This document discusses the effectiveness of rehabilitation schemes implemented by the Board for Industrial and Financial Reconstruction (BIFR) in India. It finds that the success rate of rehabilitation schemes is very low, with only 8.9% of companies having their net worth turn positive after a scheme. Several reasons are proposed for this low success rate, including delays in reporting sickness, determining sickness, and implementing rehabilitation schemes. The document analyzes a sample of companies and finds that schemes were less effective for companies made sick by macroeconomic factors versus firm-specific issues, and that delays in reporting sickness to the BIFR were common.
This document discusses the effectiveness of rehabilitation schemes implemented by the Board for Industrial and Financial Reconstruction (BIFR) in India. It finds that the success rate of rehabilitation schemes is very low, with only 8.9% of companies having their net worth turn positive after a scheme. Several reasons are proposed for this low success rate, including delays in reporting sickness, determining sickness, and implementing rehabilitation schemes. The document analyzes a sample of companies and finds that schemes were less effective for companies made sick by macroeconomic factors versus firm-specific issues, and that delays in reporting sickness to the BIFR were common.
This document discusses the effectiveness of rehabilitation schemes implemented by the Board for Industrial and Financial Reconstruction (BIFR) in India. It finds that the success rate of rehabilitation schemes is very low, with only 8.9% of companies having their net worth turn positive after a scheme. Several reasons are proposed for this low success rate, including delays in reporting sickness, determining sickness, and implementing rehabilitation schemes. The document analyzes a sample of companies and finds that schemes were less effective for companies made sick by macroeconomic factors versus firm-specific issues, and that delays in reporting sickness to the BIFR were common.
REHABIILITATION SCHEMES OF THE BIFR 4.1 Introduction The BIFR initiates steps to rehabilitate all viable sick industrial undertakings reported to it. In this process the Board sanctions a rehabilitation scheme to be implemented for a period of seven to ten years. A rehabilitation scheme is considered successful only if the company is able to make its networth positive during the period of implementation of the scheme. Hence an evaluation of the success and the failure rates of the rehabilitation schemes is the only measure to judge their efTectiveness in rehabilitating sick units. As on 3 1 July 2000, the BIFR had registered 3 1 10 references of which rehabilitation schemes were implemented in 708 companies, winding up notices issued in 960 cases and 572 cases were dismissed as non-maintainable. Eight hundred and seventy references remained at the preliminary stage of enquiry. Among the 708 companies for which rehabilitation schemes were sanctioned only 277 companies were declared as successful after making their networth positive. This shows that the success rate is only 8.9 percent of the total number of cases registered by the BIFR. 4.2 Reasons for the Low Success Rate of Companies Reported to the BIFR The high failure rate of the companies reported to the BIFR may be due to many reasons. The policy of the BIFR to give stress to rehabilitation of sick companies 'in the public interest' rather than winding up might have increased the chances of failure. The delay in reporting sickness and determining sickness might have delayed the timely implementation of the rehabilitation schemes, which might have adversely affected the success rate. The extension of the cut off dates for implementing the rehabilitation schemes and the revision of the schemes might have caused delay in their implementation and failure in many cases. Similarly the inherent weaknesses of the rehabilitation schemes and their defective implementation might have resulted in failure in many cases. In order to verify the reasons for the low success rate with the BIFR, this chapter aims to evaluate the effectiveness of the implementation of the rehabilitation schemes in two sections. 'The policy of the BIFR in rehabilitating sick units, the time taken for reporting sickness and determining sickness along with the efficiency of the Operating Agencies in determining sickness are analysed in the first section. The effectiveness of the rehabilitation schemes are evaluated in the second section by analysing in detail the time taken for sanctioning rehabilitation schemes, their implementation along with the inherent weaknesses, if any. Chapter 4 4.3 Section 1 4.3.1 Delay in Reporting and Determining Sickness Timely detection of sickness and implementation of a properly drawn rehabilitation scheme are prerequisites for reviving a viable sick unit. This makes it clear that timely reporting of sickness and timely determination of sickness are essential for the timely implementation of a rehabilitation scheme. In order to study whether timely reporting of sickness by companies and timely determination of sickness by the Operating Agencies were made, a sample size of 203 companies reported to the BIFR has been taken and analysed. The present status of those companies is given in Table 4.1 and its diagrammatic representation in Fig. 4.1 and Fig. 4.2. Rehabilitation schemes sanctioned: Declared no longer sick: Not declared no longer sick: Rehabilitation measures not initiated: Winding up recommended: Dismissed as non-maintainable: Table 4.1:- Status of Companies Reported to the BIFR (as on 3 1-07-2000) References pending with the BIFR Total Percentage to 'Cotal Status of Companies Source: Primary data. Number of Companies Chapter 4 89 Table 4.1 points out that out of the 203 cases selected for the study, only 28 companies were declared no longer sick by the BlFR This shows that the success rate is only 13.8 percent of the total number of cases registered. The success rate when compared to the 89 companies, for which rehabilitation schemes were implemented, is only 31.5 percent. In 91 cases winding up notices were issueddismissed as non-maintainable after an enquiry by the BIFR. This makes it clear that the performance of the BIFR in rehabilitating sick industrial units has not been satisfactory. 