceding
such financial year or
ii)Failed to repay its debts within any three
consecutive quarters on demand made in writing
for its repayment by a creditor or creditors of such
company.
According to the Development Commissioner,
a small scale industrial unit (SSI)
becomes sick if its:
a) Capacity utilisation is less than 50 per cent of
the highest achieved during the preceding five
years ,
b) Net worth has been eroded by more than
50 per cent
c) The unit has remained closed for a period
more than six months
The Sick Industrial Companies Act 1985 identifies
sickness in terms of cash losses for two consecutive
financial years and accumulated losses equalling or
exceeding the net worth of the second financial year.

The State Bank of India has defined a sick unit asone

“which fails to generate an internal surplus on a
continuous basis and depends for its survival upon
frequent infusion of funds.”
Causes of Industrial Sickness
 Internal Causes
 External Causes
1. Technical feasibility:
a) Inadequate Technical know-how
b) Outdated production process
c) Locational disadvantage
2. Economic viability:
a) High cost of inputs
b) Break even point too high
c) Unduly large investment in fixedassets
d) Under-estimation of financial
requirements
e) Uneconomic size of project
f) Overestimation of demand
g) Cost over runs resulting from delays in
getting licenses/ sanctions etc
h) Inadequate mobilization of finance
3. Production management:
a) Poor capacity utilisation
b) High wastage
c) Inappropriate product-mix
d) Inadequate maintenance and replacement
e) Poor quality control
f) Poor inventory management
g) High cost of production
h) Lack of timely & adequate modernization
4. Labour management:
a) Poor labour productivity
b) Excessive manpower
c) Lack of trained/skilled labour
d) Excessively high wage structure
e) Inefficient handling of labour problems
f) Poor labour relations
5. Marketing management:
a) Lack of market research and market feedback
b) Defective pricing policy
c) Dependence on limited number ofcustomers
d) Dependence on limited number of products
e) Poor sales realization
f) Booking large order at fixed price during
inflation
g) Weak market organization
h) Lack of knowledge of marketing techniques
6. Financial management:
a) Inadequate working capital
b) Deficiency of funds
c) Poor resources management & financial planning
d) Faulty costing
e) Liberal dividend policy
f) General financial indiscipline
g) Applicaion of funds for unauthorized purposes
h) Overtrading
i) Unfavourable gearing
j) Absence of cost consciousness
k) Lack of effective collection machinery
Internal Causes
7. Administrative management:
a) Excessive expenditure on research &
development
b) Incompetent management
c) Lack of timely diversification
d) Over centralization
e) Lack of professionalism
f) Lack of feedback of management
g) Lack of proper management information systems
h) Lack of controls
i) Divided loyalties
j) Dishonest management
1. Infrastructural bottlenecks:
a) Irregular supply of critical rawmaterials
b) Transport bottlenecks
c) Chronic power shortage
2. Government controls and policies:
a) Government price controls
b) Abrupt change in government policies
c) Improper Fiscal duties
External Causes
3. Market Constraints:
a) Market saturation
b) Technological obsolescence
c) Recession
d) Fall in domestic / export demand
4. Extraneous factors:
a) Natural calamities
b) Political situation
c) Sympathetic strikes
d) War
External Causes
5. Financial Bottlenecks
a) Non availability of adequate finance at
the right time
b) Non cooperation from banks and
financial institutions
Symtoms of Sickness

a) Delay or default in payment to

suppliers
b) Irregularity in the bank account
c) Delay or default in payment to bank
and financial institutions
d) Non-submission of information to
banks and financial institutions
e) Frequent request to banks and
financial institutions for additional
credits
f) Decline in capacity utilization
g) Poor maintenance of plant &
machinery
h) Low turn over of assets
i) Accumulation of inventories
j) Inability to take trade discount
k) Excessive turnover of personnel
l) Extention of accounting period
m) Resort to creative accounting which
seeks to present a better financial
picture than what it really is
n) Decline in price of equity shares &
debentures
Financial indicator
 Persisting shortage ofcash
 Frequent request to banks and financial
institutions for loans

 Frequent turnover of personnel in the

industry
 Continuous tumble in the prices of the
shares
 Deteriorating financial ratios.
 REMEDIES

STEPS TAKEN BY
FINANCIAL
REVIVAL PROGRAMME INSTITUTIONS
Remedies
1. Steps taken by commercial banks:

 Provide working capital assistance

 Recovery of interest atreduced rates
 Suitable moratorium on payment ofinterest
 Freezing a portion of outstanding in theaccounts
 No. of organizations or agencies were set up:
- sick industrial undertaking cell
- state level inter-institutional committees
- standing coordination committee
- special cell – rehabilitation finance division of
IDBI
2. Policy framework for the government

 Ministry were given moreresponsibility

 They were responsible in detection of sickness at the early stage
 Policy frame work was framed in 1981 & reviewed in 1982

3. Concessions by the government :

 No. of concessions was given by the govt.

 Margin money scheme was introduced
 Excise loan were provided
4. The Indusrial Investment Bank of India:
 Establishment of Reconstruction
Corporation of India
 to provide all kinds of assistance
 IRCI converted to IRBI (industrial
reconstruction bank of India)

5. Board For Industrial &

Financial
Reconstruction
 Rehabilitation package
 Operating agencies will designed the
scheme
6. Companies act :
 Charted accountant oppointed for revival
of that companies
 Only fellow CA can become revival
officer
Sr no. Name of the
company
1 Bengal chemical and
pharmaceuticals
2 Fertilizer corporation
of India
3 Hindustan fertilizer
corporation limited
4 NEPA ltd
5 Scooters india limited
Declared sick Revival
measures
The company was formally Revival was approved
declared sick by BIFR on 14th by BIFR on 4th april
January,1993 ,1995
Corporation was declared sick in Revival was approved
November,1992 by BIFR by BIFR on 24th
august,2009
Referred by BIFR in 1992 Include sick units in
FCIL
The company was formally On 23rd august,2007
declared sick by BIFR in may,1998 Cabinate approved
revival of NEPA
through joint venture
in private sector in
disinvestment of
government of india
equity
Declared as a sick company on Revival scheme was
august 11th ,1992 by BIFR sanctioned on 9th
September ,1996
REVIVAL PROGRAMME

VIABILITY STUDY
a) MARKET
b) OPERATIONS
c) FINANCE
d) HUMAN RESOURCES
e) ENVIRONMENT
Revival programme:

1. Settlement with creditors

2. Provision of additional capital
3. Divestment & disposal
4. Reformulation of product strategy
5. Modernisation of plant & machinery
6. Reduction in manpower
7. Strict control over costs
8. Streamling of operations
9. Improvement in managerial systems
10. Workers participation
11. Change of management
12. Merger with healthy company
List of Number of Large Scale Companies register under
BIFR to declare Sick:
Source: BIFR Website
S.No Years No of companies
1 1991 155
2 1992 177
3 1993 152
4 1994 193
5 1995 115
6 1996 97
7 1997 233
8 1998 370
9 1999 413
10 2000 429
11 2001 463
12 2002 559
13 2003 430
14 2004 399
15 2005 180
16 2006 118
17 2007 78
18 2008 57
19 2009 64
20 2010 72
21 2011 73
22 2012 80
23 2013 92
24 2014 91
25 2015 175
Source : Thebusinessline