Business environment

UNIT-4
Multinational Corporations(MNCs):Meaning,FeaturesandAdvantages|Business
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Read this article to learn about the meaning, features, advantages and limitations of
Multinational Corporations (MNCs).
MeaningofMultinational Companies(MNCs):
A multinational companyisone whichis incorporatedinone country (calledthe home country);but
whose operations extend beyond the home country and which carries on business in other
countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located in the home
country.
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Neil H. Jacoby defines a multinational company as follows:
“A multinational corporation owns and manages business in two or more countries.”
Point of comment:
A multinational corporation is known by various names such as: global enterprise, international
enterprise, world enterprise, transnational corporation etc.
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Some popular examples of multinationals are given below:
Featuresof Multinational Corporations(MNCs):
Following are the salient features of MNCs:

(i)Huge Assets and Turnover:
Because of operations on a global basis, MNCs have huge physical and financial assets. This also
results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are
bigger than national economies of several countries.
(ii)InternationalOperations Through a NetworkofBranches:
MNCs have productionand marketingoperationsinseveral countries;operatingthrougha network
of branches, subsidiaries and affiliates in host countries.
(iii)Unity ofControl:
MNCs are characterized by unity of control. MNCs control business activities of their branches in
foreign countries through head office located in the home country. Managements of branches
operate within the policy framework of the parent corporation.
(iv)Mighty EconomicPower:
MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.
(v)Advanced and Sophisticated Technology:
Generally, a MNC has at its command advanced and sophisticated technology. It employs capital
intensive technology in manufacturing and marketing.
(vi)ProfessionalManagement:
A MNC employs professionally trained managers to handle huge funds, advanced technology and
international business operations.
(vii)AggressiveAdvertisingand Marketing:
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MNCs spend huge sums of money on advertising and marketing to secure international business.
This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy, they are able to
sell whatever products/services, they produce/generate.
(viii)Better Quality ofProducts:
A MNC has to compete on the world level. It, therefore, has to pay special attention to the quality
of its products.

AdvantagesandLimitations ofMNCs:
Advantages ofMNCs fromthe ViewpointofHostCountry:
We propose to examine the advantages and limitations of MNCs from the viewpoint of the host
country. In fact, advantages of MNCs make for the case in favour of MNCs; while limitations of
MNCs become the case against MNCs.
(i) Employment Generation:
MNCs create large scale employment opportunities in host countries. This is a big advantage of
MNCs for countries; where there is a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
MNCs bring inmuch neededcapital for the rapid developmentof developingcountries.Infact,with
the entryof MNCs, inflowof foreigncapital isautomatic.As a resultof the entryof MNCs, India e.g.
has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are in a position to properly utilise idle
physical and human resources of the host country. This results in an increase in the National
Income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host country to
improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantagesof technical development 10 host countries. In fact, MNCs are a vehicle
for transference of technical development from one country to another. Because of MNCs poor
host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of research in
management.Ina way,theyhelpto professionalize managementalonglatestlinesof management
theory and practice. This leads to managerial development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition in the host countries. Local monopolies of host countries
either start improving their products or reduce their prices. Thus MNCs put an end to exploitative
practices of local monopolists. As a matter of fact, MNCs compel domestic companies to improve
their efficiency and quality.
In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of competition
posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the standard of living of
people of host countries.

(x) Promotion of international brotherhood and culture:
MNCs integrate economiesof variousnationswiththe world economy. Through their international
dealings,MNCspromote international brotherhoodandculture; and pave way for world peace and
prosperity.
Limitations ofMNCs fromthe ViewpointofHost Country:
(i) Danger for Domestic Industries:
MNCs, because of theirvast economic power, pose a danger to domestic industries; which are still
in the process of development. Domestic industries cannot face challenges posed by MNCs. Many
domestic industries have to wind up, as a result of threat from MNCs. Thus MNCs give a setback to
the economic growth of host countries.
(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign exchange
reservesof the host country; whichmeans that a large amount of foreign exchange goes out of the
host country.
(iii) No Benefit to Poor People:
MNCs produce only those things, which are used by the rich. Therefore, poor people of host
countries do not get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:
Initially MNCs help the Government of the host country, in a number of ways; and then gradually
start interfering in the political affairs of the host country. There is, then, an implicit danger to the
independence of the host country, in the long-run.
(v) Disregard of the National Interests of the Host Country:
MNCs invest in most profitable sectors; and disregard the national goals and priorities of the host
country. They do not care for the development of backward regions; and never care to solve
chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses for a long while, in the hope
of earninghuge profits-once theyhave ended local competition and achieved monopoly. This may
be the dirties strategy of MNCs to wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly. They cause rapid depletion
of some of the non-renewable natural resources of the host country. In this way, MNCs cause a
permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alienculture inhost country to sell theirproducts.Theymake people forget
about their own cultural heritage. In India, e.g. MNCs have created a taste for synthetic food, soft
drinks etc. This promotion of foreign culture by MNCs is injurious to the health of people also.

