Industrial Sickness Redefined


There are a number of definitions of industrial sickness based on different norms such as generation of surplus, liquidity, solvency, amount and period of irregularities in operation etc.

The Reserve Bank of India (RBI) in November 2012 modified the definition of sickness and a procedure for assessing the viability of sick micro and small enterprises (MSEs). According to RBI, “A Micro or Small Enterprise (as defined in the MSMED Act 2006) is considered sick when any of the borrowal account of the enterprise remains NPA for three months or more; or there is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth.”

( Net worth is the total assets minus total outside liabilities of  a company. So it is the amount by which assets exceed liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be used to determine creditworthiness because it gives a snapshot of the company's investment history.)

The stipulation that the unit should have been in commercial production for at least two years has been removed by the RBI.

Earlier, an MSE was considered sick if any of the borrowal accounts of the unit remains substandard for more than six months. This means if principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding one year. RBI had also said it would be considered sick if there was erosion in the net worth due to accumulated cash losses to the extent of 50 per cent of its net worth during the previous accounting year; and the unit had been in commercial production for at least two years.

Earlier, there was no stipulated time frame for deciding the viability of a unit. However, now the decision on viability of the unit should be taken at the earliest but not later than three months of becoming sick under any circumstances.

RBI has also laid down the procedure for declaring a unit unviable.

In fact now incipient sickness or handholding stage has been defined by the regulator.
The changes have been made because the recent global slowdown has adversely impacted the economy in general and more specifically the MSEs. It was recognised that MSEs suffer the most in such situations especially from discontinuity of business, which they normally are not in a position to bear and become sick immediately.

This would enable banks to take timely action in identification of sick units for their revival. The MSE units which could not be revived after intervention by banks at the ‘handholding stage’ need to be classified as sick subject to complying with any one of the two conditions as laid down above and based on a viability study the viable/potentially viable units be provided rehabilitation package. The rehabilitation package should be implemented speedily in a time bound manner. The rehabilitation package should be fully implemented within six months from the date the unit is declared as 'potentially viable' / 'viable'. While identifying and implementing the rehabilitation package, banks are advised to do ‘holding operation' for a period of six months. This will allow small-scale units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such ‘holding operation'.

Units becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners / promoters, etc. should not be classified as sick units and accordingly should not be eligible for any relief and concessions. In such cases steps should be taken for recovery of bank’s dues. The declaration of a borrower as a willful defaulter should be done strictly in accordance with the extant RBI guidelines.

Earlier, the State Bank of India (SBI) study team in its report on Small Industrial Advances (1975), defined a sick industrial unit as a unit which fails to generate adequate internal surpluses on a continuing basis and dependr; for its survivaI on frequent infusion of external fina~tcid help, thereby it brings about serious disequilibrium in its financial structure

The Sick Industrial Companies (Special Provisions) Act, 1985 defines a Sick industrial Company as an industrial company (being a company registered for not less than five years), which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

In general, a sick unit is an unhealthy unit to a common man, a profit postponing unit to an investor, a discouraging unit to an industrialist, a source of industrial problems to the Government, a victim of technological change to a technocrat, a bad employer for workers and a source of wastage of technical and human resources to the country.

Monday, 04th Apr 2016, 12:26:03 AM

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