CORPORATE FINANCECORPORATE FINANCE

Role and Responsibility ofRole and Responsibility of

BIFRBIFR

REHABILITATION FOR REHABILITATION FOR SICK UNITSSICK UNITS

PRESENTED BYPRESENTED BY Rashmi SinhaRashmi Sinha

INTRODUCTIONINTRODUCTION Sick industries have far-reaching consequences on the economy of Sick industries have far-reaching consequences on the economy of

the nation. the nation. The following are the bad effects of Industrial The following are the bad effects of Industrial Sickness--Sickness--

1.There is under utilization of capital assets.1.There is under utilization of capital assets.

2.The entrepreneurship level declines. Increase in industrial2.The entrepreneurship level declines. Increase in industrial sickness discourages entrepreneurship.sickness discourages entrepreneurship.

3.The investor confidence reaches to lower extent. Thus, capital is 3.The investor confidence reaches to lower extent. Thus, capital is not put to productive use.not put to productive use.

4.Industrial sickness results in large scale unemployment and 4.Industrial sickness results in large scale unemployment and industrial unrest.industrial unrest.

5.Profitability of banks and financial institutions gets affected since 5.Profitability of banks and financial institutions gets affected since they don’t get back their funds invested in projects that have gone they don’t get back their funds invested in projects that have gone sick..sick..

DEFINITION OF SICKNESSDEFINITION OF SICKNESS

The sick industrial companies (Special The sick industrial companies (Special provisions) Act, 1985, as amended in 1993 provisions) Act, 1985, as amended in 1993 defines –defines –

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

BOARD OF INDUSTRIAL AND BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR)FINANCIAL RECONSTRUCTION (BIFR)

(BIFR) was established by the Central Government, under section (BIFR) was established by the Central Government, under section 3 of the Sick Industrial Companies (Special provisions) Act, 1985 3 of the Sick Industrial Companies (Special provisions) Act, 1985 and it became fully operational in May, 1987. and it became fully operational in May, 1987.

RRole of BIFR as envisaged in the SICA (Sick Industrial ole of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is:Companies Act) is:

(a) Securing the timely detection of sick and potentially (a) Securing the timely detection of sick and potentially sick companies.sick companies.

(b) Speedy determination by a group of experts of the (b) Speedy determination by a group of experts of the various measures to be taken in respect of the sick various measures to be taken in respect of the sick company.company.

(c) Expeditious enforcement of such measures.(c) Expeditious enforcement of such measures.

Reporting to the BIFRReporting to the BIFR

To report the sickness to the BIFR within 60 days of finalisation of To report the sickness to the BIFR within 60 days of finalisation of audited accounts, for the financial year at the end of which theaudited accounts, for the financial year at the end of which the

company has become sick.company has become sick.

The BIFR prescribes a different format for the report to be The BIFR prescribes a different format for the report to be submitted by any interested parties regarding the sickness.For submitted by any interested parties regarding the sickness.For eg’s – Banks , other financial institutions.eg’s – Banks , other financial institutions.

When a company has been financed by a consortium of banks,it When a company has been financed by a consortium of banks,it is the Lead Bank that should report to BIFR about the sickness is the Lead Bank that should report to BIFR about the sickness

under advice to other participating banks in the consortiumunder advice to other participating banks in the consortium..

Enquiry by the BIFREnquiry by the BIFRWhen a case is referred to the BIFR, it is verified by the When a case is referred to the BIFR, it is verified by the Registrar of the BIFR as to whether the company is SICK.Registrar of the BIFR as to whether the company is SICK.

BIFR accepts the case and notifies a date for hearing the case.BIFR accepts the case and notifies a date for hearing the case.

Co-ordination of connected agencies is achieved by BIFR.Co-ordination of connected agencies is achieved by BIFR.

Invites the informant Sick Company to come to negotiation with Invites the informant Sick Company to come to negotiation with the concerned financial institutions.the concerned financial institutions.

After the Survey and hearing, the court summons the rehab to After the Survey and hearing, the court summons the rehab to an operating agency.an operating agency.

