Industrial sickness

INDUSTRIAL SICKNESS

Definition of Industrial Sickness•

According To Sick Industrial Companies Act, 1985 A unit is defined as sick industrial company where:

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a company is registered for not less than seven years

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It incurred cash losses for the current and preceding financial year.

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Its net worth was eroded.

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Even 50% or more of the net worth of the past 5 financial years is eroded because of accumulated losses

Definition according to companies Act,2002 Sick industrial company means an industrial company which has –  Accumulated losses in any financial year which are equal to 50 percent or more of its average net worth during four year immediately preceding such financial year  Failed to repay its debts within any three consecutive quarter on demand made in writing for its repayment by a creditor of such company.

CAUSES FOR SICKNESS 

Losses are due to drainage of resources on wasteful or unnecessary expenditure. Sickness is caused by long periods of losses sustained by the company.

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There are two main categories: 1. Internal Reasons

2. External Reasons

INTERNAL REASONS

(which can be controlled by company)  Underestimation of the cost of the project  Delay in the implementation of the project  Under Utilization of Resources

 Diversion of Funds (Heavy Expenditure in Advertisements etc. )

 Lack of Management depth  Bad Industrial Relations

 Inadequate working capital  Inadequate Power supply

EXTERNAL REASONS

(which cannot be controlled by the company)  Adverse government rules and regulations

 Adverse Price Control Policy  Recession Trend/economic conditions  Tough Competition  Shortage of Manpower, Raw Materials etc.

 Changes in Technology  Changes in Consumer Behaviour  Delay in getting any financial assistance.

SICKNESS SIGNALS!! 

Empty Treasury

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Inability to repay debt installments from loans and statutory liabilities like Provident Fund etc.

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Mounting Losses,

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High Rejection Rate of Goods,

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Piling Inventory

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Inability to do Business competitively, Industrial Disputes, Low Capacity Utilization.

CONSEQUENCES OF SICKNESS 

The Sickness of a company has an immediate impact on all the entities related to it.

Chiefly: 1. The Labor or Workforce of the Company faces unemployment 2.

The Creditors of the Company (to which it owes money) face bad loans and losses

Loss of production 4. Adverse effect on investors & entrepreneurs 3. 5.

Loss of revenue to government

6.

Adverse impact on related units

Measures to prevent Industrial sickness

It is possible to prevent industrial sickness in any industry, if we ensure:That the project is viable  That simplified procedures and one windows service are available for obtaining approvals and clearances. 

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That there is no delay in importing capital goods and raw materials. That the project is implemented and commercial operation started as per schedule. That the finance and the assistance are available in time. That the power connection and other utilities are available in time.

1.

Financial Institutions:  giving

adequate working capital when there is a shortage.

 Continuous

 Incentives a

monitoring of unit

to units to remain healthy

Professional, Speedy, and coordinated response to the problem of Units

Cont’d………… 2. The government:  Frequent

changes in government policies need to be avoided

 liberalization

on sick industries

(high liberalizations in terms of financial rather than intervention.)  Introduce

the scheme for sick industry  Prompt action by government on all matters where action on their part is necessary, helps in rehabilitation.

Cont’d…………

3. The Entrepreneur: Determination of area where s/he has to concentrate his/her efforts to get the greatest average. Drawing focus of the plan towards generating cash inflow because most of the sick units at this stage have negative cash flow. Reduction of excess manpower and stock of common materials particularly which are easily and timely procurable at the local market. Evaluation of all the segments by means of SWOT analyses with a view to capitalize strength and opportunities and minimize weakness and threats.

BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR) 

Set-up in January 1987 under the SICA act, 1985

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In order to serve potentially Viable companies

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The board has been given wide raging power in respect of the approval of rehabilitation packages for sick industrial companies

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Reconstruction and revival of sick industries

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It has both administrative and quasi-judicial powers

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