TABLE OF CONTENT

S.R.NO. PARTICULAR PAGE NO.

1. INTRODUCTION OF SICK UNIT 02-122. BIFR - INTRODUCTION 133. ROLE OF SICA 14-164. STAGES OF SICKNESS 175. GOVERNMENT ROLE  18-196. RELIEFS AND CONCESSIONS 20

7. A CASE STUDY – NICCO BATTERIES LTD. 21-41 ABOUT NICCO CORPORATION 22 PRODUCTS OF NCL 23-26 AMALGAMATION SCHEME FOR NBL AND NCL MERGER 27

COST OF SCHEME AND MEANS OF FINANCE 28-29

RELIEF AND CONCESSION 30-35 STRATEGIC ASPECT – RISK AND BENEFIT 36-38 INVESTOR PROTECTION 39 CONCLUSION 40-41

8. APPENDICS 42-489. BIBLIOGRAPHY 49

1

INTRODUCTION OF REHABLITATION OF SICK UNIT

2

Sick unit:

Sickness in the industrial units is not a new phenomenon as is evident

in the developing countries. Even in the industrially advanced

countries of the world, varying degrees of sickness are found to occur.

An industrial unit may face a number of odds during its implementation

and operation stage because of a number of factors in the environment

– internal and external. If the problems perpetuate & does not permit

the unit to pursue the normal course of operations leading to

reasonable utilization of capacity, generation of surplus, debt servicing,

etc, it can be presumed that some kind of sickness has engulfed the

unit and if this trend grows unchecked, it would adversely affect

production and employment in the country besides other socio-

economic repercussions. However, it is also recognized that in a

market economy, the survival of the fittest and weeding out of

inefficient industrial units is a natural outcome which is considered

useful as well. Because the exit of the non-competitive and loss-

incurring units should not pose difficulty to any society. But sickness

assuming an epidemic shape creates concerns to the policy makers

and stakeholders. Experience suggests that small scale industries are

more prone to sickness as compared to medium and large scale

industries. In this context, sickness in small industry should not be left

only to the market forces. Creation of objective conditions and

enabling environment through suitable policy support are essential for

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sustained growth of the small industry sector in the developing

economies. It is, therefore, imperative to diagnose the causes of

sickness so that preventive measures are suggested. Even if a small

unit turns sick despite taking all possible precautionary measures,

efforts should be made to find out the possibility of its revival. This

warrants appropriate package of restructuring and rehabilitation

strategies. If the unit’s survival is still under threat, it should be better

allowed to die a natural death.

Definition of Sick Industry by Different Institutions

Industrial sickness in India has been defined by different institutions in

different ways. The Reserve Bank of India (RBI) has given two

definitions – one for large and medium scale units and the other for

small scale units. According to the RBI definition, large and medium

scale sick unit is one which incurs cash losses for one year and which,

in the judgment of the bank, is likely to continue to incur cash losses

for the current as well as the following year and which has an

imbalance in its financial structure, such as current ratio of less than

1:1 and worsening debt equity ratio. RBI’s definition of a sick small

scale unit follows like – if it has

(a) Incurred cash losses in the previous year and is likely to incur cash

loss in the current year and has an erosion of 50% or more of its net

worth; and/or

(b) made defaults in payment of four consecutive quarterly

installments of interest or two half-yearly installments of principal on

the term loans and there are persistent irregularities in the operation

of its credit limits with the bank.

4

The Study Team of the State Bank of India in its report on Sick Industry

Advances defined a sick unit as "one which fails to generate internal

surplus on a continuing basis and depends for its survival upon

frequent infusion of external funds".

The Government of India enacted the Sick Industrial Companies

(Special Provisions) Act, 1985. As per the revised definition provided by

this Act, a sick industrial company would be one which is registered for

a period not less than five years and whose accumulated losses are

equal to the sum of paid up capital and free reserves

5

6

There are mainly two types of industrial sickness:

A)Internal causes

B)External causes

A)Internal causes

1) Planning

a) Technical feasibility

Inadequate technical know how

Locational disadvantage

Out dated production process

b) Economic viability

High cost of inputs

Break even point too high

Uneconomic size of prject

Under estimation financial requriments

Unduly large investment in fixed asset

Over estimation of demand

2)Implementation

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Cost over runs resulting from delays in getting licenses & sanctions

etc.

Inadequate mobilization of finance

3)Production

a) Production management

Inappropriate product mix

Poor quality control

Poor capacity utilization

High cost of production

Poor inventory management

Inadequate maintenance and replacement

Lack of timely and adequate modernization etc.