4.3.2 Policy of the BIFR The BIFR has clear preference for rehabilitation over winding upi. Consequently many winding up cases were considered for rehabilitation. Companies becoming sick due to macro-economic reasons like technological obsolescence, adverse impact of globalisation, government policy, market recession and heavy taxation will remain sick so long as such reasons exist. Any attempt to rehabilitate such units will become futile. But companies, which became sick due to anomalies in various function& areas such as finance, production, marketing and personnel, can be rehabilitated by properly implementing rehabilitation schemes. To evaluate the effectiveness of the rehabilitation schemes sanctioned by the BIFR in reviving sick industrial units, 180 companies2 were selected and their causes of sickness has been analysed. The present status of those companies is given in Table 4.2. 1 Goswmi Committee Report as quoted by Pahwa and Puliani in Sick Industries and BIFR (2000), 5 15. 'Out of the 203 companies selected for the study, 23 companies remained at the preliminary stage of enquiry. Rehabilitation schemes were implemented only in 89 cases, of which 28 companies were declared no longer sick. Among the 180 companies, 124 companies became sick due to the Table 4.2:- Causes of Sickness and the Status of Companies anomalies in various functional areas such as production, finance, marketing and personnel (firm specific reasons). Along with other causes, macro economic reasons like obsolete technology, adverse impact of globalisation, government % 68.9 31.1 100.0 Causes of sickness Firm specific reasons Macro- economic reasons Total Source: Status of companies policy and market recession were the main causes of sickness in 56 companies. No. of Cos 124 56 180 Primary data. Among the 124 companies, which became sick due to firm specific reasons 26 companies were declared no longer sick, the success rate being 2 1 percent. Among Not declared no longer sick Declared no longer sick the 56 companies, which became sick due to macro economic reasons only two No. of Cos 43 18 -- - 6 1 References rejected No, of Cos 26 2 28 companies were declared no longer sick This shows that only 3.6 percent of Yo 34.6 32.1 No. of Cos 5 5 36 --- 91 % 21.0 3.6 companies that became sick due to macm economic reasons were declared no Yo 44.4 64.3 longer sick. This shows that it is drflcult to rehabilitate those comjmpies, which became sick due to macro economic reasons so long as such reasons exist. Chapter 4 9 1 There is also difference in success rate of the rehabilitation schemes in companies, which became sick due to firm specific reasons and macro economic reasons. Among the 124 companies, which became sick due to firm specific reasons rehabilitation schemes were sanctioned in 69 companies, of which 26 companies were declared no longer sick. The success rate of the rehabilitation schemes was 37.7 percent. Rehabilitation schemes were implemented in 20 companies selected out of 56 companies, which became sick due to macro economic reasons. Among them only two companies were declared successfbl. The success rate of the rehabilitation schemes sanctioned was only 10 percent. In order to test whether there is any significant relation between the success rate in companies which became sick due to firm specific reasons and macro economic reasons, a Chi-square test3 was conducted taking the null hypothesis that there is no signiJicant difference in success rates between companies which became sick due to firm speciJic reasurn and macro economic reasons. The test revealed that at five percent significance level the calculated value (5.528) is higher than the table value (3.84 1) at one degree of freedom. This result leads to the rejection of the null hypothesis and it is concluded that the dlg'erence in success rates between companies, which became sick due to firm spec f l c reasons and macro economic reasons is statisticalrly significant. 4.3.3 Delay in Reporting Sickness Proper and timely implementation of a rehabilitation scheme is essential for the revival of a sick unit. This requires identification and reporting of sickness in time. Hence SlCA makes it mandatory for a sick industrial unit to make a report to the BIFR within 60 days from the date of finalisation of the duly audited accounts. But companies delay the reporting of their sickness to the BIFR, which For the test only those companies, which were 'declared no longer sick' and 'not declared no longer sick' afker implementing the rehabilitation schemes were taken. in turn delays the implementation of the rehabilitation schemes. Delayed reporting of sickness might have adversely affected the success of the rehabilitation schemes. The relationship between the time taken by the companies for reporting their sickness to the BIFR and the success rate among the 180 companies considered for the study are analysed and given in Table 4.3. Table 4.3 shows that no company was able to report its sickness to the BIFR within the prescribed time limit of 60 days. Sixty-one companies took three to six months to report their sickness to the BIFR. Among them 2 1.3 percent cases were declared no longer sick by the BIFR. Eighty-one companies took seven to twelve months to report their sickness to the BIFR and among them 14.8 percent cases were successful. The reporting of sickness was delayed for more than one year in the case of 38 companies and among them only 7.9 percent cases were Table 4.3:- Time Taken for Reporting Sickness and the Status of Companies Time taken for reporting sickness Less than 2 months 3-6 months 7-12 months One year and above Total Source: Primary data No. of Cos 6 1 8 1 38 180 % 33.9 45.0 21.1 100.0 Declared no longer sick No. of Cos 13 12 3 28 % 2 1.3 14.8 7.9 Status of companies References rejected No. of Cos 27 40 24 9 1 Not declared no longer sick % 44.3 49.4 63.2 No. of Cos 2 1 29 11 6 1 % 34.4 35.8 28.9 Chapter 4 93 declared no longer sick. This makes it clear that early reporting of sickness to the BIFR increased the chances of the revival of sick companies. In order to verify this Karl Pearson's Correlation Coefficient is calculated (r = -0.135: p = .036). Thus it can be concluded that there is an inverse correlation between time taken for reporting sickness and the success rate of the rehabilitation schemes. 