The alternative legal route to meet the above objectives, i.e., revival/rehabilitation of sick units or the liquidation of the company, is incidental to industrialization.
The time has come for an institutional network and procedures to be evolved for the revival/rehabilitation of sick and potentially sick industries.
In Bangladesh, we do not have a similar act as those in vogue in India, Pakistan, and other SAARC countries. Since there exists a multiplicity of laws, which has resulted in delays, the desired assistance, whether financial or otherwise, could not reach the sick unit in time.
The major problem was the lack of coordination among the different agencies involved in the rehabilitation process of the unit.
This created sufficient grounds to enact suitable legislation in the “public interest” to provide for:
- Timely detection of sickness.
- Expeditious determination by a body of experts of the preventive, ameliorative, remedial, and other measures that need to be adopted with respect to such sick and potentially sick industries.
- Enforcement of the measures considered appropriate.
The Government of India and the Reserve Bank of India have initiated several measures to keep sickness under control. The Reserve Bank of India has been issuing directions to various commercial banks over the years, including the following guidelines:
- Banks have been asked to adopt a single-window approach for lending under consortium arrangements for both sick and weak units in respect of the disbursement of working capital and term loans (rehabilitation term loans).
- They have been asked to strengthen their organizational machinery to detect sickness in time so that there is a possibility of revival of the unit.
SEBI was set up in 1992 to protect the interests of investors and promote the development of the capital market in India. It serves a dual purpose: helping entrepreneurs raise capital from the public and instilling confidence in investors.
In August 1991, the Government issued a directive to all Stock Exchanges to ensure transparency in securities transactions for the benefit of the investing public and to enforce stricter regulations on specific groups of shares, timely settlement of transactions, and broadening the governing bodies of the Stock Exchanges.
Revised guidelines for good and bad delivery of shares have been issued by SEBI.
The listing agreement has been modified to provide for greater disclosure for investor protection and to require half-yearly results.
A scheme has been developed by the Stock Exchanges for market makers.
All restrictions on interest rates on public sector bonds, except tax-free bonds, were removed in August 1991. It was felt that interest rates should be governed by market forces, but companies are required to obtain a credit rating before floating such instruments. Ratings would be optional for public sector bonds and NCDs up to Rs. 5 crores for private placements and convertible debentures into equity shares within 18 months of allotment.
For industrial groups with sick units, banks have been instructed to encourage the group to present concrete proposals to assist the units where sickness is due to internal factors. In such cases, infusion of additional resources should be insisted upon by the healthy units of the group.
It was re-emphasized that banks would also participate in the rehabilitation package. This has been made a mandatory requirement.
If, for any reason, a bank is unable to “discount” its debt within the RBI’s laid-down parameters, the bank will be required to take up its share. If any member bank is unable to take up its share, the bank’s consortium reserves the right to refer the repayment of dues to it under the package.
The Indian Parliament, therefore, enacted the Sick Industrial Companies (Special Provisions) Act, 1985. This legislation marks the beginning of a new era in resolving industrial sickness by providing remedial measures for sick companies as well as for potentially viable sick companies.
To define the term “industrial company,” it is necessary that the company shall have 50 or more workers engaged. If the company cannot establish that 50 or more workers are engaged, it would not be considered an “industrial company” within the meaning of the Act.
However, where a reference has been made to BIFR and subsequently the number of employees falls below 50, the reference cannot be struck down on the ground that the sick company is no longer an “industrial company.”
Sickness as per the Act Prior to the Amendment Act, 1993
Prior to the amendments made by the Sick Industrial Companies (Special Provisions) Amendment Act, 1993 (w.e.f. 1-2-1994), a unit could be declared sick if:
- It was registered for seven years.
- It had accumulated losses equal to the net worth of the company.
- It had incurred cash losses during the financial year in which the reference to the Board was made and the preceding financial year. Thus, the occurrence of cash loss, i.e., loss after deducting depreciation, had to be for two years.
Suggestions for Enactment
A. Long-term Industrial Growth:
The long-term success of Bangladesh’s economic reform process depends on sustained growth in industrial output and investment. Without this, a genuinely competitive industrial base cannot be established to launch an export drive and systematically reduce debt service obligations over time.
The focus should now be on rapid industrial sector reform. This goes beyond eliminating licensing and other barriers to entry; it requires sending signals to potential entrepreneurs about operational flexibility in output choices, markets, and the use of labor and capital. Industrial restructuring involves commercially reorganizing ailing but economically viable companies while facilitating the withdrawal of unviable ones. The presence of various barriers to industrial and corporate restructuring serves no economic purpose.
There are two main reasons for restructuring:
- Except for occasional scale effects, there is no fundamental difference in economic, commercial, and legal principles between reorganizing private sector firms and public sector companies. The distinction lies in political willโparticularly the ability to create a consensus that shapes and enforces decisions.
- Industrial sickness and the need for restructuring, reorganization, and strategic withdrawal of financial penalty clauses will help ensure GDP growth and reduce unemployment.
B. Sick Industry Definition:
A company registered for at least five years, whose accumulated losses equal the sum of paid-up capital and free reserves, incurs cash losses for two consecutive years (including the current year), and has cumulative losses wiping out its net worth may fall under this category.
C. Causes of Sickness:
Industrial sickness arises from poor financial structures, inefficient use of production factors, and weak market positioning. The outcome is the locking of scarce investable funds in sub-optimal activities.
One approach to addressing sickness is to examine the amount of outstanding credit locked up in sick industrial units.
D. Preparation of Reorganization Schemes:
Financial reconstruction of sick industrial companies should be economically flexible and commercially viable.
- Interest on term loans should be reduced.
- All penalties, such as penal interest and damages for non-repayment, must be waived.
- Unrealized normal interest may be waived by 50% to 75% on a case-by-case basis, with the remaining interest funded or capitalized at a subsidized rate subject to periodic review. The total interest rate can be up to 2% higher than financial institutions’ cost of funds in exceptional cases. Normal repayment of funded interest should be 5โ6 years, extendable to 7 years.
- The irregular component of a firm’s cash flow, other than unadjusted interest, should be converted into working capital, with subsidized interest applied.
- Cash losses, including unpaid workers and overdue creditors, should be shared between participating banks and institutions on a 50-50 basis.
Anti-Dumping Measures Under GATT Law:
Bangladesh may impose anti-dumping duties on products being produced locally but facing unfair competition from imported goods.
The GATT rules address two “unfair” trade practices:
- Exported goods benefiting from subsidies.
- Goods dumped in foreign markets at below-market prices.