High wastage

b)Labour management

Excessively high wage structure

Inefficient handling of labour problems

Excessive manpower

Poor labour productivity

Poor labour relations

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Lack of trained skied labour or technically competent personnel

c) Marketing management

Dependence on a single customer or a limited of customer / single or a

limited number of products

Poor sales realization

Defective pricing policy

Booking of large order at fixed prices in an inflationary market

Weak market organization

Lack of market feed back and market research

Lack of knowledge of marketing technique

Unscrupulous sales / purchase practices

d) Financial management

Poor resources management & financial planning

Faulty costing

Liberal dividend policy

General financial indiscipline& application of funds for unauthorized

purposes

Deficiency of funds

Over trading

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Unfavorable gearing or keeping adverse debt-equity ratio

Inadequate working capital

Absence of cost consciousness

Lack of effective collection machinery

e) Administrative management

Over centralization

Lack of professionalism

Lack of feed-back to management (MIS)

Lack of controls

Lack of timely diversification

Excessive expenditure on R & D

Dividend loyalties (where the same management has interest in more

than one unit ,cases are known where promoters of ltd companies who

also own private owner ship firms tend to look after the interest of the

latter ,often at the cost of the former)

1) Dissension with in the management

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2) Incompetent management

3) Dishonest management

B) External causes

a) Infrastructural bottle necks

Non availability of irregular supply of critical raw materials or their

inputs

Chronic power shortage

Transport bottle necks

b) Financial bottle necks

Non-availability of adequate finance

c) Government controls & policy ,etc

Government price controls

Fiscal duties

Abrupt change in government policy

Procedural delays on the part of the financial / licensing / other

controlling or regulating authorities (banks, RBI, financial institutions,

government department, licensing authorities, MRTP boards, etc)

d) Market constraints

Market saturation

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Revolutionary technological advances rendering once’s product

obsolete

e) Extraneous factors

Natural calamities

Political situation (domestic as well as international)

War

Sympathetic strikes

Multiplicity of labour unions.

12

Brief Introduction of BIFR and its functioning

In the wake of sickness in the country’s industrial climate prevailing in

the eighties, the Government of India set up in 1981, a Committee of

Experts under the Chairmanship of Shri T.Tiwari to examine the matter

and recommend suitable remedies therefore. Based on the

recommendations of the Committee, the Government of India enacted

a special legislation namely, the Sick Industrial Companies (Special

Provisions) Act, 1985 (1 of 1986) commonly known as the SICA.

The main objective of SICA is to determine sickness and expedite the

revival of potentially viable units or closure of unviable units (unit here

in refers to a Sick Industrial Company). It was expected that by revival,

idle investments in sick units will become productive and by closure,

the locked up investments in unviable units would get released for

productive use elsewhere.

The Sick Industrial Companies (Special Provisions) Act, 1985

(hereinafter called the Act) was enacted with a view to securing the

timely detection of sick and potential sick companies owning industrial

undertakings, the speedy determination by a body of experts of the

preventive, ameliorative, remedial and other measure which need to

be taken with respect to such companies and the expeditious

enforcement of the measures so determined and for matters

connected therewith or incidental thereto.

The Board of experts named the Board for Industrial and Financial

Reconstruction (BIFR) was set up in January, 1987 and functional with

effect from 15th May 1987. The Appellate Authority for Industrial and

Financial Reconstruction (AAIRFR) was constituted in April 1987.

Government companies were brought under the purview of SICA in

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1991 when extensive changes were made in the Act including, inter-

alia, changes in the criteria for determining industrial sickness.

SICA applies to companies both in public and private sectors owning industrial

undertakings:-

(a) pertaining to industries specified in the First Schedule to the

Industries (Development and Regulation) Act, 1951, (IDR Act) except

the industries relating to ships and other vessels drawn by power and;

(b) not being "small scale industrial undertakings or ancillary industrial

undertakings" as defined in Section 3(j) of the IDR Act.

(c) The criteria to determine sickness in an industrial company are (i)

the accumulated losses of the company to be equal to or more than its

net worth i.e. its paid up capital plus its free reserves (ii) the company

should have completed five years after incorporation under the

Companies Act, 1956 (iii) it should have 50 or more workers on any

day of the 12 months preceding the end of the financial year with

reference to which sickness is claimed. (iv) it should have a factory

license.

OBJECTIVES OF SICA

The objectives of this Act (SICA) as incorporated in its preamble,

emphasizes the following points:

The SICA had been enacted in the public interest to deal with the

problems of industrial sickness with regard to the crucial sectors

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where public money is locked up.

It contains special provisions for timely detection of sick and

potentially sick industrial companies, speedy determination and

enforcement of preventive, remedial and other measures with

respect to such companies.

Those measures are to be taken by a body of experts.

The measures are mainly

(a) Legal

(b) Financial restructuring

(c) Managerial

GENISIS OF SICA, 1985

Industrial sickness had started right from the pre-Independence

days.

Government had earlier tried to counter the sickness with some ad-

hoc measures.

Nationalization of Banks and certain other measures provided some

temporary relief.

