CHAPTER 2

CORPORATE SICKNESS AND REHABILITATION

2.1 Introduction
Industrial sickness has emerged as a significant problem in all market
economies. At an elementary level industrial sickness refers to an industrial or
manufacturing firm performing systematically worse than the average, not
covering its fixed cost and frequently reneging on its debt repayment obligations
(Pawha and Puliani, 2000, 500). This happens when the rate of return on investment
of the concern is lower than the cost of capital used for the investment. It arises
out of weak financial structure andlor chronically inefficient use of factors of
production andlor market positioning. Its outcome is the locking up of scarce
investable funds in sub-optimal activities and acts as a major deterrent to industrial
growth.
In India and elsewhere in the third world the problem of industrial
sickness is more severe compared to the developed and industrialised nations since
such economies with their well established social security system can easily
absorb the economic disturbances like retrenchment etc., brought about by the
Chapter 2 20
closure of industrial units. It is pervasive across ownership (public or private
sector), industries, states and scale (small, medium and large). This chapter aims
at examining the various aspects of sickness in the Indian industrial scene in two
sections. The first section contains definitions and the causes of industrial
sickness and the second section deals with the dimension of industrial sickness in
India and the role of different agencies in reviving sick industrial units.
2.2 Section 1
2.2.1 Industrial Sickness-Definitions
There are a number of definitions of industrial sickness based on different
norms such as generation of surplus, liquidity, solvency, amount and period of
irregularities in operation etc. In order to have a clear idea about the different
aspects of industrial sickness the various definitions given by various authorities
are mentioned briefly.
' The State Bank of India (SBI) study team in its report on Small Industrial
Advances (1975), defined a sick industrial unit as a unit which fails to generate
adequate internal surpluses on a continuing basis and dependr; for its survivaI
on frequent infusion of external fina~tcid help, thereby it brings about serious
disequilibrium in its financial structure. '
ii. The Reserve Bank of India (RBI) defined a sick industrial unit as a unit, which
has incurred cash losses for one year and in the judgment of the bank, it is
likely to continue to incur cash losses for the current year as well as the
following year and which has an imbalance in the financial structure, such as
current ratio of less t hm I : I and worsening debit-equity ratio.'
' Vide circular, DBOD, No: CAS, D.C. 133/C 446 (SIU) 76 dated 26' hovernber
1976, RBI, Bombay.
Chapter 2 2 1
iii. The National Institute af Bank Management (NIBM) defined sick units as
those where the operations result in continuous losses affecting the borrowing
potential almost permanently. 3,
iv. The National Council of Applied Economic Research (NCAER) defined
sickness in terms offinancial viability consisting of fhree independent elements
of equal emphasis and weight viz., profiaabils'fy, Iiquidity and solvency
represented by cash profit or loss, net working cupdtul, and networth
respectively. When all the parameters show positive Fgures, #he unit's
financial viability will be sound; where one of the parameters shows negative
figure, the unit could be a case of incipient sickness; where all the rkree
parameters show negative figures, the unit may be termed us sick.'
v. The Industrial Credit and Investment Corporation of India (ICICI) defined a
sick industrial unit as one whose flnaneial viability is threatened by adverse
factors present and continuing. The adverse factors might relute to
management market, fiscal burden, labour relation, or aql other. When the
impact of these factors reaches a point where a company begins to incur cash
losses or leading to erosion of its hnd r there is n threat to its financial
viability.
vi. The Sick Industrial Companies (Special Provisions) Act, 1985 defines a Sick
industrial Company as an industrial company (being a company registered for
not less than f i ve years), which has at the end of any financial year
accumulated losses equal to or exceeding its entire ne t w~r t h. ~
3Biswasroy et a1( 1 990), 19.
"bi d.
'Srivastava and Y adav ( I 986), 10.
h
Section 3(1)(0) of the Sick Industrial Companies (Specid Provisions) 'Act, 1985 as
quoted by Pahwa H.P.S. and M. Puliani in Sick Industries and BIFR (2000), 30.
Chapter 2 22
b
From the above definitions it is clear that no single definition is
comprehensive enough to be accepted universally. Almost all the definitions are
from the point of view of financing agencies and they describe the position of
sickness in financial terms only. Sickness has also a qualitative aspect and none of
them tries to see what sickness means to the employees, to the investors or to the
society. In this context, the description of sick industrial units by Biswasroy et a1
(1990, 20) seems more relevant and apt to cite. Accordingly, a sick unit is on
unhealthy unit to a common man, a proJit postponing unit to an investor, a
discouraging unit to an industrialist, a source of industrial problems to the
Government, a victim of technological change to a technocrat, a bad employer 60
workers and a source of wastage of technical and human resources to the
2.2.2 Causes of Industrial Sickness
There is no single cause for corporate sickness; indeed the variety seems
staggering. Sickness may come as the result of any type of bottleneck in any area
and of any level of operation and the reasons differ from industry ta industry in the
economy and Erom firm to firm in a given industry. These causes may be generally
classified into two viz.. internal causes and external causes.
Internal causes arise due to anomalies in the various hnctional areas such
as finance, production, marketing and personnel and are within the control of the
firm7. The external causes of sickness arise from changes in environment and are
beyond the control of the management. These changes may arise due to
government legislation or due to certain economic, political and international
factors. Inadequate credit facilities, unfavourable investment climate, shortage of
1
Desai (1980), Pawar (1981), Bidani and Mitra (19821, Dixit (1984), Sinha (1984),
Srivastava and Yadav (1986), Biswasroy (1990) and Khan (1990j highlighted the various causes
of industrial sickness elaborately.
Chapter 2 23
raw materials and power, import restrictions, labour unrest, market recession,
global competition, heavy taxation and obsolete technology are generally
considered as the major extemal causes of sickness. An RBI study8 for the period
ending March 1998 revealed that 50.4 percent of industrial sickness is caused by
internal factors comprising shortcomings in project appraisal (7.3 percent),
technical feasibility, economic viability and project management deficiencies
(43.1 percent). External factors which are beyond the control of the
promoters/managers of the units concerned accounted for the remaining 49.6
percent of the major causes of sickness.
