Industrial Sickness: Symptoms or Signals

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What is Industrial Sickness?

In common parlance, a sick unit is one which is not healthy. Financial institution considers a unit sick when it fails to meet its contractual obligation.

According to the Sick Industrial Companies (Special Provisions) Act, 1985, a sick industrial undertaking means, “an industrial company (registered for not less than seven years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year.”

Symptoms of Industrial Sickness

Common symptoms of industrial sickness include failure to pay statutory liabilities like provident funds and E.S.I. contributions, failure to pay a timely installment of capital and interest or loans taken from financial institutions and through public deposits, increase in inventories with a large number of slow or non-moving item, high rate of rejection of goods manufactured, low capacity utilization and frequent industrial dispute. Industrial units may become sick at different stages.

Some industrial units are ‘born sick’ some achieve sickness and some of them have sickness thrust upon them. The following factors may cause the symptoms of industrial sickness:

  1. Failure to Pay Statutory Liabilities
  2. Increase in Inventories
  3. Failure to Pay Loan
  4. Rejection of Goods
  5. Others

Failure to Pay Statutory Liabilities

Financial management causes failure to pay statutory liabilities like provident funds and E.S.I. contributions.

Increase in Inventories

Poor inventory management with respect to finished goods as well as inputs puts units in trouble and the result is sickness inventories.

Failure to Pay Loan

Industrial units fail to pay timely installments of capital and interest on loans taken from financial institutions and through public deposits. It is a major symptom of industrial sickness.

Rejection of Goods

Due to the declaiming in technical efficiency rejection of the goods is possible.

Others

  1. Dealing in capacity utilization.
  2. Non-submission of data to banks and financial institutions.
  3. Frequent breakdowns in plants and equipment.
  4. Irregularity in maintaining bank accounts.
  5. Frequent turnover of personnel in the industry.

Signals of Industrial Sickness

The persistence of various signals over a long period of time becomes a symptom of industrial sickness. The various symptoms ultimately reflect on plant performance, ratios, share market price, and capacity utilization. Some of the major symptoms which characterize industrial sickness are as follows:

  1. Persisting shortage of cash.
  2. Widespread use of creative accounting.
  3. Deteriorating financial ratios.
  4. Continuous tumble in the price of the shares.
  5. Delay in the audit of annual accounts.
  6. Degradation of employee morale and desperation among the management team.
  7. Delay in payment of statutory dues.

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FAQs Section

What are the symptoms of industrial sickness?

Failure to Pay Statutory Liabilities, Increase in Inventories, Failure to Pay Loans, and Rejection of Goods are the symptoms of industrial sickness.