Corporate Restructuring

Corporate Restructuring
•Restructuring is the modern mantra of survival
•Its an attempt to revive the operation of the entity to
make it profitable once again
•Globalization & Liberalization firms compete in unfamiliar
manner.
•Change is inevitable e.g Mergers & Acquisitions Telecom &
Aviation
•Organization's need to adopt a result orientated approach
•Impact of COVID 19- Q2 2020 recorded just 90 M&A deals
as compared to 231 in Q1 2020, a drop of 61%.
Corporate Restructuring
Justice DHANANJAYA Y. CHANDRACHUD, “Corporate restructuring is one of the means that can
be employed to meet the challenges and problems which confront business. The law should be
slow to retard or impede the discretion of corporate enterprise to adapt itself to the needs of
changing times and to meet the demands of increasing competition. The law as evolved in the
area of mergers and amalgamations has recognised the importance of the Court not sitting as an
appellate authority over the commercial wisdom of those who seek to restructure business.” Ion
Exchange (India) Ltd, Re (2001) 105 Comp Cases 115 (Bom)
 It’s a broad term: Significant reorientation or realignment
of the assets and/ or liabilities of a company

Alternation of quality and quantum of its future cash flow

streams- Conscious Management Action
Approaches
to Corporate It includes mergers, acquisitions, demergers, divestures,
debt –equity changes

Restructuring
Articulated action to restore competitiveness of the firm

Organizational and ownership changes including

privatization
Types of Corporate Restructuring
Financial Restructuring: Changes in capital structure and capital mix of the company to minimize its
cost of capital.
Where businesses have debts and tax considerations, it’s often necessary to restructure financially
to reduce liabilities and increase profitability.
E.g mergers, the sale of divisions or abandonment of product lines, or cost-cutting
measures such as closing divisions.
Reasons:
Generate Cash flow
Effective use of financial resources
Changes in existing financial structure
Reduction in cost of capital
 Portfolio Restructuring

It involves investing or acquiring a line of business perceived peripheral to the

long-term business strategy of the company. E.g. Selling off unwanted assets
(Coromandal Fertilizers Limited sold its cement division to India Cements Limited)
Reasons:
To have strategic alliance
To fulfill shareholders’ desire to downsize and refocus the company’s operations
Organizational Restructuring

Over time, a business or group’s organizational structure can become inefficient either
because of surplus services or complex employee hierarchies.
E.g- Tesla's CEO, Elon Musk in 2019 had announced a major reorganization and cost-cutting
initiative
Reasons:
To increase efficiency
Effectiveness of Personnel through significant changes
Response to business and environmental changes
 Merger / Amalgamation: A merger is a combination of two
or more businesses into one business.
Merger through Absorption:- An absorption is a
combination of two or more companies into an ‘existing
company’. All companies except one lose their identity in
Forms of such a merger.
Restructuring E.g.= A+B=A
Merger through Consolidation:- A consolidation is a
combination of two or more companies into a ‘new
company’.
E.g A+B=C
Amalgamation (Section 2(1B) of Income-tax Act, 1961): means merger of either one or more
companies with another company or merger of two or more companies to form one company in
such a manner that :
• All the property/liability of the amalgamating company/companies becomes the property/liability of
amalgamated company.
• Share holders holding minimum 75% of the value of shares in the amalgamating company (other than
shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary) become share holders of the amalgamated company.
 Forms of Restructuring
Acquisitions and Takeovers: An acquisition may be defined as an act of acquiring effective control by one
company over assets or management of another company without any combination of companies.
A

B
A can be individual or entity or group of individuals or entities.
In a share acquisition the underlying agreement is made between the buyer and the company
shareholders. Accordingly, the ownership of the company passes to the buyer along with all the
company assets and ongoing liabilities.
Forms of Restructuring
In a share acquisition the underlying agreement is made between the buyer and the
company shareholders. The ownership of the company passes to the buyer along with all
the company assets and ongoing liabilities.

