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Abhishek Kumar & Sidhartha Mahopatra
 
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Industrial growth in India is guided by the Industrial Revolution
of 1956. The problem of industrial sickness has been growing at
an annual rate of about 28% and 13% respectively in terms of
number of units and outstanding number of bank credit. It is
reckoned that as of today there are more than 2 lakhs sick units
with an outstanding bank credit of over Rs 7000 crore nearly
29000 units are added to sick list every year. It seems that the
deterioration of the sick industries appears to be faster than the
growth of sick industries.

Industrial sickness especially in small-scale Industry has been

always a demerit for the Indian economy, because more and
more industries like ± cotton, Jute, Sugar, Textile small steel and
engineering industries are being affected by this sickness
 problem. Loss making industries, both in the private sector and
public sector are contributing for the downfall of industrial
economy.

There has been an increase in industrial sickness, both in the

large and small sectors, in India. By consoling that this is, to
some extent, a corollary of industrial growth, one shall not
belittle the seriousness of the problem. Industrial sickness
affects not only the owners, employees and creditors but also
causes wastage of national resources and social unrest. It is,
therefore, considered very much essential to devise suitable
measures for dealing with sick units as well as to make suitable
arrangements for detecting symptoms of industrial sickness at an
early stage so as to take measures to prevent sickness.

The progress of industrial sickness has been highlighted from

the period before Independence to the present prevailing
condition. The Rehabilitation given to sick industrial companies
is not the answer and solution for them.

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Before 1947, the Indian economy was predominantly
agricultural in nature. The development of producers was almost
negligible and was inadequate to meet the demands of the
market. Only those industries survived who served the interests
of the Britishers. There was dearth of private players in the
market. The market was unorganized because of the reluctant
attitude of the Britishers and due to lack of proper
communication facility as well as the shortage of power. This
issue was further aggravated with the lack of any proper bank or
financial institutions to finance the industrial projects. And, if at
all, any help was available from the money lenders, they charged
exorbitant rates of interest along with arbitrary terms and
conditions. There was also minimal intervention of the
Government in the promotion of the industries. As a result, it
was difficult for any trader to survive in the market on a long
terms basis. Also there were no proper implementation of any
policy in regard to the efforts of the Government in the revival
and rehabilitation of sick industries.

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 After the Constitution came into force, the primary aim was to
convert India from a colonial country to a socialist welfare
society, as envisaged in the Preamble and the Directive
Principles of State Policy. The Government was prompted to go
for rapid industrialization of basic and heavy industries to
convert India from agricultural to industrial economy. Soon, the
Government realized that a large number of units are turning
sick. In order to check the growth of the sick units, the
Government adopted strategies to takeover of the sick industrial
units and restrict the problem if unemployment, labour unrest
and social unrest. The Government also took the initiative of
taking over the management of sick industrial undertakings for a
brief period and returning it back to the owners once the
sickness is removed. The Government in its aim of preventing
the growth of sickness was given support by various agencies
such as RBI, IDBI etc.

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Timely action is required for identification of sickness. For this

we need to analyze the symptoms which would help us identify
the sickness of the unit. This can be traced from the signals that
get displayed by the sick units. The signal may be in the form of
financial distress starting with short term liquidity problems,
revenue losses, operating losses and moving in the direction of
over use of external credit until it reaches a stage where it is
overburdened with debt and nor being able to generate sufficient
funds to meet its obligations. In case of large units whose shares
are quoted in stock exchanges, a signal of sickness is sent when
dividends are skipped and share price sharply declines. This
measure, therefore, will have to be used very cautiously with
other identifiable symptoms to judge whether skipping
dividends indicates sickness or represents a temporary
downward slide in financial performance. The existence of these
signals and symptoms provides a ground for suspecting that the
industrial unit concerned is prone to
sickness
.
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Based on the recommendation of a Committee of Experts under

