Chapter-VII

GOVERNMENT'S POLICY FOR

SICK INDUSTRIES IN INDIA

The Government policy statement on industrial

sickness on May 15, 1978 in the Parliament requires

that the government should make suitable arrangements

for monitoring and detecting industrial sickness at an

early stage. Further, the financial institutions should

jointly set up a group of professional directors, who

would be full time employees of the institutions and

who could be nominated on the board of directors of

the companies with doubtful managerial competence or

integrity and in which the institutions have a substantial

stake.

Furthermore the government should set up a

‘Screening Committee under the chairmanship of the

Secretary, Industrial Development with representatives

of the Finance Ministry, Reserve Bank of India and

Financial Institutions1, to make recommendations relating

1. Srivastava, S.S. and Yadav, R.A., Management and Monitoring of

Industrial Sickness; Concept Publishing Company, New Delhi, 1996, p. 210.
 [ 190 ]

to sick undertakings for : (a) take-over of the

management of a sick undertaking with the clear

understanding that the units will not be handed back to

the same management; (b) selling off the unit after

taking-over of the management or alternatively,

reconstructing which may include writing down the share

values, conversion of loans into equity, acquisition of

shares by the government, constitution of new board of

directors, etc.; and (c) effecting the merger of the

unit with a public sector undertaking.

For the sick units in the small sector, it

has been suggested that the State Financial Corporation

and commercial banks should devise a scheme for

rehabilitation of sick industries in the small-scale

sector and the assistance given by them for the revival

of such units should be eligible for refinancing by the

Industrial Reconstruction Corporation of India Ltd., or

the Industrial Development Bank of India at a concessional

rate of interest.

Further, the Government and other purchasers

of the products of small-scale industry be directed to

settle dues of small-scale units on a priority basis

and commercial banks be asked to ensure that the credit

 [ 191 ]

given to large-scale units for working capital is applied

first towards meeting dues of small scale suppliers.

Furthermore, the small-scale units promoted by technical

entrepreneurs, if forced to close down for reasons beyond

their control, the interest of entrepreneurs must be

safeguarded by evolving a suitable scheme of risk

insurance.

Thus, the main thrust of the policy is to reduce

the incidence of sickness in industry and dishonest

management. As per the Government policy, a special cell

on sick units in the Reserve Bank of India was formed

to monitor the performance of sick units and to suggest

corrective measures in regard to their rehabilitation.

Similarly, regional monitoring cells have been formed

with experienced and qualified staff to provide

counselling assistance to the agencies financing small-

scale units. There is an acute need for review of

financial statements, which will enable the state to

understand whether a particular enterprise is healthy,

sickness-prone, sick at an early stage or sick at the

advanced level.

Since there is a ‘considerable scope for

manipulation in the financial statements, it may be

 [ 192 ]

difficult to discover many of the manipulations on the

basis of financial audit alone. It would, therefore,

be appropriate to insist on cost audit which could

reveal the malpractices in the manner of expenditure

and, thus, indicate whether a particular unit was sound

or not’.2 The danger signals can be noted more easily

in cost audit, rather than in financial audit.

The government policy on industrial sickness

as announced by the Ministry of Industries in February,

1982 concerns with :

i) Monitoring Arrangements : Financial institutions

and banks should evolve a system of monitoring the

accounts and wherever required should strengthen

the same so that it is possible to take timely

corrective action to prevent sickness at the

incipient stage. The financial institutions should

also get a feedback in respect of the working of

the assisted units to enable them to monitor

utilisation of loans as also the performance of

individual units. ‘The financial institutions

should maintain a panel of qualified persons

2. Datt, R. and Sundharam, K.P.M., Indian Economy, S. Chand and Company

Ltd., New Delhi, 1996, p. 569.
 [ 193 ]

experienced in the various industries. From such

panel, they should make nomination of directors

on the board of sick units or those units which

are showing signs of sickness’.3 Such nominee

directors be asked to submit periodic reports to

the financial institutions so that they know the

latest developments taking place in the unit.

ii) Assistance from Government Agencies : In case, the

banks and the financial institutions alone are not

able to find effective remedial measures for nursing

a sick industrial unit, the financial assistance

from government agencies particularly where

rationalisation of labour, infrastructural inputs

and control of raw-materials are involved, is

required. Such cases should be tackled by the

Department of Industrial Development, which may take

up the matter with the concerned central ministries

and state government.

