Corporate Restructuring Corporate restructuring is one of the most complex and fundamental phenomena that management confronts.

Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification. Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following Pattern of ownership and control  Composition of liability  Asset mix of the firm. It is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives:  Synergetic  Competitive  Successful It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to make more profitable and efficient. Meaning and Need for corporate restructuring Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company.

Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability. Purpose of Corporate Restructuring To enhance the share holder value, The company should continuously evaluate its:  Portfolio of businesses,  Capital mix,  Ownership &Asset arrangements to find opportunities to increase the share holder s value.  To focus on asset utilization and profitable investment opportunities.  To reorganize or divest less profitable or loss making businesses/products.

 The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital. Characteristics of Corporate Restructuring  To improve the company s Balance sheet, (by selling unprofitable division from its core business).  To accomplish staff reduction ( by selling/closing of unprofitable portion).  Changes in corporate management.  Sale of underutilized assets, such as patents/brands.  Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.  Moving of operations such as manufacturing to lower-cost locations.  Reorganization of functions such as sales, marketing, & distribution.  Renegotiation of labor contracts to reduce overhead.  Refinancing of corporate debt to reduce interest payments.  A major public relations campaign to reposition the company with consumers. Financial Restructuring Financial restructuring is the process of reshuffling or reorganizing the financial structure, which primarily comprises of equity capital and debt capital. Financial restructuring can be done because of either compulsion or as part of the financial strategy of the company. This financial restructuring can be either from the assets side or the liabilities side of the balance sheet. If one is changed, accordingly the other will be adjusted.

The two components of financial restructuring are;  Debt Restructuring  Equity Restructuring

Debt restructuring Debt restructuring is the process of reorganizing the whole debt capital of the company. It involves reshuffling of the balance sheet items as it contains the debt obligations of the company. Debt restructuring is more commonly used as a financial tool than compared to equity restructuring. This is because a company s financial manager needs to always look at the options to minimize the cost of capital and improving the efficiency of the company as a whole which will in turn call for the continuous review of the debt part and recycling it to maximize efficiency. Debt restructuring can be done based on different circumstances of the companies. These can be broadly categorized in to 3 ways. A healthy company can go in for debt restructuring to change its debt part by making use of the market opportunities by substituting the current high cost debt with low cost borrowings. A company that is facing liquidity problems or low debt servicing capacity problems can go in for debt restructuring so as to reduce the cost of borrowing and to increase the working capital position. A company, which is not able to service the present financial obligations with the resources and assets available to it, can also go in for restructuring. In short, an insolvent company can go for restructuring in order to make it solvent and free it from the losses and make it viable in the future. Components of debt restructuring The components of debt restructuring are as follows  Restructuring of secured long-term borrowings  Restructuring of unsecured long-term borrowings  Restructuring of secured working capital borrowings  Restructuring of other term borrowings

 Restructuring of secured long-term borrowings: Restructuring of secured long-term borrowings will be done for the following reasons such as reducing the cost of capital for healthy companies, for improving liquidity and increasing the cash flows for a sick company and also for enabling rehabilitation for that sick company.  Restructuring of unsecured long-term borrowings: Restructuring of the long-term unsecured borrowings will be done depending on the type of borrowing. These borrowings can be public deposits, private loans (unsecured) and privately placed, unsecured bonds or debentures. For public deposits, the terms of deposit can again be negotiated only if the scheme is approved by the right authority.  Restructuring of secured working capital borrowings: Credit limits from commercial banks, demand loans, overdraft facilities, bill discounting and commercial paper fall under the working capital borrowings. All these are secured by the charge on inventory and book debts and also on the charge on other assets. The restructuring of the secured working capital borrowings is almost all the same as in case of term loans.  Restructuring of other short term borrowings: The borrowings that are very short in nature are generally not restructured. These can indeed be renegotiated with new terms. These types of short-term borrowings include inter-corporate deposits, clean bills and clean over drafts. Equity restructuring Equity restructuring is the process of reorganizing the equity capital. It includes reshuffling of the shareholders capital and the reserves that are appearing in the balance sheet. Restructuring of equity and preference capital becomes a complex process involving a process of law and is a highly regulated area. Equity restructuring mainly deals with the concept of capital reduction. The following are the some of the various methods of restructuring. Repurchasing the shares from the shareholders for cash can do restructuring of share capital. This helps in reducing the liability of the company to its shareholders resulting in a capital reduction by returning the share capital. The other method that falls in the

same category is to change the equity capital in to redeemable preference shares or loans. Restructuring of equity share capital can be done by writing down the share capital by certain appropriate accounting entries. This will help in reducing the amount owed by the company to its shareholders without actually returning equity capital in cash.

