Home / Money / Calculators /  De-jargoned: sick company

Bharati Shipyard Ltd on 21 July informed stock exchanges that its net worth as on 31 March 2015 has completely eroded and it has become a sick industrial company under section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. Therefore, it has filed a reference with the Board for Industrial and Financial Restructuring (BIFR).

Bharati Shipyard, established in 1973, is in the business of building various kinds of ships. However, the past few years have not been good for the company. Its revenue fell from the level of 1,581.17 crore in the financial year (FY) 2011 to 38.72 crore in FY15. Similarly, net profit, from 113.45 crore in FY 2011, turned into a net loss of 864.58 crore in FY15. Consequently, the market capitalization of the company has also declined from about 660 crore in the beginning of 2011 to the current level of about 87 crore.

According to its latest filing with the exchanges, Edelweiss Asset Reconstruction Co. Ltd has taken over majority of the company’s debt from financiers and is working with it for revival.

WHAT IS A SICK COMPANY?

A sick company, according to Sick Industrial Companies (Special Provisions) Act, 1985, is one where at the end of a financial year, accumulated losses are equal to or more than its net worth. Also, it should have completed five years of incorporation under the Companies Act, 1956. Further, the company must have had more than 50 workers on any given day of 12 months prior to the financial year in which sickness is claimed. There are other stipulations as well.

Once a company has made a reference to BIFR and it is being considered, or if a scheme for it is under consideration or has been sanctioned, no suit for recovery of money can be initiated without the consent of BIFR or the appellate authority.

If it is decided that the company can be revived, financial assistance, relief and concession is provided through financial and other institutions. However, if it is found that the company is unlikely to improve its net worth that exceeds the accumulated losses in a reasonable period of time and is not in a position to fulfil its financial obligations, action can be initiated to wind it up.

This legislation was enacted in 1985 because of the distress in the industrial environment in the 1980s. The primary objective of the sick industrial companies Act is to determine sickness and speed up the revival of companies or shut those that are unviable. The idea is to make investments more productive in case of sick companies and unlock value from the unviable ones, so that it can be used elsewhere in the economy.

WHAT DOES IT MEAN FOR INVESTORS?

It’s a long road for investors in companies that are distressed. Therefore, it is important that individual investors stay away from such companies. One of the thumb rules to follow is to avoid companies with high debt. If revenue and profits are falling along with high or rising interest liability, it’s a clear sign of bigger trouble.

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