(ix) Exploitation of People, in a Systematic Manner:
MNCs join hands with big business houses of host country and emerge as powerful monopolies.
This leads to concentration of economic power only in a few hands. Gradually these monopolies
make it their birth right to exploit poor people and enrich themselves at the cost of the poor
working class.
Advantages fromtheViewpointofthe Home Country:
Some of the advantages of the MNCs from the viewpoint of the home country are:
(i) MNCs usuallygetraw-materialsandlabour suppliesfromhostcountriesat lowerprices;specially
when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and increase their profits.
They usually have good earnings by way of dividends earned from operations in host countries.
(iii) Through operating in many countries and providing quality services, MNCs add to their
international goodwill on which they can capitalize, in the long-run.
Limitations fromtheViewpointofthe Home Country:
Some of the limitations of MNCs from the viewpoint of home country may be:
(i) There may be loss of employment in the home country, due to spreading manufacturing and
marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract managements’
attention from main business issues, causing loss to the home country.

(iii) MNCsmay face severe competitionfrombiggerMNCs in international markets. Their attention
and financesmightbe more devoted to wasteful counter and competitive advertising; resulting in
higher marketing costs and lesser profits for the home country.
Unit-5
External and Internal Causes of Industrial Sickness in India
Reasons and Causes of Industrial Sickness in India
The various external and internal causes of Internal Sickness in India have been discussed
below:
1. External causes
Recessionin the Market: Sometimes recession hits the whole industry as a result of which
individual units are unable to sell their products. The availability of credit is also restricted
during such times which jeopardize the production activities of such units. Hence, the work
of these units comes to a standstill.
Decline in Market Demand for the product: A product may reach a stage of maturity and
ultimately a stage of decline. This happens when new better products invade the market and
make the old product redundant.
Excessive competition in the Market: Excessive competition in the market will justify the
survival of only the fittest firm. The high cost units over time will become weak and fall sick.
Erratic supply of Inputs: Erratic and insufficient supply of inputs like raw-materials, power,
skilled manpower, finance, credit and transport at reasonable prices could cause disturbance
in the production schedule and ultimately result in sickness of the firm.
Government Policy: Excessive govt., control and restrictions on capacity utilisation,
location, product mix, product quality, prices, distribution etc. come in the way of smooth
functioning of the firms and often result in sickness of the firm. Further, frequent changes in
government policy relating to industrial licensing, import, exports, taxation, credit can make
healthy units sick overnight.
Unforeseen circumstances: Natural calamities such as droughts, floods earthquakes,
accidents and wars etc. may turn some units sick and enviable.

2. Internal Causes
Faulty planning: At the planning stage itself, weak foundations may be laid, which may
ultimately result in downfall of the unit.
Incompetent Entrepreneurs: Many persons starting new business lack technical knowledge
of the product they want to manufacture. It is the normal case with small scale entrepreneurs.
They sometimes plough into production activity, without bothering to find out the marketing
potential of their product or sometimes they start production without properly calculating the
ultimate cost. Poor maintenance of plant and machinery, constant technical problems with
maintenance of production volume, quality, time schedule and cost limits may ultimately
spell doom for the firm.
Problems relating to Management: Since Production, marketing, finance, etc. are in the
hands of management, any wrong decision by them in regard to these fields may ultimately
ruin a firm. The management may lack business acumen to make demand projections, to push
the product in the market, to build up market image and customer loyalty, to face competition
and so on.
Improper level and use of working capital can also ruin the firm. Similarly, poor industrial
relations, lack of human resources planning, faulty wage and promotional policies can cause
problems for the existence of the firm. So, incompetent management is the most important
reason behind industrial sickness.
Financial problems: These problems are generally faced by small units. Often the financial
base of the small units is very weak. They generally borrow from their own known sources or
banks, rather than approaching market. Generally, they are unable to meet their debt
obligations in time and these debts accumulate. Banks normally do not help at this stage
when symptoms begin to show the problem and sickness becomes chronic.
Labor unrest: Labor unrest for a long period may ultimately spell doom for the firm.
The above causes are general causes of sickness. A firm could get sick because of one or
more of the above causes. However, it has been found that industrial sickness results more
due to faulty, careless behaviour and attitude of management, than due to any other reason. In
many cases, irresponsible and callous behaviour of the managers has been found to be the
most important cause of sickness for the firm.
Steps Taken for Revival of Sick Industrial Units
The Government of India has taken a number of steps for the revival of sick industrial units.
Important among these are:-
1. Setting up of Industrial Reconstruction Bank of India (IRBI) for rehabilitating sick
units.

