ECONOMIC HIGHLIGHTS               

New Delhi, 10 October 2007

Sick Industries

ALLOW TAKEOVER OF UNITS

By Dr. Vinod Mehta

As the economy is booming the problem of sick industrial units has receded into the background but it has not disappeared. Industrial units that are unable to financially sustain themselves are generally called "sick units" in India. A number of studies have revealed that sick units have not only lost their net worth, but they have also lost capital raised from sources other than ownership. Shockingly, the extent of accumulated losses of sick units in the country is about two times that of the net worth of the sick units.

Bluntly, this means that factories are simply abandoned. The owners strip them of everything portable and sneak away in the night. Leaving people with claims against the firm without any remedy. Creditors, suppliers and workers despite or should one say because of their formidable legal protection get nothing.  Far from adding to the growth of the Gross Domestic Product (GDP) they are in fact eating into it. How long can this go on?

Moreover, bank loans to such industrial units have become non-performing assets for some of the lending banks. There is little production in these units, the machine and equipment lies unused and the labour force is idle but gets some payment for doing no work. Not only that. The unit cannot be closed down because of our company and labour laws and these units cannot be taken over by better managements.

Look at the sick textile or jute mills. The Government does not have the money to revive them and the workers would not like them to be taken over by another management in the private sector. The result, scarce funds remain locked and assets remain idle.

A few years back the RBI had reported that the total outstanding bad debt of the sick industries stood at Rs 12,474 crores. Today, this figure might be much higher. If these resources were to be recovered, they could be used to set up power plants and many other infrastructure projects in the country. But in the absence of any exit policy the scarce resources of the country are blocked for the last so many years. Some special package has been announced for the revival of sick textile units but it had very little impact.

In most parts of the world takeover of inefficient units by healthier units is an accepted norm. It is for this reason that there is no concept of "sick industry" in the economic literature of most countries. The production units are either efficient or inefficient but never sick. The inefficient units, which are unable to improve their efficiency, are generally taken over by the healthier units or are allowed to close down.  This saves the society from wasteful investment and ensures efficient use of scarce resources.

It is for this reason that from the very beginning of economic reforms both the domestic and foreign investors have been asking for an exit policy so that if something goes wrong with their investment because of a changed investment climate, altered market scenario etc. they are able to get out of their investment with the least loss. 

The main culprit appears to be India’s archaic Industrial Disputes Act which does not allow easy closure or takeover of sick units. Also, the closure of sick units is decided by the Board of Industrial and Financial Rehabilitation (BIFR). The BIFR process is extremely slow and often takes 10 years or more to decide cases of sick units.

It was hoped that in the absence of any exit policy, the takeover code, which was introduced a few years ago, would substitute for an exit policy. Importantly, it could be used to nurse the sick units back to health, of course, with the change of management. However, the so-called takeover code has miserably failed in tackling the problem of sick industries.

This is not to state that there have been no takeovers in the past.  There have been changes in management in the past but they are of no significance and have been mainly for the existing profit earning units and seldom sick units.  And whatever takeovers have occurred they have never been transparent.

Clearly, the time has come for the Finance Ministry to either come out with the long needed exit policy or make amendments in the existing takeover code and turn it into some kind of an exit policy. In fact, the takeover code if modified and vigorously implemented in the case of sick companies could very well redeem the situation of sick industries.

Under the takeover code the inefficient and mismanaged companies should be openly encouraged to be taken over by the stronger companies. There is no harm if inefficient Indian companies are taken over by foreign companies as it would not only bring foreign capital, the latest technology but also modern management practices.

Additionally, it would encourage companies to efficiently manage their business or risk being taken over by other. This would not only save the exchequer lots of precious funds, the banks saved from the ignominy of non-performing assets and the workers and employees from a shortfall in their income. The financial institutions too would not be required to write off their bad debts or the Government to contribute from the Central budget. Or the sick company should be allowed to go to the highest bidder without any interference from any quarter.

It is common knowledge that the primary capital market has almost dried up for the last almost several years. While the secondary capital market is booming and quite volatile.  Thus, an easy takeover of sick industries might perhaps also have a salutary effect on the capital markets and may contribute to their revival.

The need of the hour is that the Finance Minister tackles the problem of sick industries once and for all. That too in the shortest possible time and enable the country to redeploy the resources to more meaningful areas like infrastructure development. With foreign investors showing interest in investing in India, the time is opportune to allow takeover of sick industries by the healthier domestic and foreign units.

With the economy booming, if necessary the Government could amend the Industrial Disputes Act to make the closure of sick units easier and also make the takeover code more meaningful.  Within the next three to five years there should be no category of sick industrial units in India. ---- INFA

(Copyright India News and Feature Alliance)