Professional Documents
Culture Documents
The most important criticism levied against public sector undertakings has been that in relation to the capital employed, the level of profits has been too low. Even the government has criticized the public sector undertakings on this count. Of the various factors responsible for low profits in the public sector Undertakings, the following are particularly important: Price policy of public sector undertakings Under utilization of capacity Problem related to planning and construction of projects Problems of labor, personnel and management Lack of autonomy
REASONS FOR DISINVESTMENT The public sector in India at present is at cross roads. The new economic policy initiated in July 1991, clearly indicated that the public sector undertakings have shown a very negative rate of return on capital employed. On account of this phenomenon many public sector undertakings have become burden to the government. They are in fact turning out to be liabilities to the government rather than being assets. This is a sector which the government clearly wants to get rid off. In this direction the government has adopted a new approach to reform and improve the public sector undertakings performance i.e. Disinvestment policy'. This has gained lot of importance especially in latter part of 90s. At present the government seriously perceives the disinvestment policy as inactive tool to reduce the burden to financing the public sector
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1) Profitability: The return on investment in PSEs, at least for the last two decades, has been quite poor.
The PSE survey shows PSEs as a whole, never earned post tax profit that exceeds 5% of total sales or 6% of capital employed , which is at least 3% points below the interest paid by the government on its borrowings.
2) Recurring budgetary support to PSEs: Despite huge investment in the public sector, the Government is required to provide more funds every year that go into maintaining of the unviable/week PSEs
3) Industrial sickness in PSUs: To save the PSUs from sickness, the government has been sanctioning restructuring packages from time to time.
4) Employees issue: Of the 1.6 million jobs added in the organized sector 1 million, or two third, were added in the private sector during the year 1991 to 2000.
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2. Procedure of IPO?
An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise expansion capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although an IPO offers many advantages, there are also significant disadvantages. Chief among these are the costs associated with the process, and the requirement to disclose certain information that could prove helpful to competitors, or create difficulties with vendors. Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertaking an IPO do so with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide a valuable service, which includes help with correctly assessing the value of shares (share price), and establishing a public market for shares (initial sale). Alternative methods, such as the dutch auction have also been explored. In terms of size and public participation, the most notable example of this method is the Google IPO. China has recently emerged as a major IPO market, with several of the largest IPO's taking place in that country. Procedure IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell those shares. The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:
Best efforts contract Firm commitment contract All-or-none contract Bought deal
A large IPO is usually underwritten by a "syndicate" of investment banks, the largest of which take the position of "lead underwriter". Upon selling the shares, the underwriters retain a portion of the proceeds as their fee. This fee is called an underwriting spread. The spread is calculated as a discount from the price of the shares sold (called the gross spread). Components of an underwriting spread in an initial public offering (IPO) typically include the following (on a per share basis): Manager's fee, Underwriting feeearned by members of the syndicate, and the Concessionearned by the broker-dealer selling the shares. The Manager would be entitled to the entire underwriting spread. A member of the syndicate is entitled to the underwriting fee and the concession. A broker dealer who is not a member of the
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Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of stock brokers, sub-brokers etc. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self - regulatory organizations, mutual funds and other persons associated with the securities market.
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EQUITY CAPITAL Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These shareholders do not enjoy preference regarding payment of dividend and repayment of capital. Equity shareholders are paid dividend out of the profits made by a company. Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend. The value of equity capital is computed by estimating the current market value of everything owned by the company from which the total of all liabilities is subtracted. On the balance sheet of the company, equity capital is listed as stockholders' equity or owners' equity. Also called equity financing or share capital. Essentially, equity capital is money that is invested into a company in exchange for an ownership interest in that company. Traditionally, equity capital unlike debt is not intended to be repaid according to a specific schedule and is not secured (or guaranteed) by the company's assets. Instead, an equity investor (i.e., the individual or entity that supplies the company with the money) expects that, within a certain time frame, the ownership percentage she holds will be worth more than the original amount she invested.
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PREFERENCE CAPITAL
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DEBENTURE A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements.