4.3.4 Time Taken for Determining Sickness All references received by the BIFR in the prescribed form are scrutinised and registration is granted only to those cases, which come under the purview of the BIFR. But before initiating the rehabilitation measures the Board conducts a detailed enquiry to determine whether the company has become sick within the meaning of SICA. Any delay in conducting the enquiry to determine the sickness in companies reported to the BIFR might have delayed the implementation of the rehabilitation schemes and their chances of success. To determine the sickness in a company, the Board may require the Operating Agency to conduct a detailed enquiry and report the finding within a period of 60 days. The Board reserves the right to extend this time limit in desirable circumstances. Taking this loophole as a privilege, the Operating Agencies might have conducted the enquiry in a leisurely manner resulting in an extension of the time allotted for enquiry. This delays the implementation of the 4 For conducting the correlation test dummy variables are used. Companies 'declared no longer sick' and 'not declared no longer sick' are designated as '1' and '0'. Time taken for reporting sickness to the BIFR is classified into four groups: 1 = up to 2 months, 2 = 3 to 6 months, 3 = 7 to 12 months and 4 = more than one year. Chapter 4 94 rehabilitation schemes. Table 4.4 points out the time taken for determining the sickness regarding 180 companies selected for the study and their present status. Table 4.4:-Time Taken for Determining Sickness and the Status of Companies Source: Primary data. The Board was able to determine the sickness of only 16 companies within the prescribed time limit of 60 days and among them 25 percent cases were declared successfui. In the case of 86 companies the Board took three to six months for determining their sickness, in which 17.5 percent cases were declared successful and 48.8 percent cases were rejected. There was an inordinate delay of more than six months in the case of 78 companies and among them the success rate was only 11 -5 percent. This shows that early determination of sickness increased the chances of rmiving sick industrial units. Time taken for enquiry Within 60 days 3-6 months More than 6 months Total 1 To test whether there is any relationship between the time taken for determining the sickness and the success rate of the rehabilitation schemes Karl No. of Cos 16 86 78 180 Status of companies % 8.9 47.8 43.3 100.0 Not declared no longer sick Declared no longer sick No. of Cos 6 29 26 61 No. of Cos 4 15 9 28 References rejected % 37. 5 33.7 33.4 % 25.0 17.5 11.5 No. of Cos 6 42 43 9 1 % 37.5 48.8 55. f Person's coefficientS of correlation is calculated (r = -0.08 1 : p = -140). This clearly points out that there is an imerse correlation between the time taken for determining sickness a d the success rate of the rehabilitation schemes. Determination of sickness in a company without delay can help timely implementation of the rehabilitation scheme. It can also increase the chances of reviving the company. There may be differences in the time taken by different Operating Agencies for determining the sickness in companies allotted to them. The time taken for determining the sickness in companies allotted to various Operating Agencies might have varied according to the efficiency of the Operating Agencies in dealing with the cases allotted. Certain Operating Agencies might be able to complete the enquiry within the minimum possible time. This might have helped in the early implementation of the rehabilitation schemes and increased the chances of revival in those cases. To evaluate the individual performance of Operating Agencies the time taken by them to determine the sickness in 180 companies allotted has been analysed and given in Table 4.5. %or conducting the correlation test dummy variable are used. Companies 'declared no longer sick and 'not declared no longer sick" are designated as 'I' and '0'. Time taken for reporting sickness of industrial units are classified into three groups: I = within 60 days, 2 = 3 to 6 months and 3 = more than 6 months. Chapter 4 96 Table 4.5:- Time Taken by the Operating Agencies to Determine Sickness Source: Primary data. Among the 180 companies taken for the study 157 companies were allotted to All India Development Banks like IDBI, LFCI, ICICI and IIBI. This represents 87.2 percent of the total number of references. Among the different Operating Agencies, ICICI was the most efficient in dealing with the cases allotted to it. At the same time the performance of IIBI was the worst. ICICI was able to complete the enquiry of 11.8 percent cases allotted to it within the prescribed time limit of 60 days, 70.6 percent cases within three to six months and 17.6 percent cases took more than six months. IIBI completed the enquiry of only 4.5 percent cases within the stipulated time limit of 60 days, 36.4 percent cases within three to six months, and in 59.1 percent cases it took more than six months to complete the enquiry. This shows that there is dzflerence in time taken by various Operating Agencies in determining the sickness of companies allotted to them. % 100 100 100 100 100 To test whether there is any significant difference in time taken by various Operating Agencies a Chi-square test was conducted by taking the null hypothesis that there is no sipifcant drference in time taken by various Operating Agencies IIBI 1 FCl IDBI ICICI Banks & SFCs Total Within 60 days 3-6 months No. of Cos 1 1 8 4 2 16 No. of Cos 8 11 30 24 13 86 ~~~~l no. of Cos 22 28 73 34 23 180 Above 6 Inonths % 4.5 3.6 11.0 11.8 8.7 % 36.4 39.3 41.1 70.6 56.5 No, of Cos 13 16 35 6 8 78 % 59.1 57.1 47.9 17.6 34.8 Operating Agencies. Since at five percent significance level the calculated value ( 1 6.347) is higher than the table value (1 5.507) at eight degrees of freedom the null hypothesis is rejected and it