Industrial sickness

 The term industrial sickness has been defined in Sick Industrial Companies (Special Provision) Act, 1985, (amended 1993) as, “one which has been in existence for at least more than five years, and has the accumulated losses equal to or exceeding its entire networth at the end of any financial year.”

It is an indicative of malfunctioning of industrial units and is not an unnatural phenomenon.

If the sickness of an industrial unit is identified during early stages, it is called incipient sickness. In case of small scale units, if the capacity utilisation achieved during preceding five years is less than 50 percent of the highest capacity achieved during preceding five years, it is taken as an indicator of incipient sickness. There are many indicators of industrial sickness like liquidity crunch, decline in revenue, declining market price of the company' shares, skipping of dividend payout and default in loan repayment.

If net worth of an industrial unit declines by 50 per cent or more, or there is a halt in business for a period of 6 months or more, it is considered as an indicator of actual sickness. Thus, an industrial unit is considered as sick, if the company sustains losses for period of two years or more, and if the latest balance sheet shows accumulated losses more than 50 per cent of the paid-up capital and reserves.

Defining industrial sickness is a difficult task. Usually, incipient sickness and other non-financial indicators are used as early indicators of industrial sickness. However, accurate financial information is not always available. The financial information contained in the annual reports and other public documents is not completely reliable. Further, financial indicators give clue about sickness which has already set in. Hence action based on these will be rather curative rather than preventive and these indicators cannot be used as early signs of sickness (incipient sickness).

Industrial sickness can be traced to management deficiencies and other non-financial factors. However these are very subjective in nature and cannot be easily known. Sometimes factors causing sickness are out of firm's control. These exogenous factors affect the entire industry, but some unit(s) may be more adversely affected than others. Some of the exogenous factors include unfavourable market conditions (recession), rise in competition and entry of substitutes, changes in government policy, decline /changes in demand, rise in production cost, changes in logistics (distribution and supply), changes in monetary policy, shortage in supply of inputs due to reasons like import freeze, increase in import duty, crop failure; etc. 

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