RBI monitored the industrial sickness.

A study group came to be known as Tandon Committee was

appointed by RBI in 1975.

In 1976, H.N. Ray committee was appointed.

In 1981, Tiwari Committee was appointed to suggest a

comprehensive special legislation designed to deal with the problem

of sickness laying down its basic objectives and parameters,

remedies necessary for revival of sick Units.

The committee submitted its report to the Govt. in September 1983

and suggested the following:

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Need for a special legislation

Need for setting up of exclusive quasi-judicial body.

Thus the SICA came into existence in 1985 and BIFR started

functioning from 1987.

IMPORTANT PROVISIONS OF SICA

Constitution of two quasi-judicial bodies – BIFR and AAIFR and their

Benches.

Procedure of the Board and the Appellate Authority.

Filing of references u/s 15 and criteria of sickness.

Provision of enquiry u/s 16.

Appointment of Special Directors and OAs u/s 16(4) and 17(3).

Preparation of sanctioned scheme under section 17(2), 17(3) &

18(4).

Provision for monitoring of schemes u/s 18(12)

Rehabilitation by giving financial assistance u/s 19.

Winding up of sick industrial companies u/s 20.

Protection to safeguard the interests of the sick companies u/s

22(1), 22(2), 22(3).

Provisions for dealing with potential sickness u/s 23, 23(a), 23(b).

Provision in case of misfeasance u/s 24.

Provision for seeking information and giving information – Central

Govt., RBI, FIs State institutions and sick companies and in case of

amalgamation other companies.

Power to seek assistance of MMs & DMs u/s 29.

SICA has overriding provisions u/s 32 over other laws except the

provisions of FERA, 1973 and the ULCRA, 1976.

Penalty u/s 33 for violation of the Act.

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17

Govt. Concessions and Incentives for the Sick Sector

The Government of India provided various concessions and incentives

to the Sick sector for their sustained growth, which have briefly been

outlined here as under:

a. Assisting new Sick units on soft terms by lending

institutions,

b. Reservation of Certain Industries for the SSI sector,

c. Incentives related to land/shed financing, machinery and

raw-materials,

d. Provision of facilities within the Industrial Estates, and

e. Excise duty exemption and price preference

Incipient Sickness  

It is of utmost importance to take measures to ensure that sickness is

arrested at the incipient stage itself. The branch/bank officials should

keep a close watch on the operations in the account and take

adequate measures to achieve this objective.  The managements of

the units financed should be advised about their primary responsibility

to inform the banks if they face problems which could lead to sickness

and to restore the units to normal health. The organizational

arrangements at branch level should also be fully geared for early

detection of sickness and prompt remedial action. Banks/Financial

Institutions  will have to identify the units showing symptoms of

sickness by effective monitoring and provide additional finance, if

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warranted, so as to bring back the units to a healthy track. An

illustrative list of warning signals of incipient sickness that are thrown

up during the scrutiny of borrowable accounts and other related

records e.g. periodical financial data, stock statements, reports on

inspection of factory premises and godowns, etc. is given in

Appendix-I which will serve as a useful guide to the operating

personnel. Further, the system of asset classification introduced in

banks will be useful for detecting advances, which are deteriorating in

quality, well in time. 

When an advance slips into the sub-standard category, as per norms,

the branch/bank should make full enquiry into the financial health of

the unit, its operations, etc. and take remedial action.  The

bank/branch officials who are familiar with the day-to-day operations in

the borrower accounts should be under obligation to identify the early

warning signals and initiate corrective steps promptly. Such steps may

include providing timely financial assistance depending on established

need, if it is within the powers of the branch manager, and an early

reference to the controlling office where the relief required are beyond

his delegated powers.  The branch/bank manager may also help the

unit, in sorting out difficulties which are non-financial in nature and

require assistance from outside agencies like Government

departments / undertakings, Electricity Boards, etc. He should also

keep the term lending institutions informed about the position of the

units wherever they are also involved. 

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Reliefs and Concessions for     Rehabilitation of Potentially Viable Units

It is emphasized that only those units which are considered to be

potentially viable should be taken up for rehabilitation. The reliefs and

concessions specified are not to be given in a routine manner and have

to be decided by

Concerned bank/financial institution based on the commercial

judgment and merits of each case. Banks have also the freedom to

extend reliefs and concessions beyond the parameters in deserving

cases.  Only in exceptional cases, concessions/ reliefs beyond the

parameters should be considered.  In fact, the viability study itself

should contain a sensitivity analysis in respect of the risks involved

that in turn will enable firming up of the corrective action matrix.

Norms for grant of reliefs and concessions by banks/financial

institutions to potentially viable sick SSI units for rehabilitation are

furnished in Appendix-II.  

