How to prevent sickness in enterprises


October 2019
How to prevent sickness  in enterprises

Enterprises need to undertake global benchmarking, so as to remain locally, regionally and globally competitive, writes Dr Rajen Mehrotra.

Industrial sickness in any country affects the economy of that country in a number of ways, such as loss of revenue to the Government, increase in non-performing assets held by the banks and financial institutions, erosion of capital invested by the owners/shareholders and likely loss of employment to persons working/associated with the enterprise and also in the supply and distribution chain of that enterprise. In India, post-independence (i.e. 1947 to the beginning of 1970s), when any large size industrial undertaking became sick, the Government was inclined to nationalise the industrial undertaking. This was to safeguard industrialisation plus existing jobs, and we thus landed up with a substantial number of nationalised engineering and textile companies in the country. These enterprises became part of Public Sector Units (PSUs) owned by the Government, and it was not easy for these units to be turned around.

To detect sick or potentially sick companies and industrial undertakings and for their possible revival, or for their closure, Government of India enacted The Sick Industrial Companies Act (SICA), 1985. An important provision of SICA was establishing two quasi-judicial bodies û the Board for Industrial and Financial Reconstruction (BIFR), and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR was set up as an apex board to spearhead handling the industrial sickness issue, including reviving and rehabilitating potentially sick units and liquidating non-viable companies. AAIFR was set up to hear appeals against BIFR orders. SICA was repealed and replaced by the Sick Industrial Companies (Special Provisions) Repeal Act of 2003, which diluted some SICA provisions and plugged certain loopholes. A key change in the new Act was that apart from combating industrial sickness, it aimed to reduce its growing incidence by ensuring that companies did not resort to a sickness declaration, merely to escape legal obligations and gain access to concessions from banks and financial institutions.

The Government brought in The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) which allowed banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans. The first Asset Reconstruction Company (India) was set up under this Act, but it did not yield the desired result. There was a time, when enterprises that were not in a position to pay the interest on their loans with the banks and financial institutions would negotiate concessions from the lenders. Reality is that, the banks and financial institution in turn, did grant concessions and agreed to take haircut. Times have changed, because of the Insolvency and Bankruptcy Code, 2016, wherein the banks and the lenders presently take the defaulting enterprises to the National Company Law Tribunal (NCLT) and the promoters could lose control and ownership of the enterprise, if there are buyers for the enterprise. We are well aware of two recent cases in the country where Bhushan Steel had been brought over by Tata Steel in 2018 and similarly Lakshmi Mittal-led Arcelor won a bid to acquire debt-laden Essar Steel. In 2019, though the transaction is presently pending before the Supreme Court of India.

Enterprises are bound to be impacted by external factors such as technological changes, input raw material shortage or price rise, increasing competition, infrastructure bottlenecks, increasing regulatory and environmental compliance, inadequate credit. Enterprises have to find suitable innovative approaches for continuing to remain viable and grow. Enterprises cannot change the external factors impacting them; but they have to learn, how to adapt and successfully face the impact of changes in the external environment affecting the enterprise, take appropriate corrective steps and ensure that the enterprise remains healthy and does not become sick.

The external environment is dynamic and keeps changing, wherein competitors continuously aim at improving market share, and new competitors also enter the market. Also, enterprises need to keep pace with technological changes, relook at the product portfolio and their margins, and also have an effective employee relations climate where changes can be implemented without delay and the business continues to remain viable and profitable and also avoid getting the enterprise into a debt trap. For this the owners / top management need to be proactive at every stage during the enterprise life cycle and manage the required change effectively and speedily.

Sickness of enterprises
Enterprises at birth should be born healthy, as the objective of setting up a business is that it must be viable and profitable, though there can be an initial gestation period. It is possible that over a period of time the enterprise could become sick for various reasons. Some of the internal factors which could lead to sickness are overestimating demand, unwarranted expansion, excess debt, underutilisation of plant capacity, failure to manage adequate working capital, failure to undertake timely modernisation and also an ineffective labour management relationship.

Sickness in enterprises can be for various reasons and they can be classified under broad three categories and there can be combinations of these also (i) errors of judgment by the owners/top management, which resulted in decisions which were not in the interest of the enterprise and hence the enterprise became unviable, (ii) negligence/mismanagement by the owners/top management in running the enterprise, and not taking corrective timely decisions to prevent the enterprise becoming vulnerable and unviable, (iii) fraud by the owners/top management in running the enterprise by diverting funds from the enterprise.

Presently in India, we are witnessing quite well-known leading private sector companies, which at one time were prosperous, then went through turbulence, and have now moved towards sickness and in certain cases the companies have also closed operations and are for sale or have been sold under the Insolvency and Bankruptcy Code, 2016. To name a few, some of these leading companies are: Amtek Auto, Dewan Housing Finance Corporation (DHFL), Infrastructure Leasing & Financial Services (ILFS), Jet Airways, J P Infrastructure, Lanco Infratech, Monnet Ispat, Ranbaxy, Ruchi Soya Industries, Videocon Group, Zee Entertainment, and others. The reasons for this situation to occur in each case will differ, but the end result is that each of these companies are sick and hence the lenders desire to reduce their loss by sale of the enterprise, if there is a buyer or for the enterprise to be liquidated.

