STUDENTS NAME - KENDRICK JOEL FERNANDES

ROLL NO. 8250

SEMESTER VI
SUBJECT – TURNAROUND MANAGEMENT
TOPIC- INDUSTRIAL SICKNESS
INDUSTRIAL SICKNESS

SICK COMPANY

Sickness in industry is a universal phenomenon. Defining sickness in

industry is tough. There is no standard definition of sickness in industry but the

existence of various parameters which, if present would indicate that the

industrial unit is sick. The financial institutions pay reliance on the following

parameters for the categorisation of the unit in the sick category

 Continuous default in repaying the dues of industry.

 Continuous default in repaying the instalments which have fallen due.

 Continuous losses.

The sick company can be highlighted as under

 To a Layman – A sick unit is one which is not healthy.

 To an Investor – it is one which is not giving dividends

 To a Banker – it is a unit which has incurred cash losses in the previous

year and is about to repeat the same performance in current and following

years

 To an Industrialist – it is a unit which is making losses and about to close.

 Sickness concerns the Government, employees, bankers and others having

direct contact with the company. However, it is a national problem in as

much as companies which consistently make losses.

 Underutilisation of productive capacity

 Lack of product demand.

 Loss of revenue for government in various forms of indirect taxes.

 Over staffing

WHAT IS INDUSTRIAL SICKNESS?

Industrial sickness can be defined as a steady imbalance in the debt-

equity ratio and distortion in the financial position of the unit. A sick unit is one

which is unable to support itself through the operation of internal resources.

Once the sick units continue to operate below the break-even point (at which

total revenue = total cost), industries are forced to depend on the external

sources for funds of their long-term survival.

According to the criteria accepted by the Reserve Bank of India, “a sick

unit is one which has reported cash loss for the year of its operation and in the

judgment of the financing bank is likely to incur cash loss for the current year as

also in the following year.”

An industrial unit tends to show signs of financial distress starting with –

 Short term liquidity problems

  Revenue losses

 Moving in the direction of over use of external credit

 Operating losses.

There are 5 lac sick units in small scale sector and one lac in the medium

and large scale sector. Over Rs. 75,000 crores of banks and financial

institutions funds are locked up in these units.

DEFINITION OF INDUSTRIAL SICKNESS –

According to Companies Act , 2002 - Sick industrial company means ‘an

industrial company which

 Had the accumulated losses in any financial year equal to 50 percent or ore of its

average net worth during 4 year immediately preceding such financial year or

 Failed to repay its debts within any 3 consecutives quarters on demand made in

writing for its repayment by a creditor of such company.

As per Sick Industrial Companies Act, 1985 SICA

 Sick industrial unit is defined as a unit or a company having been in existence for not

less than five years which is found at the end of any financial year to have incurred

accumulated losses equal to or exceeding its entire net worth.

 The net worth is calculated as the toal of paid up capital and free reserves less

provisions and expenses if any.

SIGNALS OR SYMPTOMS OF SICKNESS

 Industrial sickness can be defined as a steady imbalance in the debt-equity ratio and

distortion in the financial position of the unit.

Major criteria’s to identify a sick unit are

 A unit incurring continuous financial losses, having negative equity, having

excess of current liabilities over current assets, defaulting in payment of principal

and interest on borrowed capital, having low capacity utilisation, having

worsening debt equity ratio etc.

SYMPTOMS OF SICKNESS

 A general decline in that particular industry.

 Any major changes in shareholding.

 Autocratic one man rule.

 Increase in the consumption of overdraft facilities

 Window-dressing and creative accounting

 Cumbersome administrative procedures

 Decrease in working capital

 Diversion of fund other than running the unit

 Failure to pay statutory liabilities.