5.         Units becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners / promoters, etc. should not be considered for rehabilitation and steps should be taken for recovery of bank’s dues.   The definition of willful default will broadly cover the following:

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a)     Deliberate non-payment of the dues despite adequate

cash flow and good net worth.

b)     Siphoning off of funds to the detriment of the

defaulting unit.

c)     Assets financed have either not been purchased or have been sold and proceeds have been misutilised.

d)     Misrepresentation/falsification of records.

e)     Disposal/removal of securities without bank's

knowledge.

f) Fraudulent transactions by the borrower.

The views of the lending banks in regard to willful mismanagement of funds/defaults will be treated as final.

CASE STUDY ON NICCO 21

BATTERIES LTD.

ABOUT NICCO CORPORATION LTD.

Nicco Corporation Limited (NCL) is the flagship company of the Nicco Group. For

nearly over six decades, NCL has been one of the pioneers in the Indian cable

manufacturing industry.

NCL's Cable Division produces a wide range of power cables.

NCL's Project Division is an ISO 9001 certified Engineering, Procurement and

Construction (EPC) contracting company serving the refining, gas handling and

processing, petrochemicals & chemical process industries.

Nicco Engineering Services Limited (NESL) was started in 1981 with On-Line Leak

Sealing Services in collaboration with Furmanite International Ltd. U.K. With time this

division has grown up into a full fledged specialised maintenance services provider by

bringing in many state-of-the-art technologies from world leaders.

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Nicco Parks has three mega amusement parks in Eastern India and is looking at setting

up more parks in India and emerging markets. Drawing on its core strengths in

engineering design and project execution, Nicco Parks is a pioneer in designing and

manufacturing rides. It has the potential and expertise of setting up parks in a cost

effective turnkey basis. The company is also equipped to provide consultancy services to

other oraganisations in similar business and function.

Nicco Internet Ventures Limited (NIVL) provides HR solutions including recruitment,

training and psychometric testing.

PRODUCTS

Nicco Corporation Limited (NCL) is the flagship company of the Nicco

Group.

For nearly over six decades, NCL has been one of the pioneers in cable

manufacturing industry. It produces a wide range of power, control,

instrumentation and telecom cables and provides a spectrum of

engineering services and executes turnkey projects.

Established in 1942, the US$ 67 million Nicco Group is a widely

respected Indian industrial powerhouse. It is involved in a spectrum of

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activities ranging from power cables to turnkey engineering projects and

services, and from HR activities to amusement parks. The diverse and

dynamic Group employs over 2000 people and comprises Nicco

Corporation, Nicco Engineering Services, Nicco Parks and Resorts

and Nicco Internet Ventures Limited.

 

The products manufactured by the cable division of the company

include the following range:-

Aircraft & Air Field Cables - Cables for Aircraft Wiring,

Instrumentation, Air- field lighting, Aircraft Starter - Pren. Nyvin cables

with PVC, PCP, Nylon or Glass insulation and sheathing.

Conforming to various International Specifications.

Fire Retardant Low Smoke Cables (FRLS) - Fire Retardant cables

with low emission of smoke and toxic fumes both for Power & Control

applications.

Fire Survival Cables - Cables with special characteristics in addition

to low smoke emission and low halogen properties to maintain the

circuit integrity to essential services under severe fire conditions.

Automobile Cables - Electron Beam Irradiated Thin Wall Cables to

opearte at 125 degree celcius having XL-PVC & XLPE insulation.

Oil Rig Cables/Cables for Oil Exploration - Elastomeric insulated

and HOFR sheathed screened and unscreened cables for Rigs. Seismic

cables for Seismic Survey logging cables for Wells. Submersible cables

for Pumps used in Wells.

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Copper Conductors - Rods, Wires (plain or tinned), solid or stranded

or Rectangular Conductors, and Flexible Wires.

Cables For Cranes - Power and Control cables - Elastomeric - EPR or

Butyl Rubber (BR), or PVC insulated & sheathed for all types of cranes

in steel plants and in other heavy industries. Festooned Cables for

Cranes.

Elevator Cables (lift Cables) - Elastomeric - EPR or Butyl Rubber

(BR), Elastomeric or PVC insulated cables with Central Hauser, Braided

or Unbraided Flexible Cables for Elevators.

Furnace & High Temperature Cables - Butyl Rubber, EPR, EVA,

Varnished, Cambric, Class Fibre and Asbestos insulated sheathed and

PCP, CSP, Nitrile Rubber, EVA sheathed for Furnace and for High

Temperature applications.

Marine Cables (Ship wiring Cables) - Varnished Cambric insulated,

lead or PVC sheathed armoured/unarmoured cables. Elastomeric (EPR,

BR, SBR) insulated, PCP, CSP, Nitrile Rubber, LSZH Polyolefin sheathed,

Steel Wire/Copper Wire braided/unbraided solid type or flexible type

cables for Power, Control, Communication, lighting applications.

