Columns: Kautilya

Columns

India Today, May 17, 1999
May 17, 1999

KAUTILYA
Sick Solutions

A humane exit policy will actually benefit labour.

By Jairam Ramesh

The Big B has been much in the news these past few days with the problems he has been having repaying the Rs 12 crore he owes Canara Bank. Amitabh Bachchan has followed in the footsteps of many of India's top industrialists who, when faced with mounting debts, simply get themselves declared what is called a "BIFR case". Once you get this stamp, you are free from the clutches of your creditors. In this instance, a judge of the Bombay High Court in his interim judgement of April 26 ruled that since ABCL, the Big B's collapsed enterprise, has already approached the Board for Industrial and Financial Reconstruction (BIFR), Canara Bank couldn't take possession of Bachchan's mansion in Mumbai. If you ever wonder why there are no sick industrialists in India while there are sick companies you have the answer.

The quasi-judicial BIFR came into being in May 1987 under the Sick Industries Companies (Special Provisions) Act, 1985, commonly called SICA. This law was meant to be an instrument of industrial revival. Any company whose net worth has been completely eroded becomes a "sick" company and falls under sica's purview. BIFR then gets into the act, examines the prospects for revival and suggests a rehabilitation plan where feasible.

Since May 1987, BIFR has accepted 2,404 companies for further scrutiny under SICA, of which 157 are state and Central PSUs. Of these 2,404 companies, 606 have been recommended to the high courts for winding up but only in 40 cases have winding-up notices actually been issued by the courts. In another 637 cases rehabilitation schemes have been approved by BIFR.

SICA has many infirmities. It does not capture incipient sickness. It only embraces the terminally sick as revealed by the fact that less than 10 per cent of the companies scrutinised by BIFR are no longer "sick". BIFR itself has become like a civil court, whereas industrial revival demands a professional and managerial approach. It has become a post-retirement sinecure for government officials.

Delays have become endemic and the average delay in BIFR is around 24 months, enough time for influential owners to secure a favourable deal for themselves. Over half of BIFR's winding-up orders have been challenged in the appellate tribunal by managements, showing that the board is seen by industry as an instrument of filibuster and as a trigger for a slew of fiscal incentives.

In May 1997, the United Front (UF) government introduced a whole new bill to replace SICA and facilitate a timely turn-around where revival is possible, quick closure where closure is inevitable and to protect the interests of secured creditors. This bill has many innovative features and alters the definition of bankruptcy to a default on debt in any two quarters out of four. The existing SICA provides for an automatic stay on all legal proceedings. The new bill does away with this open-ended provision.

The BIFR's role in the new legislation is that of a facilitator, which enters the picture only when negotiations between management and secured creditors break down. Thereafter, the bankruptcy procedure is clearly defined and subject to a regimen of transparent rules so that a company exits from BIFR in no more than 150 working days. Unfortunately, this bill has become a victim of political instability and has lapsed. The new government will have to start all over again.

But it is not enough to have a new SICA. Major changes have to be introduced simultaneously in the Companies Act, 1956, as well to quicken the process of liquidation. Sixty per cent of the companies under winding up in courts have been there for over 10 years. Again, the comprehensively new Companies Bill introduced in Parliament by the UF government in November 1997 had far-reaching provisions to transform and expedite liquidation proceedings. But like the new SICA draft, it lost its champion with the departure of P. Chidambaram. Deliberately, he had introduced the new Companies Bill in the Rajya Sabha. This means it is still active and has not lapsed.

There are other barriers to faster industrial restructuring. The Urban Land Ceiling Act has prevented companies from disposing of their most valued asset -- namely, land -- and using the proceeds for golden-handshake packages and new economic activity. Fortunately, this Act was repealed by the Centre a few months ago. Now the onus is on the states.

The Industrial Disputes Act -- specifically sections 25-N and 25-O -- while designed to protect labour has actually worked against labour's interests by resulting in illegal shut-downs, lock-outs and haphazard exits. In the absence of a pro-labour exit policy, economist Omkar Goswami has estimated that 35,000 textile workers who lost their jobs in the late '80s were deprived of their terminal benefits and arrears. The conclusion he and Rakesh Mohan, another expert on industrial restructuring, have reached is unambiguous: labour laws in India have resulted in inflexible labour deployment with niggardly compensation. According to a World Bank study, employment security regulations may have caused a 17.5 per cent reduction in employment in India.

An exit policy does not necessarily mean blind hire and fire. Properly designed and humanely executed, it will actually be an essential component of a policy that aims at faster growth, greater employment and industrial renewal -- all of which India so very badly needs.

The author is secretary of the AICC's Economic Affairs Department.
The views expressed here are his own.

Issue Contents | Write to us | Subscriptions | Syndication