 Frequent changes in management

 High rate of rejection of goods by the customers

 Increasing customer complaints

 Inferior technology

 Downward trend in sales and profits

 Scarcity of goals
  Slow growth

 Sudden increase in the turnover of key personnel

 Incompetent and unbalanced management team

 Falling reputation of the company in the market

CAUSES OF INDUSTRIAL SICKNESS OR REASONS FOR

INDUSTRIAL SICKNESS

Industrial sickness can be due to many factors such as

Bad strategy and policy

 Bad strategy and policy

 Selecting wrong location for starting an enterprise

 No diversification

 Delays in execution of new project

 Poor organisation and staffing

 Poor marketing organisation

 Inadequate emphasis on marketing as opposed to selling

 Lack of focus on customers

 Lack of focus on technology

 Wrong capital structure

CAUSES OF SICKNESS - Can be grouped as under

 Internal cause for sickness

 External cause for sickness

 Born sick

 Achieved sickness
INTERNAL REASONS THAT LEAD TO SICKNESS

Internal factors are within the control of management. Some of the internal factors that

lead to industrial sickness are

 LACK OF FINANCE

This includes weak equity base, poor utilization of assets, inefficient working capital

management, absence of costing and pricing, absence of planning and budgeting,

wrong dividend policy and inappropriate utilization or diversion of funds.

 BAD PRODUCTION POLICIES

Another important reasons for sickness could be wrong production policies like

- Wrong selection of production location.

- Defective selection of plant and machinery

- Bad maintenance of plant and machinery

- Overestimation of demand

- Adoption of obsolete technology

- Lack of quality controls

- Lack of standard research and development

 MARKETING AND SICKNESS

This factor impacts the health of any sector and organisation. It includes

 Wrong demand forecasting

 Selection of inappropriate product, price, place and promotion

 Absence of product planning

  Wrong market research methods

 Ineffective sales promotion

 INAPPROPRIATE PERSONNEL MANAGEMENT

 Bad wages and salary administration

 Lack of behavioural approach causing dissatisfaction among the employees

and workers.

 Poor labour management

 Low workers morale

 Low productivity, strikes, lockouts etc. arising from strained industrial relation

over the issues like wages, bonus etc.

 MISMANAGEMENT

Industrial sickness could be because of mismanagement in various functional

areas like financial production, marketing and personnel resulting from wrong

managerial decisions.

 Wrong location of a unit e.g. high technology based projects being based in

areas without skilled labour and supporting infrastructure.

 Paucity of funds and faulty financial management

 Delay in supply of equipment, slippage in the schedule of civil works etc.

 INCOMPETENT ENTREPRENEURS
  Lack of knowledge about the market customers, costing, marketing , accounts,

finance etc. could lead to industrial sickness.

EXTERNAL REASONS THAT LEAD TO SICKNESS

 PERSONAL CONSTRAINT

Lack of skilled labour is the first external reason for sickness. For certain type

of work, it is important to have skilled and qualified labour, in the absence of

which, there can be a rise in industrial sickness.

MARKETING CONSTRAINTS

The sickness can be caused due to

Changes in global marketing, technology, consumer behaviour, changes in

customer tastes, preferences and demand and market recession

PRODUCTION CONSTRAINTS

Production problems arise due to shortage of raw material, shortage of power,

increasing fuel prices, import – export restrictions.

INFRASTRUCTURE CONTRAINTS

This problem arises because of lack of proper transportation, electricity, power

water, communication modes etc.

FINANCE CONSTRAINTS
 Lack of finance is another external cause of sickness and it arises due to credit

restraints policy, rise in interest rates, delay in disbursement of loan by

government. shortage of working capital etc.

RECESSION

Industrial sickness is caused because of recession in local and global markets.

Recession leads to downturn of economy. Leading to major loss and closure

for various industrial units.

COMPETITION

New firms may get new technology and features in their products which may

lead to reduction in demand of existing firms

GOVERNMENT POLICIES

Frequent changes in government policies in respect of industrial licensing,

taxation, power tariffs, imports and export duties etc may lead to industrial

sickness.