iii) Role of Administrative Ministries : These ministries

have been asked to play a pivotal role in monitoring

sickness and coordinating actions for revival and

rehabilitation of sick industrial undertakings. ‘The

3. Bidani, S.N. and Mitra, P.K., op. cit., p. 135.

 [ 194 ]

ministry should also take remedial action to prevent

sickness and, if required, should work out policy

measures to meet the situation’.4 These should set

up the standing committees for major industrial

sectors where sickness is widespread for reviewing

the extent of sickness periodically and suggest

policy measures required to tackle the problem.

iv) Take-over of the Unit by the Government : As policy

guidelines, banks and financial institutions should

submit a detailed report to the Department of

Industrial Development in respect of those sick

units, whose revival appears doubtful. The

Department of Industrial Development may refer the

matter to the Administrative Ministry concerned.

The Administrative Ministry, in consultation with

the Department of Industrial Development, should

decide whether the unit should be nationalised or

whether any other alternative including workers’

participation in the management can be considered

for revival of the unit.

v) Rehabilitating Sick Units : Banks should undertake

diagnostic study in respect of units, which are

4. India, 1995, A Rereference Annual Minisry of Information and

Broadcasting, Government of India, p. 427.
 [ 195 ]

showing signs of sickness. These should provide

rehabilitation finance for revival of the unit after

assessing the viability and ensuring that they can

restore to unit a healthy state. The ministry has

also suggested that IDBI should consider creating

a cadre of professional managers, who could be

entrusted with the job of managing the sick units

in which the financial institutions have made

substantial investment. ‘The approach towards the

rehabilitation of sick units has to be very

selective and systematic. There is no point in

throwing away further resources in support of units

which are irretrievably sick. Only such units as

are found to be potentially viable need be taken

up for the formulation or rehabilitation packages

to restore them to health’.5

A basic weakness of the existing policy is

that although social consideration compels the

Government to take over these units and make heavy

investments on modernisation or renovation, the

previous management is not held accountable for

the lapses which impaired the economic viability

5. Government of India, Economy Survey, 1995-96, p. 39.

 [ 196 ]

of the units concerned. The policy for sick

industrial units has, therefore, to provide,

wherever necessary, for sanctions against

fraudulent management’.6

In case, the administrative ministry is

satisfied that the unit has potential viability and can

be restored to a healthy state within a reasonable period

of time and that nationalisation of the unit is in

public interest, it may decide to nationalise the unit.

Under such a situation, the management should be taken

over as per the provisions of the ‘Industries Development

and Regulation Act, 1951’ so as to enable the

administrative ministry to take necessary steps including

legislation, nationalisation, etc. The department should

take action for taking over the management for a period

not exceeding six months after complying with the relevant

provisions of the Act and keep in mind the principles

of natural justice. During this period, the administrative

ministry should complete all the formalities in

connection with nationalisation of the unit. ‘It is

necessary to guard against the management looking forward

to the Government take-over of an industrial company,

6. Planning Commission, Seventh Five Year Plan, 1985-90, Vol. II, p. 173
 [ 197 ]

after fleecing and mismanagement from it to the point

of making it permanently sick’.7 In case, it is decided

not to nationalise a unit and no other alternative

solution is available, banks and financial institutions

should be provided with the information immediately so

that these may proceed to deal with the matter in

accordance with the normal bank procedure. The

Administrative Ministry should also consider the

possibility of a sick unit being taken over by a private

sector unit by process of merger/amalgamation or by

purchase. In any case a final decision about the

disposition of the case of a sick unit should be

communicated to the Department of Industrial Development.

THE SICK INDUSTRIAL COMPANIES

(SPECIAL PROVISION) ACT, 1985 :

In accordance with the policy decision of the

Government of India, the Sick Industrial Companies

(Special Provisions) Act, 1985 was passed by the

Parliament which received the assent of the President

of India on January 8, 1986. The Act shall come into

force, on such date as the Central Government may, by

notification in the Official Gazette, announce. 8 The

7. Government of India, Economy Survey, 1995-96, p. 40.

8. Sick Industrial Companies (Special Provisions) Act, 1985, All-India
Reporter, 1986, Vol. 73, Part 870, p. 27-37).
 [ 198 ]

Central Government may by notification, appoint the Board

for Industrial and Financial Reconstruction to exercise

the jurisdictions and powers and discharge the functions

and duties conferred or imposed on the Board. It is

heartening to note that one year after the president’s

assent to the Act, the Central Government has announced

the date for the enforcement of the Act, and has also

established the Board for Industrial and Financial

Reconstruction.

