Industrial Sickness is a term used to describe an industrial unit's poor health or financial condition, which makes it unable to operate effectively or sustainably. It is characterized by the inability of the unit to generate enough revenue to cover its expenses, leading to a decline in productivity, loss of jobs, and potential closure of the unit. A consistent mismatch in the debt-to-equity ratio and distortion in the unit's financial status are symptoms of industrial sickness. A sick unit is unable to function properly with its internal resources. Industries are forced to rely on external funding sources after the sick units function below the break-even point (at which total revenue equals total cost).

Factual and conceptual questions have been asked from the Economy Section in the UPSC IAS exam. The Topic of Industrial Sickness is equally important for the State PSC exams. It covers a significant part of the Economy subject in the General Studies Paper-3 syllabus and current events of national importance in the UPSC prelims syllabus.

In this article, we shall study in detail the special provisions act, 1985, causes and impact of industrial sickness on the economy.

Also, read about the Index Of Industrial Production for the UPSC exam here.

What is Industrial Sickness?

"Industrial sickness" refers to industrial weakness when the business fails to profit reasonably. It is the persistent debt-to-equity ratio imbalance and the inaccurate representation of the financial situation of the industrial unit. Industrial Sickness is a stage where a company cannot consistently generate a surplus and must rely on outside financing to survive in the market. A unit cannot support itself while it is ill through normal functions.

Causes of Industrial Sickness

• Industrial sickness is not produced by a single element but rather by the cumulative influence of several causes.
• The variables that cause industrial disease are divided into two categories: internal causes and external causes, which are addressed further below:

Internal Causes

• Mismanagement: Poor management decisions, lack of effective leadership, and inadequate planning can lead to a company's downfall.
• Financial issues: Insufficient working capital, poor financial planning, and inability to secure loans or investments can lead to financial distress.
• Obsolete technology: Failure to adopt modern technology or upgrade existing systems can reduce efficiency and competitiveness.
• Labour issues: Strikes, disputes, or high employee turnover can negatively impact productivity and morale.
• Inefficient production processes: The inability to control costs or maintain quality standards can hamper a company's profitability.

External Causes

• Economic conditions: Economic downturns or recessions can lead to reduced demand and increased competition, making it difficult for businesses to survive.
• Government policies: Changes in regulations, taxes, or import-export policies can adversely affect certain industries or sectors.
• Competition: Intense competition from domestic or international players can lead to market saturation and reduced profitability.
• Natural disasters or unforeseen events: Floods, earthquakes, or pandemics can disrupt supply chains and cause significant damage to industrial units.

Other causes of Industrial Sickness

• Finance, technical difficulties, poor management, a lack of raw materials, electricity, natural disasters like fire or earthquake, or a combination of these can all contribute to illness.
• External reasons are those that are beyond the management’s control and are deemed to be more important than internal causes.
• The following are the additional causes:
  • Disagreements among various individuals involved in the enterprise’s promotion and administration.
  • Mechanical flaws and failure.
  • Inability to obtain raw materials at a reasonable cost and appropriate time.
  • Failure to implement controls promptly where there are shortcomings in work­ings.
  • Deteriorating labour-management relations, resulting in a drop in capacity utilisation.

Also, read SARFAESI ACT, 2002 for UPSC here.

Industrial Sickness: Special Provisions Act, 1985 for UPSC

• The Sick Industrial Companies Act of 1985 (SICA) was a crucial piece of legislation dealing with India’s epidemic of industrial disease.
• The Sick Industrial Enterprises Act of 1985 (SICA) was implemented in India to discover unviable (“sick”) companies that might cause systemic financial risk.
• SICA was abolished and replaced in 2003 by the Sick Industrial Companies (Special Provisions) Repeal Act, which softened some features of the original Act and addressed some issues.
• SICA was later completely repealed in 2016, partly because some of its provisions clashed with those of another Act, the Companies Act of 2013.

Also, read the Strategic Debt Restructuring (SDR) for the UPSC exam here.

Remedial measures

• Government Role: The government must actively protect sick units, particularly those in small-scale sectors that are struggling to compete in the age of globalization.
• Financial institutions’ Role: Financial institutions can help prevent illness in the following ways:
  • Continuous monitoring of unit
  • Careful project appraisal
  • Professional, institutional response to unit’s problems
  • Required systems at client units
  • Incentives to units to remain healthy
• Role of Industry Associations: A good practical review by each industry association of installed and usable capacity in the industry, capacity utilization, growth trends, problems, etc., should be useful for the potential new entrants in deciding whether to enter the industry or not.

Also, read Insolvency And Bankruptcy Code (IBC) for UPSC here.