A survey of the companies reported to the BIFR up to March 1998
revealed that financial problems in 34.5 percent cases, production and technical
problems in 21.4 percent cases, managerial problems in 20 percent cases,
marketing problems in 15.3 percent cases and the government policies in 8.8
percent cases were the reasons for their sickness.'
As far as the causes of industrial sickness are concerned, the above-
mentioned factors can jointly and severally be attributed. In the majority of cases
no single factor can be identified as the sole reason of sickness, the causes come in
groups. For example, in the case of M/S Transformers and Electricals Kerala
~ t d " the main causes for sicknew were low capacity utilisation, high cost of raw
materials, low productivity, excess personnel, high interest burden, shortage of
working capital and high turnover of top management personnel. Similarly, in the
'BIFR Performance Review (1 998),20.
9
Rl FR Performance Review ( 1 998), 1 7
"M/S Transformers and Electricals Kerala Ltd (TELK) was established in 1963 to
manufacture transformers and transformer components to cater to the needs of the State
Electricity Boards. The entry of multi-national companies into the market with better technology,
product range, price, service and delivery affected the performance of the company. The
company made a report to the BIFR in May 1995 and a rehabilitation scheme was implemented
w.e.f. 1" January 1998. But the rehabilitation scheme failed within two years of its
implementation due to the heavy losses incurred by the company. Pp 158- 17 1.
Chapter 2 24
case of M/S South India Wire Ropes ~ t d " the main causes of sickness were lack
of discipline in financial management, working capital deficiency, inadequate
modernisation and replacement of plant and machinery, high cost of quality raw
materials, non co-operative work force and managerial problems. These findings
are in congruence with Argenti ( 1 977, 47)'s observation that industrial sickness
can be attributed to several factors working simultaneously.
2.3 Section 2
2.3.1 Dimension of Industrial Sickness in India
Industrial sickness has emerged as a bane of Indian economy resulting in
the closure of many enterprises every year creating large-scale unemployment and
loss of investment ultimately slowing down the wheels of economic progress of
the nation. It was first noticed with concern in mid sixties, which also coincided
with the period of industrial stagnation. A few hundred units in some of the
traditional industries such as Cotton Textiles, Jute and Sugar became sick.
Inadequate replacements and modernisation of plant and machinery were the
reasons for sickness. But its magnitude has been increasing at a steady rate since
then.
The total number of sick industrial units increased from 24550 units in
December 1980 to180597 units by the end of March 2002. 'Shis points out that the
number of sick industrial units increased more than seven times during the period.
The amount of institutional credit locked up in them increased more than 14 times
from Rs. 1809 crores to Rs.26065 crores during the same period. The dimension of
industrial sickness both in the small and large-scale sectors is given in Table 2.1. The
diagrammatic representation of sicWweak units in the SSI Sector and the Non-SSI
"~romoted in 1961, M/S South lndia Wire Ropes Ltd (SIWR) is the largest
manufacturer of steel wire ropes in South India. The company incurred losses continuously
since 1985-86 and it was reported to the BIFR in October 1987. The rehabilitation scheme
sanctioned by the BIFR codd not be implemented properly due to the non co-operation of the
participating agencies. The BIFR decided to wind up the company in 1995. Pp 233-243.
Chapter 2 25
Sector are shown separately in Fig. 2.1 and Fig. 2.2 respectively and the amount of
institutional funds locked up in sick units in Fig. 2.3.
Table 2.1 :- Dimension of Industrial Sickness in India
(Rs. in crores)
March
2000
March
200 1
March
2002
Total
24550
119606
221094
223809
247924
240700
258952
271206
264750
237400
--
224012
309013
Total
1809
4271
9353
10768
11534
13134
136%
13739
13749
13787
15682
t 9464
SSI Sick
Units
306
1071
2427
2792
3101
3443
3680
3547
3722
3609
A -
3856
4314
Non SSI
Weak
Units
814
876
813
657
591
476
418
420
.--,.
446
435
-,
Source: RBI Report on Trend and Progress of Banking in India (various issues).
304235
249630
177336
Units
Non SSI
Sick
Units
1401
1823
1455
1461
1536
1867
1909
1915
1956
1948
2030
2357
Period
December
1980
December
1985
March
1990
March
1991
March
1 992
Mm h
1993
March
1994
March
1995
March
19%
March
1997
March
1998
March
1 999
Institutional
Non SSI
Sick
Units
1503
3200
4539
5106
5787
7901
8152
8740
8823
8614
9862
13114
Number of
SSI
23 49
1 17783
218825
22 1472
245575
238 1 76
256452
268815
262376
235032
221536
30622 1
2742
2928
2880
Finance
Non SSI
Weak
Units
2387
2870
2646
1790
1864
1452
1204
1564
1964
2036
422
389
381
307399
252947
180597
4608
4506
4819
16748
18478
17591
2299
2793
3655
23655
25777
26065
Chapter 2
Fig: 2.1:- SSI Sick Units
Year
pi s aEi q
Fig: 2.2:- NonSSl SickMleak Units
year IS ~ S S I Sickkeak units (
Chapter 2
Fig: 2.3 Institutional Funds insick Units
Year
I H SSI Sick Units Non SSI Sick Units I
It can be seen that the incidence of sickness is more in the small-scale
(SSI) sector than in the large-scale sector. The total number of sick units in the
SSI sector increased by 7.7 times from 23 149 units in December 1980 to 177336
units by March 2002 and the amount of bank credit locked up in them increased
more than 15.7 times from Rs.306 crores to Rs. 4819 crores during the same
period. In the non-SS1 sector the number of sicklweak units increased by 2.3
times from 1401 units to 3261 units and the amount of bank credit locked up in
them increased more than 14 times fiorn Rs.1503 crores to Rs.21246 crores
between December 1980 and March 2002. This shows that the total number of
sicWweak units in the non-SSI sector was only 1.8 percent of the total number of
sickjweak units but the non-SSI sector accounted for more than 8 1.5 percent of the
institutional credit locked up in sicklweak units.
