unitiii industrialpolicyandindustrialsickness compiled 130205115220 phpapp01

7/29/2019 Unitiii Industrialpolicyandindustrialsickness Compiled 130205115220 Phpapp01

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UNIT III Industrial Policy and

Industrial Sickness

1. Industrial Policy

2. Industrial Sickness

3. Institutional Support Companies Act, IDRA, SICA

(BIFR)

4. Current scenario


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IntroductionThe Industrial Policy of the Government

of India and the regulatory measures

introduced to achieve the policyobjectives have always been matters of

severe controversy. While the

industrialists and many others in India

and abroad and many foreigngovernments and international

development organizations regarded the

policy as too restrictive and the

regulations and procedures toocumbersome and perplexing, the leftists

in India were demanding a more

restrictive regime and are now opposing

the liberalizations.


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The industrial policy and regulation had

grown more and more restrictive untilabout the mid Seventies. Having

realized the deleterious effects of the

restrictive regime, the 1980s saw a very

slow process of liberalization.


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Industrial Policy Resolution,1948The Industrial policy Resolution of 1948 which

envisaged that the "State must play a

progressively active role in the

development of industries" established

exclusive monopoly of the Central

Government in the case of

(i) manufacture of arms and ammunitions

(ii) production and control of atomic energy

and

(iii) ownership and control of railway transport


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Further, establishment of new undertakings in

six other major industries (coal; iron and-steel;

aircraft manufacture; ship building;

manufacture of telephone, telegraph andwireless apparatus, excluding radio receiving

sets; and mineral oils) was made the exclusive

responsibility of the State, except where, in the

national interest, the State itself found it

necessary to secure the cooperation of privateenterprise subject to such regulations and

controls as the Central Government prescribed.

The Industrial Policy Resolution of 1948, thus,envisaged a mixed . economy and emphasized

the entrepreneurial, promotional, regulatoryand planning roles of the State in the

industrialization of the country


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Industrial Policy Resolution,1956

In the light of certain important developmentsthe enactment of the Constitution of India

which guarantees certain Fundamental

Rights and enunciates the Directive

Principles of State Policy, the constitutionof the Planning Commission and the

inauguration of development planning, and

the adoption by Parliament of the socialist

pattern of societyas the objective of social

and economic policy.

A new Industrial Policy Resolution was,

therefore, announced on 30th April 1956

and this remained the basic plank of the

industrial policy until 1991.


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The Resolution of 1956 made the industrial

policy more socialist-oriented, and widened the

scope of the public sector. In order to realize

the aims specified in the preamble to theConstitution and to give effect to the Directive

Principles of State Policy as well as to achieve

the object of socialist pattern of society, it was

decided that "the state will progressively

assume a predominant and direct responsibilityfor setting up new industrial undertakings and

for developing transport facilities. It will also

undertake state trading on an increasing scale.

At the same time, as an agency for plannednational development, in the context of the

country's expanding economy, the private sector

will have the opportunity to develop and

expand.


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The principle of co-operation should be

applied wherever possible, and a steadily

increasing proportion of the activities ofthe private sector be developed along

co-operative lines." It was, thus, clear

that the adoption of the principle of

socialist pattern of society did not meanthe end of the private sector. Instead,

the private sector was assigned and

expected to play an important role in the

nation's economy. The Industrial PolicyResolution of 1956, thus, reiterated the

resolve to foster national development

through a system of mixed economy.


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The Resolution classified industries into

three categories, having regard to the

role which the state would play in each

of them.

(i) The first category contained

industries "the future development of

which will be the exclusive responsibilityof the state." Industries in this category

were listed in Schedule A of the

Resolution. Schedule A contained 17

industries. These 17 industries alsoincluded railways and air transport, arms'

and ammunition, and atomic energy,

which were to be developed as Central

Government monopolies.


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In the remaining industries in Schedule

A, the expansion of the existing

privately-owned units, or the possibility

of the state securing the cooperation ofprivate enterprise in the establishment

of new units when the national interest

so required, was not precluded.

However, it was made clear that"whenever co-operation with private

enterprise is necessary, the state will

ensure, either through majority

participation in the capital or otherwise,that it has the requisite powers to guide

the policy and control the operations of

the undertaking."