is concluded that the d~ference in time taken by various Operating Agencies for determining the sickness of companies a Elotted to them is sfati~:sticuE/y sigpt@cunt. There were differences in the time taken by various Operating Agencies for determining the sickness in companies allotted to them. Certain Operating Agencies with efficiency and expertise were able to determine the sickness taking less time compared to others. This points out the difference in the success rate among different Operating Agencies. The present status of 180 companies has been malysed and given in Table 4.6 to show the differences in success rate among the Operating Agencies. Table 4.6:- Status of Companies Allotted to Operating Agencies 'Table 4.6 shows that among the different Operating Agencies, ICICI was Operating Agency IJBI IFCI IDBI ICICI Banks and SFCs Total - the most efficient in dealing with the cases allotted to it. Thirty-four cases were allotted to the ICICI in which nine companies were declared no longer sick. This % No. of Cos allotted Source: Primaty data 22 28 73 34 23 180 - Status of companies Declared no longer sick 12.2 15.6 40.6 18.9 12.7 100.0 References rejected Not declared no longer sick No. of Cos 1 1 13 9 4 28 % 4.6 3.6 17.8 26.5 17.4 No. of Cos 14 18 39 12 8 91 No.of Cos 7 9 2 1 13 1 1 6 1 % 63.6 64.3 53.4 35.3 34.8 % - 31.8 32.1 28.8 38.2 47.8 represents a success rate of 26.5 percent. IFC1 reported the lowest success rate of 3. 6 percent. Among the 28 cases allotted to IFCl only one company was declared successful. This shows that there is difference in success rates among dzferent Operating Agencies. To test whether there is any significant difference in success rates among different Operating Agencies a chi-square6 test was conducted by taking the null hypothesis that there is no sign dfcant drflerence in the success rates among dz@rent Operating Agencies. The test revealed that at five percent significance level the calculated value (5.1 75) is lower than the table value (9.48) at four degrees of freedom. It leads to the acceptance of the null hypothesis and it can be concluded that the dzference in success rates among different Operating Agencies is statistically not significant. 4.4 Section 2 4.4.1 Evaluation of the Effectiveness of the Rehabilitation Schemes The BIFR does not initiate steps to rehabilitate all sick companies reported to it. Only those units, which are found 'viable' after a techno-economic viability study and those found necessary 'in public interest' are rehabilitated. This makes it clear that only a portion of the sick companies reported to the RIFR are rehabilitated and all non-viable sick companies are advised to wind up. But majority of the rehabilitation schemes sanctioned by the BlFR were not declared successful. That might be due to many reasons. Timely implementation of the rehabilitation schemes being a prerequisite for their success, delay in preparing and sanctioning the rehabilitation schemes after arriving at a consensus among all participating agencies might have affected o or the test only those companies, which were declared 'no longer sick' and 'not declared no longer sick' after implementing the rehabilitation schemes were taken. their success adversely. The defective implementation and the inherent weaknesses of the rehabilitation schemes also might have affected their chances of success. Timely implementation of a properly drawn rehabilitation scheme is a prerequisite for its success. Where the sick company has already implemented a rehabilitation scheme the Board may approve the continuation of such a scheme when it is satisfied that the company would be able to make its networth positive within a reasonable period. Normally well-managed companies may take steps to cure sickness by implementing their own rehabilitation schemes as soon as symptoms of sickness are discovered. This helps the BIFR to implement the rehabilitation schemes without any delay. Where the company has no rehabilitation scheme of its own, the Board appoints the Operating Agency to formulate a rehabilitation scheme for the company. The Operating Agency has to prepare the scheme in consultation with all participating agencies and the BIFR can sanction the scheme only after arriving at a consensus among the participating agencies. It is a time consuming process and it may affect the timely implementation of the rehabilitation scheme and the chances of revival of the company. To test whether there is any difference in success rates among the rehabilitation schemes of companies and that of the Operating Agencies, 89 rehabilitation sc,hernes sanctioned by the RIFR have been analysed and given in I'able 4.7. Table 4.7 shows that in seven companies the BIFR had given approval for the continuation of already implemented rehabilitation schemes and among them five companies were declared no longer sick, the success rate being 7 1.4 percent. In the case of 82 companies rehabilitation schemes prepared by the Operating Agencies were sanctioned and among them 23 companies were declared successful, the success rate being 28 percent. This shows that there is drfSerence in success rates among the rehabilitation schemes of companies and that of the Operati~zg Agencies. Table 4.7:- Nature of Rehabilitation Schemes and Status of Companies To test whether the difference in success rate among the rehabilitation schemes of companies and that of the Operating Agencies is statistically significant, a chi-square7 test was conducted by taking the null hypothesis that there is no signr;ficant dzflerence in the success rates among the rehabilitation schemes of the companies and that of the Operating Agencies. It was found that at five percent significance level he calculated value (5.641) is higher than the table o or the test only those companies, which were 'declared no longer sick' and 'not declared no longer sick' after implementing the rehabilitation schemes, were taken. -. Nature of rehabilitation schemes Schemes of companies Schemes of BIFR or OAs Total -- - Source: ~rimarydata. % 7.9 92.1 100.0 No-of Cos 7 82 89 Status of companies Declared no longer sick Not declared no longer sick No, ofCos 5 23 28 No. ofCos 2 59 6 1 % 71.4 28.0 