It is evident from the preamble to the Act

that the main objects of the Act are : (i) to secure

timely detection of sick and potentially sick industries

owning industrial undertakings; (ii) to determine

preventive ameliorative, remedial and other measures which

need be taken with respect to such enterprises and the

expeditious enforcement of the measures, so determined.

Consequently, the detection and determination of

sickness of an industrial company is of paramount

importance in the scheme of the Act.

The sickness of an enterprise as per the Act

may be appraised at two levels:

i) When the erosion of the net worth is 100 per cent

and more and the unit is likely to continue to show

 [ 199 ]

cash losses for the next two years, the management

of the unit is required to report this to the newly

constituted Board under the Act, who would then take

appropriate actions which may involve merger,

rehabilitation or even mercy killing after a fresh

appraisal through an operating agency;

ii) When the erosion of the net worth is of the order

of 50 per cent, the Board of Directors of the sick

unit may be asked to bring this fact to the notice

of the shareholders and depending on their

recommendations in a general body meeting, carry

out their directives.

In case, an industrial company becomes sick,

its Board of Directors shall, within sixty days from

the date of finalisation of the duly audited accounts

of the enterprise, make a reference to the Board for

Industrial and Financial Reconstruction (BIFR) for

determination of the measures which shall be adopted in

this regard. However, if the Board of Directors had

sufficient reasons even before such finalisation of

accounts to form the opinion that the enterprise had

become sick, it will, within sixty days, make a reference

to Board for Industrial and Financial Reconstruction for

 [ 200 ]

the determination, of the measures to be adopted with

respect to the enterprise.

In other cases the Central Government, the

Reserve Bank of India, a State Government, Public

Financial Institutions, State level institutions or

scheduled commercial banks may also make a reference to

the Board for determination of the measures which may

be adopted in respect of such sick enterprise. However,

any State Government shall not make any such reference

unless all industrial undertakings belonging to such

company are situated in such a State. Similarly, a public

financial institution or a State level institution or a

scheduled commercial bank shall not make such a reference

unless it has, by reason of any financial assistance or

obligation rendered by it, or undertaken by it with

respect to such enterprise, an interest in such

enterprise.

The Board may make such inquiry as it may deem

fit for determining whether any industrial enterprise

has become a sick industrial enterprise, upon receipt

of a reference from any source or upon its own knowledge

as to the financial conditions of the enterprise. The

Board may, if it deems necessary or expedient for the

 [ 201 ]

expeditious disposal of an enquiry, require by order

any operating agency to enquire into and make a report

with respect to such matters as may be specified in the

order. The enquiry shall be completed within sixty days

from the commencement of the enquiry.

In case, the Board deems it fit while making

or causing to make an enquiry, it shall appoint one or

more persons to be a Special Director/Directors of the

company for safeguarding the financial and other

interests of the enterprise Any special director, so

appointed, shall hold office during the pleasure of the

Board and may be removed or substituted by any person

by order in writing by the Board. The special director

shall not incur any obligation or liability by reason

only of his being a director or for anything done or

committed to be done in good faith in discharge of his

duties as a director or anything in relation thereto

and such director shall not be liable to retirement by

rotation and shall not be taken into account for

computing the number of directors liable to retirement.

In case the Board, on completion of the enquiry,

feels satisfied that a company has become sick and that

it is not practicable for the sick industrial company

 [ 202 ]

to make its net worth positive within a reasonable time,

the Board may, by order in writing and subject to such

restrictions or conditions as may be specified in the

order, give such time to the company as it may deem fit

to make its net worth positive.

Similarly, in case the Board decides that it

is not practicable for a sick industrial enterprise

to make its net worth positive within a reasonable

time and that it is necessary or expedient in the public

interest to adopt certain measures in relation to the

said enterprise, it may, by order in writing, direct

any operating agency specified in order to prepare, having

regard to such guidelines as may be specified in the

order, a scheme providing for such measures in relation

to such enterprise.

The Board or the operating agency shall

prepare a scheme within ninety days for :

i) the proper management of the sick industrial unit

by change in, or take over of its management;

ii) the sale or lease of a part or whole of any

industrial undertaking of the sick industrial unit.

iii) the reconstruction, revival or rehabilitation of the

sick industrial unit;

 [ 203 ]

iv) the amalgamation of the sick industrial unit with

any other industrial unit; or

In case, the scheme relates to preventive,

ameliorative, remedial and other measures with respect

to any sick industrial unit, it may provide for

financial assistance by way of loans, advances or

guarantees or reliefs or concessions or sacrifices from

the Central Government, a State Government, any scheduled

commerical bank or other bank, a public financial

institution or State level institution or any institution

or other authority, any Government Bank, institution

or other authority required by a scheme to provide

for such financial assistance to the sick industrial

unit.