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Secondary Public offer The issuance of new stock for public sale from a company that has already made its initial public offering (IPO). Usually, these kinds of public offerings are made by companies wishing to refinance, or raise capital for growth. Money raised from these kinds of secondary offerings goes to the company, through the investment bank that underwrites the offering. Investment banks are issued an allotment, and possibly an overallotment which they may choose to exercise if there is a strong possibility of making money on the spread between the allotment price and the selling price of the securities.
Rights Offering (Issue) Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period.
Preferential Allotment When a listed company doesn't want to go for further public issue and the objective is to raise huge capital by issuing bulk of shares to selected group of people, preferential allotment is a good option. A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956, which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.
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Decision Rule: A project which gives the shortest payback period, is considered to be the most acceptable.
This method is considered better than pay back method because it considers project during its full economic life. This method is also known as Return On investment. It is mainly expressed in terms of percentage.
ARR or ROI =
Average annual earnings after tax Average book investment after depreciation
*100
Pros: a) It is simple to calculate and easy to understand. b) It considers earning of the project during the entire operative life. c) It help in comparing the projects which differ widely.
Cons: a) It ignores time value of money. b) It lays more emphasis on profit and less on cash flows.
Decision Rules: In ARR a project is to be accepted when if actual ARR is higher than the rate of returns. Otherwise it is rejected.
This method mainly considers the time value of money. It is the sum of the aggregate present values of all the cash flows,
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NPV = PV of net cash inflow PV of cash outflow Pros: a) It is conceptually sound. b) It considers time value of money. c) It facilitates ranking of project which help in the selection of project. Cons: a) It is vulnerable to different interpretations. b) Its computation process is complex.
Decision rule: If NPV is positive, accept If NPV is negative, reject If NPV is 0 then apply payback period method.
IRR (Internal Rate of Return) This method is known by various other name like Yield on Investment or Rate of Return. It is used when the cost of investment and the annual cash inflow are known and rate of return is to be calculated. It take into account time value of the money by discounting inflow and cash flow. Pros: a) It considers the profitability of the project for its entire economic life and hence enables evaluation of true profitability. b) It recognizes the time value of money Cons: a) it is most difficult method of evaluation of investment proposals. b) It is based upon the assumption that the earning is reinvested. c) It may result in incorrect decision in comparing the Mutually Exclusive project
Decision Rule: In the case of an Independent Investment accept the project if its IRR is greater than the required rate of return and if it is lower than reject.
Companys Overall Strategy The analyst must assess the usefulness of each alternative within the companys overall strategy to determine how foreign operations may perpetuate current strengths or offset weaknesses. Cost of Capital Discount Rate Required Rate Minimum Rate The cost of capital is in effect the MAGIC NUMBER used to decide whether a proposed foreign investment will increase or decrease the firms stock price. Economic Evaluation Once cash flows and cost of capital are known process of evaluating investment projects. * Pay back period * ARR * NPV * IRR Which is Good Selection * * * Accept Reject decision Mutually Exclusive Choice Capital Rationing
Adjusted Present Value : PV Technique Discounts different cash flows at different rates depending upon risk associated with each cash flow. What makes International Capital Budgeting different from domestic Capital Budgeting
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Financial Tools No doubt Financial Tools such as pay back, NPV or IRR can be used. But considering the additional issues involved that affect both the cash flows and the risk (discount rate) make these techniques insufficient.
1. Ratings CRISIL Ratings: It is the only ratings agency in India with sectoral specialization It has played a critical role in the development of the debt markets in India. The agency has developed new ratings methodologies for debt instruments and innovative structures across sectors. CRISIL Ratings provides technical know-how to clients all over the world and has helped set up ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean. 2. Research CRISIL Research: It provides research, analysis and forecasts on the Indian economy, industries and companies to over 500 Indian and international clients across financial, corporate, consulting and public sectors. CRISIL FundServices: It provides fund evaluation services and risk solutions to the mutual fund industry. The Centre for Economic Research: It applies economic principles to live business applications and provide benchmarks and analyses for India's policy and business decision makers.