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(ii) In the second category were included

industries "which will be progressively state-

owned and in which the state will, therefore,

generally take the initiative in establishing newundertakings, but in which private enterprise

will also be expected to supplement the efforts

of the state. "With a view to accelerating their

future development, the state will increasingly

establish new undertakings in these industries.

At the same time, private enterprise will have

the opportunity to develop in this field, either

on its own or with state participation."

The industries included in the second categorywere listed in Schedule B of the Resolution.

Schedule B contained 12 industries.


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(iii) The third category contained all the

remaining industries and it was expected that

"their development will be undertaken

ordinarily through the initiative and enterpriseof the private sector, though it will be open to

the state to start any industry even in this

category. It will be the policy of the state to

facilitate and encourage and the development

of these industries in the private sector, in

accordance with the programmes formulated in

successive five year plans, by ensuring the

development of transport, power and other

services, and by appropriate fiscal and othermeasures."

It was also made very clear that "the division of

industries into separate categories does not

imply that they are being placed in watertightcom artments.


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Inevitably, there will not only be an area of

overlapping but also a great deal of dovetailing

between industries in the private and public

sectors. It will be open to the state to start anyindustry not included in Schedule A and

Schedule B when the needs of planning so

require or there are other important reasons

for it.

The Industrial Policy Resolution of 1956

reiterated Government's determination to

provide all sorts of possible assistance for the

accelerated development of small and cottage

industries in view of the distinct advantagesthey possess in respect of generation of large-

scale employment by utilizing locally available

resources, wider dispersal of industrial

activities and a more equitable distribution ofincome and wealth.


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Another important objective spelt out by the

Resolution was the removal of regional

disparities in development through the

accelerated development of the regions lagging

behind industrially. The need for proper

infrastructural facilities for industrial

development in the backward regions was

emphasized by the Policy Resolution.The Industrial Policy Resolution of 1956 has,

thus, reiterated the faith in the virtues of a

"mixed economy." While it clearly demarcated

the areas of public and private sectors, it wasat the same time sufficiently flexible to make

the required adjustment and modifications in

the national interest.


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Policy Development in 1970s

Accordingly, an Industrial Licensing Policy was

announced on 18th February 1970.This policy classified industries into:

(i) the Core Sector consisting of the basic,

critical and strategic industries

(ii) the Heavy Investment Sector consisting ofprojects with investment of over Rs. 5

crores

(iii) the Middle Sector consisting of projects

involving investment of Rs. 1 crore to Rs. 5crores

(iv) the De-licensed sector where investment

was less than Rs. 1 crore and was

exempted from licensing.


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The Industrial Licensing Policy of 1970, thus,restricted the role of large industrial

houses and foreign concerns to the core,heavy and export-oriented sectors. The

main purpose was the promotion of new

and small and medium entrepreneurs and

the prevention of the concentration of

economic power in a few hands.

The main thrust of the new policy was on

effective promotion of cottage and small

industries widely dispersed in rural areas

and small towns. It was decided that"whatever can be produced by small and

cottage industries must only be so

produced"


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Industrial LicensingAn industrial license was mandatory for

investments above certain specified limit.

This limit which was Rs. 5 crores was

raised for non-MRTP /non-FERA companies

to Rs. 15 crores in case of projects in non-

backward areas and to Rs. 50 crores in

backward areas, subject to certainconditions, in June 1988.

A license was required not only for

establishment of a new undertaking but

also for substantial expansion of capacityof existing undertakings, manufacture of

new items, continuation of business in

certain cases and change of location of an

industrial undertaking.


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Review of the IndustrialLicensing System

Some of the important disclosures made by the

reports of the above inquiries are given

below:

1. The working of the planned economy had

contributed to the growth of bigcompanies.

2. The working of the industrial licensing

enabled the large industrial houses to

obtain a disproportionately large share ofthe licenses issued.

3. Some of the large industrial houses were

guilty of non-implementation of licenses

and preemption or foreclosure of capacity.


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4. The operation of the industrial

licensing was not successful in

achieving the objective of regional

dispersal of industries.5. The large industrial houses were the

major beneficiaries of the public

financial institutions.

