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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.
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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:
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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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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.
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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
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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
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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
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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
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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
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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
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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
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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.