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Rating agencies all across the world have often been accused of not being able to predict future problems. In part, the problem lies in the rating process itself, which relies heavily on past numerical data and standard ratios with relatively lower usage of judgment and understanding of the underlying business or the country economics. Data does not always capture all aspects of the situation especially in the complex financial world of today. An excellent example of the meaningless over reliance on numbers is the poor country rating given to India. Major rating agencies site one of the reasons for this as the low ratio Indias exports to foreign currency indebtedness. This completely ignores two issues firstly, India gets a very high quantum of foreign currency earnings through remittances from Indians working abroad and also services exports in the form of software exports which are not counted as "merchandise" exports. These two flows along with other "invisible" earnings accounted for almost US$11bn in FY 99. Secondly, since India has tight control on foreign currency transactions, there is very little error possible in the foreign currency borrowing figure. As against this, for a country like Korea, the figure for foreign currency borrowing increased by US$50bn after the exchange crisis began. This was on account of hidden forward liabilities through swaps and other derivative products. In general, Indian rating agencies have lost some amount of their credibility in the last two years due to their inability to predict defaults in many companies, which they had rated quite highly. Sometimes, some of the agencies had an investment grade rating in place when the company in question had already defaulted to some of the fixed deposit holders. Further, rating agencies resorted to mass downgrading of 50-100 companies as a reaction to public criticism, which further eroded their credibility. The major reasons for these downgrades are as follows : 1) Biased rating and misrepresentation: In the absence of quality ratings , credit rating is a curse for capital market industry. To avoid biased rating ,the expert in rating agency ,carrying out detailed analysis of the company ,
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Rating is a search for long-term fundamentals and the probabilities for changes in the fundamentals. Each agency's rating process usually includes fundamental analysis of public and private issuer-specific data, 'industry analysis, and presentations by the issuer's senior executives, statistical classification models, and judgment. Typically, the rating Agency is
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Key areas considered in a rating include the following: i) Business Risk : To ascertain business risk, the rating agency considers Industry's characteristics, performance and outlook, operating position (capacity, market share, distribution system, marketing network, etc.), technological aspects, business cycles, size and capital intensity. ii) Financial Risk : To assess financial risk, the rating agency takes into account various aspects of its Financial Management (e.g. capital structure, liquidity position, financial flexibility and cash flow adequacy, profitability, leverage, interest coverage), projections with particular emphasis on the components of cash flow and claims thereon, accounting policies and practices with particular reference to practices of providing depreciation, income recognition, inventory valuation, off-balance sheet claims and liabilities, amortization of intangible assets, foreign currency transactions, etc. iii) Management Evaluation: Management evaluation includes consideration of the background and history of the issuer, corporate strategy and philosophy, organisational structure, quality of management and management capabilities under stress, personnel policies etc. iv) Business Environmental Analysis : This includes regulatory environment, operating environment, national economic outlook, areas of special significance to the company, pending litigation, tax status, possibility of default risk under a variety of scenarios.
Rating is not based on a predetermined formula, which specifies the relevant variables as well as weights attached to each one of them. Further, the emphasis on different aspects varies from agency to agency. Broadly, the rating agency assures itself that there is a good congruence between assets and liabilities of a company and downgrades the rating if the quality of assets depreciates. The rating agency employs qualified professionals to ensure consistency and reliability. Reputation of the Credit Rating Agency creates confidence in the investor. Rating Agency earns its reputation by assessing the client's operational performance, managerial competence, management and organizational set-up and financial structure. It should be an independent company with its own identity. It should have no government interference. Rating of an instrument does not give any fiduciary status to the credit rating agency. It is desirable that the rating be done by more than one agency for the same kind of instrument. This will attract investor's confidence in the rating symbol given. A rating is a quality label that conveniently summarizes the default risk of an issuer. The credibility of the issuer's, proposed payment schedule is complemented by the credibility of the rating agency. Rating agencies perform this certification role by exploiting the economies of scale in processing information and monitoring the issuer. There is an ongoing debate
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Who is a Candidate for Private Stock Offerings? The ideal small business candidate is a company in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when your company has completed product development, conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.
Where to Find Private Placements? The money from private placements will come from accredited investors defined by the SEC Rule 501 under Regulation D as: An individual earning 200k per year. A household with income of $300K per year or having a net worth over $1M. or venture funds, some banks and other institutions.
Connect with bankers, attorneys, and accountants who can network your small business with a private investor. What is required for Private Placements? A sound business plan
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With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.