Chapter 2
2.3,2 Role of Different Agencies in Reviving Sick Industrial Units
Corporate sickness has emerged as a significant problem in many market
economies. Growing competition and ever changing international economic
development often led to high incidence of corporate failure in developed market
economies. The incidence of closure tends to be high in industries characterised
by fierce competition and in industries with high degree of obsolescence. In the
U.K., one in five firms listed on the stock exchanges turns sick, and of these, only
one in four manages a successfbl turnaround." In the U.S. one in four companies
listed on the stock exchanges had turned sick, and only a third of those that got
sick recovered." Hawever, these economies with their well-established social
security system can easily absorb the economic disturbances brought about by
the closure of industrial units. But developing economies with their limited
resources cannot afford their productive resources turning non-operational due to
industrial sickness. Rehabilitation is the only remedy available for the industrial
undertakings, which have already become sick and are on the verge of virtual
collapse (Srivastava and Yadav, 1986,206).
The growing incidence of industrial sickness in India and the resource
blocked in sick unitsI4 made it imperative that solutions are to be found to
I 2
Stuart Slatter, Corporate recovery: Successful Turnaround Sfrategies und their
Implementation as quoted by Khandwalla, P.N., in Effective Turnaround of Sick
Enterprises, ( 1989), I .
' '~ibeault, D., Chrporate Turnaround: How Managers Turn Losers into
Winners, as quoted by Khandwalla, P.N., in Fffective Turnaround of Sick Enterprises,
( 1989), I .
I 4 ~he number of sick industrial units increased from 20651 to 180597 between
December 1978 and March 2002 and the amount of bank credit locked up in them
increased from Rs. 901 crores to Rs. 26065 crores during the same period.
Chapter 2 29
rehabilitate sick units and to overcome the problem of widespread sickness in
industrial scene. The following paragraphs review the measures taken by the
Government, the Reserve Bank of India (RBI) and the All India Financial
Institutions (AIFIs) in reviving sick industrial units in the country.
2.3.3 Government Measures in Reviving Sick Industrial Units
In the sixties the Government perceived corporate sickness as a threat to
employment of labour force; hence it resorted to takeover of the units closed by
making necessary amendments to the Industries (Development and Regulation)
Act, 195 1 , It worked well since the number of units becoming sick was negligible.
The depressed and reccessionary industrial climate experienced by the country
during the late sixties resulted in a number of industrial units becoming sick
especially in the Northeastern region and in and around Calcutta. At this juncture,
the Government came out with a conscientious and well-defined policy of
establishing an institution to act as a reconstruction agency for the revival of sick
industrial units and the Industrial Reconstruction Corporation of India (IRCI) was
established in April 197 1. Nevertheless the magnitude of industriai sickness has
been increasing at a steady pace along with industrial development. Taking
serious note of the adverse impact of industrial sickness on production and
employment the Government and the RBI have been constantly trying to bring
down the incidence of sickness in industry by taking suitable remedial measures.
The objective of such measures was to revive the sick enterprises. Further, the
Government has made certain policy announcements on sick industrial units from
time to time. The various policy measures taken by the government before the
enactment of the Sick Industrial Companies (Special Provisions) Act, 1985 to
revive sick industrial units are discussed broadly under the following heads.
i. SoA Loan Scheme
ii. Industrial Policy 1977
Chapter 2
iii. Merger Policy 1977
iv. Policy Guidelines on Sick Units 1 978
v. Policy Statement 1980
vi. New Strategy 198 1 and
vii. Conversion of the IRCI into the TRBI in 1984.
i. Soft Loan Scheme
The Soft Loan Scheme for modernisation was introduced in November
1976 for five selected industries viz., cotton textiles, jute, cement, sugar and
specified engineering industries. The basic objective of the scheme was to provide
financial assistance on concessional terms to the weaker units for modernisation,
replacement and renovation of their old plant and machinery. The scheme was
operated by the Industrial Development Bank of India (IDBI) in collaboration with
the Industrial Finance Corporation of India (IFCI) and the Industrial Credit and
Investment Corporation of India (ICICP). The IFCI was the lead institution for
sugar and jute industries, the IDBI for cotton and cement industries and the ICICI
for engineering industries. Loans under the Soft Loan Scheme were provided on
concessional terms not only in regard to the rate of interest but also in regard to
other provisions such as the promoters' contribution, debt-equity ratio, initial
moratorium and repayment period. All types of industrial concerns such as
proprietary, partnership, private and public limited companies were eligible for
assistance under this scheme, But preference was given to the units promoted by
technicians or entrepreneurs and projects in backward areas.
The industrial unit should have been in operation for at least 10 years to
be eligible for assistance under the Soft Loan Scheme. The plant and machinery
proposed to be replaced should have been in use for more than 10 years. The 10
years criterion was relaxable if the project aimed at increase in exports, import
substitution, energy saving and anti-poilution measures.
Chapter 2 3 1
Under the Soft Loan Scheme the units were classified into three groups
'weak', 'not so week' and 'better off units' (Srivastava and Yadav 1986, 207).
Assistance to 'weak' units was given at a concessiond rate of 7.5 percent while
the concessional part was reduced in the case of 'not so weak' and 'better off
units on a grading scale depending upon the financial position of the units.
The scheme was modified in January 1984 and renamed as Soft Loan
Scheme for Modemisation. All the categories of industries were eligible to receive
financial assistance under the new scheme. The modified scheme reduced the
interest rate from 12.5 percent to 1 1.5 percent for loans up to Rs. 4 crores.
The industry-wise sanctions and disbursements under the Soft Loan
Scheme by the IDBI, IFCI and the IClCI between 1976-77 and 1984-85 are given
in Table 2.2 and its diagrammatic representation in Fig. 2.4. The industry-wise
classification of the total number of units assisted under the Soft Loan Scheme up
to 31 March 1985 is given in Fig. 2.5
Table 2.2:- Financial Assistance Sanctioned and Disbursed under the Soft Loan Scheme (Rs. in lakhs)
1
198 1-82
I
1982-83
I
1 983 -84
I 1984-85 1
Total
I
lndustry
Textiles
Cement
Total 53 6586 0 79 10950 1964 103 19815 5858 106 17759 11166 81 14430 13362
Industry
Textiles
Cement
Sugar
Jute
Engineering
Others
Total
1976-77
Source: IDBI Operational Statistics 1984 - 85, P69.