2. Introduction of margin money scheme for sick units.
3. Instructing banks and financial institutions to detect sickness in the incipient stage and
to take corrective measures in time.
4. Close monitoring of sick units by the Reserve Bank of India.
5. Setting up of the BIFR under SICA for determining preventive ameliorative and
remedial measures.
6. Introduction of the scheme of excise loan to sick units.
7. Instructions to banks to actively participate in rehabilitating the units which have turned
sick to whom they had earlier given finance under consortium agreement.
Industrial Sickness in India: Meaning, Causes and Suggested Remedies
Industrial Sickness in India: Meaning, Causes and Suggested Remedies!
Meaning:
One of the adverse trends observable in the corporate private sector of India is the growing
incidence of sickness. It is causing considerable concern to planners and policymakers. It is
also putting a severe strain on the economic system, particularly on the banks.
There are various criteria of sickness. According to the criteria accepted by the Reserve
Bank of India “a sick unit is one which has reported cash loss for the year of its
operation and in the judgment of the financing bank is likely to incur cash loss for the
current year as also in the following year.”
A major symptom of sickness is a steady fall in debt-equity ratio and an imbalance in
the financial position of the unit. Simply put, a sick unit is one which is unable to support
itself through the operation of internal resources (that is, earnings plough-back). As a gen-
eral rule, the sick units continue to operate below the break-even point (at which total
revenue = total cost) and are, thus, forced to depend on external sources for funds of their
long-term survival.
Industrial sickness creates various socio-economic problems. When an industrial unit falls
sick those who depend on it have to face an uncertain future. They fear loss of jobs. Even if
they do not lose jobs they do not get their wages and compensation in time and are, thus,
forced to live in extreme hardship.
Of course, sickness is not a special problem of India. It is, undoubtedly, a global
phenomenon. Even in industrially advanced countries there are numerous cases of
bankruptcy or liquidation. These sick units are nursed back to health through mergers,
amalgamations, takeovers, purchase of assets, or outright nationalisation. When the-problem
becomes really alarming or unmanageable, the unit is permitted to die its natural death.
Causes:
Industrial sickness has become a major problem of the India’s corporate private sector. Of
late, it has assumed serious proportions. A close look reveals that there are, at least, five ma-
jor causes of industrial sickness, viz., promotional, managerial, technical, financial and
political.

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An industrial unit may become sick at its nascent stage or after working for quite some time.
For instance, two major traditional industries of India, viz., cotton textiles and sugar, have
fallen sick largely due to short-sighted financial and depreciation policies. Heavy capital
cost escalation arising out of price inflation accentuates the problem. The historical method
of cost depreciation is highly inadequate when assets are to be replaced at current cost
during inflation.
Moreover, since the depreciation funds are often used to meet working capital needs, it does
not become readily available for replacement of worn-out plant and equipment. The end
result is that the industrial unit is constrained to operate with old and obsolete equipment, its
profitability is eroded and, sooner or later, the unit is driven out of the market by the forces
of competition.
External vs. Internal Causes:
The factors leading to sickness can be due to reasons of finance, technical issues,
mismanagement, non-availability of raw materials, power or natural calamities or disasters
such, as fire or earthquake or a combination of such factors.
The causes of industrial sickness may be divided into two broad categories:
(i) external and
(ii) internal.
External causes are those which are beyond the control of its management and seen to be
relatively more important than internal causes.
The causes which have been identified so far include:
(a) Delay in land acquisition and building construction
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(b) Delay in obtaining financial assistance from public financial institutions
(c) Delayed supply of machinery by the manufacturers
(d) Problems related to recruitment of technical and managerial staff
(e) Delay on the part of the Government in sanctioning licences, permits, etc.
(f) Shortages of basic inputs like power and coal. Other causes include
(g) Cost over-runs due to factors beyond the control of management
(h) Lack of demand for products or shift of demand to products of rival firms due to delays
in project implementation
(i) Unsatisfactory performance by collaborators—financial and technical
(j) Large changes in the scale of operation and optimum product mix in the long run and, last
but not the least
(k) Changes in the policy of the Government relating to movement of goods from one place
to another within the country

