Exit Policy and Implications

Posted on Feb 21 2019 - 3:59pm by admin

Exit Policy and Implications

The term ‘exit’ means the right of an industrial unit to close down. Exit policy means the policy regarding the retrenchment of the surplus labour force resulting from restructuring of industrial units and workers displaced by the closure of sick units. Exit may become necessary due to strategic reasons, financial constraints and environmental changes. Therefore, exit policy refers to the policy concerned with the action to be taken regarding surplus manpower in companies, owing to a variety of reasons, such as, restructuring, retrenchment, closure, or technological developments. There are arguments both in favour of and against exit policy.

Arguments for Exit Policy

People who demand exit policy put forth the following arguments:
i) Closure of sick units would be beneficial for the country’s economy. Banks, financial institutions, state governments and the central government would be freed form the burden of providing incentives, subsidies and other concessions to keep the sick units going, the resources so saved can be invested for the growth of healthy units.
ii) An exit policy will ensure that the legitimate dues of displaced workers are paid to them speedily and satisfactorily. Without such a policy, these workers have to lose their dues.
iii) Closure of sick units may cause temporary unemployment. But the investment made out of the sale proceeds would create permanent employment.
iv) Maintenance of sick units provides more benefit to inefficient and corrupt employers responsible for sickness than to the workers.
v) Sick units will ultimately close down exit policy or no exit policy.
vi) Several countries such as Singapore, Malaysia, Thailand and Indonesia have carried out economic reforms with exit policies. The result of such policies has been encouraging. A similar policy would be beneficial for India.
vii) Integration of an economy with the world economy would be incomplete without an exit policy. Indian companies would face a competitive disadvantage in the absence of freedom to retrench surplus labour.
viii) In the absence of an exit policy, labour is the biggest loser. The legitimate interests of workers are protected, only when there is a legal closure of a sick unit.

Arguments against Exit Policy

People who oppose exit policy, put forth the following arguments:
i. In the absence of a safety net, closure of sick units would cause undue hardships to displaced workers and their families.
ii. Exit policy is not the ideal remedy for tackling industrial sickness. Other strategies like turnaround management, merger and takeover may be tried before closing down sick units.
iii. Ext policy would benefit employers as they siphon off funds from old units to newer ones.
iv. Promoters of sick units have borrowed huge amounts from banks and financial institutions. They cannot be permitted to close their units without government approval.

A well-laid out exit route should be provided both in the interest of workers and the economy. The exit route must include safety net for labour. Those responsible for sickness must pay and fulfill all legal obligations to workers and creditors and should not be allowed to benefit from exit. The key consideration in evolving a practical industrial exit policy is the protection of the legitimate interests of workers, both in the public and the private sector. Hence, the Government policy has been that if a unit can be made economically viable by restructuring it and retraining/redeploying the labour, no efforts should be spared to do this. Only in the case of units where even restructuring would not render it economically viable should the option of closure of the unit be allowed. Even here, to minimise the adverse effects of closure of a unit on labour, several options like social security nets, insurance schemes and other employee benefit schemes as well as creation of a fund to pay retrenchment benefits to employees have been in place. Some of the measures introduced are:-

1. Voluntary Retirement Scheme (VRS)
The most important measure is the introduction of Voluntary Retirement Scheme(VRS). It was introduced as an alternative legal solution to solve this problem. It is the most humane technique to provide overall reduction in the existing strength of the employees. It is a technique used by companies for trimming the workforce employed in the industrial unit. It is now a common method used to dispense off the excess manpower and thus improve the performance of the organisation. It is a generous,tax-free severance payment to persuade the employees to voluntarily retire from the company. It is also known as ‘Golden Handshake’ as it is the golden route to retrenchment.
VRS allows employers including those in the government undertakings, to offer voluntary retirement schemes to off-load the surplus manpower and thus no pressure is put on any employee to exit. These schemes are also not subjected to vehement opposition by the Unions, because the very nature of its being voluntary and not using any compulsions. It was introduced in both the public and private sectors. Public sector undertakings, however, have to obtain prior approval of the government before offering and implementing the VRS.

2. National Renewal Fund (NRF)
The government of India created this fund on February 4, 1992 to provide a safety net for labour. The fund would provide assistance for retraining and redeployment of labour arising as a result of modernization and technology upgradation and also provide compensation to workers affected by restructuring of industrial units.

Objectives of National Renewal Fund
The main objective of the National Renewal Fund was to provide a social safety net to the workers who are likely to be affected by technological up-gradation and modernization in the India Industry. The objectives were to be achieved as follows:
i. By providing assistance to firms to cover the costs of retraining and redeployment of employees arising as a result of modernization and technological up gradation of existing capacities and from Industrial restructuring.
ii. By providing funds for compensation to employees affected by restructuring or closure of industrial units, both in public and private sectors.
iii. By providing funds for employment generation schemes in the organized and unorganized sectors in order to provide a social safety net for labour.
The following categories of units are eligible for getting assistance from the NRF.
i. Units which are potentially viable and require money for schemes like voluntary retirement.
ii. Units which require money for technology up gradation urgently to survive competition.
iii. Sick units which need to be closed down requiring money for compensating the retrenched workplace.
iv. Units requiring funds for training of workers and generating employment for weaker sections of the society.

The National Renewal Fund was abolished by the government in 2000 and administration of the VRS scheme was shifted to Department of Public Enterprises (DPE), instead of DIPP from fiscal year 2001-02.. The reason for abolishing NRF was that most of the payments under this was made for VRS and this fund did not server adequately the purpose of retrain

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