Disbur-
sements
0
0
1977-78
No
33
5
No
73
4
8
4
17
0
106
No
43
1
San-
ctions
2159
2217
1978-79
San-
ctions
10837
6117
1534
724
3145
0
22357
San-
ctions
4934
515
No
70
2
Disbur-
sements
8727
1045
1345
561
3055
0
14733
Disbur-
sements
5892
961
1111
217
2145
0
10326
No
40
2
0
0
22
0
64
Disbur-
semen&
583
436
1979-80
San-
ctions
4405
710
0
0
5433
0
10548
N~
36
3
3
1
4
2
49
San-
ctions
11012
2600
1980-81
Disbur-
sements
5192
2637
Disbur-
sements
3217
834
No
63
4
No
42
5
San-
ctions
9391
2300
995
229
870
150
13935
Sari-
ctions
11585
1168
Disbur-
sements
3990
734
407
134
1609
0
6874
Disbur-
sements
3446
972
82
344
1109
1297
7250
No
26
3
3
1
10
25
68
No
426
29
43
28
156
27
709
San-
ctions
6760
1090
San-
ctions
11468
1554
180
55
1497
18627
33381
Disbur-
sement
8968
1073
San-
ctions
72551
18271
7449
5418
27295
18777
149761
Disbur-
sements
40015
8692
5335
1 926
14268
1297
71533
Fig: 2.4:- Assistance Under Soft toan Scheme
40000 -
35000 -
30000 -
-- 25000 -
C
g 20000 -
4 15000 -
10000 -
5000 -
0 I
CY 0
?
3 zi$garn
? Z F Z ?
Year
1s Sanctions . Disbursements (Rs. in labs) 1
f
Fig: 2.5:- Sick Un'b Assisted Under Soft Loan
Scheme
27
\
ff mrn \ 1 I
426
A
[B Textiles M Cement Sugar .Jute Engineering . Omers I
Chapter 2 3 4
Table 2.2 shows that 709 industrial units were given assistance under the
Soft Loan Scheme up to 31 March 1985 and the cumulative sanctions and
disbursements under the scheme amounted to Rs. 1497.6 1 crores and Rs.7 15.33
crores respectively.
The Sol? Loan Scheme could not make any impact on curbing the
industrial sickness in the country. The number of sick industrial units increased
nearly five times from 20651 units to 98487 units between June 1978 and 1985."
ii. Industrial Policy 1977
Industrial sickness, for the first time found a specific mention in the
industrial policy statement laid before the Parliament in December 1977. The
policy statement announced that taking over of the management of the sick units
would be resorted to selectively and only after careful examination of the steps
required to revive the units. This was a major deviation from the earlier policy
measures. In the past, whenever there were possibilities of closure of a unit the
response from the Government was to bring the management under the Industries
(Development and Regulation) Act, 195 1.
iii. Merger Policy 1977
In 1977 the Union Government evolved a scheme of merger of sick units
with healthy ones with a view to reviving sick industrial units. In the Finance Act,
1977 the Government introduced certain fiscal concessions whereby a healthy unit
taking over a sick unit was allowed to carry forward and set off the accumulated
losses and unabsorbed depreciation of the latter against its own tax
However, it was stipulated that the merger should be in public interest and the sick
company taken over should have employed staff numbering more than 100 and it
15
Biswasroy and Misra (1 992), 503.
I6
Section 72-A of the Income Tax Act, 196 1 .
Chapter 2 3 5
should have assets of more than Rs.50 lakhs. These two conditions were
applicable to both MRTP and non-MRTP companies.
iv. Policy Guidelines on Sick Units 1978
The Government Policy of 1978 on sick industries recognised that revival
of a sick unit cannot be the responsibility of any single agency and that it can be
achieved effectively only by sharing the responsibility by the Central Government,
State Governments, Financial Institutions, the Reserve Bank of India and the
management itself. The policy emphasised the need for a closer and more vigilant
involvement of financial institutions in units with management of doubtful
competence or integrity. For this purpose the policy statement announced that
financial institutions would set up a group of professional directors jointly, to be
nominated to the Board of the above said companies. This group would report to
the financial institutions on measures that should be taken in order to prevent the
units falling sick. In the case of industrial units, which were already sick, the
policy advocated rehabilitation through the joint efforts of the state government
and financial institutions, which have provided financial and managerial support,
with suitable restructuring of the management. Tt also announced that a special
authority under the Income Tax Act, 1961 would examine proposals for the
merger of sick units with healthy ones. The steps under the Industries
(Development and Regulation) Act, 1951 like take over etc., would be considered
only when the above courses of action have failed. A major decision that the 1978
policy statement announced was not to return to the same management the units,
which had been taken over under the Industries (Development and Regulation)
Act.
v. Policy Statement 1980
The policy statement issued by the Government of India in 1980 also
reiterated that resort to takeover the management of a sick unit under the
Chapter 2 36
Industries (Development and Regulation) Act, 195 1 would be only in exceptional
cases on the ground of public interest where other means for the revival of sick
industrial undertakings are not considered feasible.
vi. New Strategy 1981
In June 198 1, the Union Industry Minister announced a new strategy for
sick industrial units, which aimed at preventing sickness in industry, quick
rehabilitation of sick units and an early decision on the future of sick units. The
major feature of the strategy was the provision that units employing over 1000
persons or having an investment of Rs.9 cores or more in fixed assets should be
nationalised, in case the Reserve Bank of India, the financial intuitions, arid the
state governments were unable to prevent the growing sickness in sick units. This
would however be subject to three considerations. A sick unit would be
nationalised provided that
i. the line of production is critical to the economy
i i . the unit has been functioning as a mother unit with large ancillary linkage
and
iii. its closure would cause substantial dislocation and throw out of employment of
such a large number of persons that it would not be possible to provide alternative
jobs to them.
The nationalisation of inherently non-viable units was not favoured in the
new strategy. It emphasised the need for the concerned administrative ministry to
satisfy itself regarding the viability of the unit before a decision was taken to
nationalise it.
An examination of these broad features of the new strategy aimed at
curing industrial sickness revealed that it completely left out small-scale sector
units from its scope even though sickness among these units was by no means
insignificant.