Revival PackageRevival PackageOnce a company has been found sick, the BIFR may grant time Once a company has been found sick, the BIFR may grant time to the sick company to enable it to make its networth positive and to the sick company to enable it to make its networth positive and bring the company out of sickness, bring the company out of sickness, without any external without any external financial assistance.financial assistance.

The BIFR will direct the operating agency to prepare a suitable The BIFR will direct the operating agency to prepare a suitable revival package for the restoration of the health of the company.revival package for the restoration of the health of the company.

Revival PackageRevival Package includes- includes- additional financial assistance,additional financial assistance,

postponement of recovery of loan already lent by banks, change postponement of recovery of loan already lent by banks, change in management, amalgamation, sale of redundant assets, lease in management, amalgamation, sale of redundant assets, lease of assets or any other suitable measure. of assets or any other suitable measure.

Need for revival/rehabilitation Need for revival/rehabilitation programmeprogramme

A sick company has already swallowed huge scarce resources. In A sick company has already swallowed huge scarce resources. In order to utilize the assets and infrastructure already created for order to utilize the assets and infrastructure already created for the project, the project is to be revived from sickness.the project, the project is to be revived from sickness.

Revival of a sick unit may be necessitated, because – Revival of a sick unit may be necessitated, because –

1. The project may be in a sector that is vital to the economy1. The project may be in a sector that is vital to the economy. .

2.2. Many ancillary units may be dependent on the unit that Many ancillary units may be dependent on the unit that has gone sick. Unless the sick unit is revived, it will have a chain has gone sick. Unless the sick unit is revived, it will have a chain effect of all such dependent ancillary units becoming sick.effect of all such dependent ancillary units becoming sick.

3. Banks and financial institutions would have locked up their 3. Banks and financial institutions would have locked up their money in sick ventures.money in sick ventures.

Causes of SicknessCauses of Sickness

Internal Causes-Internal Causes-

1.1. Project formulation.Project formulation.2.2. Project implementation.Project implementation.3.3. Production.Production.4.4. Marketing.Marketing.5.5. Finance.Finance.6.6. General and personnel General and personnel

administrationadministration

External CausesExternal Causes

1.1. Government’s plans and actions.Government’s plans and actions.

2.2. Failure of monsoon which affects Failure of monsoon which affects agriculture and allied industries.agriculture and allied industries.

3.3. Emergence of strong competitors etc.Emergence of strong competitors etc.

ACTIVITY AND ACTIVITY AND RESULTS of RESULTS of BIFRBIFR

• BIFR has had mixed successBIFR has had mixed success

• Some examples of successful recoveries Some examples of successful recoveries are:-are:-

1. 1. recovery of Bharat Heavy Electricals Limited in recovery of Bharat Heavy Electricals Limited in the 1980s.the 1980s.

2. the turnaround of Arvind MillS Scooters India.2. the turnaround of Arvind MillS Scooters India.

3. the North Eastern Regional Agricultural 3. the North Eastern Regional Agricultural Marketing Corporation.Marketing Corporation.

Case Study Of Asoka MillsCase Study Of Asoka Mills

In In 1989-901989-90, Asoka had posted a , Asoka had posted a LBD of Rs 82.6 LBD of Rs 82.6 millionmillion, and was , and was referredreferred to the to the Board for Industrial Board for Industrial and Financial Reconstruction (BIFR).and Financial Reconstruction (BIFR).

After After negotiations with ICICInegotiations with ICICI, a draft revival scheme for , a draft revival scheme for the company was submitted to the company was submitted to BIFR in March 1991BIFR in March 1991..

• The total outlay of The total outlay of Rs 80.0 million was sanctioned by Rs 80.0 million was sanctioned by BIFRBIFR included included modernizationmodernization and and expansionexpansion of plant of plant and machinery, labour rationalization.and machinery, labour rationalization.

That Included That Included term loans from financial institutions of Rs 34.9 term loans from financial institutions of Rs 34.9 million.million.

loans from banks of Rs 19.8 million.loans from banks of Rs 19.8 million.

unsecured unsecured loans from Arvind Mills of Rs 25.3 millionloans from Arvind Mills of Rs 25.3 million..