Conforming to various Admirality specifica- tions. American Bureau of

Supply (ABS) and Llyods Register of Shipping (LRS), Det Norske Veritas

(DNV), Indian Register of Shipping (IRS), Mercantile Marine Department

(MMD) etc.

General Cables & Flexible Cords - PVC insulated Wiring Cables for

Domestic Wiring, domestic appliances. Elastomer Insulated Flexible

Cords. PVC Insulated Flexible Cords (light duty). Elastomer insulated

Heavy Duty Flexible cables. Welding cables both Copper and

Aluminium conductors. Cables in flat formation & Winding Wires for

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Submersible Pumps. Cables for Chemical and Petroleum Plants. CSP

Insulated Flexible for coil leads, vehicle wiring and other High

Temperature applications.

Power Cables - Cross-linked polythelene (XLPE) Insulated Power

Cables upto 66 kV, XLPE and PVC/HR PVC control cables.

Mining Cables - PVC insulated/sheathed, XLPE insulated PVC

sheathed double wire armoured/single wire armoured cables upto 11

kV for Power Supply applications. Light duty PVC cables for Control,

Lighting and Telecommunications. Elastomeric insulated multicore

screened and unscreened HOFR compound (PCP, CSP, Nitrile Rubber-

NBRPVC) sheathed with or without pliable wire armoured cables for

Coal Face Lighting, Drilling, Remote Control, Coal Cutting in

underground mines and in quarries and metal ferrous mines.

Shuttle Car cables

Miners' Cap Lamp Flexible

Shot Firing cables

Submersible cables for pumps in mines. Shaft cables

High Voltage Land Line cables upto 1 1 kV grade

High Voltage Machine Trailing cables upto 11 kV grade.

Cables for Excavators/Shovels/Load Haul Damper (LHD)

Any other trailing cables or screened flexible cables conforming to

relevant specifications. Mining Cables conforming to NCB (National

Coal Board), U.K. Specification.

Cables for Railway Transportation

Electron Beam Cross Linked Irradiated Cables

Protection & Alarm System Cables

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Jumper cables for inter coach connections

Power Cables

Screened cables for EMI/EMC sensitive environment

Data bus cables for communications

Battery Cables

Conductors for Railway Transportation - Grooved Copper Contact

(GCC) wires, Cadmium Copper Catenery wires, Jumper wires, Dropper

wires for Railway Electrification. Kapton (Polymide) Film covered

conductors for winding of Traction Motors.

NICCO BATTARIES LTD.

The sanctioned rehabilitation –Cum-Amalgamation

scheme

The scheme envisages amalgamation of M/s NICCO BATTARIES LTD

with NICCO Corporation LTD (NCL) with effect from 1 April 1994 as per

the amalgamation scheme enclosed as per Annexure 1.

In term of said amalgamation scheme the entire undertaking of NBL

shall be transferred to NCL and the transferee company, that is, the

NCl shall issue and allot t the share holder of the NBL share in the

transferor company in the proportion of two share of the face value of

Rs10 each of the transferee company for 13 equity share of the face

value Rs.10 each of the transferor company on such date after the

transfer date as may be determine by the BOD transferor company.

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The share exchange ratio for the transfer of share is on the basis of the

Valuation Repot of the auditor of the 2 companies. All the employee of

the transferor company shall become the employee of the transferee

company from the effective date of the amalgamation with out

interrupting their services, the employment & the terms & conditions

of employment applicable to such employee on the effective date and

will not be less favorable to them than those immediately before the

transfer date.

The rehabilitation –Cum-amalgamation scheme envisages settlement

of dues of the bank and the institution, payment to pressing creditors

besides capital expenditure of Rs 163 lakhs.

Cost of the Scheme and Means of Finance

28

The cost of the scheme & means of finance are envisaged as

under:

A Cost of the scheme:

( Rs in lakhs)

a) Capital expenditure

163.00

b) Settlement of dues of the banks

619.00

c) Payment of unsecured loans from

Peerless &banks Nationale De paris

20.00

d) Payment of pressing creditors

18.00

e) Margin money for working capital

57.00

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TOTAL

877.00

B Means of finance

(Rs in lakhs)

a) Promoter’s contribution out of internal accruals of NCL

477.00

b) Benefit under section 72 A of IT Act,1961

400.00

TOTAL

877.00

The scheme for amalgamation of NBL , with NCL shall be 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.

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RELIFES AND CONCESSIONS:

The following reliefs and concessions are envisaged:

A)INSTITUTIONS:

1) To waive liquidated damages, compound interest & other

charges aggregating Rs 138 lakh approximately accrued in

respect of terms

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Loan upto 31 March ,1994

2) To waive 76 % of the over due simple interest in respect of

term loan upto 31 march, 1994 aggregating to Rs 432 lakhs

approximately.