P % 28.6 72.0 value (3.84 1 ) at one degree of freedom. This result leads to the rejection of the null hypothesis and hence the conclusion is that the diference in success rates between the rehabilitation schemes of companies and that of the Operating Agencies is statistically signzjkant. ?'he adoption of an already implemented rehabilitation scheme helped to avoid all procedural delays associated with the BIFR in arriving at a consensus among the participating agencies. That might be the main reason for their high success rate. The low success rate of the new rehabilitation schemes prepared by the Operating Agencies might be due to the delay in preparing, sanctioning and implementing them. To test the relationship between the time taken for sanctioning the rehabilitation schemes and their success rate, the time taken by the Operating Agencies for preparing and sanctioning new rehabilitation schemes in 82 companies have been analysed and their present status is given in Table 4.8. Table 4.8 Time Taken for FinaIising Rehal 1 1 Time taken for sanctioning rehabilitation schemes / Within I year I 1-2 years 1 l 9 2-3 years I 35 3-4 years 1 20 / 4 years and above I LL.. to^^ .- ilitation Schemes and Status of Com~anies Status of companies kcl ared no longer I Not declared no longer sick " k k k Source: Primary data. Table 4.8 shows that the BIFR could not sanction any rehabilitation scheme within one year. There was a success rate of 42.1 percent in cases where rehabilitation schemes were sanctioned within a period of one to two years and it has reduced to 37.1 percent and 10 percent respectively in cases of rehabilitation schemes sanctioned within two to three years and three to four years. No revival is reported in cases where it took more than four years to finalise rehabilitation schemes, This shows that the delay in implementing the rehabilitation schemes reduced the chances for revival of the companies. To test whether there is any relationship between the time taken for implementing the rehabilitation schemes and the success rate of the schemes, Karl Pearson's correlation coefficientX is calculated (r = -0.322: p= ,002). Thus it can be concluded that there is an inverse correlation between the time taken for implementing the rehabilitation schemes and the success rate of the schemes. The delay in finalising the rehabilitation schemes might be due to the delay by the Operating Agencies or due to the time consuming BIFR process in arriving at a consensus among the participating agencies. Table 4.9 analyses the difference in time taken by different Operating Agencies for finalising the rehabilitation schemes in companies allotted to them. a For conducting the correiation test dummy variables are used. Companies 'declared no longer sick' and 'not declared no longer sick' are designated as ' I ' and '0'. Time taken for sanctioning the rehabilitation scheme is classified into five groups: 1 = less than one year, 2 = 1 to 2 years, 3 = 2 to 3 years, 4 = 3 to 4 years and 5 = more than 4 years Chapter 4 Among the Operating Agencies ICTCI was the most efficient in finalising the rehabilitation schemes for companies allotted to it while the performance of IlBl was the worst. Fifteen companies were allotted l o the ICICI in which rehabilitation schemes for six companies were finalised within a period of one to two years, seven schemes within two to three years and only two schemes took more than two years for their finalisation. Among the nine companies allotted, IIBl was able to finalise rehabilitation schemes of only one company within a period of one to two years. Two cases took two to three years, five cases, three to four years and in the case of one company it took more than four years to finalise its rehabilitation schemes. Table 4.9:- Time Taken for Finalising Rehabilitation Schemes - OA wise To test whether there is any Operating Agency-wise difference in time taken for finalising the rehabilitation schemes a Chi-square test was conducted taking the null hypothesis that there is no sign$cant dlference in the time faken by the Operating Agencies in f i finalising the rehabilitation schemes. The test revealed that at five percent significance level the calculated value (12.901) is lower than the table value (21.026) at 12 degrees of freedom. It leads to the acceptance of the null hypothesis and it can be concluded that the difference in ppdI 1 1 : 1 ; 1 ; 1 1 ; : I ' r~t d 19 3 5 20 82 Source: Primary data. Note: OA = Operating Agency. 4 years and above I . -- 2 3 3-4 years 5 - 4 6 Total 9 . - 13 34 -- 2-3 years . 2 5 18 - 1-2 year I 2 7 Operating Agency IlBI -- " IFCI lDBl JCICI Less than one year . - Chapter 4 1 04 time taken hy various Operating Agencies in finalising the rehabilitation schemes is statisaicallj~ not signi>cunt. 4.4.1.1 Extension of Cut-off Date and Revision of the Schemes The quasi-judicial nature of the BIFR proceedings, which depends on consensus at all stages, is a time consuming process. The conflicting interests of the participating agencies makes it difficult to arrive at a consensus. Financial Institutions are only interested in recovering their dues, employees try to limit their sacrifices and the promoters are interested in protecting their interests by implementing their own schemes. This results in exercising veto power by the participating agencies when the scheme includes terms and conditions detrimental to their interest. This necessitates repeated sitting of the Board to arrive at a consensus on the scheme to be sanctioned. Throughout the process debates are carried out without sufficient analyses and understanding of discounted cash flows, balance sheet projections, the market position of the firm and the status of the industryg, As the deliberations meander on, the delays create their own complications necessitating extension of cut off dates and/or revision of the schemes. Among the 89 companies selected for the study, cut off' dates for the implementation of the rehabilitation schemes were extended in 68 cases. In 21 cases, schemes were implemented without the extension of cut off dale. This shows that the cut off dates for the implementation of the rehabilitation schemes were extended in 76.4 percent