FINANCIAL MANAGEMENT IN SICK UNITS

CAUSES SYMPTOMS DEBT RESTRUCTURING TAX TREATMENT

DEFINITION
A business firm is if It faces financial embarrassment ( arising out of its inability to honour its obligations as and when they mature) and Its inability is seriously threatened by adverse factors

CAUSES
External causes 1. Shortage of inputs (power, R.M) 2. Changes in government policies 3. Emergence of large capacity leading to intense competition 4. Development of new technology 5. Shifts in consumer preferences 6. Natural disasters 7. Adverse international developments 8. Reduced lending by Financial Institutions

MANAGERIAL DEFICIENCIES
Production Improper location Wrong technology Uneconomic plant size Unsuitable plant & machinery Inadequate emphasis on R&D Poor quality control Poor maintenance

Managerial Deficiencies.
Finance wrong capital structure Bad investment decisions Weak management control Inadequate MIS Poor working capital management Strained relations with investors

Managerial Deficiencies.
Marketing o Inaccurate demand projection o Improper product-mix o Wrong product positioning o Irrational price structure o Inadequate sales promotion o High distribution costs o Poor customer service

Managerial Deficiencies.
Human resources ineffective leadership Inadequate human resources Overstaffing Poor organisation design Insufficient training Irrational compensation

SYMPTOMS
Delay or default to 1. Suppliers 2. Banks 3. Financial institutions Production I. Decline in capacity II. Poor maintenance of P&M

SYMPTOMS
Working capital 1) Low turnover of assets 2) Accumulation of inventories 3) No trade discount availed High attrition rates Window dressing in Accounting

Corporate debt restructuring

Sick Industrial Undertaking SICA 2(O), 1985 I. Which is more than 5 years old II. Which has accumulated losses equal to or exceeding its entire net worth BIFR (Board for Industrial and Financial Reconstruction) Rehabilitation schemes for CDR

CDR..
SICA Sec.23 potentially sick company Negotiate with existing lenders A. CDR guidelines regarding RBI applicable B. 75% of lenders ratify a. Debtor-Creditor Agreement (DCA) b. Inter-creditor Agreement (ICA)

CDR.
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act Or Securitization Act I. Negotiated settlement (negotiated one sum payable within 18 months) II. One Time settlement (within 3 to 6 months )

COMMON ELEMENTS OF CDR

Interest rate relief Deferment of past interest dues Waiver of penalties Rescheduling of loan repayment Reduction in the loan amount

Tax treatment of CDR

Interest paid in PY is tax deductible Interest overdue and waived no tax implication Interest on, O/D paid or not tax deductible If such interest is waived treated as income of PY taxable No tax implication on partial or full waiver of principal amount of loan

Accounting treatment of CDR

Interest paid or not charged to P&L A/c Such interest waived written back to P&L A/c revenue profit Waived principal repayment 1.Transfer to capital reserve 2.Credit made through P&L Appropriation A/c