Definition of Industrial Sickness

Sick Industrial Companies Act, 1985

A unit is defined as sick industrial company where:
a company is registered for not less than seven years
It incurred cash losses for the current and preceding financial year.
Its net worth was eroded. Even 50% or more of the net worth of the past 5 financial years is
eroded because of accumulated losses

3. Definition For Small Scale Sick Units

Incurred losses in previous and current year

Due to cumulative losses 50% or more of its peak net worth during past 5 years should be
eroded.
They must have continuously defaulted 4 consecutive installment of interest or 2 half yearly
installment of principal.
Large small scale unit all 3 criteria should be fulfilled
small small scale unit - any 1 of the criteria should be fulfilled

4. Definition According to companies (2nd Amendment) Act, 2002

Sick Industrial Company means an unit which has

accumulated losses in any financial year which are equal to 50% or more of its average net
worth during 4 years immediately preceding such financial years ; or
Failed to repay its debts within any 3 consecutive quarters on demand made in writing for
its repayment by a creditor or creditors of such company.

5. Magnitude of industrial sickness in India

Industrial sickness is growing at an annual rate of about 28% and 13% respectively in terms
of No. of units and out standing number of bank credit.
It is estimated that as of today there are more than 2 lakhs sick units
with an outstanding bank credit of over Rs7000crore
nearly 29000 units are added to sick list every year.

Causes of Industrial Sickness in India

According to V.N Nadkarni, .some industrial units are born sick,

some achieve sickness and-some have sickness thrust upon them.
(1) Internal Causes of Sickness:
Some industrial units have sickness inherent in them; they have the potential of sickness
in them right from their inception. This would mean that such industrial units never

have a chance of becoming viable and profitable. They generally develop sickness within
two to three years or even earlier after they commence their activities.
Any one or more of the following factors are responsible for such inherent sickness in
industrial units or for born in sickness among industrial units.
(a) Certain initial thing may go wrong:
An entrepreneur may choose a wrong project; he may lack experience; his planning may
be faulty or his entire calculations may be based on faulty assumptions regarding his
own ability. He may be a beginner full of enthusiasm to start a new unit and things on
any of the above grounds, may be wrong.
There has been a great increase in the number of so-called consultancy services with
inexperienced fresh MBAs on their bodies. In order to make quick money. These
consultancy services give a totally wrong picture about the amount of investment
involved, about projection of demand, capital cost, recurring expenses and so on.
Along with this, various public financial institution and governments promotion
agencies often paint an extremely rosy picture totally or greatly devoid of reality in the
business world. The consequence of all these developments is the inevitable sickness
right from the start.
(b) Faulty Financial Planning:
It is another serious factor. Under- capitalisation is often a very common cause and its
signs become evident right from the time the unit starts functioning. In some cases,
capital is adequate but a substantial part of it is misdirected into unproductive channels
such as staff quarters and provision of ammonites for top executives even before
production has commenced.

Another reason may be inadequate provision for various contingencies which are bound
to arise in the initial stages of a project or in fact any stage of the functioning of an
industrial unit. This heavy outflow of funds becomes a cause of concern right from the
start.

(c) Gestation Period:

Often the gestation period becomes for too long than anticipated specially in the case of
large scale industrial unit. This might be due to delay in the supply of capital goods to be
imported or indigenous, defect in planning surfacing at a later stage, falling behind
schedule in various phases of the completion of the project and so on.
Such delays cause cost escalations, leading to capital shortages, liquidity problems, hike
in production costs, and rise in prices and hence smaller than anticipated demand for
the product of the industrial unit, adversely affecting its profits.
(d) Wrong Location:
Selection of a wrong location may create problems for an industrial unit and may lead to
industrial sickness at an early stage. Thus, high technology based units are established
in areas without skilled labour on supporting infrastructure facilities industries based on
imported raw materials are established in regions without adequate transport and
communication system.
It is necessary to take into a account a number of factors such as availability of various
infrastructural facilities like energy, water, transport and so on, apart from skilled
labour, climate, etc. before the choice of location of a particular industrial unit is

finalised any mistake in respect of any one of the factors would surely lead to industrial
sickness at an early stage.
(e) Technology:
Technological factor also plays vital role. Adoption of inappropriate technology or
obsolete technology or installation of sophisticated machinery for which spare parts are
not easily available or of defective machinery may all lead to sickness of an industrial
unit.

