Industrial and Financial Reconstruction in India

Industrial and Financial Reconstruction in India!

Introduction:

The Government of India set up a Board for Industrial and Financial Reconstruction (BIER) under the Sick Industrial Companies (Special Provisions) Act (SICA) 1985.

The board became operational from May 15, 1987. The amendment in the Sick Industrial Companies Act (SICA) in December 1991 brought public sector enterprises also within the purview of BIFR. The industrial companies (other than those specifically exempted under the Act) whose net worth has been eroded completely or by 50 per cent or more are required to make a reference to the BIFR under sections 15 and 23 of the Act, respectively.

The present BIFR norms lay down that a unit must be in existence for a minimum period of five years for it to qualify for classification under the BIFR Act in case of sickness. The powers of BIFR are wide ranging and extend to the framing of the scheme of amalgamation, merger and financial reconstruction. The scheme relating to revival of any sick industrial company offered by BIFR could provide for financial assistance by way of loans, advances, guarantees, reliefs etc. from official financial institutions.

The scheme offered by BIFR for the revival of a sick industrial company may provide for any one or more of the following measures:

1. The financial reconstruction of the sick unit so as to make it viable.

2. Change in the management of the sick company or to arrange for its takeover by a non-sick efficient company.

3. Merger of the sick industrial unit with any other company.

4. The sale or lease a part or whole of the sick industrial undertaking.

BIFR follows a clear-cut policy of holding the large groups responsible for their sick units. Large houses will have also to make the maximum sacrifice in the revival process. The bulk of financial package will have to be borne by the healthy units in the group. If it is found that large corporate houses are dithering in their help to sick units, the RBI’s group concept will be applied.

Where the BIFR finds that it is not possible to revive the sick unit through financial reconstruction, change in management or takeover by others and that its net worth cannot be increased to exceed its accumulated losses within reasonable time, it then recommends that the sick company should be wound up. It can then approach the High Court of a State for winding up of the company. It is worth mentioning that the decision of BIFR is binding on all concerned.

References to BIFR for Revival of Sick Industrial Companies:

Those industrial companies whose net worth has been eroded completely or by 50 per cent or more are required to make reference to BIFR for taking appropriate measures for their revival. As will be seen from Table 38.2, since its inception in May 1987 till the end of September 2006, the Board of Industrial and Financial Reconstruction (BIFR) received 6,991 references under the Sick Industrial Companies (Special Provisions) Act (SICA), 1985. These references included 296 references from Central Public Sector Undertakings (CPSUs) and State Public Sector Undertakings.

With 6,991 references received, 1,707 were dismissed as non-maintainable under the Act. 760 rehabilitation schemes (including 12 by Appellate Authority of Industrial and Financial Reconstruction (AAIFR) (Supreme Court), were sanctioned and 1,303 companies were recommended to be wound up. 485 companies have been declared ‘no longer sick’ and were discharged from the purview of SICA as their net worth turned positive after the implementation of the schemes.

Among the 296 references for Public Sector Undertakings (PSUs) registered up to Sept. 30,2006, Rehabilitation Schemes were sanctioned for 28 CPSUs and 26 SPSUs. It was recommended that 29 CPSUs and 40 SPSUs be wound up. Besides 9 CPSUs and 14 SPSUs were declared no longer sick. As on Sept. 30, 2006, the gross disposal of cases by BIFR stood at 4,115.

Recommendations of the Committee on Industrial Sickness and Corporate Restructuring:

Government of India appointed a Committee on Industrial Sickness and Corporate Restructuring in May 1993.

The committee submitted its report in July 1993. The major recommendations of the Committee are as follows:

1. The industrial unit should be treated as a sick unit if it makes:

(a) Default of 180 days or more on repayment to term lending institutions; and

(b) Irregularities in cash credits or working capital for 180 days or more.

2. A sick company’s own reference to BIFR should be voluntary, not mandatory.

3. The BIFR should act as a fast track facilitator and occasionally an arbitrator.

4. There should be five fast track winding up Tribunals to reduce the problem of delays in winding up.

5. The Industrial Disputes Act (IDA) should be amended so that there is no need for seeking prior approval of the Government for lay-off and retrenchment of workers and for a permanent closure. Further, for the operation of the provisions relating to lay-off, retrenchment and closure, the number of workers in an undertaking should be raised from 100 to 300. The compensation for retrenchment and closure may be increased from 15 days’ wages to one month’s wage per year of the completed service.

Conclusion:

A viable policy for dealing with the sick units must provide for orderly closure of the units which have no chance of survival. In the past, the Government was compelled to take over sick units because of the socio-economic reasons for maintaining employment and to avoid sudden and undue hardship to the workers’ families. But this is not a rational way of bailing out uneconomic industrial units.

The previous management must be held accountable for the lapses which impaired the economic viability of the units concerned. The inept and fraudulent managements must receive adequate punishment. Needless to say that sick units with no prospect of becoming viable should not be kept alive artificially at heavy cost. Special institutional arrangements are needed to deal with this complex problem of industrial sickness.

As the mismanagement by the private businessmen has been the main factor the policy of takeover of these private sick units by the Government has been widely criticised. Dr. Prem Shankar Jha rightly writes, “In fact as the takeover of sick engineering units and textile mills has shown in every case what the Government has inherited is a load of worn-out machinery, a mountain of debts and a distrust of work-force. Nationalization in such circumstances has become a means of indemnifying the entrepreneur against the consequences of his misdeeds instead of punishing him — first he milks an enterprise dry, then hands it over to the Government for salvage”.

Further in our view the approach towards the rehabilitation of sick industrial units has to be very selective and systematic. There is no point in throwing away further resources in support of units which are irretrievably sick. Only such units as are found to be potentially viable need to be taken up for the formulation of rehabilitation packages to restore them to health.