I d t i l P li St t t


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Industrial Policy on 23rd July, 1980.The socio-economic objectives of the Industrial

Policy Statement of 1980 were optimum

utilization of the installed capacity; maximizing

production and achieving higher productivity;higher employment generation; correction of

regional imbalance through a preferential

development of industrially backward areas;

strengthening of the agricultural base by

according a preferential treatment to agro-

based industries, and promoting optimum inter-

sectoral relationships;

Industrial Policy Statement,

1980


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faster promotion of export oriented and import

substituting industries; promotion of economic

federalism with an equitable spread of

investment and dispersal of returns amongst

widely spread small but growing units in rural

as well as urban areas; and consumerprotection against high prices and bad quality.

Small doses of liberalizations with a view to

accelerating domestic economic development

and export growth were introduced followingthe Industrial Policy Statement of 1980

P li Lib li ti i th


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These liberalization measures were introducedwith the following objectives:

(i) acceleration of industrial development;

(ii) better capacity utilization;

(iii) achieving economies of scale;

(iv)removing / reducing procedural

impediments;

(v) development of backward areas;

(vi) export promotion and import substitution;

and

(vii)increasing competitiveness and

competition

Policy Liberalizations in the

Eighties


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Public Sector Policy

In view of the development the nation has

achieved by now and the unsatisfactory

performance of the public sector, the new

policy has redefined the role of the public

sector. Accordingly, the number ofindustries reserved for the public sector

was pruned down to eight. This was further

pruned to four. These four industries are

defence products, atomic energy, railwaytransport and minerals specified in the

schedule to the Atomic Energy Order, -

1953.


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Other Important Changes

1956 life insurance business was

nationalized

1969 most large commercial banks

were nationalized 1973 public sector acquired the

insurance business

1985 - government abolished some of

its licensing regulations and other

competition-inhibiting controls.


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Industrial subsidies were given.

Public sectors was given thecommanding heights of the economy.

A regulatory system consisting of

IDRA, MRTP and FERA was introduced.

Results:

Oligopolistic economy.

High tariff walls curtailed foreign

competition.

Misuse of industrial licensing.


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In order to redress the situation

Government of India announced a New

Industrial Policy on July 24,1991.

The major objectives of the new

industrial policy package are:

To build on the gains already made ;To correct the distortions or weakness

that have crept in;

To maintain a sustained growth in

Productivity and gainful employment

and ;

To attain international competitiveness


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Analysis of the NIP

Certain economists praised the NIP because: It will releases competitive forces

internally . It will help in increasingindustrial efficiency and productivity since

private sector will be more active andpublic sector will be competitive

It will help in promoting entrepreneurialenergies and releasing market forces todetermine allocation of resources because

most of the tedious controls andregulations have been removed. Itwillinfuse cost and quality consciousnessamong entrepreneurs.


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In NIP the role of public sector has been

reduced, so it will improve allocative

efficiency. Opening up of a number ofareas reserved for public sector to private

sector will promote economic efficiency

and growth. Closure or rehabilitation of

sick or weak public sector units will freeresources for more productive use.

Similarly, privatisation of the public sector

may help improving its productivity.


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Greater stress on controlling monopolistic,

restrictive and unfair trade practices and

strengthening the MRTP commission will

curb the anti-competitive conduct ofcompanies. Removing the threshold limits

will result in expanding the implementation

of investment decisions.

In NIP foreign investment and technologyare being invited ,so there would be a flow

of foreign capital, technology and

managerial expertise from abroad . This will

improve the supply of scarce resources in

the country and also improve the balance of

payments situation.


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Critics of the NIP NIP might in misallocation and wastage of

scarce resources. The fact that norestriction are imposed on the entry, over-

zealous entrepreneurs may create

excessive capacities.

The scrapping of a large portion MRTP Acthas also been criticised. Ii is argued that

even in advance economies, business

activities are closely scrutinised for

protecting the interest of consumers andpublic at a large.


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Free technology import may result in

import of second-hand technology or

creation of multiple technology.

Unrestricted import of foreign

technology may destroy the

indigenous industry and technology.