(f) Collaboration:
Unsatisfactory collaboration agreements leading to legal complications may result in
industrial sickness right from the start or at any later stage.
(g) Demand Forecast:
Wrong demand forecasts sudden appearance of competing substitutes on the market,
radical and sudden change in the tastes of people as production of a commodity is being
taken up may all cause industrial sickness.
(2) Achieved Sickness:
An industrial unit may start functioning and after some years may fall sick due to
various internal causes that begin to affect the unit. Some of the important internal
causes or factors that may result in industrial sickness are as follows:
(a) As Nadkarni has pointed out bad management with lack of professional expertise,
internal squabbles, indifference and inefficiency may result in industrial sickness after a
unit starts functioning.

(b) Expansion not warranted by available resources and beyond managements capacity
unwarranted diversification and diversion of units resources, setting up new subsidiary
concern or acquiring interest in another industrial unit, personal extravagance.
Indulgences in corporate luxuries like having a fleet of air-conditioned cars, luxury guest
houses with air-conditioning, etc. may contribute to industrial sickness.
(c) Unsatisfactory materials, and especially inventory mismanagement, may contribute
to industrial sickness unnecessarily heavy inventory would mean locking up a
substantial amount of funds in an unproductive way for the time being and lack of
scientific management of inventory may cause trouble to an industrial unit and affect its
health.
(d) Failure in the field of marketing (which is an essential element in the processes of
production), faulty change in production-mix, failure to modernise production
processing these days when rapid technological changes in all spheres of production are
taking place, may all cause industrial sickness.
In modern time where quick changes are taking place in all spheres like technology,
advertisement and media handling, marketing etc. it is absolutely essential for any
industrial unit to be adequately flexible so that it can adapt itself fairly quickly to the
ever changing environment.
Failure to do so or incapacity to do so many results in sickness of an industrial unit.
Large industrial units with heavy capital equipment (as for example, in the case of
Bombay textile industry) may face problems of adaptability and may fall an easy prey to
industrial sickness.
(e) Another major internal cause of industrial sickness is unsatisfactory labourmanagement relations. Inflexible and unhelpful attitude of management, politicalisation
of labour-management in a factory, rivalry among trade unions in the same factory,

leading to strikes or lockouts or resorting to go-slow tactics, may all result in low morale
and inefficiency of workers, sabotage by workers, etc. all of which may cause industrial
sickness. Estranged management-labour relations have caused sickness in the case of
many large-scale industrial units.
(3) External Factors Causing Industrial Sickness:
It is quite possible that an industrial unit may fall sick far no fault of the entrepreneur
and due to reasons entirely beyond his control the entrepreneur may be a practical and
very careful man with adequate expertise and resources and the project may have been
very carefully prepared, and yet the unit may fall sick far no fault of his. This is because
various external factors influence the health of industrial unit. Following are some of the
important external factors that may cause industrial sickness.
(a) In the case of India, energy crisis, coal shortages and steeply rising petroleum prices
have caused sickness among many industrial units. Energy shortages have become
endemic and often anywhere from 25 to 50 per cent of electricity requirements are not
met, with extremely adverse effect on production and revenue of industrial
establishments, forcing many of them to fall sick.
(b) In a number of cases the installed capacity of an industrial unit cannot be used to the
maximum possible extent but only partly because of shortages of essential raw materials
due to production setbacks in supply industries; or due to failure of monsoon,
agricultural production and incomes have received a setback with adverse effect on
demand from the agricultural sector for products like diesel pumps fertilizers, etc., and
industrial units producing these goods continually for two or three years may find
themselves in a condition of sickness, or import policies of some countries may change
so that demand for certain goods produced for export purposes declines steeply. If this
persists for some years, it would mean a great setback to the concerned industrial units
making them sick as a consequence.

(c) Infrastructural problems (such as heavy demand for railway services) may cause
immense problems for industrial units in getting necessary raw materials in time and in
sending out manufactured goods to different markets in the country and also abroad
according to schedule. This would upset the smooth working of the industrial unit.
(d) Non-availability of adequate credit due to depressed conditions in capital and money
markets of credit squeeze policy of the government may upset the working of an
industrial unit making it sick. The policy of credit squeeze followed by the Government
of India for some time during 1970s was responsible for sickness of many industrial
units, ultimately forcing some of them to close down.
(e) Unfavourable government policies such as in respect of taxation, export imports,
controls, rate of interest, foreign competition etc. may produce unfavourable
environment for working of some industrial units, some of which for failure to
successfully cope with all these constraints may fall sick or may close down completely.

