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Closing or Changing a Business
Closing or Changing a Business
Regulatory Requirements:
Exit Policy
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The introduction of reforms in India and the consequent liberalisation of the economy has exposed the entrepreneurs to an ever increasing competition. Since then, several policy measures have been undertaken by the Government in order to enhance the global competitiveness of the Indian companies. One of the important sets of policy measures relates to reforms in the labour sector. But the most contentious issue in this sector which still remains unaddressed is that of the EXIT policy. This is because the companies have been arguing for a flexible EXIT policy while the labour unions have been against such a step because of their fear of loss of job security. But a liberal policy towards the entry and expansion of firms would be beneficial only if it is accompanied with a rational policy towards the exit of unviable firms. It is a necessary condition for inducing competition and enhancing the efficiency of resource use.

The term 'exit' is the obverse of the term 'entry' into industry. It refers to the right or ability of an industrial unit to withdraw from or leave an industry or in other words to close down. The proposal to introduce an exit policy was first mooted in 1991 when it was felt that without labour market flexibility, efficient industrialisation would be difficult to achieve. The need for such a policy arises as a result of modernisation, technology upgradation,restructuring as well as closure of industrial units. Such a policy will allow employers to shift workers from one unit to another and also retrench excess labour. In India, the Industrial Disputes Act,1947 puts restrictions on employers in the matter of reducing excess staff by retrenchment, by closure of establishments and the retrenchment process involved lot of legalities and complex procedures. Also, any plans of retrenchment and reduction of staff and workforce are subjected to strong opposition by trade unions.

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:-

  • 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.

    A business firm may opt for a voluntary retirement scheme under the following circumstances:-

    • Due to recession in the business.


    • Due to intense competition, the establishment becomes unviable unless downsizing is resorted to.


    • Due to joint-ventures with foreign collaborations.


    • Due to takeovers and mergers.


    • Due to obsolescence of Product/Technology.

    For more details visit our Section on "Managing a Business"

  • In order to protect the interest of workers, Government had set up a National Renewal Fund (NRF) in 1992. The objectives and scope of the National Renewal Fund were:- (a) to provide assistance to cover the costs of retraining and redeployment of employees arising as a result of modernisation, technology upgradation and industrial restructuring. (b) to provide funds, where necessary, for compensation of employees affected by restructuring or closure of industrial units, both in the public and private sectors. (c) to provide funds for employment generation schemes both in the organised and unorganised sectors in order to provide a social safety net for labour needs arising from the consequences of industrial restructuring.
  • The National Renewal Fund had two constituents:-

    • National Renewal Grant Fund (NRGF) dealt with the immediate requirements of labour arising from the revival or closure of sick units. The funds were disbursed in the form of grants for funding approved schemes relating to retraining, redeployment, counselling and placement services of employees affected by technology upgradation, modernisation, restructuring and revival of industrial undertakings. These funds were also utilised for
      compensation payments to employees affected by rationalisation in industrial undertakings and parts thereof.


    • Employment Generation Fund (EGF) disbursed grants for approved employment generation schemes for both the organised and unorganised sectors. It included schemes such as:- (a) Special programme designed to regenerate employment opportunities in areas affected by industrial restructuring. (b) Employment generation schemes for the unorganised sectors in defined areas.

    Though this fund was dissolved, but the Government has been continuously making efforts in this direction.

  • Scheme of Counselling, Retraining and Redeployment (CRR) of rationalized employees of Central Public Sector Undertakings (CPSUs)
  • The objective and scope of the scheme is to provide opportunities of counselling, retraining and redeployment to the rationalized employees of Central Public Sector Enterprises (CPSEs) rendered redundant as a result of modernization, technology upgradation and manpower restructuring in the Central PSEs. It consists of three main elements:-

    • Counselling:- is the basic pre-requisite of the rehabilitation programme of the displaced employees. The displaced employees need psychological counselling to absorb the trauma suffered by them due loss of job and the resulting challenges both for himself and for the members of his family. He needs to be made aware of the new market opportunities so that he may, depending upon his aptitude and expertise, take up suitable economic activities.


    • Retraining:- is to help the rationalized employees in rehabilitation. The trainees will be helped to acquire necessary skills/expertise/ orientation to start new activities and re-enter the productive process after loss of their jobs.


    • Redeployment:- of such rationalized employees in the production process through the counselling and retraining efforts. At the end of the programme they should be able to engage themselves in alternate vocations of self-employment. Whereas there cannot be any guarantee that the rationalized employee will be assured of alternate employment, yet possible help from the identified nodal training agencies as well as from the concerned Central Public Sector Undertakings (CPSUs) would be extended to them for starting new avocations.

    The scheme was introduced by the Department of Public Enterprises (DPEs) and has been assigned the responsibility of implementing the scheme through its CRR Cell. For carrying out various activities for implementation of the CRR Scheme, many nodal training agencies have been set up which have several Employees Assistance Centres located all over the country to meet the training needs under the Scheme.

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