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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
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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.
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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
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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.
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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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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
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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:
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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:
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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
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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
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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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