India: Blocking Closures

Last Updated: 8 August 2002
Article by Ruchir Sinha
Originally published in the Hindustan Times

An entrepreneur starts a business with a view to earn profits and recruits workforce in synchrony with the size, nature and profitability of the business. But what happens when the enterprise ceases to earn profits, what happens when running the enterprise becomes a liability for the entrepreneur rather than an asset? In such cases the employer is usually left with only 2 options : -

  1. To reduce the redundant workforce and make the business profitable yet again, or at least put an effort in the same direction
  2. To close down the sick industrial unit and prevent further losses and invest the sum elsewhere.

The recent recession in the Indian scenario leaves the entrepreneur with the above options only and such approach is homogenous for almost all employers small or big. But what if the law prevents them from opting for either of the two options and impels them to suffer losses over losses. Yes, under the Industrial Disputes Act, 1947 there is a clause which states that if the employees are more than 300 in UP and more than 100 in Delhi, the employer needs to take permission of the appropriate authorities. But, the fact is, that this permission is never ever given. Though the law provides that the permission may be given after examining the facts and circumstances of the case, but practically speaking the permission is never given.

There is no laid down criterion on which permission is given or rejected. It therefore becomes discretionary, and arbitrary powers are vested in the appropriate authority who as a practice and as an established fact never gives the permission, political (as workers form a substantial voting class) and social reasons being the primary reasons. I still remember when Mr. VP Luthra, Chairman of a company TELEVISTA had come to me after his permission for closure was rejected. I also remember when Mr. Nidhipati Singhania, Managing Director of Fibertech Engineers Ltd., a unit of JK Synthetics approached me. In this case, the Industrial relations were disturbed over the issue of dearness allowance which was followed by an illegal strike, drubbing and violence. The company then declared a lockout which was held unjustified by the authorities. The company then applied for permission for closure which was again rejected. In both the cases, however, we maneuvered the closure of the companies by other means, but the permission was never given.

It has been seen that the employers are making agreements with the employees on a higher financial package forcing them to resign themselves by giving more than legal financial packets and sometimes by muscle power. Definitely, good and big employers are not using the third degree force of muscle power and do not want to involve themselves criminally. But in almost all the cases, the law teaches or rather encourages the employer to manipulate/twist the law to beat the provision of law.

By not giving permission it is not only a liability on the employer, it also creates bad industrial relations for which the HRD personnel are held responsible and finally when the industry is not able to survive, the only alternative for the bigger units is to go under Board of Industrial Financial Reconstruction (BIFR). This, yet again brings a liability on the public in general as the govt. spends on running such sick and loss making bodies and the public in general bears the brunt. And even for instance, if it survives, it lives in such bad taste that no HRD personnel find it easy to bring back the some healthy relations which the firm had at one time.

Unfortunately, in labour laws, unlike other laws, if an appointment letter is issued which contains specific clause of termination of services after notice or in lieu of notice pay is not sustainable in the eyes of law. If any other unreasonable clause is there in the appointment letter, even that is not sustainable because the apex court is of the view in labour matters that there is so much unemployment in the country that the employer can force the employee to accept any unreasonable terms and conditions or wages at the time of appointment.

Govt. should not make such law which is neither in the interest of the employee, employer or public at large. Instead, we feel that the Govt. should have made provisions for some reserve money by way of nominal contribution and deduction which accumulates in the long run and used for the rainy days i.e. at the time of closure, retrenchment etc. so that the employees get so much money, that when they resign or make an agreement with the management to leave the job on their own will and wish, they are able to start afresh in life without burdening the company when in bad health. Such policy can also be implemented by the industry on its own and this will not attract any complications of permission etc. also.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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