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Funds can also be collected from foreign sources, which usually consists of:Foreign Collaborators:If approved by the Government of India, the Indian companies may secure capital from abroad through the subscription of foreign collaborator to their share capital or by way of supply of technical knowledge, patents, drawings and designs of plants or supply of machinery. International Financial Institutions:Like World Bank and International Finance Corporation (IFC) provide long-term funds for the industrial development all over the world. The World Bank grants loans only to the Governments of member countries or private enterprises with guarantee of the concerned Government. IFC was set up to assist the private undertakings without the guarantee of the member countries. It also provides them risk capital. Non-Resident Indians:Persons of Indian origin and nationality living abroad are also permitted to subscribe to the shares and debentures issued by the companies in India. Retained Profits or Reinvestment of Profits An important source of long-term finance for on-going profitable companies is the amount of profit which is accumulated as general reserve from year to year. To the extent profits are not distributed as dividend to the shareholders, the retained amount can be reinvested for expansion or diversification of business activities. Retained profit is an internal source of finance. Hence it does not involve any cost of floatation which has to be incurred to raise finance from external sources.
In the current scenario, there is no estimate of the volume of business handled by the unorganized sector. While the volume of business handled in the urban sector may be small, their role in rural India is very significant. One of the negative effects of the sway of the unorganized sector is that it reduces the efficacy of a country's monetary policy. A lot of initiatives have been undertaken over the years both by central and state governments to reduce the adverse impact. Some of these initiatives are: All India Development Financial Institutions [DFIs] State level Financial Corporations [SFCs] Insurance Companies Mutual Funds [MFs] Non Banking Finance Corporations [NBFCs]
All India Development Financial Institutions The following are the various institutions covered under all India DFIs:
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State Level Financial Corporations These are state level bodies that mainly concentrate on industrial development in a state. They are legal bodies created under the State Finance Corporations Act, 1951 and are funded through an issue of shares in which the state governments, banks, financial institutions, and private investors participate. SFCs are also permitted to raise funds through the issue of bonds and debentures. The main focus of SFCs is financing the local industrial units, which are usually small and medium units, situated in backward regions of the state.
Insurance Companies Insurance companies concentrate on fulfilling the insurance needs of the community, both for life and non life insurance. With the globalization of the Indian economy, a large number of private players have entered into this field, offering products that allow investors to select the kind of policies to suit their financial planning needs. Many of these organizations are formed as subsidiaries of banks that enable the banks to cross sell insurance products to their existing customers. Banks benefit by way of fee income through referrals and enhanced relationships with insurance companies for their banking needs. Mutual Funds These organizations satisfy the needs of individual investors through pooling resources from a large number with similar investment goals and risk appetite. The resources collected are invested in the capital market and money market securities and the returns generated are distributed to investors. The fund managers of MFs are specialists in the fields of investment analysis and are able to diversify and even out risks through portfolio mix. MFs offer a wide variety of schemes, such as, growth funds, income funds, balanced funds, money market funds and equity related funds designed to cater to the different needs of investors.
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There are 4 broad categories of NBFCs: Finance Companies Leasing Companies Loan finance companies Investment finance companies
market confidence to maintain confidence in the financial system financial stability - contributing to the protection and enhancement of stability of the financial system consumer protection - securing the appropriate degree of protection for consumers. reduction of financial crime - reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.
Structure of supervision Acts empowers organizations, government or non-government, to monitor activities and enforce actions. There are various setups and combinations in place for the financial regulatory structure around the global. Leaf parts are in any case:
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Investment banking helps public and private corporations in issuance of securities in the primary market. They also act as intermediaries in trading for clients. Investment banking provides financial advice to investors and helps them by assisting in purchasing and trading securities as well as managing financial assets Investment banking differs from commercial banking as investment banks don't accept deposits neither do they grant retail loans. Small firms which provide services of investment banking are called boutiques. They mainly specialize in bond trading, providing technical analysis or program trading as well as advising for mergers and acquisitions
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Documentary Collections International trade procedure in which a bank in the importer's country acts on behalf of an exporter for collecting and remitting payment for a shipment. The exporter presents the shipping and collection documents to his or her bank (in own country) which sends them to its correspondent bank in the importer's country. The foreign bank (called the presenting bank) hands over shipping and title documents (required for taking delivery of the shipment) to the importer in exchange for cash payment (in case of 'documents against payment' instructions) or a firm commitment to pay on a fixed date (in case of 'documents against acceptance' instructions). The banks involved in the transaction act only in a fiduciary capacity to collect the payment but (unlike in documentary credit) make no guaranties. They are liable only for correctly carrying out the exporter's collection instructions and may, if so instructed, sue the non-paying or non-accepting importer on the exporter's behalf (see protest). Trade Finance The science that describes the management of money, banking, credit, investments and assets for international trade transactions. Companies involved with trade finance include importers and exporters, financiers, insurers and other service providers.
