Analysis of Financial Statements_14

SICK UNITS

Meaning

According to 1975, SEBI guidelines,

A unit which fails to generate internal surplus on continuing basis & depends for its survival on frequent infusion of external funds is called as a Sick Unit.

Sick Industries Companies Act was amended (1985)– according to that,

A sick unit is, an industrial company which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

Two conditions:

1. Industrial unit has been in existence for last 5 years.

2. Industrial unit has completely lost its net worth & accumulated losses exceed net worth.

According to Companies’ Act’1956 (amended in 2002)

1. Accumulated losses in any financial year equal to 50% or more of its average net worth during 4 years immediately preceding such financial year.

2. It has failed to repay its debts within any 3 consecutive quarters on demand made in writing for its repayment by creditors.

CAUSES

1. Selection & implementation of projects without the required feasibility study.

2. Inadequate / non – availability of working capital.

3. Lack of timely decisions i.e. poor management.

4. Poor marketing strategy.

5. Improper utilization of all resources.

6. It was found in many cases that sick units’ average capacity utilization is around 41%.

An industrial unit does not become sick overnight. There are symptoms / signals from which one can make out that the unit is not performing well.

Indicators:

1. Continuous cash losses.

2. Manipulation of stock – statements, accumulation of finished goods stock.

3. Unexplained delay in submission of periodical statements to the bankers or other authorities.

4. Frequent issue of post – dated cheques to the creditors due to unavailability of cash.

5. Lay - offs or retrenchments of workers.

6. Borrowings from markets at an excessive interest rate.

7. Raising of money against all assets of the company.

WHAT TO DO?

All those industrial units which have become sick are not bankrupt. They can be again made profitable. There are chances of there being again successful so Govt. try to revive these units before they reach to the stage of bankruptcy.

Which are these units which can be revived is decided by the banks / financial institutions. The rehabilitation is undertaken in those cases where the concerned banks / financial institutions are of the opinion that the unit is viable.

Restructuring / Revival / Rehabilitation / Turnaround

1. One of the difficult challenges is turning around a sick company before all its assets are under water.

2. Contact Creditors & tell them that you want to restructure your company & want to pay – off all your debts.

3. Cost Control measures.

4. Sales Growth – new strategies.

5. Sales Growth – contact your old customers & provide them good s with new services which otherwise you might not have provided.

6. Financial restructuring wherever appropriate.

7. Formation of Joint – Venture.

8. Modernization & innovation of technology.

9. Infusion of fresh funds in the company.

10. Improved market strategy.

According to Institute of Chartered Accountants of India (ICAI) an auditor has to report in Auditor’s Report that the Company is not sick & is in good condition if it is performing well, in the Annexure to the Auditor’s Report in the Financial Statements of the Company. (in CARO Report)