25

A CONCEPTUAL ANALYSIS OF
CORPORATE FAILURE IN INDIA
Krishn Awatar Goyal and Ravinder Kumar

Introduction
Corporate failure, why it happen? Generally we will search causes, condition,
management related aspects and market related factors. In most of the cases of corporate
failure, management of companies has prior information of causes before the corporate
failure. But there is no action plan for dealing the situation of corporate failure. Every
business has some directions or objective. A company going to sick, in most of cases
such companies primarily focus on cost cutting in terms of employee retrenchment,
reduction in allowances and reduction in wages. Management has produced the evidence
before CEO that we have saved millions or billions for the company. In short-term,
management has succeeded for dealing the situation of corporate failure. Employees can
take organization from bottom to top in business growth; it is not means they cannot give
anything for organization or just as donkey work for management. We cannot make them
fool. It is easy to blame others than doing actual. Employees are ultimate asset of any
organization. Management is more concentric business planning and controlling pertaining
to the internal factors of the sick business unit. But corporate failure is wide phenomena
308 Contemporary Issues in Management A Conceptual Analysis of Corporate Failure in India 309
and can be resolved through proper systematic process. If we wider negative impact of any economy in terms of increasing
have sound planning, implementation and control system with unemployment, declining export, increasing import, non-availability
sound ethical values in organization create healthy goods or services and increasing pricing. Corporate failures refer to
environment in organization to enhance business growth. those units which perform poorly against expected results, incur
If a person open shop after study of profit margin and volume of cash losses for consecutive years, erode away almost whole of the
sales at a desired place, another person come and starts his net worth of working capital and obviously fail to service the debt
business. It is obvious that competition increase and profit margin obligations. To reduce the situation of corporate failure, there is
will decrease. Some of business will fail while others have some need to development of all kind of infrastructure (financial,
impact on the business from the competitors in this situation the production, marketing, etc.) for the industrial units.
growth rate of business will be lower. Vision and objective are key Corporate failure prediction has been developed a major research
points to be considered for analysis of corporate failure. It should be for industrial units. Therefore, it is necessary to use appropriate
analyzed and to be ensuring that it is feasible or not to achieve in prediction model for prediction of corporate failure. Industrial sickness is
this competitive business environment. Disclosure of business cognitive process in which management should keep its eyes on the all
objectives have no guidelines and not been studied in corporate stakeholders of the business. Business always risk oriented therefore, it
failures in previous studies. is much needed continuous planning for development and innovation to
India is a most developing country in the South Asia Region. To lead the organization. We have gone through state wise analyze the
fulfill the necessity of the nation, there is a greater need of development industrial sickness, but the factor of rate of investment also influences. If
of its industries or reduce the rate of corporate failure. It is needed to a state have more industry as compare to other state, geographical and
upgrade the sick industrial units or revive the closure units through market condition impact on the business. As we have seen number
diversification or with other possibilities of scope of the business. Future industrial units failure in the textile units due to changing customer
development of an economy is depending on the sustained growth of trends and fashion leads to failure of many small scale traditions
industrial production and exports. It is a necessarily to be cautious about oriented units in India. Many of research have been conducted on the
the probability of corporate failure through conceptual analysis. There causes of industrial sickness but we find new cause of failure of
should be timely check its selected key financial ratios and other industrial unit
prediction tools to predict financial position. In India, the problem of the
industrial sickness has been a long standing one and the sizable Objectives of Study
magnitude and incidence of sickness has been a serious concern for
Government has agenda for industrial development in India. No
the government. The prone of industrial sickness not just affects the
doubt recently World Bank has predicted above 7.2% annual
industrial concern but also leads to accumulation of Non-Performing
growth of Indian economy for the year 2016-17. Government has
Assets with the banks and labor problems. Agriculture failure or crops
some plan for promote industrialization in India such as
failure creates situation of suicidal for farmers likewise corporate failure
introducing the promotional programs of ‘Startup India’, Make in
also creates suicidal situation for workers, creditors, financial institutions
India and Digital India. The government is also focusing on
and middle managements. Prediction of corporate failure is always
revival of sick industrial units in India:
based on facts and evidences of present and past of an organization’s
environment. Qualitative and quantitative data are used to forecast • To know criteria of detection of sick industrial units in India.
future prospectus of any business unit. As prediction plays vital role in • To know symptoms of corporate failure in India.