In an asset acquisition the underlying agreement is made between the buyer and the
owner of the assets i.e. the company. After the acquisition’s completion the buyer will be
the new owner of the acquired assets (and liabilities) and will carry on the business’s
operation by using the said assets. 
Forms of Restructuring
Demerger: Demerger is a form of corporate restructuring in which an entity’s business
operations are segregated into one or more components.
Divestiture: Divestiture means an out sale of all or substantially all the assets of the company
or any of its business undertakings / divisions, usually for cash
Reduction of Capital: Reduction of Capital is a process by which a company is allowed to
extinguish or reduce liability on any of its shares in respect of share capital not paid up or is
allowed to cancel any paid-up share capital.
Forms of Restructuring
Joint Venture: Joint Venture is an arrangement in which two or more companies (called
joint venture partners) contribute to the equity capital of a new company (called joint
venture) in pre-decided proportion.
Buy back of Shares
In corporate finance, a leveraged buyout (LBO) is a transaction where a company is
acquired using debt as the main source of consideration.  E.g- when a private equity firms
borrows as much as they can from a variety of lenders (up to 70 or 80 percent of the
purchase price) and assets of the target co. are collateral security. (Tata tea & Tetley)( 100
crores purchase price)
Slump Sale: ‘slump sale’ means the transfer of one or more undertakings as a result of the
sale for a lump sum consideration without values being assigned to the individual assets
and liabilities in such sales.
Forms of Restructuring
PIPES Transactions:
Private investment in public equity (PIPE) is the buying of shares of publicly traded stock
at a price below the Current Market Value (CMV) per share. This buying method is a
practice of investment firms, MF, and other large investors.
Earn Outs:
An earnout is a risk allocation mechanisms for the acquirer wherein the
purchase price is contingent on the “future performance” of the target
company. The acquirer pays a majority of the purchase price upfront, at the
time of closing the deal, and the remainder is contingent on the performance
of the target
Reasons for Corporate Restructuring
Economies of Scale e.g. HLL-TOMCO
Increasing Market Power e.g Idea Vodafone
Core Competencies
Change in Fiscal Government Policies e.g Telecom Sector, Aviation Sector,
Pharmaceutical
Enhancing shareholder Value
Growth & Profitability
Resolving Conflict
Trends of Mergers & Acquisitions in
India
Mergers & Acquisitions have been prominent in the advanced capitalist countries since the
19th Century
Regular Phenomenon for Developing Countries
Emergence of cross border mergers
New Policy regime of privatization, liberalization in trade, finance & investment, technological
changes
New Economic Environment facilitated M&A since 1990s
Impact of Policy Reform & Trends of
M&A in India
1990-95
Shift in the industrial Policy Regime
Restrictive Provisions of Monopolies & Restrictive Trade Practices Act were removed in 1991
Licensing for expansion of enterprises, amalgamations & takeovers of business enterprises
Foreign Exchange regulations Act was substantially altered
All restrictions on companies with respect to borrowing fund or raising deposits in India
were removed
SEBI was established under SEBI Act, 1992 to regulate corporate behavior
SEBI (SAST) , 1994 for regulating substantial acquisition of shares
1995-2000
Mutual Funds Foreign Institutional Investors were allowed to enter capital
market.
Foreign Exchange Management Act ,2000 was enacted
FEMA allowed companies to invest 100% of the proceed in acquisitions of
foreign companies & Direct investments
Indian parties were to invest upto $ 100 million
SEBI (SAST) was revised in 1997
2000-2005
Allowed Indian firms to invest in entities abroad up to 200% of their net worth
Indian parties were to invest upto $ 200 million
Competition Act, 2002 was enacted but it came into force in 2008
Setting up of CCI
Check on anti-competitive practice-cartelization, abuse of dominant position &
combinations
3 major waves of M&A in India with structural adjustments & New industrial
regime adopted by the government promoted M&A
Covid-19: Kamath committee identifies 26 sectors for
loan restructuring
The Kamath panel has recommended financial ratios for 26 sectors which could be factored by
lending institutions while finalizing a resolution plan for a borrower
The financial aspects include those related to leverage, liquidity, debt serviceability
To make recommendations on the financial parameters to be considered for the one-time
restructuring of loans impacted by the Covid 19 pandemic.
The committee will also vet the resolution plans for all the accounts where the exposure is more
than ₹1,500 crore.
Borrower accounts shall be eligible for resolution which were classified as standard, but not in
default for more than 30 days with any lending institution as on March 1, 2020.