Impact of Industrial Sickness on the Economy

• The Indian market has been opened to foreign investors, and their shares in Indian companies are increasing.
• After the introduction of the policy of disinvestment, many Central and State Public Sector Undertakings (CPSUs and SPSUs) have been transformed into private units for smooth running.
• A formidable decision has also been taken. To overcome this bottleneck situation West Bengal Government adopted a separate Industrial Policy in 1994. The major objectives of this policy were –
  • Decentralization of units,
  • Establishment of a strong relationship between rural agrarian and urban industrial economy through food processing units,
  • Emphasis on the expansion of micro and small-scale units and
  • Establishment of different industrial parks in different locations to create an advantage of industrial agglomeration.

Government Policy for Industrial Sickness

• Various steps have been done to address the issue of industrial illness. The RBI has emphasised the necessity of detecting illness at its early stages. 
• The policy framework for dealing with the problem of industrial sickness was spelt out in recommendations released in October 1981 for the direction of administrative ministries of the Central Government, state governments, and financial institutions.
• Within their particular duties, the administrative ministries in the government shall have explicit responsibility for sickness prevention and corrective measures in the industrial sector.

Concessions

• From January 1, 1982, a system was implemented for providing soft margin money to ill units in the small-scale sector to allow them to receive essential cash from banks and financial institutions to undertake their revival scheme.
• Furthermore, the National Equity Fund provides financial support through long-term equity up to Rs. 15 lahks to units with a project cost not exceeding Rs. 10 lakhs at a nominal service charge of 1% to potentially viable ill SSI.
• The government has also made significant concessions to let ill units recover without requiring direct intervention. For example, in 1977, the government revised the Income-tax Act by adding Section 72A, which allows healthy units to receive a tax break when amalgamating with sick units to resurrect them.
• The tax gain comes from carrying forward accumulated business losses and unprovided depreciation of the ill firms by the healthier companies following amalgamation.

Goswami Committee Report on Industrial Sickness

• The Committee on Industrial Sickness and Corporate Restructuring report, chaired by Dr Omkar Goswami, was submitted in July 1993.
• Dinesh Goswami's committee was concerned with Electoral reforms.
• Its recommendations
  • Need for amendment of Anti-defection law to restrict disqualification where elected member voluntarily gives up his membership.
  • Changes in voting pattern Fresh delimitation based on 1981 census.
  • Not more than 2 constituencies for one candidate.
  • Reduce the age of candidates from 25 to 21 for assembly seats.
  • Discourage non-serious candidates – increasing the security deposit to Rs.5000 (Lok Sabha) and Rs. 2500 for Assembly elections.

Also, read about the Public Sector Undertakings (PSU) here.

Major Symptoms of Industrial Sickness

The following are the primary indications or symptoms of industrial sickness in India that can help determine whether a company is a sick unit, according to the Sick Industrial Companies Act (SICA).

• The government first set a minimum registration requirement of 7 years, eventually lowered to 5 years.
• The business should have lost money over the previous and current years.
• The reserves and paid-up capital must have been lost together with the company's net worth.
• The Second Amendment to the Companies Act of 2002, which defines industrial sickness, has done so again.

Causes of Industrial Sickness

The causes of Internal sickness are classified into two types: Internal and external causes. Let's discuss each cause in detail.

Internal Causes for Industrial Sickness 

Internal factors relate to factors that are controlled by the management. Industrial sickness is brought on by some disorder that develops in these internal causes. These are some of the internal causes:

• One of the internal disorders that might cause industrial sickness is a lack of finances. It might be brought on by poor working capital management with insufficient funding.
• Poor production policies include selecting an inefficient location for production activities, maintaining equipment and plants poorly, omitting quality control procedures, and using non-standard research and development methods, among other things.
• Marketing and Sickness A company's marketing efforts invariably impact the industry's well-being and competitiveness.
• Ineffective Personnel Management: Ineffective personnel management can be seen in mismanaging employees' pay and salaries.

External Causes for Industrial Sickness 

• Personnel constraints include things like a lack of skilled labour or manpower and a wage gap between workers and employees in comparison to other industries.
• Recession in the market, liberal licencing and tax laws imposed by the government, restrictions on making large purchases, and a dynamic worldwide market environment that may experience unexpected changes are all marketing limits.
• Production Restrictions: Small-scale industries are also at risk for illness because of a lack of power supply, expensive fuel, a shortage of raw materials, import/export restrictions, etc.
• Financial restraints are the final external factor that affects an industry's health the most frequently.

What are Sick Companies?

• Sick companies are defined as industrial units that have sustained cash losses in the past, i.e. for two fiscal years in a row and are projected to continue to suffer losses in the future.
• Furthermore, if the company has been registered for 5 years or longer, its total losses equal or exceed its net value by the end of the second year.
• Furthermore, the corporation fails to settle the debt within three consecutive quarters, notwithstanding a creditor’s formal demand for a return.

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