Vii. Conversion of the IRCI into the IRBI in 1984
The Industrial Reconstruction Corporation of India (IRCI) was
established in April 1971 as a specialised financial institution to promote and
operate schemes for industrial development and in particular to provide financial
assistance for the reconstruction and rehabilitation of sick industrial units. Up to
March 1984, the IRCI provided fmancial assistance to 242 units and the
cumulative sanctions and disbursements were Rs.266 crores and Rs.184.9 crores
re~pcctively.'~ The Corporation also provided credit facilities to various state level
institutions like State Financial Corporations (SFCs) to help rehabilitation of sick
small-scale units. But the financial assistance provided by the Corporation was not
sufficient to curb industrial sickness in the country. At this juncture, the
Government of India established a high power statutory body with an autonomous
status by converting the lRCI into a statutory corporation, the Industrial
Reconstruction Bank of India (IFU31) in 1984 to function as the principal credit and
reconstruction agency for industrial revival and to co-ordinate similar works of
other institutions engaged in the revival of industries. The IRBI's hnctions would
cover not only reconstruction assistance to sick units but also development
assistance combined with merchant banking. The IRBI was empowered to take
over the sick industrial units under its assistance far the purpose of managing and
running them, leasing them out or selling them as running concerns or preparing
schemes for reconstruction by scaling down the liabilities with the approval of the
Central Government. It was also empowered to take certain decisions in
conformity with MRTP and FERA rules so as to permit large multi-national
houses to participate in reconstruction plans for sick units and to expedite the
cases of amalgamation. The financial assistance sanctioned and disbursed by the
"~rivastava and Yadav ( 1986), 220.
IRBl between 1984-85 and 1996-97 along with their percentage change are
presented in Table 2.3
Table 2.3:- Financial Assistance Provided by the IRBl
(Rs. in crores)
Table 2.3 shows that the total assistance sanctioned and disbursed by the
[RBI up to 3 1 March 1997 amounted to Rs. 4600.5 crores and Rs. 2764.2 crores
Growth Rate
("/. )
NA
23.7
39.7
7.6
14.3
21.1
9.1
--
20.3
- 0.7
2.6
1 10.8
32.9
4.0 -
P38.
respectively.
Disbursements
I Rs)
54.8
67.8
94.7
101.9
1 16.5
141.1
153.9
185.2
183.9
188.6
397.6
528.6
549.6
in india 1998-99,
The enactment of SICA, 1985 and the setting up of the Board for
Growth Rate
( %)
NA
- - - -32.1
98.0
25.3
12.0
-29.8
- - -
60.1
18.3
6.0
44.7
82.7
15.3
-9.1
Development ~ a z i n ~
Year
1984 - 85
1985 - 86
--
1986 - 87
1987 - 88
1988 - 89
1989 - 90
1990 - 91
1991 - 92
1992 - 93
1993 - 94
1994 - 95
1995 - 96
1996 - 97
Source: IDBl
Industrial and Financial Reconstruction (BIFR) under it as the single agency
Sanctions
( Rsl
1 10.8
75.2
148.9
186.5
208.8
146.6
234.7
277.7
294.3
425.8
777,9
897.3
816.0
Report on
responsible for the rehabilitation of sick industrial units in the non-SSI sector
made the role of the IRBI in rehabilitating sick industrial units irrelevant and as
sequel to that the Government of India decided to convert it into a full fledged all
purpose financial institution. Accordingly, the IRBl was incorporated as a
government company in March 1997 under the name, the Industrial Investment
Bank of India Ltd (IIBI).
2.3.4 Role of the Reserve Bank of India in Curbing Industrial Sickness
In the context of safety of funds lent as also the impact on the profitability
of banks, apart from the implications from the point of the larger socio economic
objectives of sustaining/increasing production and employment, the emergence,
towards the middle of the seventies, of the phenomenon of 'sickness' in a
significant way in industrial units financed by banks and term lending institutions
was a matter of concern for the Reserve Bank and the Government of India.
Banking and term lending institutions through their intimate knowledge of the
working of the industrial units financed by them can play a helpful and positive
role in arresting industrial sickness and reviving potentially viable sick units. The
Reserve Bank coordinates the efforts of' banks, financial institutions and
government agencies in the rehabilitation of such units.
The first organised effort to tackle the problem was made when the RBI
organised a seminar on sick industrial units in April 1976. As an outcome of the
seminar, the RBI created a Sick Industrial Undertaking CeH in 1976 in its
Department of Operations and Development. The cell has taken the following
steps in the direction of rehabilitating sick industrial units.
(a) Reorientation of the attitude and approach of commercial banks in dealing with
the problem of sick industries so that the larger social objectives are not lost
sight of by them.
(b) Building up within the banks necessary organisational framework and
expertise to pay specialised attention to sick industries.
Chapter 2 40
(c) Furnishing guidelines equipping the banks to identify the sickness at an early
stage and to take corrective action.
(d) To monitor the performance of commercial banks in identifying the sick units
and coordinate the efforts of governments, banks and fmancial institutions in
rehabilitating the potentially viable sick units.
The Reserve B& oversees the performance of banks in identifying sick
industrial units, and taking appropriate remedial action with a view to nursing
them back to health. Towards this end, the RBI directed the commercial banks in
November 1976 to hrnish it with a quarterly statement showing particulars of all
sick units enjoying aggregate credit limit of Rs.1 crore and above from the
banking system.
The RBI had also directed the commercial banks to create a 'Sick
Industrial Undertakings Cell' in the H.O. and Regional Offices of each Bank to
watch the position of sick industrial units on an ongoing basis. The cell was
required to find reasons for sickness and to ascertain whether the unit is viable and
if so to determine the various steps necessary for its rehabilitation. For the
detection of sickness at an incipient stage, the RBI introduced a health code
system to categorise various borrowal accounts regarding the quality of accounts
for better monitoring and for facilitating preventive action where necessary. The
RBI also initiated steps for the co-ordination between the commercial banks and
term lending institutions in the formulation and implementation of rehabilitation
packages. To avoid the time lag between the formulation of the final rehabilitation
package and its implementation banks were asked to ensure that the package
proposals were sent to the RBI sufficiently in advance of the date of the joint
meeting fixed to examine the same and take final view thereon.
Since cases of incipient sickness were not being reported by banks either
to the RBI or Central Government, commercial banks were advised that where any
medium or large unit employing 1000 or more persons financed by them was
Chapter 2 41
likely to become actually sick, a report thereon giving broad particulars of the unit
should be promptly made to the union Ministry of FinanceMinistry of Industry.