the Chairmanship of Shri T.Tiwari, the Government enacted a
special legislation named as the Sick Industrial Companies
(Special Provisions) Act, 1985 commonly known as SICA. The
Board of Industrial and Financial Reconstruction (BIFR) and the
Appellate Authority for Industrial and Financial Reconstruction
(AAIFR) were also established in 1987 to look after the matters
covered under the purview of SICA. SICA was further amended
in 1991 to bring government companies under its purview and
again in 1993 certain changes were brought out in the act for the
determination of industrial sickness. Hence, in short, we can
conclude that the main objective of SICA is to determine
sickness, expedite the revival of potentially viable units and
effect closure of unviable units.

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1. To evaluate the techno-economic viability of sick

industrial companies with a view to either to rehabilitate
them, if the public interest so demanded and their
rehabilitation was possible, or to close them down, if
continuing them would be impossible.

2. To stop continued drain of public and private resources for

the overall economy of the country.

3. To protect employment as far as possible.

In the case of O


 
  

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was held that SICA had been enacted to safeguard the economy
of the country and protect the viable sick units.

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As per section 3(1) (o) of SICA, an industrial company is a sick
company, when its accumulated losses are equal to or exceeding
entire worth. Further as per section 23 of SICA of the
accumulated losses of an industrial company as at the end of any
financial year have resulted in erosion of 50% or more of peak
net worth of immediately preceding four financial years is
considered to be a potentially sick industrial company.

To fall under the purview of SICA:

¦ A company should be engaged in any scheduled

industry (i.e any industry specified in First Schedule to
Industries (Development and Regulation) Act, 1951.

¦ Scheduled industries include metallurgical industries,

telecommunication, transportation, chemicals, textiles but
not financial services and software technology.

¦ Criteria of µsickness¶ ± Such company should have at

the end of any financial year accumulated losses equal to or
exceeding its entire net worth.
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Board of industrial and Financial Reconstruction (BIFR) was

established by the Central Government, under section 3 of the
Sick Industrial Companies (Special provisions) Act, 1985 and it
became fully operational in May, 1987. BIFR deals with issues
like revival and rehabilitation on sick companies, winding up of
sick companies, institutional finance to sick companies,
amalgamation of companies etc. BIFR is a quasi judicial body.

The role of BIFR as envisaged in the SICA (Sick Industrial

Companies Act) is:

(a)Securing the timely detection of sick and potentially sick

companies

(b) Speedy determination by a group of experts of the various

measures to be taken in respect of

The sick company

(c)Expeditious enforcement of such measures

BIFR has a chairman and may have a maximum of 14 members,
drawn from various fields including banking, labour,
accountancy, economics etc. It functions like a court and has
constituted four benches.

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Once a company has been found sick, the BIFR may grant time
to the sick company to enable it to make its net worth positive
and bring the company out of sickness, without any external
financial assistance. If it is found infeasible for company to
make its networth positive without any external financial
assistance, or if the BIFR decides that the company can not
make its net worth positive within a reasonable time, then the
Board appoints an operating agency under section 17(3) of the
Act, then the operating agency is required to prepare and submit
a schedule in respect of the referred company by providing any
or more of the following measures:

i. Financial Reconstruction of the sick industrial

company;
 ii. The proper management of the sick industrial
company by change in, or takeover of, the management of
the sick industrial company;

iii. Amalgamation with another company or vice-

versa;

iv. Sale or lease of its undertaking;

v. Rationalization of its staff;

vi. Any other preventive or remedial measures; and

vii. Incidental or consequential measures.