cases. Among the 68 companies, which extended the cut off'dates, revision of the schemes were made in 40 cases. This accounts for 44.9 percent of the total number of companies for which rehabilitation schemes were implemented. Table 4.10 exhibits the present status of 89 companies. - '~oswarni Committee report as quoted by Pahwa and-~uliani in Sick Industries and BIFR (20001, 5 16. classified on the basis of rehabilitation schemes implemented with and without the extension of cut off dates and revision of the schemes. Table 4.10:-Extension of Cut off date and Revision of Rehabilitation Schemes Table 4.10 shows that among the 2 1 companies, which implemented the rehabilitation schemes without the extension of cut off dates, 57.1 percent cases were declared no longer sick and in the case of rehabilitation schemes implemented afier the extension of cut offk dates the success rate was only 23.5 percent. This low success rate was mainly due to the delay caused in implementing the rehabilitation schemes due to the extension of cut off dates and revision of the schemes. 4.4.1.2 Defective Implementation of the Rehabilitation Schemes Status of companies Proper implementation of a rehabilitation scheme is a prerequisite for its success. The proper implementation of the rehabilitation scheme is possible only if all the participating agencies make their commitments in time. Any failure in extending the agreed support or partial fulfillment of the promises by any of the participating agencies will result in partial implementation of the rehabilitation scheme. Normally, participating agencies withdraw their suppon to the scheme when the performance of the company does not improve as envisaged in the % 76.4 Cut of f date Extended -- Nature of schemes No of Cos 68 Original 28 Declared "O longer sick Source: Primary data. 23.6 100.0 Not extended Total Revised 40 2 1 49 Not declared no longer sick No:of Cos 16 21 89 0 - -- 40 No:of Cos 52 % 23.5 % 76.5 rehabilitation scheme. To study the impact of the extent of support provided by the participating agencies on the success of the rehabilitation schemes the present status of 89 companies selected for the study has been analysed and given in Table 4.11. Table 4.1 1 :- Extent of Implementation of Rehabilitation Schemes Nature of rehabilitation schemes Fully implemented Partially implemented Total Status of companies No.of / / Declared no I Not declared no Cos 1 % 1 longer sick / longer sick Source: Primary data. The table shows that in 74 companies the implementation of ihe rehabilitation schemes were completed and among them 37.8 percent cases were declared no longer sick. In 15 companies the implementation of the rehabilitation schemes could not be completed and none of them were declared no longer sick. This shows that the failure of the participating agencies in extending their commitments affected the implementation of the rehabilitation schemes in 1 6.9 percent cases and resulted in their total failure. The delay in extending support by the participating agencies also might have delayed the implementation of the rehabilitation schemes, which in turn might have affected their chances of success. In order to verify that, the timeliness of the extension of support by the participating agencies to the 74 rehabilitation schemes implemented has been analysed and given in Table 4.12 Table 4.12:- Extent of Support by the Participating Agencies Primary data. Note: DNLS = Declared No Longer Sick NDNLS = Not Declared No Longer Sick. Participating Agencies Financial Institutions and Banks Governments The Banks and Financial lnstitutions extended timely support tu 53 companies and among them 26 companies were declared no longer sick. This shows that the success rate is 49 percent. They have delayed the extension of support to 21 rehabilitation schemes. Among them only two companies were declared no longer sick, the success rate being 9.5 percent. The governments timely extended support only to 3 1 rehabilitation schemes and delayed the support in 43 cases. Among them 17 timely support cases and 1 1 delayed cases were declared no longer sick. The success rates were 54.8 percent and 25.6 percent respectively. Promoters and labour delayed the support in nine and four cases respectively and none of them were declared successful. 4.4.1.3 Weaknesses of the Rehabilitation Schemes Promoters -. A sick industrial unit can be brought back to normal health only by improving its operating efficiency. Hence the rehabilitation schemes included proposals for increasing sales, enhancing productivity, reduction in cost of production and interest to improve the operating efficiency of the sick units. In I'imely supported cases NO. of Cos 5 3 3 1 No. of COs 74 74 Support with extended time No. of Cos 2 1 43 DNLS 26 17 NDNLS 2 7 -. 14 DNLS 2 1 1 NDNLS 19 3 2 order to verify the effectiveness of various measures adopted in the rehabilitation schemes to improve the operating efficiency of the sick units the present status of 89 companies considered for the study has been analysed and given in Table 4.13 Table 4.13:- Measures for Improving the Operating Efficiency Table 4.13 shows that all the 89 rehabilitation schemes included proposals to increase sales and among them 3 1.5 percent cases were declared no longer sick. Measures to improve operating emciency .-- - Increase in sales Financial restructuring Increase in productivity Reduction in cost of production Diversification Along with increase in sales, 77 companies adopted financial restructuring Source: Primary data. Status of companies including measures like reduction in interest, rescheduling of loans, funding of No. of Cos 89 77 18 18 I I interest and One Time Settlement (OTS) of dues. Among them 24 companies % 100.0 86.5 20.2 20.2 12.4 Declared no longer sick were declared no longer sick, the success rate being 31.2 percent. Eighteen companies each adopted measures to increase productivity and reduction in cost of production and they reported a success rate of 38.9 percent and 16.7 percent Not declared no longer sick No. of Cos 28 24 7 3 7 respectively. Among the 1 1 companies, which diversified their activities, seven No. of Cos 6 1 5 3 1 I 15 4 % 31.5 31.2 38.9 16.7 63.6 companies were declared successful, the success rate being 63.6 percent. Increase in sales and financial restructuring involving reduction in interest % 68.5 68.8 61.1 83.3 36.4 are the commonly adopted measures to improve the operating efficiency of sick units. Hence it is essential to evaluate the measures adopted for increasing sales and reduction in interest to analyse the effectiveness of the rehabilitation schemes in improving the operating efficiency of sick units. 