Q. What do you mean by Industrial Sickness? What are its revival techniques?

Ans. Introduction:
Industrial development is identified as the effective means to attain economic growth in any
country. Industrial sickness has become a common feature of the large scale sector as well as the
small scale sector. In spite of the enactment of the special legislations and various steps taken by
the government & RBI to deal with the problem, industrial sickness is growing at an alarming
pace. The liberalization of the economy resulting into increased competition had added to the
problem of industrial sickness.
Many objectives have been imputed to the corporate entity but perhaps the most important is
that of survival. To survive, a firm needs to be profitable and financially sound. The
consequences of failure are experienced by shareholders, employees, financial institutions,
suppliers, customers and the society as a whole.
The reasons like technological development, industrial recessions and international trade
policies make some uncompetitive and tardy progress in some related sectors shrink markets for
others which results in closing down of units.

Definition of Sick Industrial Companies:

Sec 2(46AA) of the Companies Act 1956 says “Sick Industrial Company” means an Industrial
Company which has
1) The accumulated losses in any financial year equal to 50% or more of its average net worth
during four years immediately preceding such financial year, or
2) Failed to repay its debts within any three consecutive quarters on demand made in writing for
its repayment by a creditor or creditors of such Company.

“Net Worth” here means the sum total of the paid up capital and free reserves after deducting the
provisions or expenses as may be prescribed.
Symptoms of Sickness:
Sickness does not occur overnight, but develop gradually over time. Some of the common
symptoms are:

1) Delay or default in payment to banks and financial institutions.

2) Irregularity in the bank Account.
3) Delay or default in payment to banks and financial institutions.
4) Non Submission of information to banks and financial institutions.
5) Frequent requests to banks and financial institutions for additional credit.
6) Poor maintenance of Plant & Machinery.
7) Excessive turnover of personnel.
8) Resort to “Creative Accounting” which seeks to present a better financial picture from what it
really is.
9) Decline in the price of equity shares & debentures.
10) Low Turnover of Assets i.e. assets don’t generate the revenue which is actually expected.

Causes of Industrial Sickness:

Factually, no single factor is responsible for the growing problem of industrial sickness. The
following causes will lead to Industrial Sickness.
Internal Causes:
1. Inadequate Technical know-how.
2. Locational Disadvantage.
3. Usage of outdated production process which won’t be useful for generating revenues.
4. Higher cost of inputs in the production process.
5. Overestimation of demand which may lead to higher production which will then lead to higher
stock turnover days.
6. Inadequate product mix may lead to industrial sickness as the demand for the goods which are
produced may be very less in the market.
7. The quality of the product may be poor.
8. The cost of production may be very high.
9. Inadequate maintenance and replacement of the plant and machinery used for production
process.
10. Poor Resource management and resource planning.
11. Liberal dividend policy which will lead to high cash flow outside the company.
12. Inadequate working capital which may lead to slowdown in the day to day activities.
13. Lack of effective collection machinery due to which there is high threat of bad debts.
14. Excessively high wage structure.
15. Inefficient handling of labour problems which may lead to strikes and lockouts.
16. Excessive manpower i.e. which leads to huge wages and less productivity.
17. Lack of trained / skilled labour or technically competent personnel.
18. Dependent on a single customer or a limited number of customers.
19. Dependence on single or a limited number of products.
20. Lack of knowledge of marketing techniques.
21. Lack of professionalism in the organization.
22. Lack of feedback to management.
23. Excessive expenditure on Research and development activities.
24. Dishonest Management.
25. Lack of control of the management on its employees.

