Sick industrial unit is defined as a unit or a company (having been in existence for not less than five years)

which is found at the end of any financial year to have incurred accumulated losses equal to or exceeding its entire net worth. The net worth is calculated as sum total of paid up capital and free reserves of a company less the provisions and expenses, as may be prescribed. An industrial unit is also regarded as potentially sick or weak unit if at the end of any financial year, it has accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on demand made in writing for such repayment. The two basic factors which may result in sickness of an industrial unit are: Internal factors are those which arise within an organisation. 1. Mismanagement in various functional areas of a company like finance, production, marketing and personnel; 2. Wrong location of a unit; 3. Overestimation of demand and wrong dividend policy; 4. Poor implementation of projects which may be due to improper planning or managerial inefficiency; 5. Poor inventory management in respect of finished goods as well as inputs; 6. Unwarranted expansion and diversion of resources such as personal

extravagances,excessive overheads, acquisition of unproductive fixed assets,etc.; 7. Failure to modernise the productive apparatus, change the product mix and other elements of marketing mix to suit the changing environment; 8. Poor labour-management relationship and associated low workers' morale and low productivity,strikes,lockouts, etc. External factors are those which take place outside an organisation. 1. Energy crisis arising out of power cuts or shortage of coal or oil; 2. Failure to achieve optimum capacity due to shortage of raw materials as a result of production set-backs in the supply industries, poor agricultural output because of natural reasons,changes in the import conditions,etc. 3. Infrastructural problems like transport bottlenecks; 4. Credit squeeze;

5. Situations like market recession, changes in technology,etc; 6. International pressures or circumstances, etc. Industrial sickness may be caused by a combination of all such factors. Effects :1. It leads to loss of substantial revenue to the Government and enhances its public expenditure 2. It locks up necessary resources and funds in the sick unit. This also increases the nonperforming assets (NPAs) of banks and financial institutions 3. It leads to loss of production and productivity in the economy 4. It aggravates the problem of unemployment in the economy 5. It vitiates the industrial atmosphere and leads to worker-management

disputes,strikes,lock-outs,etc 6. It undermines the public confidence in the functioning of the organised sector in the country which in turn affects the overall investment climate of the economy. Symptoms of sickness :1. Delay or default in payment to suppliers 2. 3. 4. 5. 6. 7. 8. Irregularity in bank A/C Delay or default in payment to banks & FI Non-submission of information to banks & FI Frequent requests to banks & FI for additional credit Decline in capacity utilization Poor maintenance of plant & machinery Low turnover of assets

9. Accumulation of inventories 10. Inability to take trade discount 11. Excessive turnover of personnel 12. Extension of accounting period 13. Resort to creative accounting which seeks to present a better financial picture than what it really is 14. Decline in the price of equity shares & debentures

In the light of the above consequences of sickness and its growing incidence by size, region and industry followed by its far-reaching adverse socio-economic effects, the Government has been taking many steps and remedial measures in order to tackle this problem in India. The most significant measure has been the enactment of the Sick Industrial Companies (Special Provisions) Act,1985 (SICA). The most important piece of legislation dealing with industrial sickness was the Sick Industrial Companies (Special Provisions) Act,1985 (SICA). It applies to industrial undertakings both in the public and private sectors. SICA pertains to the industries specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, (IDR Act) subject to the exceptions specified in the Act. SICA, including any rules or schemes made thereunder, had overriding provisions over other laws except the provisions of the Foreign Exchange Regulation Act,1973 and the Urban Land (Ceiling and Regulation) Act, 1976. The basic rationale of enacting SICA was to determine sickness in the industrial units. It also aimed at expediting the revival of potentially viable units so as to make the investments in such units profitable. At the same time, to ensure the closure of unviable units so as to release the investments locked up in such units for productive use elsewhere. Thus, the broad objectives of SICA were: Timely detection of sick and potentially sick companies. Speedy determination by a body of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies. The expeditious enforcement of the measures so determined and for all matters connected therewith or incidental thereto. It provided for the constitution of two quasi-judicial bodies, that is, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR was set up as an apex board to tackle industrial sickness and was entrusted with the work of taking appropriate measures for revival and rehabilitation of potentially sick undertakings and for liquidation of non-viable companies. While, AAIFR was constituted for hearing the appeals against the orders of the BIFR.

When an industrial unit is defined as sick unit, a viability study is conducted Viability study generally covers the following: 1. Market analysis. 2. Production/technical analysis. 3. Finance 4. Environment. 5. Personnel and organization Revival Programme 1. Settlement with creditors 2. Provision of additional capital 3. Divestment & disposal 4. Reformulation of product market strategy 5. Modernization of plant & machinery 6. Reduction in manpower 7. Strict control over costs 8. Streamlining of operations 9. Improvement in managerial systems a. Environmental monitoring b. Organizational structure c. Responsibility accounting d. Management information system e. Budgetary control 7. Workers participation 8. Change of management

Case Study

Nicco Corporation Limited(NCL) is the flagship company of the Nicco Group For nearly over 6 decades, NCL has been one of the pioneers in cable manufacturing industry It produces a wide range of power, control, instrumentation & telecom cables & provides a spectrum of engineering services & executes turnkey projects Established in 1942, the US$ 67 million Nicco Group is a widely respected Indian industrial powerhouse NICCOs PRODUCT Aircraft & Air Field Cables Fire Retardant Low Smoke Cables (FRLS) Automobile Cables Oil Rig Cables Copper Conductors Cables For Cranes Elevator Cables (lift Cables) Furnace & High Temperature Cables Marine Cable

Power Cables NICCO BATTARIES LTD(NBL) amalgamated with NICCO Corporation LTD (NCL) with effect from 1 April 1994 as per amalgamation scheme In amalgamation scheme entire undertaking of NBL shall be transferred to NCL & transferee company i.e. NCL shall issue & allot shareholder of NBL share in transferor company in proportion of 2 share of face value of Rs.10 each of the transferee company for 13 equity share of face value Rs.10 The rehabilitation Cum amalgamation scheme envisages settlement of dues of the bank & institution, payment to pressing creditors besides capital expenditure of Rs 163 lakhs Cost of the scheme Capital expenditure Settlement of dues of the banks Payment of unsecured loans from Payment of pressing creditors Margin money for working capita TOTAL B) Means of finance (Rs in lakhs) 163.00 619.00 20.00 18.00 57.00 877.00 (Rs in lakhs) 477.00

Promoters contribution out of internal accruals of NCL Benefit under section 72 A of IT Act,1961 TOTAL 400.00 877.00

The scheme for amalgamation of NBL, with NCL was under section 72A of the IT Act,1961 and shall be effective from 1 April ,1994 The carried forward accumulated loss of NBL is estimated at Rs 1896 lakhs as on 31 March 1994 The estimated tax set off at the current rates of IT Act , 1961 is restricted to Rs. 400 lakhs Benefits in the merger of sick Synergistic operating economies Diversification Taxation advantages Growth advantage Production capacity reduction Managerial motivate Acquisition of specific asset Risks in the Merger of Sick Unit Dilution of competition in the market Actual or a potential competitor, may get eliminated Efficient & growing medium or small-sized undertaking May exercise a market power to the detriment of its customers & suppliers