The standing co-ordination committee was appointed in January 1979
following the recommendations of the inter-institutional group (Bhucher
Committee) to consider the issues pertaining to co-ordination between banks and
term lending institutions. The committee was reconstituted under the chairmanship
of Shri. A. Ghosh, the then Deputy Governor, the RBI in August 1983. The aim
of the committee was to provide a standing forum for sorting out inter-institutional
problems, relating to term lending in the light of experience gained in the past and
review the involvement of banks and term lending institutions in extending credit
besides dealing with and sharing of information on term credit and any other
issues that may be referred to it.
State level inter-institutional committees had been constituted and started
functioning early in 1980 in almost all the states and union territories with the
representatives of the RBI, banks, term lending institutions, the state government
and state level institutions to serve as a forum for exchange of information and
discussion on the problems faced by the sick small and medium scale industrial
units. The RBI acted as the convener and these committees, dealt with the
problems pertaining to co-ordination between banks and financial institutions,
provision of adequate infrastructure facilities to industrial units and general
problems relating to grant of credit to such units.
In view of the growing incidence of sickness in the industrial sector the
RBI in February 1985 advised the chairmen and chief executives of commercial
banks to take all possible measures to minimise the rising incidence of sickness in
their advances portfolio. The need for detection of sickness at an early stage and
for undertaking studies to determine the viability as well as formulation of the
package programme for rehabilitation of potentially viable units without loss of
time was reiterated. T h e RBI advised the commercial banks to set up a small task
force comprising senior officials to have a detailed critical review of each of the
large sick units for determining the potential viability and the need for coming to
an early decision on the desirability of rehabilitation and evolving acceptable
package of rehabilitation of the viable unit. While over-seeing the institutional
efforts in industrial rehabilitation wherever it became necessary to intervene and
guide in individual cases the Reserve Bank took the initiatives for convening
meeting of the fmancing banks and term lending institutions to discuss the
problems of the units, find solutions and secure co-ordination.
The RBI also directed the commercial banks to classify the sick units
under their portfolios in to two categories viz., potentially viable and non viable
and to provide supportive measures to potentially viable sick units, putting them
under special nursing programme. 'The sick units put under the nursing programme
were eligible fbr relaxations in margin, concession in the rate of interest,
amortisation of past interest dues and rescheduling of repayment instalments in the
case of term loans.
Out of 180597 sicklweak units (as on 3 1-07-02) the banks identified only
4836 units as viable, 169351 units as non-viable and in the case of 64 10 units viability
was not decided. Among the 4836 units identified viable only 793 units were put
under the nusing programme by banks. The total number of sicldweak units
classified according to their viability position and the units put under the nursing
programme between 1991 and 2002 are given in Table 2.4.
Table 2.4:- Viability Position of Sicktweak Industrial Units
I
.As on 3 l March
I 1991 1992 1993 1 1994 1996 1997 1 2000 2001 1 2002 i
---- --t-
-- I i -1 I 7- t- --
-1
I SSI Sick Units:
I Potentiall> \-iablc. units
' Son-viable unit 167374
I Viabilii) not decided 2334 3029 2723 5607 5784 5798 3216 16336
'
' '
13219 1 11066
-1 otal
[.;nits under yursing Programme
Yon-SSI Sick Units:
Putentiallq ~' iable units
I Non-~ iablc units 7 0 ) 724 \ 828 I 8681 944l - 9 8 1 1 10701 1563 I I605 ,
t - t-
Viabilit? not decided
'
224 , 235 : 378 ( 365 3 88 417 1 567 ; 830 ; 3 -61
,
1 1 I
I
! Total 14611 5 3 I867 1909! 1956; 1948. 20301 2357 2742; 2928 2880i
I
7-
b i t s under Nursing Programme 34-1 -101 4 , 454 4 1 2 3 5 6 3 1 1 1 30 6 2 13
] Non-SSI Weak Ltnits:
I
I
274
, 57 71 ' 74 74
-
I Potentiall! viable units
( Non-\ iablc units 194
1 Viabilit) nut decided 144 106 1 122 I
T o ~ l 876 8 13 657 ; 591 4 18 I 420 '
-7-
1 Units under Nursing Progi-anme r 234 1 218 156 131 68 1 63 [ 59 I 43 i 17 1 16
Source: RBI Trends and Progress of Banking in India (Various issues). Note: Dala regarding 1994-95 not provided.
221572 ,
13224
534
233575 238176 256.152 262376
13829 117218
577
235032
1 1376
66 1
: 10539 1 1026
' 221 536
13063
676 4 10
306221
621 / 550 ' 493
12759
349 \ 339
304235 249630
269
177336
621 , 663 753
Chapter 2
The RBI has laid down certain parameters for aid to sick units. These are
to be followed by banks and financial institutions, which are likely to set at rest
some of the controversies and vexed issues thereby accelerating the pace of revival
of sick units. These parameters are:
k Interest reduction on term loans should not be more than 2 percent of
prevailing rates charged by bankslfmancial institutions.
B Interest @, 10 percent should be charged on funded interest (subject to
annual review).
P Fresh cash inputs required for meeting part of overdue statutory liabilities,
pressing creditors etc., might be shared by participating banks and
fmancial institutions on equal basis.
> Further, cash losses till breakeven and margin for working capital be borne
by financial institutions and where non-financial institutions are involved
such requirement shall be met by the IRBI.
> interest in fresh working capital shall be charged at prevailing commercial
rate. Interest, at a lower rate on such advances may be charged if
concession from State Government is available.
Tu Rehabilitation programme should have an upper limit of seven years, and
10 years in certain special and deserving cases.
> Promoter's contribution in cases involving change of management or
professional management should be 15 percent of additional long-term
requirements and in other cases, 20 percent and such funds should be
interest free.
b Banks and financial institutions should share cost of rationalisation of
labour.
> On sick units turning the corner, sacrifices made by banks and financial
institutions could be recouped from fbture profit and cash accruals.
Alternatively, there may be provision for equity participation.