External Causes:
1. Shortage of key inputs like power and basic Raw materials.
2. Changes in governmental policies with respect to excise duties, customs duties,
Export duties etc.
3. Emergence of huge competition in the market.
4. Development of new technology which may not be used in the organization because of its
high cost or unawareness of such technology.
5. Sudden decline in orders from government.
6. Consumers may change their tastes and preferences.
7. Reduced lending by financial institutions.
Revival of a Sick Unit:
When an industrial unit is identified sick, a viability study should be conducted to assess whether
the unit can be revived. Of the study suggests that the unit can be revived, a suitable plan for
revival must be formulated. If the viability study indicates that the unit is “better dead than alive”
steps must be taken to liquidate it.
The viability study may suggest one of the following:
1) The unit can be revived by adopting one or more of the following measures: debt restructuring
correction of functional deficiencies etc.
2) The unit is not potentially viable- This implies that the benefits expected from remedial
measures are less than the cost of such remedial measures.
Revival Programme:
The revival programme usually involves the following:

1) Settlement with Creditors:

-A sick unit is usually not able to pay back their outstanding amount to their creditors.
-Rescheduling of principal and interest payment; waiver of interest; conversion of debt into
equity; payment of arrears in installments etc should be done for its revival.

2) Provision of Additional Capital:

- This may be required for modernization and repair of plant and machinery etc.
- Additional capital has to be provided on concessional term to avoid debt burden on the Co.

4) Divestment and Disposal:

- This may involve divestment of unprofitable plants and operations and disposal of slow moving
and obsolete stocks.

5) Modernization of Plant & Machinery:

- To improve manufacturing efficiency, Plant & Machinery may have to be modernized,
Renovated and repaired.
-This is essential for competing effectively in the market place.
6) Reduction in Manpower:
-Generally Sick units are said to be overstaffed.
-We can say that the work is less and the people working are more.
-So the revival programme must seek to reduce surplus manpower.

7) Strict Control over costs:

-Sick units cannot afford to have high costs and expenditures.
-Review should be done to eliminate programmes and activities which are a drain on finances of
the firm.

8) Streamlining of Operations:
-Manufacturing, purchasing and selling operations have to be examined so that they can be
streamlined.
-Value engineering, standardization, simplification etc should be exploited fully to improve the
efficiency of the operations.

9) Improvement in Managerial Systems:

-Attention should be paid to:
- Environmental Monitoring.
- Organizational Structure.
- Budgetary Control.

10) Workers Participation:

- Workers participation enhances employee’s commitment, motivation and morale.
-This leads to higher manufacturing efficiency and productivity.
-Sick units will be benefited from participation of workers.

11) Change of Management:

-Management should be changed where the present management is dishonest or incompetent.
-Firm should be given in right hands who will work for the profitability of firm and not for his
own profits.
 12) Merger with a Healthy firm:
-If sick units are not able to revive itself then it should be merged with some healthy firm.
-The healthy firm can leverage its resources to revive the sick firms.

In these ways a sick unit can be turned into a healthy unit which is also known as “Turnaround
Management” which reverse the negative trends in the performance indicators of an industrial
sick unit or the firm can be handed over to the Board of Industrial & Financial reconstruction
which may help to convert the sick unit into a healthy one by providing help to that unit or
handing over that unit to any of the profitable firm.

Diagrammatic representation of how a firm turns into a sick unit:

HEALTY UNIT

(All functional areas perform

efficiently)

Neglect and inaction TENDING TOWRDS SICKNESS Timely corrective and

preventive measures
(Initial aberration in functional areas
taken.

Further Delay INCIPIENT SICKNESS Timely corrective and

preventive measures
(Performance deteriorate taken.
further

Progress Deterioration SICKNESS Timely corrective and

and non viability. preventive measures
(Functional areas become taken.
inefficient)

DEATH

(Closure of the unit)

Examples:

1) The case of Hindustan Machine Tools:

HMT was formed to manufacture machine tools with a foreign collaborator. After nearly
a decade of operation, it decided to diversify into Watch industry. The effect of this
diversification was felt only after 57 years when the main business of HMT crashed and the
company started incurring losses. The watch division came to the rescue and it generated cash
profits to keep the company going.

2) The case of Bharat Heavy Electricals Limited

The company was started with the objective of producing power generating equipments and
virtually enjoyed monopoly. But as the years went by because of the inability of the State
Electricity Boards and private sector to set up new power plants, its capacity utilization fell down
tremendously. To offset this depression, BHEL ventured into Telecommunications, Metropolitan
Transportation and Defense production. Due to this timely diversification, BHEL is now one of
the rare profit making PSUs.