Remedial Measures for Sick Industrial Unit in India

Industrial sickness (industry not in operation) in our country is a general phenomenon,
which has existed along with healthy industrial enterprises. Sickness has registered a
quantum jump with the arrival of the new economic order, ushered in by liberalisation
and globalization. Industrial sickness can be found in any state of India as well as in
some other countries. Industrial sick units caused unemployment and social unrest in an
economy. Hence, suitable and phase wise remedial measures required through
Government as well as by private sector participation. These sick unit revivals could be
done through following measures:

Adoption of latest technology & modern production process & equipment,

proper infrastructure development around existing unit.
Minimizing input costs and adopting economy of scale, adequate provision for
financial requirements, exploring new market for its product.
On time delivery & strict quality control measures should be adopted for its
product, cost minimization, modernization of existing infrastructure with time,
proper management should be in place to stop/reduce wastage, potential capacity
utilization.

1.

Adopting true professionalism and developing proper work culture & ethics,
fixing responsibility and making accountable to concern authority, promotion as per
work efficiency not as per number of years in office.
To drive knowledge transfer and exchange of ideas between the supply and
demand sides of technology-enabled markets through a high quality, easy to use
service.
To provide a forum for a sound business voice to inform government of its
technology needs and about issues, such as regulation. This could ultimately
enhance or inhibit innovation in industry.
Maximum exploitation of new technologies to gain competitive advantage.
For funding of sick unit various model could be consider like public funding,
public-private funding and competitive private funding.
For country like India, technology should be cost effective and combination of
labour-capital intensive instead of only capital intensive.
To deliver improved industrial performance through innovation and new
collaborations by driving the flow of people, knowledge and experience between
business and the science-base, between businesses and across sectors.
Incorporating innovative ideas to expand business rather than only focusing
on bringing new technology into business.
By bringing own distribution center, delivery time and price competitiveness
can be brought in.
Recognize and apply changing patterns of innovation before others do;
Be more practical about market demand of your product rather than wholly
depending upon research;
Quality of product of global level/standard instead of focusing only on Indian
market.
Think beyond using latest technology skill needed to merger & acquisition
of new business, design skills to develop new products and marketing skills to
connect with new consumers and markets;
Be medium for the spread of global best practice and new opportunities for
domestic firms through linkages with global market and firms;
Be master in using/applying new ideas (innovators) rather than merely
generating new ideas (inventors) demanding higher standards and focusing
managers on adopting and adapting external knowledge;
Two types of innovation could be adopted,
1. Product or services innovation; 2. Process innovation,
Product or services innovation; this is all about launching new or improved
products (or services) on to the market.
Its advantages include (note links to marketing):

a.

"First mover advantage which can include some of the following

b.

Higher prices and profitability

c.

Added value

d.

Opportunity to build early customer loyalty

e.

Enhanced reputation as an innovative company

f.

Public Relations e.g. news coverage

g.

Increased market share

2.

Process innovation, this is about finding better or more efficient ways of producing
existing products, or delivering existing services
Its advantages include:

a.

Reduced costs

b.

Improved quality

c.

More responsive customer service

d.

Greater flexibility

Recognising and acting upon new emerging opportunities within their industries before
other firms do;
Be focused on solutions rather than products or services.

Some other more general

mentioned below:

remedial

measures

for

Industrial

Sickness

Procedural delay in getting licences/sanctions etc should be minimized, so

that Cost over-runs should not happen.
Rationalisation of wage structure, apt handling of labour problems, gradual
reduction of excessive manpower, recruitment of highly trained/skilled personnel.
Latest marketing techniques & marketing strategy with the help of audio,
video & print media etc. for its product so that better revenue realization occurred,
competitive pricing policy, proper feedback system should be in place for it product
with best marketing research tool.
Optimum utilization and mobilization of its resources with proper financial
planning & dividend distribution policy.
Proper financial management system to fill the gap of working capital and
prohibit its unauthorized application.
Minimizing undue interference of labour/trade union particularly West Bengal,
Haryana, Orissa, etc.
De-centralization of power, proper setup for labour management information
system.
Adequate system for proper check and balance, timely diversification.

Research & Development is essential part of any organization but it should

not involved undue expenditure.