The primary cause seems to be:
(i) “Lack of experience of the promoters in a specific line of activity”.
The other causes are:
(ii) Differences among various persons associated with the promotion and management of
the enterprise
(iii) Mechanical defects and breakdown
(iv) Inability to purchase raw materials at an economic price and at the right time
(v) Failure to make controls effective in time, in case of deficiencies in workings
(vi) Deteriorating labour-management relations and the consequent fall in capacity utilisa-
tion
(vii) Faulty financial planning and lack of balance in the financial (capital) structure.
It is often observed that many projects are started without proper feasibility study. Hardly
any long-term view of the future is taken. Instead, a project is sought to be managed on the
basis of myopic vision, inadequate analysis and improper approach. Often industrial projects
are started on an ad hoc basis without gathering much information about the expertise and
competence needed for the purpose.
Moreover, once the construction work is started on the basis of a project report, there is no
periodic assessment (or review) of the economic viability of the project. Often major
changes in the political and economic environment (such as change in the party in power or
change in Government) make the basic assumptions underlying the project unrealistic or
inappropriate. Yet the project is made to remain operational without considering the after-
effects.
So, there are various reasons that make industries sick. The prime among this is market-
related. Market obsolescence is one of the prime reasons for units turning sick. A striking
example is that of the jute industry, where “the non-availability of raw materials and
constant power shortages have made many units sick. And bankers are not normally very
responsive in helping a company that has gone sick.
Incidence:
In Dec. 1980 the total number of sick units was 24,550, involving outstanding bank credit of
Rs. 1,809 crores. As at the end of March 2000, the total number of sick units stood at
307,399 involving an outstanding bank credit of about Rs. 23,656 crores. Of these 14,793
were potentially viable, 278,423 were non-viable and the viability of the remaining 14,183
has not been decided.
Three major industries affected by industrial sickness are jute, engineering goods and tex-
tiles. Some of the industries such as the real estate, light consumer goods, automobile,
diamonds and many others are reeling under the impact of steep fall in demand, inadequate
supply of finance, large proportion of non-performing assets and constraints of finance due
to huge amounts of funds getting blocked in ageing receivables

Government Policy:
A number of measures have been taken to tackle the problem of industrial sickness. The
importance of detection of sickness at the incipient stage has been emphasised by the RBI.
The policy framework in respect of measures to deal with the problem of industrial sickness
has been laid down in the guidelines issued on October 1981 (which were subsequently
modified in February 1982) for guidance of administrative ministries of the Central
Government, State Governments and financial institutions.
The salient features of these guidelines are the following:
(a) The administrative ministries in the Government will have specific responsibility for pre-
vention and remedial action in relation to sickness in industrial sector within their respective
charges. They will have a central role in monitoring sickness and coordinating action for
revival and rehabilitation of sick units. In suitable cases, they will also establish standing
committees for major industrial sectors where sickness is widespread;
(b) The financial institutions will strengthen the monitoring system so that it is possible to
take timely corrective action to prevent incipient sickness. They will obtain periodical
returns from the assisted units and from the Directors nominated by them on the Boards of
such units. These will be analysed by the Industrial Development Bank of India and results
of such analyses conveyed to the financial institutions concerned and the Government.
(c) The financial institutions and banks will initiate necessary corrective action for sick or
incipient sick unit based on a diagnostic study. In case of growing sickness, the financial
institutions will also consider taking of management responsibility where they are confident
of restoring a unit to health. The Ministry of Finance will have to issue suitable guidelines
for management;
(d) Where the banks and financial institutions are unable to prevent sickness or ensure re-
vival of a sick unit, they will deal with their outstanding dues to the unit in accordance with
the normal banking procedures. However, before doing so, they will report the matter to the
Government which will decide whether the unit should be nationalised or whether any other
alternative- including workers’ participation in management— can revive the undertaking.
(e) Where it is decided to nationalise the undertaking, its management may be taken over un-
der the provisions of the Industries (Development and Regulation) Act, 1951, for a period of
six months to enable the Government to take necessary steps for nationalisation.
(f) Finally the industrial undertakings presently being managed under the provisions of the
Industries (Development and Regulation) Act, 1951, will also be dealt with in accordance
with the above principles.
Concessions:
The Government has also provided certain concessions to assist revival of sick units without
direct intervention. For example, the Government has amended the Income-tax Act in 1977
by addition of Section 72A by which tax benefit can be given to healthy units when they
take over the sick units by amalgamation, with a view to reviving them.
The tax benefit is in the form of carry forward of the accumulated business losses and un-
provided depreciation of the sick companies by the healthy companies after amalgamation.
A scheme for provisions of margin money to sick units in the small-scale sector at soft terms

