The ‘India Growth Story’, which had made global headlines a few years back, seems to be running out of steam. High interest rates and falling demand have started taking a toll on Indian industry. The policy response has been slow. What has emerged as a consequence is a worrying trend of rising industrial sickness.

Industrial Sickness

Micro, small and medium enterprises (MSMEs) constitute the backbone of the ‘India Growth Story’, and for India to grow faster we need the MSMEs to flourish. Let me share some statistics to provide a perspective on this matter.

MSMEs account for over 8 per cent of national Gross Domestic Product (GDP) and 45 per cent of India’s manufacturing sector. There are around 3.6 crore such enterprises, employing over eight crore people. However, a large segment of these are unregistered entities.

There was a sharp spurt in the number of registered medium firms that became sick during 2011-12 — from 2,117 units in 2010-11 to 3,044 in 2011-12, a jump of about 44 per cent. States like Delhi, Madhya Pradesh, West Bengal, Punjab and Chhattisgarh registered sharp rise in sick medium-sized units.

Interestingly, registered micro and small units witnessed a dip of around 5 per cent, the number declining to 85,591 in 2011-12, compared to 90,141 a year ago.

States which recorded the maximum number of sick units in the micro and small category are Maharashtra, West Bengal, Tamil Nadu, Gujarat and Odisha. The outcome of such sickness is increased non-performing assets (NPAs) for banks and financial institutions, and rising unemployment.

Rehabilitation Options

Are sick units inevitably doomed? We need to take a closer look at the available options to get such companies back on their feet.

Unfortunately, not much can be expected from India’s existing bankruptcy laws. Under the existing system, a government body can only oversee rehabilitation of companies with licences to run factories. Companies which have operated for a minimum of five years and holding a factory licence are eligible to approach the Board for Industrial and Financial Reconstruction (BIFR), if accumulated losses equal or exceed their net worth. The recourse is available under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA). However, the BIFR route is an archaic one. Often, it takes years for even the rehabilitation plan to get approved.

In 2001, the Reserve Bank of India (RBI) allowed companies and their creditors to enter into a debt recast arrangement to help businesses return to financial health, as an alternative to the BIFR route. However, the mechanism was limited to firms that had borrowed more than Rs 20 crore from a group of lenders. But negotiation with creditor banks is often a time-consuming process, and starts only after the company reaches a stage of severe financial crisis, if not a complete collapse.

Under the Indian Companies Act, 1956, firms can voluntarily wind up operations or a court can order their closure. In a court-ordered shutdown, an official liquidator will be appointed to oversee the process and distribute the proceeds from sale of assets to creditors.

While services sector accounts for more than 55 per cent of India’s GDP, our service companies, once distressed, cannot apply for restructuring. India’s corporate laws has not been able to match the speed at which new businesses have emerged, often making it difficult for struggling companies to renegotiate debts and cut cost.

Closure of any unit should always be the last option, when so many stakeholders’ interests are at stake. Every sick company has made some initial investments in setting up basic infrastructure. Thus, it owns some assets and has employees working for it. It has to be seen how the existing resources can be put to the best possible use. Even if the liabilities of the company far exceed its assets, it is important to explore how the existing assets can be optimally utilised to prevent further erosion of value.

Way Forward

The fate of a distressed company can be compared to that of a child who has been orphaned in his childhood. The death of parents and family leaves a child helpless and vulnerable for no fault of his. His survival becomes uncertain. In this case, society has a role to play in ensuring a normal life for such children. It is the onus of the society to ensure that they get the necessary training and education to become assets to society, rather than liabilities. Likewise, stakeholders in distressed companies can disturb the societal equilibrium. Our aim should be to ensure continuity of such companies.

India needs a comprehensive bankruptcy law for both manufacturing and services sectors. Financially distressed companies must be made to revive fast. Under the existing system, there is little scope for such companies to take preventive measures to avoid a further downward spiral.

Interestingly, the new Companies Bill proposes several steps in this regard. These include empowering the Serious Fraud Investigation Office (SFIO), providing the exit option to minority shareholders, prevention of insider trading, putting in place a sound whistleblower policy, adequate representation for minority shareholders on the Board, among other things.

However, the Bill does not quite chart out a road map for reviving a distressed unit. Lenders too are affected, as their ability to lend in other ventures gets curtailed.

(The author is Vice-Chairman, Srei Infrastructure Finance Limited.

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