Industrial Sickness: Meaning, Causes,

Symptoms, Special Act, Impact and

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

What is Industrial Sickness?

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

Causes of Industrial Sickness

Industrial sickness is not produced by a single element but rather by the cumulative influence of
several causes.

The variables that cause industrial disease are divided into two categories: internal causes and
external causes, which are addressed further below:

Internal Causes

Mismanagement: Poor management decisions, lack of effective leadership, and inadequate

planning can lead to a company's downfall.

Financial issues: Insufficient working capital, poor financial planning, and inability to secure loans
or investments can lead to financial distress.

Obsolete technology: Failure to adopt modern technology or upgrade existing systems can reduce
efficiency and competitiveness.

Labour issues: Strikes, disputes, or high employee turnover can negatively impact productivity and
morale.

Inefficient production processes: The inability to control costs or maintain quality standards can
hamper a company's profitability.
External Causes

Economic conditions: Economic downturns or recessions can lead to reduced demand and
increased competition, making it difficult for businesses to survive.

Government policies: Changes in regulations, taxes, or import-export policies can adversely affect
certain industries or sectors.

Competition: Intense competition from domestic or international players can lead to market
saturation and reduced profitability.

Natural disasters or unforeseen events: Floods, earthquakes, or pandemics can disrupt supply
chains and cause significant damage to industrial units.

Other causes of Industrial Sickness

Finance, technical difficulties, poor management, a lack of raw materials, electricity, natural
disasters like fire or earthquake, or a combination of these can all contribute to illness.

External reasons are those that are beyond the management’s control and are deemed to be more
important than internal causes.

The following are the additional causes:

Disagreements among various individuals involved in the enterprise’s promotion and

administration.

Mechanical flaws and failure.

Inability to obtain raw materials at a reasonable cost and appropriate time.

Failure to implement controls promptly where there are shortcomings in work­ings.

Deteriorating labour-management relations, resulting in a drop in capacity utilisation.

Industrial Sickness: Special Provisions Act, 1985 for UPSC

The Sick Industrial Companies Act of 1985 (SICA) was a crucial piece of legislation dealing with
India’s epidemic of industrial disease.

The Sick Industrial Enterprises Act of 1985 (SICA) was implemented in India to discover unviable
(“sick”) companies that might cause systemic financial risk.

SICA was abolished and replaced in 2003 by the Sick Industrial Companies (Special Provisions)
Repeal Act, which softened some features of the original Act and addressed some issues.

SICA was later completely repealed in 2016, partly because some of its provisions clashed with
those of another Act, the Companies Act of 2013.

Remedial measures

Government Role: The government must actively protect sick units, particularly those in small-
scale sectors that are struggling to compete in the age of globalization.
Financial institutions’ Role: Financial institutions can help prevent illness in the following ways:

Continuous monitoring of unit

Careful project appraisal

Professional, institutional response to unit’s problems

Required systems at client units

Incentives to units to remain healthy

Role of Industry Associations: A good practical review by each industry association of installed and
usable capacity in the industry, capacity utilization, growth trends, problems, etc., should be useful
for the potential new entrants in deciding whether to enter the industry or not.

Impact of Industrial Sickness on the Economy

The Indian market has been opened to foreign investors, and their shares in Indian companies are
increasing.

After the introduction of the policy of disinvestment, many Central and State Public Sector
Undertakings (CPSUs and SPSUs) have been transformed into private units for smooth running.

A formidable decision has also been taken. To overcome this bottleneck situation West Bengal
Government adopted a separate Industrial Policy in 1994. The major objectives of this policy were –

Decentralization of units,

Establishment of a strong relationship between rural agrarian and urban industrial economy
through food processing units,

Emphasis on the expansion of micro and small-scale units and

Establishment of different industrial parks in different locations to create an advantage of industrial

agglomeration.

Government Policy for Industrial Sickness

Various steps have been done to address the issue of industrial illness. The RBI has emphasised the
necessity of detecting illness at its early stages.

The policy framework for dealing with the problem of industrial sickness was spelt out in
recommendations released in October 1981 for the direction of administrative ministries of the
Central Government, state governments, and financial institutions.

Within their particular duties, the administrative ministries in the government shall have explicit
responsibility for sickness prevention and corrective measures in the industrial sector.

Concessions
From January 1, 1982, a system was implemented for providing soft margin money to ill units in the
small-scale sector to allow them to receive essential cash from banks and financial institutions to
undertake their revival scheme.

Furthermore, the National Equity Fund provides financial support through long-term equity up to
Rs. 15 lahks to units with a project cost not exceeding Rs. 10 lakhs at a nominal service charge of
1% to potentially viable ill SSI.

The government has also made significant concessions to let ill units recover without requiring
direct intervention. For example, in 1977, the government revised the Income-tax Act by adding
Section 72A, which allows healthy units to receive a tax break when amalgamating with sick units to
resurrect them.

The tax gain comes from carrying forward accumulated business losses and unprovided
depreciation of the ill firms by the healthier companies following amalgamation.

Goswami Committee Report on Industrial Sickness

The Committee on Industrial Sickness and Corporate Restructuring report, chaired by Dr Omkar
Goswami, was submitted in July 1993.

Dinesh Goswami's committee was concerned with Electoral reforms.

Its recommendations

Need for amendment of Anti-defection law to restrict disqualification where elected member
voluntarily gives up his membership.

Changes in voting pattern Fresh delimitation based on 1981 census.

Not more than 2 constituencies for one candidate.

Reduce the age of candidates from 25 to 21 for assembly seats.

Discourage non-serious candidates – increasing the security deposit to Rs.5000 (Lok Sabha) and
Rs. 2500 for Assembly elections.

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

Major Symptoms of Industrial Sickness

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

The government first set a minimum registration requirement of 7 years, eventually lowered to 5
years.

The business should have lost money over the previous and current years.
The reserves and paid-up capital must have been lost together with the company's net worth.

The Second Amendment to the Companies Act of 2002, which defines industrial sickness, has
done so again.

Causes of Industrial Sickness

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

Internal Causes for Industrial Sickness

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

One of the internal disorders that might cause industrial sickness is a lack of finances. It might be
brought on by poor working capital management with insufficient funding.

Poor production policies include selecting an inefficient location for production activities,
maintaining equipment and plants poorly, omitting quality control procedures, and using non-
standard research and development methods, among other things.

Marketing and Sickness A company's marketing efforts invariably impact the industry's well-being
and competitiveness.

Ineffective Personnel Management: Ineffective personnel management can be seen in

mismanaging employees' pay and salaries.

External Causes for Industrial Sickness

Personnel constraints include things like a lack of skilled labour or manpower and a wage gap
between workers and employees in comparison to other industries.

Recession in the market, liberal licencing and tax laws imposed by the government, restrictions on
making large purchases, and a dynamic worldwide market environment that may experience
unexpected changes are all marketing limits.

Production Restrictions: Small-scale industries are also at risk for illness because of a lack of
power supply, expensive fuel, a shortage of raw materials, import/export restrictions, etc.

Financial restraints are the final external factor that affects an industry's health the most frequently.

What are Sick Companies?

Sick companies are defined as industrial units that have sustained cash losses in the past, i.e. for
two fiscal years in a row and are projected to continue to suffer losses in the future.
Furthermore, if the company has been registered for 5 years or longer, its total losses equal or
exceed its net value by the end of the second year.

Furthermore, the corporation fails to settle the debt within three consecutive quarters,
notwithstanding a creditor’s formal demand for a return.