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A swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet. For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange. Currency swaps were originally done to get around exchange controls. Purpose of Currency Swaps An American multinational company (Company A) may wish to expand its operations into Brazil. Simultaneously, a Brazilian company (Company B) is seeking entrance into the U.S. market. Financial problems that Company A will typically face stem from Brazilian banks' unwillingness to extend loans to international corporations. Therefore, in order to take out a loan in Brazil, Company A might be subject to a high interest rate of 10%. Likewise, Company B will not be able to attain a loan with a favourable interest rate in the U.S. market. The Brazilian Company may only be able to obtain credit at 9%. While the cost of borrowing in the international market is unreasonably high, both of these companies have a competitive advantage for taking out loans from their domestic banks. Company A could hypothetically take out a loan from an American bank at 4% and Company B can borrow from its local institutions at 5%. The reason for this discrepancy in lending rates is due to the partnerships and on-going relations that domestic companies usually have with their local lending authorities. Setting Up the Currency Swap Based on the companies' competitive advantages of borrowing in their domestic markets, Company A will borrow the funds that Company B needs from an American bank while Company B borrows the funds that Company A will need through a Brazilian Bank. Both companies have effectively taken out a loan for the other company. The loans are then swapped. Assuming that the exchange rate between Brazil (BRL) and the U.S (USD) is 1.60BRL/1.00 USD and that both Companys require the same equivalent amount of funding, the Brazilian company receives $100 million from its American counterpart in exchange for 160 million real; these notional amounts are swapped. Company A now holds the funds it required in real while Company B is in possession of USD. However, both companies have to pay interest on the loans to their respective domestic banks in the original borrowed currency. Basically, although Company B swapped BRL for USD, it still must satisfy its obligation to the Brazilian bank in real. Company A faces a similar situation with its domestic bank. As a result, both companies will incur interest
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For simplicity, the aforementioned example excludes the role of a swap dealer, which serves as the intermediary for the currency swap transaction. With the presence of the dealer, the realized interest rate might be increased slightly as a form of commission to the intermediary. Typically, the spreads on currency swaps are fairly low and, depending on the notional principals and type of clients, may be in the vicinity of 10 basis points. Therefore, the actual borrowing rate for Companies A and B is 5.1% and 4.1%, which is still superior to the offered international rates. Currency Swap Basics There are a few basic considerations that differentiate plain vanilla currency swaps from other types of swaps. In contrast to plain vanilla interest rate swaps and return based swaps, currency based instruments include an immediate and terminal exchange of notional principal. In the above example, the US$100 million and 160 million reals are exchanged at initiation of the contract. At termination, the notional principals are returned to the appropriate party. Company A would have to return the notional principal in reals back to Company B, and vice versa. The terminal exchange, however, exposes both companies to foreign exchange risk as the exchange rate will likely not remain stable at original
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The Problem of Industrial Sickness in India is of growing concern because it wastes capital apart from decrease in employment. Various committee appointed, found out many reasons for the Industrial Sickness. The important reasons are divided into-Internal and External reasons. First one is associated with managerial ineffectiveness, which include poor control on key areas of operations and finance. Improper estimate of demand is another reason. Improper technology, wrong location of Industry, non- flexibility of fixed assets etc. Defective capital Structure and Shortage of working capital is another reason. Second reasons regarding external reasons area like High costs of manufacturing compared to Sales revenue, Non-availability of raw material, regular power, fuel etc. Transportation bottlenecks, General recessionary from in the economy affecting the overall performance of industrial units, Adverse Policies and rules of government. The measures to overcome these reasons of sickness can be suggested as under. (a) Effective and efficient management skills should be provided. (b) Technology should be upgraded. (c) Modernisation and Competitiveness. (d) Assessment of various factors of Loans etc. can be provided. (e) Liberal and helpful Policies of Government.
Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act " The sick industrial company is a company which has at the end of any financial year
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Extent of sickness Industrial sickness is growing at an annual rate of about 28% and 13% respectively in terms of number of units and out standing 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 Rs7000crore nearly 29000 units are added to sick list every year. 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.
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a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non availability of skilled labour or manpower wages disparity in similar industry and general labour invested in the area. b) Marketing Constraints: The second cause for the sickness is related to marketing. 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. c) Production Constraints: This is another reason for the sickness which comes under external cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions. d) 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.
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VIABILITY STUDY: A viability study covers the following: Market analysis Production/technical analysis Finance Human Resources Environment
REVIVAL PROGRAMME The revival programme may involve the following Settlement with creditors: a sick unit is normally in straightened financial circumstances and is not able to honor its commitments to its a sick unit is normally in straightened financial circumstances and is not able to honor its commitments to its creditors (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.
Provision of additional capital: typically, a revival programme entails provision of additional capital. This may be required for modernization and repair of plant and machinery, for purchase of balancing equipment, for sustaining a new marketing drive, and for enhanced working capital needed to support a higher level of
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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.
Reformulation of product market strategy: many a business failure can be traced to an ill-conceived product-market strategy. For reviving a sick unit, its product-market strategy may have to be significantly reformulated to improve the prospects of its profitable recovery. This, of course, calls for a great deal of imagination and penetrating analysis.
Modernization of plant and machinery: in order to improve manufacturing efficiency, plants and machinery may have to be modernized, renovated, and repaired. This may be essentials for attaining certain cost standards and quality norms for competing effectively in the market place.
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 organization, the greater are its chances of survival. Often golden handshake involving paying significant retrenchment compensation is a better proposition than carrying redundant manpower on the payroll of the unit.
Strict control over costs: a profitable organization can afford wastefulness and laxity in its expenditures. A tottering firm, seeking to regain its health and vigour, has to exercise strict over its costs, particularly over its discretionary expenses. A zero-base review of all the discretionary expenses may be undertaken to eliminate programmes and activities which are on the finances of the firm
Streamlining of operations: manufacturing, purchasing and selling operations have to be meticulously so that they can be streamlined. Value engineering, standardization, simplification, cost-benefit analysis, and other approaches should be exploited fully to improve the efficiency of the operations.
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
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Workers participation: In general, workers participation in management enhanced employee commitment, motivation, and morale. Further, the suggestions offered by the workers result in improvements that lead to higher manufacturing efficiency and productivity. A sick organization, which is being revived, can perhaps benefit even more from workers participation in management. During the revival phase, the dedication, commitment, and support of workers is indispensable and meaningful workers participation and involvement goes a long way in enduring this.
Merger with a healthy company: If a sick firm cannot pull itself by its own bootstraps, the options of merger with a healthy firm must be seriously explored. The healthy firm can leverage its resources to revive the sick firm.
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Interest rate swap An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap. Interest rate swaps are simply the exchange of one set of cash flows (based on interest rate specifications) for another. Because they trade OTC, they are really just contracts set up between two or more parties, and thus can be customized in any number of ways. Generally speaking, swaps are sought by firms that desire a type of interest rate structure that another firm can provide less expensively. For example, let's say Cory's Tequila Company (CTC) is seeking to loan funds at a fixed interest rate, but Tom's Sports Inc. (TSI) has access to marginally cheaper fixed-rate funds. Tom's Sports can issue debt to investors at its low fixed rate and then trade the fixed-rate cash flow obligations to CTC for floating-rate obligations issued by TSI. Even though TSI may have a higher floating rate than CTC, by swapping the interest structures they are best able to obtain, their combined costs are decreased - a benefit that can be shared by both parties. The mechanism of an interest rate swap allows each company to exploit their privileged access to one market in order to produce interest rate savings in a different market. This argument is an attractive one because of its relative simplicity and because it is fully consistent with data provided by the swap market itself. However, as Clifford Smith, Charles Smithson and Sykes Wilford point out in their book MANAGING FINANCIAL RISK, it ignores the fact that the concept of comparative advantage is used in international trade
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