day to day life to predict the future. Existence of industrial sickness is • Contemporary issues of corporate failure in India.
more spread in developed countries as compared to developing
Corporate failure is a result of several factors and having major impact
countries like India. Corporate failure has
on the national economy. Prediction of corporate failure is always
310 Contemporary Issues in Management A Conceptual Analysis of Corporate Failure in India 311
based on the analysis of past, current and future trends of External Causes for Industrial Sickness
business activity. • Failure of Human Resource Management: Men are
centre of all activity. Therefore, lack of skilled manpower
Review of Literature or low skill development centre, reservation policy of
Raman Goldbach (2015) “The Great Recession, Regulatory Failure and government, effect of trade unions and differentiate
Global Governance”, according to the author, global governance is a wages in the same industry leads industrial sickness.
trans-governmental network that originated in the Basel committee. • Wrong Plant Location: Many healthy companies
There is need of global standards to prevent financial crisis. In this having their plant near to airport, ports, market and
study, the author has aim to trans-governmental harmonization of power enabled states. A governmental policy is
standards to regulate globally active banks. There are several studies also related to investment and promotion.
on Basel Committee and its standards have revealed that to overcome • Availability of Finance: Finance is major constraint for the
these problems in jurisdictions. Another level of study shows that industrial units in India. Delay in the availability is also
standards are set according to national and international level. As causing delay in introducing a new product in the market.
financial crisis started in the year 2007 and what will be the future of • Management of Marketing: A companies may have
governance through global standards.
1 restriction for entering in a state, export, licensing
Dr. K.A. Goyal, Dr. Nitin Gupta and Neeta Gupta (2012), “An
policies, tax rate and octroi, etc.
• Economical Condition: A country’s economical
Overview of Sickness in Micro, Small and Medium Enterprises in India;
conditions also affect the business of an industrial unit
classified the industrial sickness into internal and external causes.
while other industrial may earn abnormal profit also.
Internal Causes of Industrial Sickness • Government policy for disinvestment of non-profit
• Lack of Skilled Manpower: Company’s ineffective Human making units whereas units having possibility of
2
Resource policies regarding recruitment, promotion and revival or necessary support needed.
development also lead to industrial sickness D.P. Gupta (1990) “Industrial Sickness and The Role of
• High Cost of Production: High rate of storage or Reconstruction Agencies”, The study is concerned for the revival of
inventory is major blocking of financial resources, sick industries because a country like India with limited investible
cost of production, maintenance, ineffective product resources and vast population, cannot afford the loss of production,
handlings are causes for industrial sickness. income and employment. There are many problems arises due to
• Less New Product Development: A company industrial sickness in India. In the early stage of industrial sickness,
should have a good research and development a business unit is not able to meet its cost and depreciation,
centre to generate new product. Many MNC’s therefore its net profit decline. Incurring continuous losses is the
having good R&D facility at worldwide level. main criteria for declaring sick industrial unit. The author classify the
• Out Dated Technology: Technology is prime aspect for growth causes of industrial sickness are external and internal. The study
of industry. Many Large, SMEs and Micro companies having also focuses on the role of financial institutions and banks to provide
outdated technology leads to industrial sickness. 3
financial assistance to sick industrial units in India.
• Malpractice by management of company and K. Ranganathan (1988) “Industrial Sickness”, Author in this book
government policies are supplementary factor for has discussion regarding various aspects of industrial sickness from
creating intentionally sick company by transfer of cash defining industrial sickness as per financial institution and focused on
or funds to other companies for receiving the revival
the causes of industrial sickness. The author has elaborated internal
and rehabilitation grant from the government.
312 Contemporary Issues in Management A Conceptual Analysis of Corporate Failure in India 313
and external causes of industrial sickness. Internal factors are those phenomenon of sickness in the first place. The study
factors related to location, incorrect estimation of production process, shown there has been 12 percent decline in cotton cloth
market demand, cost, technological aspect of plant and machinery, cost production between 1976 and 1980. Author concludes that
of project, financial factors, usability of funds, wrong assessments of there will be three issues remain always with the textile
6
working capital, diversion of fund, manpower factor and managerial industry namely technology, organization and finance.