3) To pay 50% of the principal amount with in 15 days of

sanction of the scheme & below 50 % to be converted into

share of NCL at a premium acceptable to FIs.

4) To pay 25 % of SI on TL in 4 qutarly installment during 1995 -

96 on interest basis .

B)BANKS:

1) Funding of the interest about Rs 149 lakh on working capital

borrowing from the bank upto 31 March ,1992 so as to be

repayable in 7 years commencing from 1995 -96. The funded

interest would carry interest @ 6.5 % below MLR.

2) Funding of interest on the working capital borrowings from the

banks aggregating to Rs. 130 lakhs approximately from 1

April,1992 to 31 March ,1994 computed at reduced rate of

14.5% per annum so as to make it repayable in 7 years

commencing from 1995-96. The funded interest would carry

interest @ 6.5% per annum below the minimum lending rate

oh the respective bank.

3) To provide need based working capital facility on normal

interest.

C)NCL:

32

1) NCL was merged NBL in NCL w.e.f. 1st April, 1994;

2) NCL will absorb all the employees of NBL on term not less

favorable than the exiting term and without any break in

services;

3) NCL will undertake to pay all outstanding liabilities including

contingent liabilities of NBL as on the date of merger to the

institutions, banks and the other creditors;

4) To convert

(a)To convert Rs.130 lakhs provided by peerless to NBL as

advance against capital share capital into NCL’s equity

of face value of Rs. 10each at a premium of Rs. 25;

(b)The balance Rs. 115 lakhs provided by peerless as

advance against equity share capital into unsecured

loan to repaid in 7 years commencing from 1995-96.

The unsecured loan would not carry any interest;

(c) The entire advance of Rs. 150 lakhs provided by IBP and

HMCPL to NBL as advance against share capital into

NCL’s equity shares of face value of Rs. 10 each at a

premium of Rs. 25; and

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(d)The trade advances aggregating Rs. 54 lakhs provided

by Peerless NCL into NCL’s equity shares of face value

of Rs. 10 each at a premium of Rs. 25.

5) To arrange funds from the Consortium of bank financing NCL

for meeting enhanced working capital requirements of the

company.

6) To meet any

a) Short fall in the cost of the scheme;

b) Short in the projected cash flow

c) Contingent or other liability not disclosed / not known at

the time of the sanctioning of the scheme

d) Short fall in tax benefits of Rs 400 lakhs &

e) Short fall in meeting working capital requirements.

By bringing in interest free funds by way of unsecured subordinated

loans of there own & not by way of diversion of working capital of

funds earmarked for long term investment.

D) NBL :

NBL will complete all the formalities for merger with NCL in a

manner satisfactory to the institution, banks, BIFR & other

relevant statuary authorities.

E)Central government:

34

a)To grant tax benefits under section 72 A of income tax Act

1961 to the extent envisaged under the scheme and as me

be passed by the Income –tax authorities.

b)To grant exemption from the applicability of section 372 of

company Act , for 1956 for allotment of share in NCL to the

share holders of NBL.

F)Other conditions:

a) To appoint a reputed firm of Chartered Accountants as

Concurrent Auditors to the satisfaction of and having

direction reporting relationship with the banks and the

financial institutions;

b) NCL to maintain separate account in respect of NBL till the

dues of banks and the institution are repaid in full;

c) NBL & NCL to obtain all necessary clearances statutory

approval for effecting the merger;

d) All the loans and securities documents extended by NBL in

favor of banks/ institution shall remain free to effect even

after merger of NBL with NCL excluding to right to appoint

nominee directors on BOD of the NCL;

e) The central government , the state government , the banks &

the financial institution reserve the right of recompense as

also the right to accelerate the repayment schedule in case

the future profitability and other conditions of company so

35

warrant. How ever such rights shall be exercised with, the

prior approval of BIFR;

f) The MA shall conduct an annual review of the implementation

of the scheme with in one month of end of each year and

submit a report on the result thereof to the bench within a

period of one month from the date of review;

g) The scheme shall be subject to annual review being

conducted by SBL. A special review of implementation of the

scheme would be conducted after six months of the date of

sanction of the scheme. For this purpose MA shall submit the

status report on implementation of the scheme with in four

month of the date of sanction of the scheme.

G) Viability:

The assumption underlying the profitability projections,

profitability statement, cash flow, balance sheet and DSCR

statement are enclosed as per Annexure 1 to 2, after the merger,

the operation of the transferee company would be viable on long

term basis and NCL would be able to amortize the term liabilities

of the NBL with and average DSCR. The accumulated losses of

the company would be wiped off immediately on merger.

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Strategic Aspect – Risks and Benefits

37

Benefits in the merger of sick unit to the NCL

(1) Synergistic operating economies

(2) Diversification

(3) Taxation advantages

(4) Growth advantage

(5) Production capacity reduction

(6) Managerial motivate

(7) Acquisition of specific asset

Risks in the merger of sick unit to the NCL

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Merger of two companies in the same field may result in dilution of competition in the

market, adversely affecting consumers' interests.