to enable them to obtain necessary funds from banks and financial institutions to implement
their revival scheme has been introduced from January 1, 1982.
Moreover, financial assistance in the form of long-term equity up to Rs. 15 lakh to units with
a project cost not exceeding Rs. 10 lakhs at a nominal service charge of 1% is available to
potentially viable sick SSI from the National Equity Fund.
Establishment of BIFR:
The Central Government has set up a Board for Industrial and Financial Re-construction
(BIFR) with effect from 12 January 1987 in pursuance of enactment of the Sick Industrial
Companies (Special Provision) Act, 1985. This is a major step for intervening at an early
stage and detecting, preventing, as well as taking ameliorative, remedial and such other
measures which to be taken with respect to sick and potentially viable companies.
The role of the Board for Industrial and Financial Reconstruction (BIFR) needs a re-look in
the face of a steep rise in the number of industries turning sick. BIFR was constituted to
facilitate the revival of industries deemed sick. When an industry turns sick, BIFR acts as an
operating agency (generally the lead financial institution having the largest loan exposure
among the creditors) to devise a revival strategy proposal.
Progress in the right disposal of sick company cases registered with BIFR has been slow on
account of the conflicting interests between the companies and the creditors (banks and
financial institutions, government bodies/agencies) and certain lacunae in the SIC A Act.
The rehabilitation schemes met with 40-45% failure, as a result of which many of the cases
had to be reopened.
The rate of registration/sickness increased substantially during 1997-98 due to (a) the
recessionary trends prevalent in industry, (b) poor financial market conditions, and (c) the
tough stance taken by banks/financial institutions (FIs) towards defaulters/potentially sick
companies under their non-performing assets (NPA) accounts for rescheduling of
repayments, etc.
The problem appears even more acute if we take note of potentially sick BIFR companies, as
also the NPAs of FIs and banks. In fact, the NPAs of banks and others have continued to
rise.
Upto 1997-98 the outstanding bank credit against sick companies has reached an abnormal’
proportion of over Rs. 23,658 crores, in March’ 2000. Over 15 lakh workers have been
affected by companies turning sick.
IRBI (IIBI):
The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated various steps
for checking the growth of industrial sickness and helping in industrial revival. From April
1997 the name of IRBI has been changed to Industrial Investment Bank of India (IIBI). By
March 2000, cumulative financial assistance sanctioned and disbursed by it stood at Rs.
10.090 crores and Rs. 7,353 crores, respectively.
A significant measure taken during 1986 was the setting up of Small Industries
Development Fund (SIDF) in the IDBI. This is meant to provide special financial assistance
to the small-scale sector. The Fund would be used for providing refinancing assistance not

only for development, expansion and modernisation, but also for the rehabilitation of the
small-scale sick industries.
Modernisation Fund:
The Government has set up two funds, namely the Textile Modernisation Fund and the Jute
Modernisation Fund, for modernisation of the textiles and jute sector. Under these two
funds, assistance is provided not only to the healthy units for modernisation at 11.5% rate of
interest; but also’ to sick but potentially viable units. Special loans are given to the weak
units for meeting a part of the promoters’ contribution.
Goswami Committee Report:
The Committee on Industrial Sickness and Corporate Restructuring under chairpersonship of
Dr. Omkar Goswami submitted its report in July 1993.
The main recommendations of the Committee with respect to sick companies are:
(a) For early detection of sickness the definition of sickness should be changed to:-
(i) Default of 180 days or more on repayment to term lending institutions, and
(ii) irregularities in cash credits or working capital for 180 days or more.
(b) Amendment of the Urban Land (Ceiling & Regulation) Act, 1976 to improve generation
of internal resources of sick companies.
(c) Empower the BIFR for speedier restructuring, winding-up and sale of assets of compa-
nies; and
(d) A sick company’s own reference of BIFR should be voluntary, not mandatory.
SICA Amendment Act, 1994:
The modifications brought in the Sick Industrial Companies (Special Provisions) Act, 1985
by the 1994 Amendment Act pertain to the changes in the definition of SICA, expansion of
the term operating agency, clarification that an enquiry as to sickness shall be deemed to
have commenced on receipt of a reference by the BIFR complete in all respects, scope for
reverse merger, “deemed consent” after the lapse of 120 days, “single window concept”
for release of funds by banks/financial institutions to the sick company, monitoring
implementation of sanctioned revival schemes by BIFR, holding on operations by financial
institutions/banks/State Governments, empowering the Central Government, State
Government, banks, institutions, etc., to report cases of potential sickness, etc.
In the definition of sickness the period for the registration of an industrial company as sick
has been reduced from seven to five years. Furthermore, the condition of incurring cash
losses during the preceding two years has been waived. This means that an industrial
company would be considered a sick industrial company once its net worth is completely
eroded and has been registered for not less than five years.
SuggestedRemedies:
Some of the effective measures which may be taken for revival of sick units are technical
help, professional counselling and improved management. Also, the role of professionals
and experienced management becomes more important in times of sickness.