In case, th e B oar d, an inq uir y a nd

c on s i de r at i on of a ll t he re l ev a n t f ac t s and

circumstances and after giving an opportunity of being

heard to all concerned parties, is of the opinion that

it is just and equitable that the sick industrial

company should be wound up, it may record and forward

its opinion to the concerned High Court, which shall,

on the opinion of the Board, order winding up of the

sick industrial company and may proceed and cause to

 [ 204 ]

proceed with the winding up of the sick industrial

company in accordance with the provisions of the

Companies Act.

In order to effect winding up of the sick

industrial enterprise, the High Court may appoint any

officer of the operating agency; if the operating agency

gives its consent, as the liquidator of the sick

industrial company and the officer so appointed shall

for the purposes of winding up the sick industrial company

be deemed to be, and have all the powers of, the official

liquidator appointed under the Companies Act.

In case the accumulated losses of an industrial

company, as at the end of any financial year, are fifty

per cent or more of the peak net worth during the

immediately preceding five financial years, the enterprise

shall, within a period of sixty days from the date of

finalisation of the duly audited accounts of the

enterprise for the relevant financial year, report the

fact of such erosion to the Board. The company shall

hold a general meeting of its share holders for

considering such erosion. The Board of Directors shall,

atleast twenty-one days before the date on which the

meeting is to be held, forward to every member of the

 [ 205 ]

company a report in regard to the facts and the causes

for such erosion.

In case, during the scrutiny or implementation

of any scheme or proposal, it appears to the Board

that any person who has taken part in the promotion,

formation or management of the sick industrial company

or its undertaking, including any past or present

director, manager or officer or employee of the sick

industrial company has misapplied or retained, or become

liable or accountable for, any money or property of the

sick Industrial company; or has been guilty of any

misfeasance, malfeasance, or non-feasance or breach of

trust in relation to the sick industrial company, the

Board may by order, direct him to repay or restore the

money or property or any part thereof, with or without

interest, as it thinks just or to contribute such sum

to the assets of the sick industrial company or the

other person in respect of the misapplication, retention,

misfeasance or breach of trust, as the Board thinks just

and also report the matter to the Central Government

for any other action which that Government may deem fit.

In case, the Board is satisfied on the basis

of the information and evidence in its possession with

 [ 206 ]

respect to any person, who is or was a director or an

officer or an employee of the sick industrial company,

that such person by himself or alongwith others had

diverted the funds or other property of such company

for any purpose other than a bonafide one, of the company

or had managed the affairs of the company in a manner

highly detrimental to the interests of the company, the

Board shall, by order, direct the public financial

institutions, scheduled banks, and State level

institutions not to provide, during a period of ten years

from the date of the order, any financial assistance to

such person or a partner or any company or other body

corporate of which such person is a director.

GOVT.'s SUGAR POLICY :

The Gundu Rao Committee (1965) observed that

a large number of Indian sugar factories are old and

outdated. They are of small capacities which have high

manufacturing losses and poor efficiency recording, high

fuel consumption and low productivity and unsuitable

qualified personnel. The committee reported that of

the 186 factories working in 1963, 47 factories were

having plants below ten years old, 24 between 11 and 24

years and as many as 115 factories had plants more than

 [ 207 ]

25 years old. The largest of these older units were in

Uttar Pradesh and Bihar. According to recent estimates,

out of 215 factories working in 1969-70 as many as 113

factories were between 32 and 67 years of age which

need major replacement for efficient working. Due to

lack of modernisation, we are being priced out from the

international market in so far as we could not even

utilize full quota of export of sugar under international

sugar agreement. On the contrary, we have started

importing sugar to meet domestic requirements.

In spite of the heavy costs involved,

rehabilitation and modernisation were recommended by the

Gundu Rao Committee. The committee came to the conclusion

that, "if the cost of production has to be brought down

further, the need is for rehabilitation and modernisation;

possible replacement of old units with new ones of bigger

capacity; expansion of existing capacities to economic

size; improving labour productivity and making up the

deficiency of technical personnel is inescapable".

The Sen Enquiry Commission (1965) in general

endorsed the view of the Gundu Rao Committee. The

commission was of the view that most of the uneconomic

units could only rehabilitate themselves if they are

 [ 208 ]

provided with loan facilities by the Government of India.

