Industrial sickness is rampant in India. There are hundreds of large sick units, thousands of medium scale sick units, and countless number of small scale sick units. Thousands of crores of bank funds have been locked in these sick units. In addition, the unpaid arrears of excise duty, sales tax, provident fund, wages, power bills, and so on are considerable.
The rising incidence of industrial sickness has been a cause of great concern to the government, financial institutions, banks, entrepreneurs, employees and others.
Causes of Sickness:
Industrial sickness is caused by a variety of factors like market recession, infrastructure bottlenecks, technical short comings, changes in government policies, and so on. Of course managerial deficiency is often the most important factor. A study of RBI put it this way: A broad generalization regarding important causes of industrial sickness emerges. It is observed that the factor most often responsible for industrial sickness can be defined as management. This may take the form of poor production management, poor labor management, poor resources management, lack of professionalism, dissension within the management or even dishonest management.
When an industrial unit is identified as sick, a viability study should be conducted to assess whether the unit can be revived / rehabilitated and a suitable plan for rehabilitation must be formulated. This may involve one or more of the following elements.
Settlement with Creditors:
A sick unit is normally in straitened financial circumstances and is not able to honor its commitments to its creditors (financial institutions, debentures holders, commercial banks, suppliers, and of government authorities). To alleviate its financial distress, a settlement scheme has to be worked out which may involve one or more of the following rescheduling of principal and interest payments; waiver of interest; conversion of debt into equity; payments of arrears in installments.
Provision of Additional Capital:
Typically a revival program entails provision of additional capital. This may be required for modernization and repair of plant and machinery, for purchase of balancing equipment for sustaining a new marketing drive, and for enhanced working capital needed to support a higher level of operations. The additional capital has to be provided on concessional terms at least for the initial years, so that the financial burden on the unit is not high.
Divestment and Disposal
The revival program may involve divestment of unprofitable plants and operations and disposal of slow moving and obsolete stocks to improve liquidity.
Reformulation of product Market Strategy:
Many a business failure can be traced to an ill-conceived product market strategy. For reviving a sick unit, its product market strategy may have to be imaginatively reformulated to improve the prospects of its successful recovery.
Modernization of Plant ad Machinery:
In order to improve manufacturing efficiency plant and machinery may have to be modernized renovated and repaired. This may be essential for attaining certain cost standards and quality norms for competing effectively in the market place.
Reduction in Manpower
Generally sick forms tend to be over staffed. The revival program must seek to reduce superfluous manpower. Often a golden handshake involving paying significant retrenchment compensation is a better proposition than carrying redundant manpower on the payroll of the unit.
Strict Control over Costs
A profitable organization cannot afford wastefulness and laxity in its expenditures. A tottering firm, seeking to regain its health and vigor has to exercise strict control over its costs, particularly over its discretionary expenses.
Streamlining of operation:
Manufacturing purchasing and selling operations have to be meticulously examined so that they can be streamlined. Value engineering standardization, simplification, cost benefit analysis, another approaches should be exploited fully to improve the efficiency of the operations.
Improvement in Managerial Systems:
The managerial systems in the unit must be strengthened. In this exercise greater attention may have to be paid to the following environmental monitoring organizational structure, responsibility accounting management information systems, and budgetary control.
During the revival phase, the dedication, commitment and support of workers is indispensable and meaningful workers participation and involvement goes a long way in ensuring this.
Change in management:
A change in management may be necessary where the present management is dishonest and/or incompetent. It has observed that a new chief executive, who is competent, committed and up right can often bring about dramatic results.