In addition to technical and professional consultants, no sick industry will ever be able to
recuperate without sufficient, timely and soft finance. Bankers are the key to the problem.
The role of the bankers needs to be redefined and a new direction needs to be given to
support aid and lift sick industrial units from the situations that befall them. It is also the
level of service and support in terms of financial advice, assistance in related matters of
insurance, release of hypothecated assets and timely finance.
The Sick Industrial Companies (Special Provisions) Bill, 1997, passed by Lok Sabha, intro-
duced encouraging changes. It suggested that a time-bound procedure was to be adopted
within which the scheme has to be sanctioned and BIFR would play the role of a mediator
and not a court.
Technical obsolescence and financial mismanagement are also important factors that lead to
industrial sickness. As per the new provisions, an opportunity will be given to get an
unanimous consent to a scheme from all concerned, failing which secured creditors will
attempt to form a scheme and, if all this fails, the undertaking would be sold off. Only if it is
not possible to do that, the BIFR may order winding up of the company.
10 Major Problems faced by the Small Scale Industries of India
Major problems faced by the small scale industries are : (1) Finance (2) Raw Material
(3) Idle Capacity (4) Technology (5) Marketing (6) Infrastructure (7) Under Utilisation
of Capacity (8) Project Planning!
Small scale industries play a vital role in the economic development of our country.
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This sector can stimulate economic activity and is entrusted with the responsibility of
realising various objectives generation of more employment opportunities with less
investment, reducing regional imbalances etc. Small scale industries are not in a position to
play their role effectively due to various constraints. The various constraints, the various
problems faced by small scale industries are as under:
(1) Finance:
Finance is one of the most important problem confronting small scale industries Finance is
the life blood of an organisation and no organisation can function proper у in the absence of
adequate funds. The scarcity of capital and inadequate availability of credit facilities are the
major causes of this problem.

Firstly, adequate funds are not available and secondly, entrepreneurs due to weak economic
base, have lower credit worthiness. Neither they are having their own resources nov are
others prepared to lend them. Entrepreneurs are forced to borrow money from money
lenders at exorbitant rate of interest and this upsets all their calculations.
After nationalisation, banks have started financing this sector. These enterprises are still
struggling with the problem of inadequate availability of high cost funds. These enterprises
are promoting various social objectives and in order to facilitate then working adequate
credit on easier terms and conditions must be provided to them.
(2) Raw Material:
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Small scale industries normally tap local sources for meeting raw material requirements.
These units have to face numerous problems like availability of inadequate quantity, poor
quality and even supply of raw material is not on regular basis. All these factors adversely
affect t e functioning of these units.
Large scale units, because of more resources, normally corner whatever raw material that is
available in the open market. Small scale units are thus forced to purchase the same raw
material from the open market at very high prices. It will lead to increase in the cost of
production thereby making their functioning unviable.
(3) Idle Capacity:
There is under utilisation of installed capacity to the extent of 40 to 50 percent in case of
small scale industries. Various causes of this under-utilisation are shortage of raw material
problem associated with funds and even availability of power. Small scale units are not fully
equipped to overcome all these problems as is the case with the rivals in the large scale
sector.
(4) Technology:
Small scale entrepreneurs are not fully exposed to the latest technology. Moreover, they lack
requisite resources to update or modernise their plant and machinery Due to obsolete
methods of production, they are confronted with the problems of less production in inferior
quality and that too at higher cost. They are in no position to compete with their better
equipped rivals operating modem large scale units.
(5) Marketing:
These small scale units are also exposed to marketing problems. They are not in a position to
get first hand information about the market i.e. about the competition, taste, liking, disliking
of the consumers and prevalent fashion.
With the result they are not in a position to upgrade their products keeping in mind market
requirements. They are producing less of inferior quality and that too at higher costs.
Therefore, in competition with better equipped large scale units they are placed in a
relatively disadvantageous position.
In order to safeguard the interests of small scale enterprises the Government of India has
reserved certain items for exclusive production in the small scale sector. Various
government agencies like Trade Fair Authority of India, State Trading Corporation and the