related issues comes under the internal factors of industrial sickness. Bidani, S.N. and Mitra, P.K. (1982) “Industrial Sickness:
External factors are also important but these related to the Identification and Rehabilitation”, the authors have trace the hard
governmental policies, taxation policies, political interferences and realities of industrial sickness in this book and studied each
natural calamities, etc. According to the author financial analysis is more aspects of industrial sickness, identification and rehabilitation
important of identification of industrial sickness. Prediction of corporate program. The authors have made description of industrial
failure can be made through Altman model of Z score and breakeven sickness, process of sickness, prediction of industrial sickness,
point. For such study, financial ratios have greater implication on 7
arriving conclusion or prediction of corporate health. There is need of an
causes and symptoms of industrial sickness in depth.
analysis or search of viability in the sick industrial units. Every Criteria of Declaring Sick Unit
organization has some viable aspect for reviving and supporting cash
losses or through rehabilitation schemes of BIFR/ financial instructions. According to Tiwari Committee, It has made recommendation
The author has given suggestion for non viable sick units may have that the Government of India enacted the Sick Industrial
alternate strategy namely merger, government takeover, sale to Companies (Special Provisions) Act (SICA), in 1985. SICA was
4 considered to be a major step for detecting sickness at early
employees or cooperative, leasing and windup, etc.
stages and to suggest remedial measures for revival of
Nallini V. Dave and Dr. N.M. Khandelwal (1987) “Industrial
Sickness and Key Areas of Management”, The authors have
potentially viable sick units. For purposes of the Act a company
following key objective for the study related to know the role of some is considered to be sick if it meets the following criteria:
areas of management in efficient running of industrial enterprises. • The company has been registered for not less than 7 years;
Study has find out important factors of leading to the problem of • At the end of any financial year its accumulated
industrial sickness, to know impact of industrial sickness and losses equal to or exceed its entire net worth; and
preventing of industrial sickness. The authors have selected three • It has suffered a cash loss in such financial year
textile companies from each grouped textile namely sound textile and the immediately preceding financial year.
mills, sick textile mills and other textile mills. The study was based
on Gujarat’s textile mills. Power supply in Gujarat is comparatively The Reserve Bank of India identifies sick industrial units on the basis of
good from other states, therefore industry take advantage by a mix of criteria including continued cash losses, imbalances in the
exercising maximum advantage utilization. As power supply is a financial structure, and deterioration in liquidity. “A unit may be
major factor of industrial sickness in India. Due to deployment of considered sick if it has incurred cash losses for one year and, in the
5 judgment of the Bank (RBI), it is likely to continue to incur cash losses
Generator System impose additional cost on the factories.
V. Shanbhag (1984) “Sickness in the Textile Industry: A for the current year as well as the following year and the unit has an
Contextual Analysis”, the author has made a conceptual analysis imbalance in its financial structure such as current ratio of less than 1:1
sickness in textile industry. According to the author after decade of and worsening debt equity ratio” (RBI, 1978).
sixty, Indian textile industry was passing through the age of
Symptoms of Corporate Failure
sickness. According to the author treating industrial sickness must
be accompanied by an equally strong concern for understanding the Corporate failure is not broke out in one day but corporate shows
314 Contemporary Issues in Management A Conceptual Analysis of Corporate Failure in India 315
symptoms of failure before its actual failure. There are 1. Proper utilization of funds or management should track
several signals that can give true picture of the business record from requisition source to end use of funds.
and predict probability of business failure: 2. To check irregularities in account or tense of heavy
fluctuation.
1. Heavy customer end problem related to quality 3. Quarterly basis check the firms key ratios and take
/debit from customer/penalty. remedial action through meeting, etc.
2. Continuous cash losses or continuous erosion of net worth
4. Monthly/weekly/daily basis check EOQ level of
3. Decline in customer orders or decreasing existing inventory to control the inventory.
loyal customers of the business. 5. Monitor activities of all functional areas namely
4. Heavy cash flow or cash at bank is a major symptom finance, production, administration and personal, etc.
of business failure. Cash can only be productive when 6. Strong follow-up on credit facility and monitoring of
it has been invested in somewhere. bill receivables.
5. Delay in salary process of employees due to cash 7. Action plan for reducing customer complaint and
crunch as per fully utilization of cash credit limit decrease all customer’s debits.
facility given by the financial institution. 8. Regular market watch and ongoing training needed
6. Scarcity of input resources for the business organization.
to overcome from the failure situation.