Chapter 2
2.3.5 Recent Measures
The Central Government and the RBI have initiated a number of
measures for the revival of sick industrial units as well as for the prevention of
incidence of sickness. The guidelines issued by the RBI to scheduled commercial
banks during 1990's are outlined below.
i. Banks have been advised to adopt a single window concept for lending under
consortium arrangements for both sick and weak units.
ii. Banks have been advised to gear up their organisational machinery for taking
effective measures to detect sickness at the incipient stage and to take
appropriate remedial measures.
iii. In the event of a unit in an industrial group becoming sick, banks have been
advised to impress upon the group to come forward with concrete proposals to
assist the unit.
iv. It has been re-emphasised that the participation by banks in the rehabilitation
packages is mandatory.
v. A definite time frame for implementation of the packages should form a part of
the draft package submitted to the BEFR. This has been introduced to eschew
any tendency to deiay on the part of the involved agencies.
vi. A nodal monitoring agency (the lead bank) for monitoring the implementation
of the rehabilitation package would be designated and the name of the agency
would be indicated in the draft package submitted to the BIFR.
vii. In the context of the all round increase in lending rates the RBI parameters on
interest rates for various facilities under rehabilitation packages in respect of
non-SST sicldweak industrial units have been revised
viii. While drawing up rehabilitation packages for non-SSI sickiweak units, the
banks are required to ensure that the promoters' contribution is maximised. A
minimum of 20 percent in the cases involving change in management,
professionaVtechnocrat management and 30 percent in other cases should be
insisted upon.
ix. In order to ease the debt burden of sick units the banks and institutions have
been given the option, on the basis of their commercial judgment, to convert
pardwhole of the unpaid interestjtem loans into equitdquasi equity under the
rehabilitation package sanctioned by them.
2.3.6 Role of Development Banks in Rehabilitating Sick Units
All India Development Banks like the Industrial Development Bank of
India (IDBI), the Industrial Finance Corporation of India (IFCI) and the Industrial
Credit and Investment Corporation of India Limited (ICICI) have been providing a
variety of customised financial products to suit the varied needs of the corporates.
They have established separate departments for looking into sick problem cases in
their portfolios and have taken keen interest in the revival and rehabilitation of
such units. The sick industrial units directly financed by them were put under a
nursing programme and given assistance for modemisation and rehabilitation. As
on 3 1 March 200 1 , there were 698 companies directly financed by the IDBI, IFCI
and the IClCI reported to the BIFR. They are classified industrial-wise and given
in Table 2.5 and its diagrammatic representation in Fig. 2.6.
Table 2.5:-
pi%q
1 Food Products
2 Textiles
3 Paper and Paper Products
4 Chemicals and Chemical Products 13.0
5 Fertilisers 1.9
6 Cement 32 4.6
Basic Metal and Metal Products
Electronics and Electrical Equipment
Machinery
Transport Equipment
Other Industries
L - 1 - I'otal 1 698 1 100.0 -- 1
Source: IDBI Report on Development Banking in India-2000-0 1 , - PI 32.
Chapter 2
Fig2.6:- Sick Units Fi nanad by IDBI,IFCI and lClCl
a Food pmducts
.Terdass
Pwerrwrdpaper
pr&c)s
Rubber and rubber
ma
Chemicals and
chemical producls
D Machinery
F d l i
D M
DBaPicm!tdmdmetd
ma
~ E l e ~ W~ k a md
eiectricalesuipment
T m p a t equipment
. Other mduslrk
Table 2.5 shows that the largest number of sick units was reported in the
Textile industry. There were 166 reported cases in the Textile industry and they
accounted for 23.8 percent of the total number of cases reported. The lowest
number of reported cases was in the Rubber and Rubber Products industry (only
five companies).
Chapter 2
2,3.6*1 The Industrial Development Bank of India
The Industrial Development Bank of India (IDBI) had been playing an
important role in rehabilitating sick industrial units fmanced by it. lDB1
established a Rehabilitation Finance Division (RFD) in February 1976 to deal with
matters relating to rehabilitation of sick units viz., identification of the causes of
sickness, assessment of rehabilitation needs, formulation of appropriate measures
in consultation with other participating institutions and banks, close monitoring of
sick units and periodical evaluation of the impact of rehabilitation measures. The
Division made use of the services of experts like technologists, economists and
financial analysts to bring about the desired results.
The Soft Loan Scheme for modemisation was introduced in November
1976 for five selected industries viz., cotton textiles, jute, cement, sugar and
specified engineering industries. The scheme was operated by the IDBI in
collaboration with the lFCI and the ICICI, The scheme provided financial
assistance at concessional terms to weak units for modernisation, replacement and
renovation of old plant and machinery. -The scheme was modified in I984 to cover
all industries.
IDBI has also formulated schemes for rehabilitation of sick units in the
small-scale sector also. For this purpose a Soft Loan Assistance Fund was created
for funding the nursing of sick units. Tn 1986, the lDBI created a Small lndustries
Development Fund to provide financial assistance to the small-scale sector not
only for development, expansion and modernisation but also for the rehabilitation
of small-scale sick industrial units. The Small Industries Development Bank of
Lndia (SIDBI), a wholly owned subsidiary of the lDBI was established in April
1 990 to takeover the outstanding portfolio and activities of the I DBl pertaining to
the small-scale sector.
IDBI has been providing financial assistance for the rehabilitation of sick
industrial units directly financed by it. It also provided financial assistance for the
modernisation of industrial units, which in turn might have saved many companies
from sickness. The total financial assistance and the assistance sanctioned by the
lDB1 for the rehabilitation of sick units and modemisation purposes are given in
Table 2.6.
,-
Cumulative 224220.4 17441.3
up to 3 1/3/0 1
Source: IDBl Report on Development Banking in India, 1 990-9 1, 1 994-95, 2000-0 1.
Table 2.6:- Financial Assistance Provided by IDBI
Percentage
to Total
0
0
0
0.50
0.5 1
0.58
0.74
"- --
0.36
0.11
0.0 1
(Rs. in crores)
.-
15984.7 -13.1 726.8 4.5 28.3 0.18
1996-97 13993.5 -12.5 3 007.1 7.2 7.6 0.06
1997-98 22082.8 57.8 871.5 3.9 3.3 0.00
Assistance for
Modernisation
1060.3
25 I . b
406.5
450.6
-
852.8
1414.7
--
19115.9
Percentage
to Total
0
5.5
7.7
10.2
11.6
22.5
29.0
-
Year
Up to March
1986
1986-87
1987-88
1988-89
1989-90
1993-9 1
199 1-92
Assistance for
Rehabilitation
196.6
0
0
22.3
37.2
36.7
45.8
'I'oral Assistance
Sanctioned
20227.1
4587.6
5302.5
4408.4
7324.8
6277.9
6570.0
1992-93
1993-94
Percentage
Increase
0
0
15.6
-16.9
66.2
-14.3
4.7
9345.2
12214.9
34.2
14.0
42.2
30.7
1994-95 18394.5 30.6 1977.7 10.4 2.2
1234.5
1631.4
13.2
13.4
Up to 31 March 2000, the IDBI has sanctioned an amount of Rs.
