Causes for Sick Industrial Company.

"`Sick Industrial Company' means an industrial company which has

i) The Accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year; or

ii) Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company." The above definition tell us that, one may say that moratorium period has after all not been done away with — if anything, it has been retained at the same level of five years. It is clear that the moratorium period has been completely done away with. For, had the four-year moratorium period been intended that would have been made a common factor for both clauses. In the event, every industrial company would inevitably and invariably have to press the panic button needlessly in vast majority of cases and a trifle prematurely in others. This would happen because no industrial company can start making profit from year one. Gestation period ranges from a couple of years to a decade.

 Example

A power manufacturer has a capital of Rs 100 crore and in the first year it incurs a loss of Rs 50 crore, bulk of it thanks to huge start-up expenses that it is unable to capitalize in his books of account.

It would be unfair to brand it sick especially if there is nothing inherently wrong in its business plan and it is sure of turning the corner in a couple of years.

One may still contend that on the touchstone of accumulated losses, the moratorium period of five years has been retained. They may buttress their argument by pointing to absence of provisions similar to those contained in Section 43C of the Income-Tax Act which albeit in a totally different context says that if a company has been in existence for lesser number of years, the average figure would be found out by aggregating the total income for the years the company was in existence and dividing the same by those many number of years.

 Industrial sickness specially in small-scale Industry has been always a demerit for the Indian economy, because more and more industries like – cotton, Jute, Sugar, Textiles small steel and engineering industries are being affected by this sickness problem.

As per an estimate 300 units in the medium and large scale sector were either closed or were on the stage of closing in the year 1976. About 10% of 4 lakhs unit were also reported to be ailing. And this position also remain same in the next decades. At the end of year 1986, the member of sick units in the portfolio of scheduled commercial banks stood at 1.47,740 involving an out standing bank credit of Rs. 4874 crores.