National Small Industries Corporation are extending helping hand to small scale sector in
selling its products both in the domestic and export markets.
(6) Infrastructure:
Infrastructure aspects adversely affect the functioning of small scale units. There is
inadequate availability of transportation, communication, power and other facilities in the
backward areas. Entrepreneurs are faced with the problem of getting power connections and
even when they are lucky enough to get these they are exposed to unscheduled long power
cuts.
Inadequate and inappropriate transportation and communication network will make the
working of various units all the more difficult. All these factors are going to adversely affect
the quantity, quality and production schedule of the enterprises operating in these areas.
Thus their operations will become uneconomical and unviable.
(7) Under Utilisation of Capacity:
ADVERTISEMENTS:
Most of the small-scale units are working below full potentials or there is gross
underutilization of capacities. Large scale units are working for 24 hours a day i.e. in three
shifts of 8 hours each and are thus making best possible use of their machinery and
equipments.
On the other hand small scale units are making only 40 to 50 percent use of their installed
capacities. Various reasons attributed to this gross under- utilisation of capacities are
problems of finance, raw material, power and underdeveloped markets for their products.
(8) Project Planning:
Another important problem faced by small scale entrepreneurs is poor project planning.
These entrepreneurs do not attach much significance to viability studies i.e. both technical
and economical and plunge into entrepreneurial activity out of mere enthusiasm and
excitement.
They do not bother to study the demand aspect, marketing problems, and sources of raw
materials and even availability of proper infrastructure before starting their enterprises.
Project feasibility analysis covering all these aspects in addition to technical and financial
viability of the projects, is not at all given due weight-age.
Inexperienced and incomplete documents which invariably results in delays in completing
promotional formalities. Small entrepreneurs often submit unrealistic feasibility reports and
incompetent entrepreneurs do not fully understand project details.
Moreover, due to limited financial resources they cannot afford to avail services of project
consultants. This result is poor project planning and execution. There is both time interests
of these small scale enterprises.
(9) Skilled Manpower:
A small scale unit located in a remote backward area may not have problem with respect to
unskilled workers, but skilled workers are not available there. The reason is Firstly, skilled
workers may be reluctant to work in these areas and secondly, the enterprise may not afford
to pay the wages and other facilities demanded by these workers.

Besides non-availability entrepreneurs are confronted with various other problems like
absenteeism, high labour turnover indiscipline, strike etc. These labour related problems
result in lower productivity, deterioration of quality, increase in wastages, and rise in other
overhead costs and finally adverse impact on the profitability of these small scale units.
(10) Managerial:
Managerial inadequacies pose another serious problem for small scale units. Modern
business demands vision, knowledge, skill, aptitude and whole hearted devotion.
Competence of the entrepreneur is vital for the success of any venture. An entrepreneur is a
pivot around whom the entire enterprise revolves.
Many small scale units have turned sick due to lack of managerial competence on the part of
entrepreneurs. An entrepreneur who is required to undergo training and counseling for
developing his managerial skills will add to the problems of entrepreneurs.
The small scale entrepreneurs have to encounter numerous problems relating to
overdependence on institutional agencies for funds and consultancy services, lack of credit-
worthiness, education, training, lower profitability and host of marketing and other
problems. The Government of India has initiated various schemes aimed at improving the
overall functioning of these units.
13 Major Incentives to Small Scale Industries that Deserves Special Mention
Some of the major incentives to small scale industries in India that deserves special
mention are as follows:
An incentive is a motivational factor which induces a person to work hard or to do his work
more efficiently.

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ADVERTISEMENTS:
Many incentives are provided both by the Central and State Governments to promote the
growth of small-scale industries and also to protect them from the onslaught of the large-
scale sector. Among the various incentives given to small-scale industries the following
deserve special mention:
1. Reservation:
To protect the small-scale industries from the competition posed by large-scale industries,
the Government has reserved the production of certain items exclusively for the small-scale
sector. The number of items exclusively reserved for the small-scale sector has been
considerably increased during the Five Year Plan Periods and now stands at 822.