224220,4 crores; including Rs. 1 744 1.3 crores for modernisation of industrial units
and Rs. 559 crores for rehabilitation of sick units. This shows that only a nominal
share of .25 percent of the total assistance sanctioned was provided for the
rehabilitation of sick industrial units. This was quite inadequate when compared
to the growing incidence of industrial sickness in the co~nt r y' ~.
The Board for Industrial and Financial Reconstruction (BIFR) appointed
IDBI as an Operating Agency in May 1987. Since then it has been playing a
pivotal role in rehabilitating sick industrial units in the medium and large sectors
by associating itself with the BIFR. Up to 31July 2000, lDBI was appointed as
Operating Agency in 507 references by the BI FR' ~.
2.3.6.2 The Industrial Finance Corporation of India
The Industrial Financial Corporation of India (IFCI) had shown keen
interest in reviving sick industrial units under its portfolio through various
schemes. The IFCI was the lead institution for Jute and Sugar industries under the
Soft Loan Scheme introduced in November 1976 for the modernisation of five
selected industries. It has been providing assistance at concessional rates under the
Soft Lorn Scheme and has set up a Modernisation Cases Cell to give its undivided
attention to the processing of cases under the scheme. In order to monitor the cases
of sick industrial units financed by the corporation, a Problems Cases Department
was also set up. This department, in consonance with the government policy was
actively involved in rehabilitation, changes in management, approval of schemes
of merger and arrangements of settlement of dues based on certain relief and
concessions.
'"he number of sick industrial units increased by 15 times from 20651 units in 1978 to
30622 1 units in 1 999.
"BIFR records.
Chapter 2 5 1
IFCI has also been providing financial assistance for rehabilitation and
modernisation of industrial wits. The total assistance sanctioned by IFCI and the
assistance provided for rehabilitation and modernisation purposes are given in
Table 2.7.
Table 2.7:- Financial Assistance Provided by lFCI
1999-00 2376.2 0 94.9
Source: IDBI Report on Development Banking in India 1992-93, 1 995-96 and 1 999-00
-- ?.
The cumulative assistance sectioned by IFCI up to March 2000 amounted
to Rs.47074 crores, in which Rs. 210.8 crores was provided for rehabilitation of
sick industrial units and Rs.5652.20 crores for modernisation purposes. This
shows that only 0.45 percent of the total advances sanctioned by the corporation
-- . ,-
were provided for rehabilitation of sick units and it was quite inadequate when
(Rs. in crores)
Modernisationl
Balancing
Equipment
456.8
385.7
Rehabilitation
Assistance
74.2
2 1.5
Year
Cumulative up to
March 1988
1988-89
Total Sanctions
45 1 7.7
1635.5
Chapter 2 52
compared to the mounting fund requirements for the rehabilitation of sick units.
Of course the funds provided by the corporation for the modernisation of industrial
units might have saved many companies from sickness.
With the establishment of the BIFR under the SICA, 1985 IFCI has been
actively associating with it in rehabilitating medium and large-scale sick units.
The BIFR appointed IFCI as an Operating Agency in May 1987 and was allotted
3 1 I up to 3 1 July 2000.
2.3.6.3 The Industrial Credit and Investment Corporation of India Ltd
The Industrial Credit and Investment Corporation of India Ltd (ICICI) has
been playing an active role in monitoring the overall performance of units assisted
by it and launched a number of schemes to deal with the ever-growing problem of
industrial sickness in such units. It has been providing financial assistance for
rehabilitation of sick industrial units and for the modernisation of industrial units
by upgrading their technology, which might have saved many industrial units from
sickness.
lCICI has been acting as an Operating Agency since May 1987 for the
rehabilitation of sick companies reported to BIFR. As on 31 July 2000, the
corporation was appointed as Operating Agency in 263 cases.' '
The total assistance sanctioned and the assistance provided for
rehabilitation and modernisation purposes by the IClCl between 1988-89 and
1999-00 are given in Table 2.8.
2 0 ~ ~ ~ ~ records.
2'ibid.
Chapter 2
I
Total 1 169432.0 1 574.0 / 22638.4 1
Table 2.8 Assistance Provided by ICICI
(Rs. in cmres)
1. I I I 1
Source: IDBI Report on development Banking in India, 1991 -92, 1994-95 and 1999-00.
Year
1988-89
1989-90
1990-9 1
199 1-92
lCICI has sanctioned a total assistance of Rs.169432 crores between
1988-89 and 1999-00, which included Rs.22638.4 crores for the modernisation of
industrial units and Rs.574 crores for the rehabilitation of sick industrial units.
This shows that the involvement of ICICI in rehabilitating sick industrial units was
not encouraging. Only a nominal share of 0.34 percent of the total assistance
sanctioned was earmarked for the rehabilitation of sick units.
Total Sanctions
1532.2
1947.7
2709.6
4094.9
Rehabilitation
15.4
12.1
15.1
20.2
Modernisat ion/
Balancing
Equipment
248.1
312.1
476.4
--
281.8
Chapter 2 54
Thus it is seen that the number of industrial units falling prey to the
malady of industrial sickness every year has been increasing at a steady rate. The
amount of loan funds of Financial Institutions locked up in sick units has also
increased substantially causing not only wastage of resources but also affecting the
healthy growth of the industrial economy. The Government, the RBI and the
Financial institutions have taken various measures to curb this menace but most of
them were not effective. This has paved the way for the enactment of the Sick
Industrial Companies (Special Provisions) Act, 1985 and the establishment of the
Board for Industrial and Financial Reconstruction (BIFR) under the Act as a single
agency to deal with the problem of industrial sickness in the medium and large
industrial sector.