Market driven policies may disturbindustrial peace as there could be

large scale displacement and

retrenchment of labour.


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2. Industrial Sickness

A Sick Industrial Company implies the following:

1. It must be an industrial company which is as specified inthe First Schedule to the Industries (Development andRegulation) Act, 1951 (IDRA) but does not include anancillary industrial undertaking or a small scale industrialundertaking as defined under IDRA.

2. The company should have been in an existence for at least5 years since the date of incorporation.

3. The company should have accumulated losses equal to orexceeding its net worth at the end of any financial year.

'Net Worth' means the sum total of paid-up capital andfree reserves

Wh t d Si k


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What does Sickness

imply??? Empty Treasury

Inability to repay debt installments from loansand statutory liabilities like Provident Fund etc.

Mounting Losses, High Rejection Rate of Goods,

Piling Inventory

Inability to do Business competitively, IndustrialDisputes, Low Capacity Utilization.

Worse than Bankruptcy (which implies a debtdefault), as it implies an erosion of the networth of the company

ie. The company is Insolvent or Financially Ruinedfor all practical purposes.

Wh t th f


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What are the reasons ofbecoming sick ?

Losses are due to drainage of resources onwasteful or unnecessary expenditure.Sickness is caused by prolonged periods oflosses sustained by the company.

There are two main categories:

1. Internal Reasons

2. External Reasons

Internal reasons


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Internal reasons(which can be controlled by

company)

Mismanagement

Underestimation of the cost of the project

Delay in the implementation of the project

Increase in cost due to delay inimplementation of project

Under Utilisation of Resources

Diversion of Funds

Lack of Management depth

Bad Industrial Relations

Bureaucratic management

Inadequate working capital

Heavy Expenditure in Advertisements


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External reasons(which cannot be controlled by

the company) Adverse government rules and regulations

Adverse Price Control Policy

Recession Trend/economic conditions

Tough Competition

Shortage of Manpower, Raw Materials etc.

Changes in Technology

Changes in Consumer Behaviour

Shortage of Power Supply

Delay in getting any financial assistance.


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Types of Sick Units

Industrial units

Born Sick Achieved Sickness Sickness Thrust


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1. Born sick

These units were not financially viablefrom the out start and were undertakendue to lack of foresight and businessacumen.

Characterized by:

1. Lack of experience of the promoters,wrong selection of the project.

2. Faulty project planning

3. Paucity of funds and faulty financialmanagement

4. Time and cost over-runs.

5. Location related problems.


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(Continued.)

6. Technological factors

7. Wrong assessment of the market potential

8. Faulty demand forecasting

9. Change in the market conditions includingthe change in the customer tastes and

preferences

10. Competitive situation, etc.


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2. Achieved Sickness

These units had a viable business cycleand became sick due to mismanagementor external reasons.

Characterized by:

1. Bad management2. Unwarranted expansion and diversion of

resources

3. Inability to modernize resulting in lowefficiency

4. Too much competition by larger players,especially from overseas

5. Product becomes obsolete

6. Changes in Government rules and

regulations


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3. Sickness Thrust

These units are not yet classified as sick but arerapidly losing profits and market share tocompetitors

Characterized by:

1. Increased Competition

2. Move towards Sickness3. Inability to modernize resulting in low efficiency

4. Other factors are similar to Achieved Sickness

5. There is a scope to control the factors beforeachieving sickness

6. These units are weak or potentially sick

Weak or Potentiall Sick


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Weak or Potentially Sick

Companies

A Potentially Sick Industrial Companyimplies the following:

1. The company should be in an existence forat least 4 years since the date of

incorporation.

2. The company should have an accumulatedlosses equal to or exceeding 50% of its networth during the immediately preceding 4

years.

'Net Worth' means the sum total of paid-upcapital and free reserves.

These companies are at the stage of 50

percent erosion of their Net Worth

Consequences of


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Consequences of

Sickness

The Sickness of a company has an immediateimpact on all the entities related to it.

Chiefly:

1. The Labor or Workforce of the Company facesunemployment

2. The Creditors of the Company (to which itowes money) face bad loans and losses

3. Loss of production

4. Loss of revenue to the exchequer

Sick companies must either faceRestructuring or Closure


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Corporate RestructuringRestructuring is an attempt to revive a sick unit

by reversing negative trends throughTurnaround Management.

