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Industrial sickness :
Industrial sickness According to RBI : A sick unit is one which incurs cash losses for 1
year & which , in the judgment of the bank , is likely to incur losses for the current year
as well as the following year, & which has imbalances in its financial structure, like
worsening debt equity ratio. Magnitude of sickness The total bank credit locked up in
sick units increase form Rs 13134 crore as the end of Mar 1993 to Rs 13748 as on mar
1996.
Remedial measures :
Remedial measures Industry sickness is a social problem as its like a burden on the
society. Industrial sickness policy 1978, The govt. should make suitable arrangements for
monitoring & detecting industrial sickness at an early stage Financial institutes that have
substantial stake in the co. could nominate their employee on the BoD of the co.s with
doubtful management competency. In case if it finds co is indulging in malpractices , it
can restrict its financial assistance. The govt shoud set up a screening committee to make
recommendation relating to sick undertaking on the following lines
Slide 3:
A. in case the govt. finds that a unit can not be handed back to the same management , it
may recommend a take over to the management B. in case the financial institutions or the
state govt recommends that the unit should be taken over or the take over the units is
deemed necessary in national interest, the management should be taken over C. after take
over the management the unit can be sold as a running concern. Alternatively a
reconstructions of the undertaking could be done D. the merger of the unit with the public
sector undertaking could be considered
Reasons for sickness External Causes Internal causes Power Cuts Irregular supply of
inputs Demand & credit restraints Govt. policy( reduced custom for Chinese electronics)
Wrong location & planning(HMT) Defective plant & machinery Entrepreneurial
incompetence(Lakhotia STG, Aptech) Financial problems Management problem
Inefficient R&D
Sick Industrial Act SICA 1985. According to this Act a company can be reported sick at
2 levels. 1. when the erosion of the net worth is of the order of 50%, the BoD of the sick
units has been directed to bring it to the notice of the shareholders within a period of 60
days from the date of finalization of the duly audited a/c of the co. 2. when the erosion of
the net worth is 100% and more & the unit continues to show cash losses for the next 2
years , the management of the unit is required to report to the newly constituted Board
under the Act, which would then take appropriate action which may involve merging,
rehabilitating, or even winding up after a fresh appraisal through an operating agency
Remedial action by Banks Commercial banks grants various concessions to the sick units
like additional working capital, recovery of interest rates are reduced, Setting up a sick
industrial cell in RBI State level inter-institutional committee RBI to ensure better co-
ordination between banks at the central & state level