Further, the scheme provided for Further, the scheme provided for concessions from banksconcessions from banks, , financial institutions, and Government of Gujarat.financial institutions, and Government of Gujarat.

ICICI submitted a ICICI submitted a revisedrevised

schemescheme to BIFR in to BIFR in

December 1991December 1991

proposed to close down proposed to close down

the weaving and processing the weaving and processing

sections which employed sections which employed

22502250 employees and employees and

convert the mill into a convert the mill into a spinning unitspinning unit

Approval of Revival SchemeApproval of Revival Scheme

the scheme was approved almost a year later with the date of the scheme was approved almost a year later with the date of implementation remaining unchanged from April 1, 1992. implementation remaining unchanged from April 1, 1992.

the delay was due to the late sanction of the schemethe delay was due to the late sanction of the scheme

an extension of all reliefs and concessions granted for a further an extension of all reliefs and concessions granted for a further period of up to 18 monthsperiod of up to 18 months

After the approval, the necessary machineries were ordered out and After the approval, the necessary machineries were ordered out and the entire investment could be made only by March 31, 1994. the entire investment could be made only by March 31, 1994.

This was due to two reasons:This was due to two reasons:

(a) late deliveries of machineries ordered(a) late deliveries of machineries ordered

(b) late receipt of term loans under the scheme. (b) late receipt of term loans under the scheme.

Hence, the entire implementation of the scheme was delayed by a Hence, the entire implementation of the scheme was delayed by a period of exactly two years.period of exactly two years.

The MergerThe Merger

On many occasionsOn many occasions, more working capital was required, more working capital was required, which , which was was made available by Arvind Mills by way of unsecured made available by Arvind Mills by way of unsecured interest-free loans. interest-free loans.

The unsecured loans received from the promoter company as on The unsecured loans received from the promoter company as on March 31, 1992 stood at Rs 40.81 million which rose to Rs March 31, 1992 stood at Rs 40.81 million which rose to Rs 112.28 million as on March 31, 1994112.28 million as on March 31, 1994

Having looked at a number of options available, ICICI was of Having looked at a number of options available, ICICI was of the firm opinion that there was no other way for a fruitful the firm opinion that there was no other way for a fruitful revival of Asoka Mills except by merging the company with revival of Asoka Mills except by merging the company with Arvind Mills in May 1994.Arvind Mills in May 1994.

Positive aspect of BFIR in this Positive aspect of BFIR in this CaseCase

Many of the textile mills in Ahmadabad Many of the textile mills in Ahmadabad had closed down in 1980s due to low had closed down in 1980s due to low profitabilityprofitability

BFIR provided enough financial support to BFIR provided enough financial support to AML to sustain in the crisisAML to sustain in the crisis

closedown of weaving and processing unit closedown of weaving and processing unit was advantageous for the company as was advantageous for the company as suggested by BIFRsuggested by BIFR

Negative aspect of BFIR in this Negative aspect of BFIR in this casecase

Due its late response in providing Due its late response in providing sufficient capital the company suffered sufficient capital the company suffered loss for more than two yearloss for more than two year

Due to its negligence 2762 employee lost Due to its negligence 2762 employee lost their jobtheir job

insufficient resourcesinsufficient resources

delays and lack of political willingness to delays and lack of political willingness to take tough decisions.take tough decisions.

There have been many more cases where There have been many more cases where attempts to revive the companies failed attempts to revive the companies failed like:-like:-

Binny and Co., Calico Mills, Guest Keen Binny and Co., Calico Mills, Guest Keen Williams, Hindustan Cables, Metal Box Williams, Hindustan Cables, Metal Box Company and Wyman Gordon.Company and Wyman Gordon.

ConclusionConclusionNirmala Ganapathy said: "One look at the Nirmala Ganapathy said: "One look at the track record of BIFR, and it doesn’t take a track record of BIFR, and it doesn’t take a whiz  to conclude that it is nothing but a whiz  to conclude that it is nothing but a graveyard of companies. A tiny fraction graveyard of companies. A tiny fraction comes out healthy — only if the promoter comes out healthy — only if the promoter is interested in putting it back up on its is interested in putting it back up on its feet.feet.

THANK YOUTHANK YOU

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