Do sick PSU Companies have a future ? Even if run privately ?

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Some businesses grow and flourish, some others keep themselves steady, and a few others are simply ill-fated. Be it a startup, joint venture, or a Government PSU undertaking, dull years are inevitable to every business. And a company which never amasses much of a fortune, eventually falls short of its net worth, and turns into a sick company.

A sick company is defined as a unit which accumulates losses of more than or equal to 100 per cent of its net worth in a financial year. Thus it turns out to be a concern for both its stakeholders and for the nation. Whether to continue business by a sick unit or quitting such a prospect is indebted to just one single argument. Do sick companies ever have a phoenix rise?

Often the Government comes to the rescue of these units, providing subsidised inputs, tax holidays and several other incentives that aid them to rise from the fall. But do all these strategies actually help sick units? Or is the Government just accumulating losses being more optimistic? Perhaps, could an initiative to run sick units by private owners make it profitable? Here’s a detailed analysis.

The RBI stats show us that India has around 85,190 sick units in the Micro, Small and Medium Enterprises (MSME) Sector. UP tops the list with 16,280 units followed by West Bengal, around 11,660 units. The yearly increase in such units has caused some discomfort in the overall economy and Government is left with a debatable choice of either closure or privatisation of these sick industries. But before such big decisions are taken, one has to examine the causes of sick units.


1. Improper Planning:
A public sector initiative usually lacks adequate planning, the primary reason being Government focuses on improving employment, monitoring and regulating market competition, providing fair and subsidized prices to the consumers rather than focussing on profitization and wealth maximization. To meet the Government ends, the Government need not spend hours and efforts in planning. Just starting a venture would do. Hence, when the venture fails to generate sufficient revenue due to improper forecast, it becomes a sick unit.

2. Poor Entrepreneurship
It is a common practice seen in politics to allot pole positions to the undeserved or incompetent ones. This practice is followed in Government undertakings too, and most Government undertakings, if not all, are managed by inexperienced and incompetent persons, probably appointed due to political play and corrupt Government.

3. Inadequate Management and Experts
Government Undertakings do not consider top level management professionals, one issue being the cost of these experts, and the other being political influence which results in inadequate personnel. And the outcome of such a move is adverse. Mismanagement along with wrong decisions could end up the company as a sick unit.

4. Financial Policy
Now this policy is quite interesting. The Government never seems to make a sound investment or acquisition or some sort of expansion plan. Instead, a lot of finance is provided for subsidies, employee incentives, consumer price shield and the sorts. Such financial assistance is used inappropriately and what could have become a successful business is deliberately made into losses.

5. Lacks in Competent Areas
A Government undertaking generally lacks in proper technology, infrastructure, machinery and equipment. Though such companies possess assets, land and property of high value, the method of using them and the infrastructural support do not match with what is expected. Moreover, obsolete technology is not eradicated that soon from Government companies.

6. Decisions carry political desires.
Every company must operate with the company objectives placed in core focus. But Government companies do object this conception. As most political parties have equal interest in controlling Public Sector Undertaking companies and amassing great wealth, the fight for control results in political pressure over such industries and inevitably turns it into a sick unit.

What is more probable is that a sick unit is maintained for a long period without any sort of changes in operation, left free to function. The end result being losses, poising a burden for the Government which never opts for privatisation.

But what good would PSU privatization do?

Every year in the union budget, stakeholders, employees and consumers look ahead to what Shri Jaitley has come up with regarding sick industries. And each time people await the privatization of sick units but still has not yet been approved by the Finance Minister.

Privatising a sick PSU unit would result in reversing all the above mishaps. The private owners would appoint the best in class management, be keen on investments and expansions and make use of assets in the most productive way as their interests lay on profits alone.

Government ventures usually aren’t tagged competitive. Some believe its because Government promotes incentive and subsidized low-profit business, some others think Government lacks top managerial persons for undertaking key positions, yet many believe that the Government is a cockpit of corruption and bribery. But when private ownership is given, the focus will be on profits and wealth rather than those poor political games.

So is privatisation, a guaranteed way for reviving sick industries? Decades back, in 2001, we have seen this for Hindustan Zinc Limited. And history could be repeated once again. Sick PSUs right now are undergoing a do or die situation. Either they have to shut themselves down or the Government has to sell their stake to private owners. And if the Government opts for the latter, it could do a whole lot of good to companies such as the Air India, which are at the brim of loss-making. Hence it can be rightly concluded that, sick industries definitely have a future but only if dis-invested to the private sector.

As there are instances of people like Capt BB Sinha being removed as CMD of SCI under whom it turned into a profitable venture even being acknowledged by PM himself. We at hope and pray that a panel should be made from Corporate and Government Sector with the relevant Workers Union. Its time, that the Government carry less baggage so that decision making for all things critical can be fast and easily implementable.

About the author: JONES T is an aspiring CA candidate from Cochin with a varied knowledge of Public administration and Public Sector Undertakings.

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