More births than deaths

Written by Noor Mohammad | Noor Mohammad | Ashish Sinha | Updated: Jul 30 2014, 08:03am hrs
Finance minister Arun Jaitley has said in Parliament that public sector undertakings must learn to function like any other business organisation in a competitive environment and should not be run like a government department. Jaitleys stern message came when he was answering a question relating to sick PSUs in the Rajya Sabha.

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No one can argue with the FMs stand but the government is also partly responsible for the rampant losses in the public sector79 central public sector enterprises have incurred losses, of which 49 are sick. There is an urgent need to introduce another wave of reforms in PSEs if the problem of sickness is to be tackled. Freeing PSUs from the control of administrative ministries should be the first step in this direction.

There is also a need to tackle the viability of public companies. Around 80 CPSEs have been reporting losses in the last five years despite the government investing R1.57 lakh crore over the years. According to the records submitted in Parliament, public limited companies incurred a combined loss of R65,650 crore for the three financial years 2009-10 to 2011-12.

The government has attributed the reasons for losses to high input cost, technology obsolescence and market competition. In order to revive 48 sick CPSEs, the government is looking at infusing R41,000 crore, besides winding up four companies.

And yet, between 2008-09 and 2013-14, the central government registered 235 public limited companies having a combined paid-up share capital of R56,700 crore. Thankfully, there is a sharp decline in the number of companies incorporated in the last three years. From a high of 64 such companies being incorporated in 2008-09, the figure has come down to 16 in 2013-14. In the past four months, the Centre has registered less than five public limited companies. Experts say the incorporating-to-winding up ratio of central government companies is abysmal.

As opposed to registering around 250 CPSEs in the past six years, only six have been closed in the country, namely Bihar Drugs & Organic Chemicals Ltd (Bihar), Indian Oil Technologies Ltd (Delhi), Brushware Ltd (UP), Pyrites Phosphastes & Chemicals Ltd (Bihar), National Instruments Ltd (West Bengal) and Bharat Yantra Nigam Ltd (UP.). That speaks volumes about the government's intent on the public sector.

The revival of 44 sick CPSEs, as envisaged in 2012-13, was supposed to come at a total assistance of R27,250 crore, including cash assistance of R4,825 crore via fund infusion and non-cash assistance of R22,425 crore through waivers/write-offs of interest & loans, and conversion of loans into equity. Now that estimate has been pushed to R41,000 crore, an increase of about 51%, though four more have been added to the list.

But the new Companies Act may force more companies to join the sick list. Unlike earlier, the new Companies Act, 2013, lays down the provisions for the revival and rehabilitation of sick companies. It describes the circumstances which determine the declaration of a company as sick, and also includes the rehabilitation process. Although it aims to provide comprehensive provisions for the revival and rehabilitation of sick companies, the fact is that several provisionssuch as particulars, documents as well as content of the draft scheme in respect of application for revival and rehabilitation, etchave been left to substantive enactment. Revival and rehabilitation of sick companies under new company laws is no longer restricted to industrial companies, and the determination of the net worth would not be relevant for assessing whether a company is sick.

The coverage of Sick Industrial Companies Act, 1985 (Sica) is limited to industrial companies, while the 2013 Act covers the revival and rehabilitation of all companies, irrespective of their sector.

The determination of whether a company is sick would no longer be based on a situation where accumulated losses exceed the net worth. Rather it would be determined on the basis whether the company is able to pay its debts. That means the determining factor of a sick company is now its secured creditors or banks and financial institutions.

The new company law does not recognise the role of all stakeholders in the revival and rehabilitation of a sick company, and provisions predominantly revolve around secured creditors. Under the new law, a company is assessed to be sick on a demand by the secured creditors of a company representing 50% or more of its outstanding amount of debt, if the company has failed to pay the debt within a period of 30 days of the service of the notice of demand or the company has failed to secure or compound the debt to the reasonable satisfaction of the creditors. To speed up the revival and rehabilitation process, the 2013 Act provides a one-year time for the finalisation of the rehabilitation plan.