4.4.1.4 Measures for increasing Sales Every company requires a desired level of sales to maintain its operating efficiency and profitability, Poor sales result in poor operating efficiency and in the accumulation of losses. This is true especially in the case of a sick unit reported to the BIFR after the erosion of its total networth by accumulated losses. Hence every rehabilitation scheme projects a desired level of sales to be achieved in order to bring back the sick unit to normal health. Sales can be increased by increasing the scale of operation of existing products or by diversifying the activities of the company into new products. Among the 89 companies selected for the study, only 11 companies diversified their activities whereas the remaining 78 companies proposed increase in capacity utilisation to boost sales. To verify the effectiveness of the measures adopted to increase sales companies were classified into two groups viz., diversified and non diversified and their present status has been analysed and given in Table 4.14. ( 1 8 9 1 1 0 0 . 0 ( 2 8 I 1 6 1 1 1 Source: Primary data. Table 4.14: Effectiveness of Diversification and Nondiversification Measures Nature of companies Diversified No.of Cos 1 1 1 % 12.4 Status of companies Declared no longer sick No-of Cos 7 Not declared no longer sick % 63.6 No. of COS 4 % 36.4 Table 4.14 points out that thert: was a high success rate in those rehabilitation schemes, which included measures to diversify the activities of the companies into new products when compared to the non-diversified companies. Diversified companies reported a success rate of 63.6 percent as against 26.9 percent among the non-diversified companies. This makes it clear that diversification of activities in to new products is the best measure to increase sales especially in the case ofcompanies which become sick due to low demand for their producrs. To test whether there is any significant relationship between the success rates in the diversified and non-diversified companies a chi-squareto test was conducted taking the null hypothesis that there is no significant dtfference in success rates among diversified and non-diversified companies. The test revealed that at five percent significance level the calculated value (5.862) is greater than the table value (3.84 1 ) at one degree of freedom. This result leads to the rejection of the null hypothesis and it is concluded that the d~ference in success rates between the diversified and nun-diversified sick industrial units is statistically sign1;ficanl. One of the main reasons for the failure of the rehabilitation schemes was the inability of the companies to attain the sales targets envisaged to make the operations of the company viable. Among the 89 companies selected for the study 55 companies could not achieve the targeted sales envisaged in the rehabilitation schemes. That might be due to the fixation of sales target at a higher level, inadequate sales promotion measures and low demand for the products due to the recession in the industry, technological obsolescence, changes in fashion etc. The ' O~or the test only those companies, which were 'declared no longer sick' and 'not declared no longer sick' after implementing the rehabilitation schemes were taken. main reasons for the non-attainment of sales targets in 55 companies considered for the study have been analysed and given in Table 4.15. Table 4.1 5:- Reasons for Non-Attainment of Sales Target 1' 1 I 1 I Reasons for non-attainment of sales targets I Number of I Percentage / I--, .-A 1 companies / to total I Higher sales targets Inadequate sales promotion L__ * * I 1 Low demand for the products ( 6 1 10.9 1 Total ( 55 1 100.0 1 Other reasons . - 1 I I Source: Primary data Table 4.1 5 points out that in 43.6 percent cases rehabilitation schemes fuced sales targets ad higher levels not attainable to the sick companies. In 40 3 percent cases inadequate sales promotion measures and in 10.9 percent cases low demand for the products were the reas~ns~f or poor sales. 5.5 4.4.1 .S Measures for Reducing Interest Increased use of borrowed hnds and heavy burden of interest is a common feature of every sick unit. The inability of the promoters to provide additional funds required to recoup the cash losses incurred often result in heavy borrowing. The increased borrowing and its servicing cost affect the profitability of the company adversely. Hence rehabilitation schemes took measures to reduce debt and interest cost thereon to improve the operating efficiency of the companies to make them viable. One Time Settlement (OTS) of dues with own funds helps industrial units to get rid of interest charges totally. But the difficulty in raising the required finance and the unwillingness of the funding agencies make OTS of dues often diff~cult. Where QTS of dues is not possible reduction in interest cost is made by making arrangements for rescheduling term loans at reduced rates of interest waiving penal interest and penal charges. Among the 89 rehabilitation schemes sanctioned by the BlFR financial restructuring were arranged in 77 cases. The present status of those companies has been analysed and given in Table 4.1 6. Table 4.1 6:- Measures of Financial Restructuring Table 4.16 shows that six companies were able to arrange OTS of dues in Measure of financial restructuring OTS of dues Reduction in interest rate Other measures 'Total which four companies were declared no longer sick, the success rate being 66.7 percent. In 67 cases rehabilitation schemes included measures to reduce Source: Primary data No. of Cos 6 67 4 77 interestlinterest rate and among them 32.8 percent cases were declared successful. Other measures of financial restructuring were adopted in