MODULE 5- CASE STUDIES ON

ENTREPRENEURSHIP
• Case Studies – Successful & Unsuccessful
Entrepreneurs
• Key Variables explaining Success / Failures
• Industrial Sickness – Reasons
• Discussion on Future of SMEs in India
 Industrial Sickness
• Refers to a situation when an industrial firm
performs poorly, incurs losses for several years
and often defaults in its debt repayment
obligations.
 Definition
• The Reserve Bank of India has defined a sick
unit as one if it has following features:
• Incurred a cash loss for one year
• Likely to continue incurring losses for the
current year as well as in the following year
• The unit has an imbalance in its financial
structure, such as,current ratio is less than 1: 1
• Worsening trend in debt-equity ratio
 Sick Industrial Companies Act (SICA)
• However, prior to the enactment of Sick Industrial
Companies Act (SICA) in 1985, there was no
agreement on the criteria to be used to describe
an industrial unit as sick.
• According to SICA, as amended in 1992, an
industrial company can be declared as sick which
has at the end of any financial year accumulated
losses equal to or exceeding its entire net worth.
• Sick Industrial Companies Act (SICA) applies to
registered companies which have been in
existence for at least 5 years.
Types of Sick Companies
 Symptoms of Industrial Sickness
• Industrial sickness does not occur suddenly
• Gradual process that can take a number of years
• Warning signals may be apparent in the early life
of an industry
• Identification of signals can prevent the sickness
• Symptoms could be either financial or non
financial
• Both are apparent
• Usually non financial symptoms precede the
financial symptoms
 Non-Financial Symptoms
• Decline in capacity utilisation
• Frequent breakdown in plant & machinery
• Decline in the quality of products or services
• Fall in stock of inventories
• Incapacity to produce according to schedule
• Excessive labour turnover
• Delay in submission of data to bank and
financial institutions
 Financial Symptoms
• Improper bank accounts
• Shortage of funds to meet short-term financial
obligation
• Inability to pay interest on borrowings
• Inability to pay creditors on time
• Delay or default in the payment of statutory
dues such as PF, ESI etc
 Major symptoms of industrial
sickness
• Decline in production and • Heavy dependence on
sales external funds
• Frequent request for the • Default in payment of
enhancement of credit statutory dues
limits • Delay in audit of accounts
• Shortage of cash • Low employee morale
• Deteriorating financial
ratios
• Discounting cheques for
amounts in excess of
genuine business
transactions
 Signs of Sickness observed from
Balance Sheet
Liabilities Assets
• Current Liabilities • Current Assets
– Short term borrowings are – Dead stock and non-moving
high inventories
– Unpaid statutory liabilities for – Overdue debts
a period exceeding one year – Negligible cash and bank
– Suppliers remain unpaid for balance
long periods – Depletion of current assets
– Contingent liabilities exist due
to law suits
 Contd…
• Term liabilities • Fixed Assets
– Loan installments not – Non realizable and
paid for a period appear to be infested
exceeding 1 year
• Intangible Assets
• Equity – Include losses
– Gradually reducing and – Capitalized expenses
even negative would be prominent
Causes/Reasons of Industrial Sickness
• External Causes
– Changes in government policy
– Inadequate availability of inputs
– Recessionary trends
– Credit squeeze by banks
– Infrastructural problems
– Changes in monetary policy
– Adverse changes in money market and capital
market
 Internal Causes
• Lack of experience of • Marketing
promoters • Poor information system
• Easy approval of Small Scale • Personnel Constraints
Units • Under utilisation of capacity
• Dependence on own funds • Delayed recognition
• Improper financial structure • Lack of financial control
• Diversion of funds • Improper Technology
• Lack of management
experience
• Non observance of
principles of management
• Delay in payments
 Measures to prevent sickness
• Ensure that sickness is arrested at incipient
stage
• Make professional management expertise
easily available
• Priority to small scale units
• Action for non payment
• Rehabilitation package to cover various areas
• Separate division in BIFR to deal with sickness
 BIFR
• Board for Industrial and Financial
Reconstruction
• Was originally dealing with revival of large
units
• Now sick small units also fall within purview of
BIFR
Policy initiatives to deal with Sickness
• The Kohli Committee
• Internal group to strengthen credit flow of
SME Sector
• Dr K G Chakrabarthy Committee
• For detailed notes refer (E Gordon & K
Natarajan)