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ADVERTISEMENTS:
However, prior to the 1997 – 98 Budget the number of items reserved for the small-scale
sector stood at 836. The Finance Minister de-reserved 14 items in the 1997 – 98 Budget.
2. Preference in Government purchases:
The Government as well as Government organisations shows preference in procuring their
requirements from the small-scale sector. For instance, the Director General of Supplies and
Disposals purchases 400 items exclusively from the small-scale sector. The National Small-
Scale Industries Corporation assists the SSI units in obtaining a greater share of Government
and defence purchases.
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3. Price preference:
The SSI units are given price preference up to a maximum of 15 per cent in respect of
certain items purchased both from small-scale and large-scale units.

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4. Supply of raw materials:
In order to ensure regular supply of raw materials, imported components and equipment’s,
the Government gives priority allocation to the small-scale sector as compared to the large-
scale sector. Further, the Government has liberalised the import policy and streamlined the
distribution of scarce raw materials.

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Wines.jpg

5. Excise duty:
In respect of SSI units excise duty concessions are granted to both registered and
unregistered units on a graded scale depending upon their production value. Full exemption
is granted up to a production value of Rs.30 lakhs in a year and 75 % of normal duty is
levied for production value exceeding Rs.30 lakhs but not exceeding Rs.75 lakhs. If the
production value exceeds Rs.75 lakhs, normal rate of duty will be levied.
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6. RBI’s credit guarantee scheme:
In 1960, the RBI introduced a Credit Guarantee Scheme for small-scale industries. As per
the Scheme, the RBI takes upon itself the role of a guarantee organisation for the advances
which are left unpaid, including interest overdue and recoverable charges. This scheme
covers not only working capital but also advances provided for the creation of fixed capital.

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7. Financial assistance:
Small-scale industries are brought under the priority sector. As a result, financial assistance
is provided to SSI units at concessional terms by commercial banks and other financial
institutions. With a view to providing more financial assistance to the small-scale sector,
several schemes have been introduced in the recent past the Small Industries Development
Fund (SIDF) in 1986, National Equity Fund (NEF) in 1987 and the Single Window Scheme
(SWS) in 1988.

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SIDF provides refinance assistance to small-scale and cottage and village industries and the
tiny sector in rural areas. NEF provides equity type support to small entrepreneurs for setting
up new projects in the tiny/small-scale sector. In 1996, the small-scale sector received 42.3
per cent of the total priority sector advances from public sector banks.
8. Technical consultancy services:
The Small Industries Development Organisation, through its network of service and branch
institutes, provides technical consultancy services to SSI units. In order to provide the
necessary technical input to rural industries, a Council for Advancement of Rural
Technology was set up in October, 1982.

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The Technical Consultancy Organisation renders consultancy services to SSI units at a
subsidised rate. Many financial institutions are also providing subsidies to SSI units for
availing of consultancy services. For instance, small entrepreneurs proposing to set up rural,
cottage, tiny or small-scale units, can get consultancy services at a low cost from the
Technical Consultancy Organisations approved by the All-India and State-level financial
institutions.
They have to pay only 20% of the fees charged by a technical consultancy organisation. The
entire balance of 80% or Rs.5, 000 whichever is lower is subsidised by the Industrial
Finance Corporation of India.
9. Machinery on hire purchase basis:
The National Small Industries Corporation (NSIC) arranges supply of machinery on hire
purchase basis to SSI units, including ancillaries located in backward areas which qualify for

investment subsidy. The rate of interest charged in respect of technically qualified persons
and entrepreneurs coming from backward areas are less than the amount charged to others.
The earnest money payable by technically qualified persons and entrepreneurs from
backward areas is 10% as against 15% in other cases.
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10. Transport subsidy:
The Transport Subsidy Scheme, 1971 envisages grant of a transport subsidy to small-scale
units in selected areas to the extent of 75 % of the transport cost of raw materials which are
brought into and finished goods which are taken out of the selected areas.

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11. Training facilities:
The Entrepreneurship Development Institute of India, financial institutions, commercial
banks, technical consultancy organisations, and NSIC provide training to existing and
potential entrepreneurs.

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12. Marketing assistance:
The National Small Industries Corporation (NSIC), the Small Industries Development
Organisation (SIDO) and the various Export Promotion Councils help SSI units in marketing
their products in the domestic as well as foreign markets. The SIDO conducts training
programmes on export marketing and organises meetings and seminars on export promotion.

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13. District Industries Centres (DICs):
The 1977 Industrial Policy Statement introduced the concept of DICs. Accordingly a DIC is
set up in each district. The DIC provides and arranges a package of assistance and facilities
for credit guidance, supply of raw materials, marketing etc..

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