It Involves:

Financial Reconstruction

Change in Management Amalgamation into a larger entity

Sale or lease of a part or whole of anyindustrial undertaking of such company

Rationalization and streamlining ofpersonnel

Restructuring often generates bureaucratictangles and losses of money and time.


45/73

Closure

The Closure of a company involves:

1. Sale of assets to pay off creditors

2. Issue of Compensation, if any to laid

off workers Closure may seem a drastic option but

makes good economic sense in manycases.

This is because Restructuring is not a

panacea. It involves pumping moremoney into a company that may nothave the potential to return toprofitability.


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3. INSTITUTIONAL SUPPORT

Companies Act

Companies Act,1956 , is the successor to the

Indian Companies Act of 1913.

This Act empowers the government to

regulate the formation of companies and tocontrol the management of companies.


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S li t F t f C i


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Salient Features of CompaniesAct

The Act recognizes following threecategories

1. Companies limited by shares.

2. Companies limited by guarantee.

3. Companies with unlimited liabilities.

The Companies Act, 1956, empowers the govt tocollect information from the companies whichwould enable it to assess the state of affairs ofthe companies and to take certain measures toprevent mismanagement.

Empowers Govt. to investigate in the internalaffairs.


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WINDING UP OF COMPANIES

The company registered under the Companies Act cancease to exist by any one of the following legalmethods:

1. If the company transfer its undertaking(s) to anothercompany under a scheme of reconstruction oramalgamation.

2. The name of a defunct company may be removed fromthe Registration of Companies by the Registrar.

3. A company may be wound up under Part VII of theCompanies Act.

According to Companies Act, there are three methods ofwinding up, viz.,

1. Winding up by court.

2. Voluntary winding up.

3. Winding up subject to the supervision of the court.


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Need for new act


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Need for new act In the past, the govt. took over the management of

a number of sick undertakings under IDRA, with the

objectives of reviving them by providing

management support and financial assistancethrough banks and financial institutions

However in due course the govt. felt that it was a

mistake to have gone on taking over the sick units

and that the govt. should not be burdened with the

mounting losses of the sick units. While some units were nursed back to health ,a

number of others continued to suffer huge losses.

Takeover of sick units is not favorable for the

government.

Only such units which are found to be potentially

viable need to be taken up for formulation of

rehabilitation packages to restore them back to

health.


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The objectives of this Act (SICA) as incorporated in itspreamble, emphasizes the following points:


55/73

preamble, emphasizes the following points:

SICA had been enacted in the public interest to dealwith the problems of industrial sickness with regardto the crucial sectors where public money is locked

up. It contains special provisions for timely detection of

sick and potentially sick industrial companies,speedy determination and enforcement ofpreventive, remedial and other measures withrespect to such companies.

Those measures are to be taken by a body ofexperts.

The measures are mainly

(a) Legal

(b) Financial restructuring

(c) Managerial

The 1993 Amendment to the Act lays down that aninquiry shall be deemed to have commenced uponreceipt by the Board of any reference of informationor upon its own knowledge reduced to writing by theBoard


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mportant rov s ons o


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mportant rov s ons oSICA

Constitution of two quasi-judicial bodies BIFR and

AAIFR and their Benches. Procedure of the Board and the Appellate Authority.

Filing of references and criteria of sickness.

Provision of enquiry into companys health.

Appointment of Special Directors and OAs.

Preparation of sanctioned scheme.

Provision for monitoring of schemes.

Rehabilitation by giving financial assistance.

Winding up of sick industrial companies.

Protection to safeguard the interests of the sickcompanies.

Provisions for dealing with potential sickness. Provision for seeking information and giving

information Central Govt., RBI, FIs Stateinstitutions and sick companies and in case ofamalgamation other companies.