In quite a few cases, the Directorate of Enforcement, Ministry of Finance, Government of India, which is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime, has also launched cases of economic crime on the owners/top management. Some of the cases filed by the Directorate of Enforcement also include charges under Prevention of Money Laundering Act (PMLA), though these allegations are by and large denied by the owners / top management of the enterprise during litigation.

We also have public sector units (PSUs) in the country that are sick; for example Air India, Bharat Pumps and Compressors, Bharat Sanchar Nigam (BSNL), BHEL - Electrical Machines, HMT Machine Tools, Heavy Engineering Corporation, Hindustan Cables, Hindustan Paper Corporation, Hindustan Photo Films Manufacturing, HMT Bearing, HMT Chinar Watches, HMT Watches, Indian Telephone Industries (ITI), Instrumentation Kota, Mahanagar Telephone Nigam (MTNL), Nagaland Pulp and Paper Company, NEPA, Richardson and Cruddas (1972), Sambhar Salts, Tungabhadra Steel Products, Triveni Structurals, Tyre Corporation of India and others, but are continuing to live in comatose stage, as Government is continuing to fund them.

Quite many of these enterprises are over staffed coupled with low work ethics, which have continued over a very long time period. One also needs to analyse, why these PSUs became sick and what led to the sickness and who were responsible for it. Since Government is the owner of these enterprises, by and large the top management of these enterprises do not face the strict scrutiny of the Directorate of Enforcement, Ministry of Finance, Government of India.

Categories of enterprises
Enterprises in India can be divided under four categories by virtue of their birth and present status on sickness and health (i.e. born sick - living sick, born sick - living healthy, born healthy - living sick and born healthy - living healthy). The worst is born sick - living sick and the best is born healthy - living healthy. The following matrix will indicate the various parameters which could be responsible for the defined status.

In the present competitive business environment, one needs to perform much above mediocrity. Innovation of products and services is an essential ingredient of business when expectancy of customer's change. If the enterprise does not keep pace with changing time, it turns not only sick but can also become extinct. For example, Hind Cycles and Raleigh, both leading bicycle manufacturers in India couldn't foresee the consumer preference of automated two-wheelers (scooters/ moped/ motorcycles) over bicycles. On the contrary, Hero Cycles, once the biggest manufacturers of bicycles, foresaw what is coming and diversified into motorcycles and became one of the largest manufacturers of automated two-wheeler apart from still continuing to make bicycles. Same is also true of Premier Automobiles and Hindustan Motor, who were one time the monopoly supplier of cars (i.e. four wheelers) in India and are extinct today. Also, efficient management of funds, ensuring a profitable market for their product plus an effective industrial relations climate is a very important ingredient of a successful enterprise. At times, it is also outdated technology coupled with other factors listed above, which eventually results in the sickness of the enterprise, and if not corrected in time leads to the death/sale of the enterprise.

Conclusion
We recently heard of VG Siddhartha Hegde, billionaire businessman and founder of Café Coffee Day committing suicide on July 29, 2019. There are various reports emerging in the media about how the enterprise started by him, was presently going through financial difficulties and allegations of "scandalous" business practices and "illegal" wealth generation by his two companies Way2Wealth (earlier known as Sivan Securities and a Café Coffee Day company) and Alpha Grepp (apparently operating from Singapore and Hong Kong). Since Hegde is dead, the true story is unlikely to fold and various inferences will be drawn, though a forensic audit has been undertaken by the management of the enterprise. Enterprises need to ensure that they conduct their business in an ethical manner and avoid getting into a debt trap, which they cannot service, otherwise the enterprise will one day close down or get sold to another owner.

Enterprises, which were doing well, have become sick in certain cases, because of reckless expansion, which was not sustainable. There are also cases where enterprises have faltered as they took decisions which have negatively impacted the business and they could not recover. These are enterprises making quick gains in one area but the same did not guarantee sustainability for the total enterprise.

Enterprises need to undertake global benchmarking, so as to remain locally, regionally and globally competitive. There are examples in India of enterprises like Asian Paints, Gujarat Co-operative Milk Marketing Federation (GCMF), Hindustan Unilever, ITC and others, which have flourished over the years, because of constant innovations as per the need of the hour and the management of each of these enterprises made it a practice and a working philosophy to constantly innovate and move as per the changing environment and ensure that they remain healthy.

ABOUT THE AUTHOR:
Dr Rajen Mehrotra is Past President Industrial Relations Institute of India (IRII), Former Senior Employers"
Specialist for South Asian Region with International Labour Organization (ILO) and Former Corporate Head of HR with ACC Ltd. and Former Corporate Head of Manufacturing and HR with Novartis India Ltd. E-Mail: rajenmehrotra@gmail.com

(Published in September 2019 issue of Current Labour Reports & Arbiter)

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