 BORN SICKNESS

Born sickness is the sickness since inception of the organisation. It

can be because of

Lack of experience on the park of the promoters, selection of the

project, and faulty project planning

Paucity of funds
 Faulty financial management

Locational problems

Technological factors like selection of outdated or improper

technology

Incorrect assessment of the market potential or faulty demand

forecasting and change in market conditions.

ACHIEVED SICKNESS

Achieved sickness is the sickness that the organisation did not have since

inception.

- Bad management i.e. inexperience, inefficiency, lack of professional

expertise, bad management could be poor production management, poor

reseource management

SYMPTOMS OF BAD MANAGEMENT ARE

- One man rule

- Lack of management depth

- Bureaucratic management

- Weak financial executives

 - Non- participative board

- Poor inventory management of finished goods as well as inputs

- Failure to modernize to suit the changing environment

- Poor labour management relationship

STAGES OF SICKNESS

There are different stages of sickness

Stage I - NORMAL AND HEALTHY

Normal or healty unit may have the following features

- All functional areas like production, marketing, finance and personnel are

normal and efficient.

- Generating good cash profit

- Satisfactory debt-equity ratio.

STAGE II – TENDING TOWARDS SICKNESS

As the industrial unit tends towards the stage of sickness, initial deviation

inan functional area begins. Due to this, cash profits begin to decline in

comparison to last years . this stage conveys warning signal which should be

taken cautiously and preventive measures with close monitoring follow up

actions should be launched promptly.

STAGE III – INCIPIENT SICKNESS

 As sickness grows gradually it enters into the initial stage for a short period.

Incipient stage of sickness comes when an industrial unit incurs cash loss but

imbalance in financial structure may or may not appear. This stage has the

following features

- Cash losses incurred in last year are expected in current year

- Deterioration anticipated in current yar although current ratio was more

than 1 during last year.

STAGE IV FINAL STAGE

When suitable remedial measures are either not taken or are inadequate at

the incipient stage of sickness and adverse factors continuously effect the

production, finance, marketing and personnel areas, the unit finally becomes

sick. At this stage all the financial indicators, such as cash profit/loss, net

working capital, net worth depict negative results. Consequent, it becomes as

expensive affair to bring the sick unit back to a healthy state. If the sickness is

not arrested timely, incidence of sickness leads to incidence of closure

ultimately.

IMPACT OR EFFECTS OF INDUSTRIAL SICKNESS OR

CONSEQUENCES OF INDUSTRIAL SICKNESS.

Industrial sickness leads to higher cost for the organisations. This in turn, negatively

impacts the competitiveness of the economy resulting in rise of dead investments. Money
locked up in sick units gives no retursn and impacts the availability of resources to other

viable units.

Consequences of industrial sickness include-

- Impact on employees - sickness leads to unrest and low motivation of employees.

There are many lay-offs of various employees in the company, which adversely

impacts the employees to a great extent.

- Impact on society- sickness lead to problems for the overall economy. It results in

employment problem and high rate of dissatisfaction due to closure of industrial

unit.

- Impact on resources – it gives rise to increase in wastage of resources invested in

these sick units. It also leads to infrastructure problems and blockage of capital

equipment.

- Impact on investors – sickness brings in low satisfaction rate within the investors.

They wont be able to get a fair return in their investment. Also there is a drastic fall in

the share price of the sick unit.

- Impact on banks and financial institutions – industrial sickness causes unnecessary

locking of resources and funds in these sick units. This leads to huge losses to the

banks and other financial institutions. Sick units are not only fail to pay the interest

but also are unable to repay the principal.

- Impact on government – healthy firm contributes to the income of government, in

the way of taxes, duties etc. industrial sickness results in huge loss of revenue for

Central, State and Local government.

- Industrial unrest – with sickness there can be widespread labour unrest, high

unemployment rates, low productivity and increase in conflicts of trade union with

management. Sickness can lead to high unrest in the industry.

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