four cases and among yo 7.8 87.0 5.2 100.0 them only 25 percent cases were declared successful. This points out that the total eliminationheduction of interest, cost enhanced the chances of revival ofsick units. Status of companies Declared no longer sick No.of Cos 4 22 1 27 Not declared no longer sick % 66.7 32.8 25.0 No. of Cos 2 45 3 5 0 9'0 33.3 67.2 75.0 4.5 Factors influencing Success of the Rehabilitation Schemes The rehabilitation of a sick unit is done by implementing a rehabilitation scheme. In order to make the operations of the company viable the rehabilitation schemes include measures to increase sales, reduce cost of production, financial restructuring and change in management. Tncrease in sales requires increase in scale of operation andlor diversification of the activities of the company. Financial restructuring includes measures to increase capital, increase/decrease borrowed funds and facilitate rearrangement of borrowed funds. The policies of the government, effects of globalisation, and the level of implementation of the rehabilitation schemes also influence the success of the rehabilitation schemes. In order to analyse the impact of different factors on the success of the rehabilitation schemes Multiple Regression (linear) analysis is made. For the purpose of the regression analysis data regarding 40 companies for which detailed fmancial data are available are considered. These companies are classified in to three groups, 'successhl', 'failed' and 'schemes in operation.' 'Successful' companies include companies declared no longer sick by the BIFR. 'Failed' companies include those closed dowdwound up and companies for which, new rehabilitation schemes were sanctioned. Companies which continue the implementation of the original rehabilitation schemes sanctioned are classified as 'schemes in operation.' Based un the aforesaid details it is hypothesised that the success of a rehabilitation scheme is influenced by sales, costs of production, government policies, effects of globalisation, extent of implementation of the rehabilitation schemes etc., y = a + b l x l + b2x2 + b3x3 t ............ + bnxn = result a = constant b 1 , b2.. . . . . bn = Regression coefficient. X I = Delay in reporting sickness. x2 = Time taken for determining sickness. x3 = Time taken for implementing rehabilitation schemes. x4 = Nature of the rehabilitation scheme. x5 = Extent of implementation of the rehabilitation scheme. x6 = Implementation of the schemes withlwithout extension of cut off date. x7 = Co-operation of the Participating Agencies. x8 = Diversification of the activities of the company.. x9 = Financial restructuring. x10 = OTSofdues. x l 1 = Increase in sales. x12 = lncrease in scale of operation. x 1 3 = Reduction in cost of production x 1 4 = Effects of government policy. x 1 5 = Effect of globalisation x 1 6 = Increase in equity. x 1 7 = Additional borrowings. x18 = Waiver of loans. x19 = Waiver of interest. x20 = Reduction in interest. x2 I = Funding of interest x22 = Waiver of penal charges. x23 = Change in management The test was conducted by taking dummy variables, which are given in Table 4.1 7. Table 4.17:- Values of Various Parameters 1 0 2 1 0 1 0 I 0 Result Reporting sickness Time taken for determining sickness Time taken for implementing the rehabilitation scheme Success Failed Schemes in operation Timely Reporting Late Reporting Within three months More than three months Within one year ' More than one year - ,.- - Nature of rehabi litation scheme Extent of implementation of the rehabilitation scheme. Cut off date for implementing the rehabilitation schemes Co-operation of the participating agencies Diversification of the activities of the company. Financial restructuring OTS of dues Increase in sales - Increase in scale of operation. Reduction in cost of production Management change Effect of government policy Effects of globalisation lncrease in equity lncrease in borrowings Waiver of loans Waiver of'interest Reduction in interest pp-pL.,...--- ,.". Funding of interest Waiver of penal charges Implementation of the rehabilitation scheme Already implemented scheme sanctioned Scheme evolved by the BIFR Fully implemented lmplementation not completed Not extended Extended Time1 y supported Delayedlno support Activities diversified Activities not diversified implemented Not implemented OTS of dues arranged OTS of dues not arranged Sales increased Sales not increased -Scaleof operation increased Scale of operation not increased Cost reduced Cost not reduced Change in management made Change in management not made Positively effected Negatively/not effected Positively effected Negativelno effects Additional equity raised Not raised Additional borrowings made Not made Loans waived Loans not waived Interest waived lnterest not waived Interest reduced Interest not reduced Funding of interest made Funding of interest not made Penal charges waived Penal charges not waived Proper Not proper 1 0 1 0 I 0 I 0 1 0 1 0 1 0 1 0 I 0 1 0 1 0 I 0 1 0 1 0 I 0 1 0 1 0 1 0 1 0 I 0 I 0 Chapter 4 116 The result of the Multiple Regression test is given in Table 4.18. Table 4.18:- Multiple Regressions BORROWM COST CUT OFF DETER DIVERS EQUITY EXTENT GLOBAL GOPL N T FUND rNT RED MGTCHG NATURE OTS PENAL RESTRUCT SALES SCALE SUPPORT (Constant) Variables in the Equation The following variables are excluded because of insignificant values: IMPLEM LOANWAIV REPORTIN TNTWAIVE Multiple R 0.87345 R Square 0.76292 Adjusted R Square 0.53769 Standard Error 0.6405 Analysis of Variance DF Sum of Squares Mean Regression 19 26.53038 1.39634 Residual 20 8.24462 0.4 1223 Variable B SE B T Beta Sig T Table 4.18 points out that the regression result is statistically significant and since R~ = ,7629, it can be stated that 76.29% of the result is explained by the above-mentioned 23 variables. Among them five variables viz., sales, scale of operation, support of the Operating Agencies, One Time Settlement of dues and government policy are statistically significant.
The COVID-19 pandemic will have a significant impact on Financial Reporting for companies around the world. Discuss the validity of this statement with reference to specific areas of the financial statements