In a merger/amalgamation, an individual undertaking, be it an actual or a potential

competitor, may get eliminated.

Or, a large unit may take into its fold an efficient and growing medium or small-sized

undertaking.

Another adverse feature can be that the larger undertaking, consequent on merger, may

exercise a market power to the detriment of its customers and suppliers.

Yet another adverse feature may surface, if a large undertaking after merger because of

the resulting dominance becomes complacent and suffers from deterioration over the

years in its performance, which may be prejudicial to public interest.

These adverse features may or may not be outweighed by the positive features of mergers

such as economies of scale, stability through diversification, utilization of idle funds,

nursing a sick unit or better/optimal utilization of capacity.

Investors protection

Investor protection is a crucial aspect in the rehabilitation of the sick

unit there are various type of investors in the both companies acquirer

and the acquired company.

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Investor protection is insured by the several authorities which always

put an eyes on the restructuring of the company.

Fallowing are some regulatory authority in india for tha rehabilitation:

BIFR Act SICA has overriding provisions u/s 32 over other

laws except the provisions of FERA, 1973 and

the ULCRA, 1976.

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CONCLUSION

The rehabilitation of sick unit is an important aspect for the economic

growth of the country as well as the growth of the country in the above

case of NCL & NBL we can say that the share exchange ratio is 2 : 13

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and the cost of scheme is Rs 877 lakhs . Which is large amount for

merger though this we can conclude that the merger of NBL was the

requirement of time and now it contribute major part of share of NCL

There are various norms and Act for the rehabilitation of sick

unit, but their should be some relaxation to the acquirer & acquiree

both in the tern of tax incentive and norms it an important instrument

for the corporate restructuring and in the near future it will play a vital

role in the economic growth.

APPENDIX-I

 

Illustrative list of warning signals of incipient sickness that are

thrown up during the Scrutiny of Borrowal Accounts and other

Related Records

(e.g. Periodical Financial Data, Statements, Report on

Inspection of Factory Premises and Godowns, etc.)

 a)      Continuous irregularities in cash credit/overdraft accounts such as

inability to maintain stipulated margin on continuous basis or drawings

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frequently exceeding sanctioned limits, periodical interest debited

remaining unrealized;  

b)      Outstanding balance in cash credit account remaining continuously at the maximum;  

c)      Failure to make timely payment of installments of principal and interest on term loans;  

d)      Complaints from suppliers of raw materials, water, power, etc. about non- payment of bills; 

e)      Non-submission or undue delay in submission or submission of incorrect stock statements and other control statements;  

f)       Attempts to divert sale proceeds through accounts with other banks;  

g)      Downward trend in credit summations;  

h)      Frequent return of cheques or bills; 

i)       Steep decline in production figures;  

j)       Downward trends in sales and fall in profits;  

k)      Rising level of inventories, which may include large proportion of slow or non-moving items?  

l)       Larger and longer out standings in bill accounts;  

m)     Longer period of credit allowed on sale documents negotiated through the bank and frequent return by the customers of the same as also allowing large discount on sales;  

n)      Failure to pay statutory liabilities; 

o)      Utilization of funds for purposes other than running the units.  

p)      Not furnishing the required information/data on operations in time. 

q)      Unreasonable/wide variations in sales/receivables levels vis-à-vis level of operation of the unit. 

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r)       Non co-operation for stock inspections, etc. 

s)       Delay in meeting commitments towards payments of installments due, crystallized liabilities under LC/BGs, etc. 

t)        Diverting/routing of receivables through non-lending banks.

 

APPENDIX –II

 

Relief and concessions which can be extended by

banks/financial institutions to potentially viable sick

units under rehabilitation

 

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The viability and the rehabilitation of a sick unit would depend

primarily on the unit’s ability to continue to service its repayment

obligations including the past restructured debts. It is, therefore,

essential to ensure that ordinarily there is no write-off or scaling down

of debt such as by reduction in rate of interest with retrospective effect

except to the extent indicated in the guidelines.  The guidelines on

various parameters on reliefs and concessions are given below. 

i)             Interest Dues on Cash Credit and Term Loan  

If penal rates of interest or damages have been charged, such charges

should be waived from the accounting year of the unit in which it

started incurring cash losses continuously. After this is done, the

unpaid interest on term loans and cash credit during this period should

be segregated from the total liability and funded. No interest may be

charged on funded interest and repayment of such funded interest

should be made within a period not exceeding three years from the

date of commencement of implementation of the rehabilitation

programmes.  

ii)             Unadjusted Interest Dues  

Unadjusted interest dues such as interest charged between the date

up to which rehabilitation package was prepared and the date from

which actually implemented, may also be funded on the same terms as

at (i) above.  