The commission warned that, "if, however, any unit is

unable to rehabilitiate within a reasonable period, say

three years, of the offer of such assistance and demands

special subsidies or other concessions, the Government

should consider nationalization in the social interest,

especially in the interest of prowess and undertake

necessary rehabilitation and modernization measures.

Alternatively, the Government may consider becoming the

majority shareholders in the company and running it as

a joint venture as a precondition for providing the

reqired financial assistance".

There are a number of ways in which a "sick"

unit could be rehabilitated. Some of them one given below:

a) "The unit could be re-located in a site where agro-

climatic factors aremore favourable;

b) The unit could be merged with another unit situated

near by which can together face the challenges of

the industry;

c) The unit could be turned into a cooperative to

promote an indentity of interest between the cane

farmer and the sugar producer; or

 [ 209 ]

d) Alternatively the State can nationalize the unit

and modernise it as a public enterprise;

e) Or provide loan facilities and collaborate with the

units in the management as a majority shareholder".

There are units whose recovery and duration,

the two main determinants of cost of production, are

below the average. Many factories suffer from low capacity

and the outmoded equipments. Among the U.P. and Bihar

mills, about 30 per cent are having crushing capacity

below 800 tonnes daily and when compared to the modern

economic units of 1,500 tonnes capacity, these mills

are bound to be less efficient especially in the context

of low recovery. In this regard, licensing policy can

play an important role. Priority should be given for

expansion of existing units which are below 1,500 tonnes

capacity rather than allowing new units to be set up.

Utilisation of By-products

The scope for reduction in costs by further

utilisation of by-products of sugar industry is

considerable. Themain by-products of the sugar industry

are :
a) Bagasse
b) Molasses
c) Press mud.
 [ 210 ]

Bagasse is increasingly becoming valuable for

its cellulose content and with the decreasing forest

resources of bamboo and other pulping woods. With the

rapidly increasing demand for paper in the country, there

is no doubt that bagasse holds promise to a regular

supply of raw material to the paper industry in the

country. Good quality paper canbe produced entirely

from bagasse. Several factories have been working in

foreign countries using bagasse as raw material.

Molasses is one of the most important by-

products of the sugar industry. At present it is the

only by-product which is giving some return, however

small. The most important use to which molasses can be

put in India is for the production of industrial alcohol.

A good percentage of molasses is also used for tobacco

curing, etc. Raw sugar molasses can also be used as

cattle feed.

In Uttar Pradesh, considerable quantity of

molasses is being wasted due to lack of storage facilities

and proper transport facilities. It is very necessary

that adequate arrangements are made for molasses storage

both at the sugar factories and the distilleries and

 [ 211 ]

the maximum quantity of molasses diverted for alcohol

production.

The third by-product from the sugar factories

is the press mud. The press mud in the sulphitation

factories varies from 2.5 to 3 per cent on cane with a

moisture content of about 65 per cent and that of

carbonation factor varies from 6 to 7 per cent on cane.

The sulphite press mud is being increasingly used as a

valuable manure. This press mud has a very valuable

ingredient in the form of sugarcane wax varying between

8 per cent to 20 per cent on dry basis. With the

increasing shortage of vegetable waxes in the world,

sugarcane wax promises to be a very good source of meeting

the demands of wax in the country as well as for export

purposes. Proper use of the press mud of carbonation

factories has not been developed as yet. It finds useful

9
application on some acidic and calcium deficient soils.

Much of the problems of sugar industry are the

result of the Government's sugar policy which is seriously

lacking a long-term perspective. Since independence sugar

indsutry has been under controls, decontrols and partial

9. Report of the Committee on Rehabilitation and Modernisation of Sugar

Factories in India.
 [ 212 ]

controls. Indian Sugar Mills Associaton (ISMA) says

that during the period 1973-74 to 1985-86, the price

rise allowed in case of sguar was only 90 per cent as

against 155 per cent for all commodities taken together,

and 150 per cent for pulses, 152 per cent for khandsari

and 148 per cent for vegetables and fruits, etc. They

also say that the price of sugar is one of the lowest

in India compared to other sugar producing countries of

the world. Unduly low economic prices increase the demand

while depressing production.

The new sugar policy, announced by the

Government recently, however, has been welcomed by ISMA.

The Government has now changed the ratio of levy to

free sale sguar from 65 : 35 to 55 : 45. There also

has to be a technical breakthrough in sugarcane

production. Only some regions in the country are

sugarcane producing and its spread to other regions shall

be achieved through technological improvements.