Sick Units
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Transcript of Sick Units
FINANCIAL MANAGEMENT OF SICK UNITS
ANURADHA DAIWADNYABHAVIN DHOLAKIARADHESHYAM GUPTAKANCHAN PARABPOOJA PARDESHIKAJAL SHAHMAMTA TIWARI
14171951
527283
GROUP MEMBERS
Introduction
The Industrial Reconstruction Corporation of India (IRCI) was established in 1980’s to provide financial assistance to sick units
In 1985 the Sick Industrial Companies (Special Provisions) Act 1985, was enacted, where interested companies were invited to takeover, lease or amalgamate the sick company into itself
Increasing number of sick, private textile mills which were nationalized became part of the National Textile Mills
During 1980s Govt of India had set up The Industrial Reconstruction Corporation of India (IRCI) to provide financial assistance to Sick Units, to enable them to revive under their then existing structure
Later it was converted to The Industrial Reconstruction Bank of India (IRBI), to carry the same function under a different mould
The companies Act defines a “Sick Company” as one:
Which has accumulated losses in any financial year equal to 50 percent or more of its average net worth during four years immediately preceding the financial year in question,
or
Which has failed to repay its debts within any three consecutive quarters on demand for repayment by its creditors
Meaning
Causes of Sickness
Unfavorable external environment
Managerial deficiencies
Unfavorable External environment
Shortage of key inputs like power & raw materials
Changes in Govt policies
Development of new technology
Shift in consumer preferences
Sudden decline in the orders from the government
Reduced lending by financial institutions
Managerial deficiencies
Production-
Improper location
Wrong technology
Uneconomic plant size
Weak production and quality control
Managerial deficiencies
Finance-
Wrong Capital Structure
Bad investment decisions
Weak budgetary control
Poor management of receivables
Bad cash planning and control
Strained relationship with the suppliers of capital
Managerial deficiencies
Personnel-
Ineffective leadership
Bad labour relations
Over Staffing
Irrational compensation structure
Managerial Deficiencies
Marketing-
Inaccurate demand projection
Improper product mix
Wrong product positioning
Poor customer service
High distribution costs
Symptoms of sickness
Delay or default in payment to suppliers
Irregularity in bank A/C
Delay or default in payment to banks & FI
Non-submission of information to banks & FI
Frequent requests to banks & FI for additional credit
Decline in capacity utilization
Poor maintenance of plant & machinery
Cont…
Low turnover of assets
Accumulation of inventories
Inability to take trade discount
Excessive turnover of personnel
Extension of accounting period
Resort to ‘creative accounting’ which seeks to present a better financial picture than what it really is
Decline in the price of equity shares & debentures
Prediction of Sickness
Two types of analysis:
Univariate analysis
Multivariate analysis
Univariate Analysis
In Univariate analysis, an attempt is made to predict sickness on basis of single financial ratios
In a path-breaking study W.H.Beaver compared the financial ratios of a sample of 79 failed firms with 79 non-failed firms
His analysis suggested that many of the ratios employed by him showed the power to signal an impending failure
Multivariate analysis
Multivariate analysis seeks to predict industrial sickness using a methodology that considers combined influence of several variables
The multivariate technique is used in predicting business failure or sickness
Its a statistical technique which helps in classifying an observation into one of the several pre-specified groups on the basis of certain characteristics of the observation
It essentially involves estimating a function which discriminates best between the groups
Revival Programme in Sick Units
Settlement with creditors Provision of additional capital Divestment & disposal Reformulation of product market strategy Modernization of plant & machinery Reduction in manpower Strict control over costs Streamlining of operations Improvement in managerial systems Workers participation Change of management
CASE STUDY
About NICCO Corporation Ltd
Nicco Corporation Limited(NCL) is the flagship company of the Nicco Group
For nearly over 6 decades, NCL has been one of the pioneers in cable manufacturing industry
It produces a wide range of power, control, instrumentation & telecom cables & provides a spectrum of engineering services & executes turnkey projects
Established in 1942, the US$ 67 million Nicco Group is a widely respected Indian industrial powerhouse
NICCO’s PRODUCT
Aircraft & Air Field Cables Fire Retardant Low Smoke Cables (FRLS) Automobile CablesOil Rig CablesCopper ConductorsCables For CranesElevator Cables (lift Cables)Furnace & High Temperature CablesMarine CablesPower Cables
NICCO BATTARIES LTD(NBL) amalgamated with NICCO Corporation LTD (NCL) with effect from 1 April 1994 as per amalgamation scheme
In amalgamation scheme entire undertaking of NBL shall be transferred to NCL & transferee company i.e. NCL shall issue & allot share holder of NBL share in transferor company in proportion of 2 share of face value of Rs.10 each of the transferee company for 13 equity share of face value Rs.10
The rehabilitation Cum amalgamation scheme envisages settlement of dues of the bank & institution, payment to pressing creditors besides capital expenditure of Rs 163 lakhs
A) Cost of the scheme (Rs in lakhs) Capital expenditure 163.00 Settlement of dues of the banks 619.00 Payment of unsecured loans from 20.00 Payment of pressing creditors 18.00 Margin money for working capita 57.00
TOTAL 877.00
B) Means of finance (Rs in lakhs) Promoter’s contribution out of internal accruals of NCL 477.00 Benefit under section 72 A of IT Act,1961 400.00
TOTAL 877.00
The scheme for amalgamation of NBL, with NCL was under section 72A of the IT Act,1961 and shall be effective from 1 April ,1994
The carried forward accumulated loss of NBL is estimated at Rs 1896 lakhs as on 31 March 1994
The estimated tax set –off at the current rates of IT Act , 1961 is restricted to Rs. 400 lakhs
Benefits in the merger of sick
Synergistic operating economies
Diversification
Taxation advantages
Growth advantage
Production capacity reduction
Managerial motivate
Acquisition of specific asset
Risks in the Merger of Sick Unit
Dilution of competition in the market
Actual or a potential competitor, may get eliminated
Efficient & growing medium or small-sized undertaking
May exercise a market power to the detriment of its customers & suppliers
The rehabilitation of sick unit is an important aspect for economic growth of the country
In the above case of NCL & NBL we can say that share exchange ratio is 2 : 13 & cost of scheme is Rs 877 lakhs which is large amount for merger
From this we can conclude that merger of NBL was requirement of time & now it contributes major part of share of NCL