iii)       Term Loans  

The rate of interest on term loans may be reduced, where considered

necessary, by not more than three per cent in the case of

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tiny/decentralized sector units and by not more than two per cent for

other Sick units, below the document rate. 

iv)        Working Capital Term Loan (WCTL) 

After the unadjusted interest portion of the cash credit account is

segregated as indicated at (i) and (ii) above, the balance representing

principal dues may be treated as irregular to the extent it exceeds

drawing power. This amount may be funded as Working Capital Term

Loan (WCTL) with a repayment schedule not exceeding 5 years. The

rate of interest applicable may be 1.5 % to 3% points below the

prevailing fixed rate / minimum lending rate of the bank, wherever

applicable, to all sick units including tiny and decentralized units.  

v)         Cash Losses  

Cash losses are likely to be incurred in the initial stages of the

rehabilitation programmers till the unit reaches the break-even level.

Such cash losses excluding interest as may be incurred during the

nursing programmers may also be financed by the bank or the

financial institution, if only one of them is the financier. But if both are

involved in the rehabilitation package, the financial institution

concerned should finance such cash losses. Interest may be charged

on the funded amount at the rates prescribed by SIDBI under its

scheme for rehabilitation assistance.   

Future cash losses in this context will refer to losses from the time of

implementation of the package up to the point of cash break-even as

projected.  Future cash losses as above, should be worked out before

interest

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(i.e., after excluding interest) on working capital etc., due to the banks

and should be financed by the financial institutions if it is one of the

financiers of the unit. In other words, the financial institutions should

not be asked to provide for interest due to the banks in the

computation of future cash losses and this should be taken care of by

future cash accruals.  

The interest due to the bank should be funded by it separately. Where,

however, a commercial bank alone is the financier, the future cash

losses including interest will be financed by it.  

The interest on the funded amounts of cash losses/interest will be at

the rates prescribed by Small Industries Development Bank of India

under its scheme for rehabilitation assistance.   

vi)       Working Capital  

Interest on working capital may be charged at 1.5% below the

prevailing fixed / minimum lending rate charged by the bank wherever

applicable.   Additional working capital limits may be extended at a

rate not exceeding the minimum lending rate chargeable by the bank. 

vii)             Contingency Loan Assistance  

For meeting escalations in capital expenditure to be incurred under the

rehabilitation program , banks / financial institutions may provide,

where considered necessary, appropriate additional financial

assistance upto 15 per cent of the estimated cost of rehabilitation by

way of contingency loan assistance. Interest on this contingency

assistance may be charged at the concessional rate allowed for

working capital assistance.  

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viii)     Funds for Start-up Expenses and Margin for

Working Capital  

There will be need to provide the unit under rehabilitation with funds

for start-up expenses (including payment of pressing creditors) or

margin money for working capital in the form of long-term loans.

Where a financial institution is not involved, banks may provide the

loan for start-up expenses, while margin money assistance may either

come from SIDBI under its Refinance Scheme for Rehabilitation or

should be provided by State Government where it is operating a

Margin Money Scheme. Interest on fresh rehabilitation term loan may

be charged at a rate 1.5% below the prevailing fixed / minimum

lending rate chargeable by the bank wherever applicable or as

prescribed by SIDBI / NABARD where refinance is obtained from it for

the purpose. 

All interest rate concessions would be subject to

annual review depending on the performance of the

units. 

ix)              Promoters' Contribution  

As per the extant RBI guidelines, promoter's contribution towards the

rehabilitation package is fixed at a minimum of 10 per cent of the

additional long-term requirements under the rehabilitation package in

the case of tiny sector units and at 20 per cent of such requirements

for other units. In the case of units in the decentralized sector,

promoter’s contribution may not be insisted upon. A need is felt for

increasing the promoters' contribution towards rehabilitation from the

present limits.   It is, therefore, open to banks and financial institutions

to stipulate a higher promoters' contribution where warranted. At least

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50 per cent of the above promoters' contribution should be brought in

immediately and the balance within six months. For arriving at

promoters' contribution, the monetary value of the sacrifices from

banks, financial institutions and Government may be taken into

account, in addition to the long -

term requirement of funds under the rehabilitation package.

While evolving packages, it should be made a precondition that the

promoters should bring in their contribution within the stipulated time

frame. Further, in regard to concessions and relief made available to

sick units, banks should incorporate a ‘Right of Recompense' clause in

the sanction letter and other documents to the effect that when such

units turn the corner and rehabilitation is successfully completed, the

sacrifices undertaken by the Fls and banks should be recouped from

the units out of their future profits/ cash accruals.

BIBLIOGRAPHY

www.bifr.nic.in

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www.as.ori.nic.in

www.exim.indiamart.com

www.commerce.nic.in

www.busuness standard. Com

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