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60/73

Reference to the BIFR under

the SICA

Under the Act, other than the Board of Directors ofthe Company,the following authorities/institutionsmay refer a sick company to the BIFR:

The Central Government

The Reserve Bank of India

State Government (where all or any of theundertakings belonging to such company aresituated in such State)

Public financial institution (where it has an interestin the Company by any financial assistance orobligation, rendered by it or undertaken by it)

A State level Institution (where it has an interest inthe Company by any financial assistance orobligation, rendered by it or undertaken by it)

A Scheduled bank (where it has an interest in theCompany by any financial assistance or obligation,rendered by it or undertaken by it)


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BIFR Procedure

On the receipt of a reference or onreceipt of information or kits own

knowledge as to the financial condition

of the company, the Board is authorized

to make an inquiry for determiningwhether the industrial company has

become sick.

The Board also has the power to require

any operating agency to inquire into and

make a report on such matter as the BIFR

may specify.


62/73

BIFR Procedure (contd)

If after such enquiry the BIFR is satisfied

that the company has become a sickindustrial company, it may decide:

1. If it is practical for the company to makeits net worth exceed the accumulatedlosses within a reasonable time, it may

give the company such time as it deemsfit to make its net worth exceed theaccumulated losses. A Rehab schememay also be sanctioned

2. If it is necessary in public interest toclose the company, it is recommendedfor closure, provided it is not practicableto turnaround the company fromIndustrial Sickness.

k


63/73

Measures Taken By BIFR

The measures that are prescribed for rehabilitationunder Section 18 of the Act are

financial reconstruction of the sick industrialcompany

the proper management of the sick industrialcompany by change in or take over of the

management of the sick industrial company the amalgamation of the sick industrial company

with any other company or vice versa

the sale or lease of part/whole of any industrialundertaking of the sick industrial company

rationalization of managerial personnel, supervisory

staff and workmen in accordance with law Other measures as may be necessary in connection

with the measures specified above.

BIFR PROCEDURE


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Inquiry

References received

Monitoring

Failed &reopened

Discharged on

Revival

Registered Reg. declined

Recommendedfor closure

Rehabscheme

sanctionedDismissed

AAIFR


65/73

AAIFR

The SICA also provides for theestablishment of an appellate authority

called the The Appellate Authority forIndustrial and Financial Reconstruction

consisting of a chairman and not morethan three members.

The AAIFR was setup for hearing appealsagainst the orders of the BIFR.

BIFR P bl


66/73

BIFR--- Problems

BIFR either identifies extremely sick firmsor mistakenly declares non-sick companies

as sick

Asymmetry between lender and borrower --

at the expense of lender Lender: NPA after 180-days default

Borrower: NPA after net worth 0

SICA definition


67/73

SICA definition

Problems for BIFR

Either SICAcatches it

too late

Default starts here

SICAcatcheshere

Net worth

Years

Or,

companies

fudge

accountsto get

shelter

under BIFR

BIFR delays: Jan 97 to


68/73

BIFR delays: Jan 97 to

Mar 98

1468

1664

0

365

730

1095

1460

1825

Sanctioned Winding-up

Dayslost

Jul 87 to Jul 92:- Mean delay: 851 days

Jan 97 to Mar 98:- Mean delay : 1664 days


69/73

Where does BIFR


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Where does BIFR

stand? No. of references to BIFR shooting up

since 1996

97

400370

233

050100150200250300350400450

1996 1997 1998 1999Years

Refereces

R F D l


71/73

Reasons For Delays

There are a number of reasons why theprocess of restructuring and liquidation ofsick firms is not only slow, but extremelydifficult.

1) At every level of mediation anddecision-making, BIFR uses a consensusapproach implying thereby that all partiesi.e., the management, workers, creditors,and shareholders must agree to arestructuring plan before any restructuringor liquidation can begin.

2) Hostile trade unions with strong unionpractices have systematically opposedrestructuring in various degrees.

Reasons For Delays


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easo s o elays

contd

3) State governments have followed very

rigid practices

4) The slow moving judicial process have

all created strong barriers to restructuringand liquidation.

C t S i


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Current Scenario

SICA repealed in 2003 by theSick Industrial Companies

(Special Provisions) Repeal Act.

Most provisions have beenincorporated in Ch VI A (Sec

424A 424L) of Companies Act

with explanatory remarks.

unitiii industrialpolicyandindustrialsickness compiled 130205115220 phpapp01

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