The revival package may vary from case to case depending on

the nature of the problem and may include additional financial
assistance, postponement of recovery of loan already lent by
banks and financial institutions, change in management,
amalgamation, sale of redundant assets, lease of assets or any
other suitable measure. The revival package should be submitted
to the BIFR within a time limit of 90 days or such extended
period as may be granted by the BIFR.
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On submission of the revival package by the operating agency,

the BIFR sends the revival package in a draft form to all the
interested parties (i.e., the sick industrial company, the banks/
financial institutions who have given financial assistance to the
sick company, the operating agency, the transferee company (if
there is a recommendation in the revival package for
amalgamation) etc., eliciting their views/suggestions on the
revival package. The BIFR will also publish particulars of the
draft revival package in newspapers inviting
suggestions/objections, if any, from the shareholders of the sick
company, creditors and employees of the sick company,
transferee company and any other interested party. On receipt of
views/suggestions/objections on the draft revival scheme, the
BIFR may, if deemed fit; afford an opportunity to the interested
parties to be heard. After careful examination of all the aspects,
the BIFR will sanction the revival scheme with or without any
modifications.

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Some industries are born sick; sickness is thrust upon some,
while others become sick due to a number of causes. The
general belief is that the incidence of sickness results from the
changing economic factors and the external influence, which tilt
the economic viability. The causes of sickness may vary from
one unit to another. But the most common causes of sickness
can be grouped under two heads ± internal and external. In
India, the Tiwari Committee in its report outlined the causes of
sickness into several heads. They can be classified as:

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 Ô These are those factors which are within
the internal control of the management. Sickness arises
because of the disorder of the following concerns:

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a. Technical feasibility: Inadequate technical know-how,

locational disadvantage, outdated production process.

b. Economic Viability: High Cost of Inputs, uneconomic size

of project, under estimation of financial requirements, unduly
large investment in fixed assets, over-estimation of demand.
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a. Cost over-runs resulting from delays in getting

licences/sanctions etc., inadequate mobilization of finance.

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a. Production management: Inappropriate product mix, poor

quality control, high cost of production, lack of adequate
timely and adequate modernization, high wastage, poor
capacity utilization.

b. Labour management: Excessive high wage structure,

inefficient handling of labour problems, excessive manpower,
lack of trained/skilled component personnel.

c. Marketing management: Dependence on limited number

of customers, poor sales realization, defective pricing policy,
weak market organization, lack of market feedback and
market research, lack of knowledge of marketing techniques.

d. Financial Management: Poor resource management and

financial planning, liberal dividend policy, application of
funds for unauthorized purposes, deficiency of funds, over-
 trading, inadequate working capital, lack of effective
collection machinery.

e. Administrative Management: Over centralization, lack of

professionalism, lack of feedback to management (
management information system), lack of adequate controls,
lack of timely diversification, excessive expenditure on R&D,
incompetent and dishonest management.

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a. Infrastructural bottlenecks ± Non-availability/irregular

supply of critical raw materials or other inputs, chronic power
shortage, transport bottlenecks.

b. Finance Constraints: Another external cause for the

sickness of SSIs is lack of finance. This arises due to credit
restrains policy, delay in disbursement of loan by govt.,
unfavorable investments, fear of nationalization.

c. Government control, policies, etc. ± Government price

controls, fiscal duties, abrupt changes in Government policies,
procedural delays on the part of the financial/licensing/other
 controlling or regulating authorities (banks, RBI, financial
institutions, Government departments, licensing authorities,
MRTP Board).

d. Marketing Constraints: The sickness arrives due to liberal

licensing policies, restrain of purchase by bulk purchasers,
changes in global marketing scenario, excessive tax policies
by govt. and market recession.

e. Extraneous factors: Natural calamities, political situation

(domestic as well as international), war, sympathetic strike,
multiplicity of labour unions.

The Government taking into consideration all the factors

resulting into industrial sickness, accepted the recommendations
of the Tiwari Committee with some modification, and thus, the
Sick Industrial Companies (Special Provisions) Act, 1985 was,
accordingly enacted.