7. Decreasing in sales volume and profitability or 9. Timely clear all outstanding, to cover interest cost.
reduction in capacity utilization of plant/machinery. 10. Search better alternatives for financial resources to
8. Continuous decline working capital or disturbance meet the organizational financial need.
in receivables. 11. Search new business avenues or expand existing
9. Excessive stock of inventory at different stages from storage of
business by considering same environmental conditions.
raw material, work in process and at finished inventory.
10. Company financial position effect due to Financial institution has also responsibility to monitor the financial
governmental policy/regulation/effect of competitions. statement of quarterly basis and half yearly to check financial health
11. 10 Defaulter in meeting statutory compliances of government of the firm. Past financial record should be check while granting
12. Environmental pollution related policy will be prime additional loan and study deeply to feasibility study with considering
indication for corporate failure in coming years aspect of financial, technical and social viability of the project.
related for an organization. It is depend upon the
nature of business of an organization. Contemporary issues of Corporate Failure in India
13. There is heavy indication of discount from the
It is very needed to make action plan for the causes of corporate failure.
organization to survive in the competitive environment.
As per extensive study of literature, there is macro and micro related
Monitoring system is more needed for early detection of corporate factors of corporate failure or industrial sickness. A business planning is
failure. For more effective monitoring of corporate failure, financial more important for development of any business unit. Before setting-up
accounting should not been manipulated or producing marketing an industrial unit, there is need to conduct techno-viability study and
approach of financial statements. Organization should have good project feasibility analysis to forecast growth of business and expected
MIS system to arrest the corporate failures. Monitoring system life of the business. It is better to repair a building than making a new
should be easy to implement and real usable under the real situation building. But it is depending upon the case to case. Some our right
of the business. A regular feedback is necessary for monitoring and decision to make a new building at old building place reason of
saving a firm from failure: expectation of higher cost of repairing. Likewise, corporate
316 Contemporary Issues in Management A Conceptual Analysis of Corporate Failure in India 317
failure’s revival program should be implemented after extensive maximization of value of assets to promote ownership and
study of the business unit. Business planning should be strong to availability of credit facility for bankruptcy firms.
detection of industrial sickness. Government should have use an Corporate banking sector has always get difficulties in rehabilitation
effective prediction of model for corporate failure. It will useful for of sick industrial units due lack of legislative or change in management.
the business unit to early detection of the possibility of corporate Generally, banks have appoint their senior person to monitor the
failure. For rehabilitation program for a sick unit, there is need of situation of sickness but not protected through legal obligation of
extensive information for incorporating to take correct decision companies act 1956. Some of cases, entrepreneurs have not been faith
for a business unit. in appointed person of banks. Cultural and communication gap have
According to Chairman of Aditya Birla Group Mr. Kumar major barrier for taking expeditious decision or to take into confidence to
Manglam Birla said about Indian entrepreneurs “As far as the promoters of sick industrial unit. A new legislation or law is needed
manufacturing is concerned, a large part of it is competitive, for for determining the role of financial institution and consultant for dealing
example at most of our manufacturing facilities, we would be the situation of corporate failure.
among the top 10% most cost efficient on a global basis. In ten
years, with the way the make in India initiative is going, we’ll Conclusion
have a brand of ‘Made in India’.” This statement was made about
As per the study, there is need to revision of criteria for declaring
recently launching of smart phone of Rs 251 by Ringing Bells
an industrial unit as sick unit. There are several factors affect to
Pvt. Ltd of domestic mobile phone manufacturer.
a corporate entity and one factor influence the whole structure of
New bill of ‘Insolvency and Bankruptcy Code 2015’ has been
balance sheet. We have used criteria much of old, as situation
introduced in Lokshaba on 21st December 2015 by finance minister Mr.
and business environment is changing rapidly. In this situation,
Arun Jaitely aims to provide resolution for industrial sickness in a time
corporate restructuring strategy can be used for revival of a
bound manner. Once the bill became law, it will boost additional
business entity. Government’s plan and implementation program
investment in the country. The bill has proposes a timeline of 180 days
should be effectively implemented. So detection and removal of
for dealing with applications, which could be extended by another 90
industrial weakness can be removed much more hurdles.
days. As per report published in the Hindustan Times on the dated 22
December 2015, the bill also suggests early identification of financial
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