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The functioning of SICA proved inadequate to cater to the needs

of the sick units. The reasons of sickness can be outlined as poor
 and slow functioning of BIFR, abuse of Section 22, delay in
Winding up Procedure and defective Policy and inadequate
strength of BIFR

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Certain changes were proposed to be made for the rehabilitation
and revival of the sick units as from the proposed Companies
Amendment Act, 1956.The criteria of sickness was changed to
include µinability to pay debts¶ due to secured creditors
representing 50% or more of the outstanding debt. Further the
scope of the filing for the determination of sickness which was
restricted to the Board now included the creditor or the
company. Even powers were granted to the creditors to decide
on the issue of winding up or the revival of the company by
passing a special majority among the creditors. Moreover, the
greater powers have been conferred on the creditors to supervise
a rescue plan and restrict the powers of management in the
rehabilitation of a sick company.

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 JJ Irani Committee wanted to omit the term µsick industrial
company¶ and replace it with µinsolvent company¶ and thereby
erase the sickness test on the basis of erosion of networth with
that of the liquidity test. Moreover, it recommended that
CA/CS/CWA/law professionals should play an active role in the
insolvency process so that there would be expertise persons
dealing with the specialized, commercial and technical
characteristics of insolvency law. It also recommended the
establishment of the National Company Law Tribunal on a
speedy basis. Further, it enunciated that the rehabilitation by
cess to be replaced by the µInsolvency Fund´ with optional
contribution by companies. It also allowed the debtors to
approach the Tribunal with the rehabilitation scheme. Power
was also given to the creditors to oppose the scheme of
rehabilitation.

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No Rehabilitation, it is not the answer and solution for sick
industrial companies. It should be closed down as it is undue
exercise and puts additional burden upon the government to take
care of them. In addition, it also places burden upon all the
existing well running industrial units SICA impose cess on
companies to build up a fund for rehabilitation of the assets of
the sick companies. It is opposed by the Federation of Indian
Chambers of Commerce & Industry of India (FICCI) on the
ground that healthy and sound companies should not suffer for
faults of others.

The government should not intervene into the affairs of the

industrial company and let the market forces decide it, whether
company can be run or not. It should leave the industrial
company on its own condition and should afford an opportunity
to the company to decide its own fate in this era of cut throat
competition. The theory of survival of the fittest should be
applied in this particular realm, it says competition for survival
or predominance and ³survival of those who are better equipped
for surviving´. The government should segregate itself from the
affairs of the industrial company and should do its own job.

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Industrial sickness is a problem all economies big and small

have to face. What is important is to evolve a proper regulatory
and institutional mechanism to deal with the situation. While
there should be a mechanism to safeguard the interests of
workers, a suitable exit policy for the non-viable units should
form an integral part of the new approach. A stringent
mechanism should also be devised so that the directors of the
company should not play fraud on the unit to bring it within the
purview of sickness. NCLT should also be made to come into
force to ensure speedy disposal of cases looking into the
sluggishness of the disposal of cases by BIFR.

The approach of the government towards rehabilitation of a sick

unit being very selective, the government is now convinced that
there is no point in throwing away further resources in support
of the units which are irretrievably sick. Only such units which
are found to be potentially viable need to be taken up for
formulation of rehabilitation packages to restore them to health.
Package consisting of concessions from banks, financial
institutions, government (Central/State), government agencies,
shareholders, labour, and suppliers of goods should be provided
to those units where chances are subsisting for the revival of the
sick unit.
The enactment instead of fruitful it proved burdensome on the
healthy companies. The rehabilitation fund are created by
imposing tax on the good working companies which puts
additional burden on them without their own fault.

The Parliament itself is not sure whether rehabilitation should be

given to the sick company which is evident from the act of the
parliament itself. Parliament repealed the very first enactment of
SICA after seventeen years just because it did not confirmed the
purposes set out in the enactment and inserted few sections in
the companies Act, 1956.

Sick industrial company should be left on their own condition

and let the market forces to decide the fate of the company.
Government should refrain itself from intervention. If at all
government wants to do fruitful help for the industrial company,
it should help taking the affairs of the industrial company in its
own hand for a particular period of time.