Restructuring can also be done by reducing or waiving off the dues that the shareholders need to pay. Restructuring can also be done by consolidation of the share capital or by sub division of the shares. Reasons behind equity restructuring The following are the reasons for which equity restructuring is done:  Correction of over capitalization  Shoring up management stakes  To provide respectable exit mechanism for shareholders in the time of depressed markets by providing them liquidity through buy back.  Reorganizing the capital for achieving better efficiency  To wipe out accumulated losses  To write off unrecognized expenditure  To maintain debt-equity ratio  For revaluation of the assets  For raising fresh finance

Corporate Restructuring Corporate restructuring, out of all emerging concepts of findings ways to serve shareholders better, has been a very successful concept abroad and its been followed all the more in high context cultures like India. The rapidity with corporate finance due to external factors like

increased price volatility, a general globalisation of the markets, tax asymmetric, development in technology, regulatory change, liberalisation, increased competition and reduction in information and transaction costs and also intrafirm factors like liquidity needs of business, capital costs and growth perspective have lead to practice of corporate restructuring as a strategic move to maximise the shareholder's value. The "Corporate restructuring" is an umbrella term that includes mergers and consolidations, divestitures and liquidations and various types of battles for corporate control. The essence of corporate restructuring lies in achieving the long run goal of wealth maximisation. The term corporate restructuring encompasses three distinct, but related, groups of activities; expansions including mergers and consolidations, tender offers, joint ventures, and acquisitions; contraction including sell offs, spin offs, equity carve outs, abandonment of assets, and liquidation; and ownership and control including the market for corporate control, stock repurchases program, exchange offers and going private (whether by leveraged buyout or other means). Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. We will briefly look at each of the three major categories of restructuring in the section which follow as: Expansions:

Expansions include mergers, consolidations, acquisitions and various other activities which result in an enlargement of a firm or its scope of operations. There is a lot of ambiquity in the usage of the terms associated with corporate expansions. A Merger involves a combination of two firms such that only one firm survuves. Mergers tend top occur when one firm is significantly larger than the other and the survivor is usally the larger of the two.A Merger can take the form of :  Horizontal merger involves two firms in similar businesses. The combination of two oil companies or two solid waste disposal companies, for example would represent horizontal mergers.  Vertical mergers involves two firms involve in different stages of production of the same end product or related end product.  Conglomerate mergers involves two firms in unrelated business activities.

A consolidations involves the creation of an altogether new firm owning the assets of both of the first two firms and neither of the first two survive. This form of combination is most common when the two firms are of approximately equal size.

The joint ventures, in which two separate firms pool some of their resources, is another such form that does not ordinarily lead to the dissolution of either firm. Such ventures typically involve only a small portion of the cooperating firms overall businesses and usually have limited lives.

The term acquisitions is another ambiguous term. At the most general, it means an attempts by one firm, called the acquiring firm to gain a majority interest in another firm called the target firm. The effort to gain control may be a prelude to a subsequent merger to establish a parent subsidiary relationship, to break up the target firm and

dispose of its assets or to take the target firm private by a small group of investots. There are a number of strategies that can be employed in corporate acuisitions like friendly takeovers, hostile takeovers etc.The specialist have engineered a number of strategies which often have bizarre nicknames such as shark repellents and poison pills terms which accurately convey the genuine hostility involved. In the same vain, the acquiring firm itself is often described as a raider. One such strtegy is to emply a target block repurchase with an accompaying stanstill agreement. This combination sometimes describes as greenmail. Contractions: Contraction, as the term implies, results in a maller firm rather than a larger one. If we ignoe the abondanment of assets, occasionally alogical course of action, coporate contraction occurs as the result of disposition of assets. The disposition of assets, sometimes called sell-offs, can take either of three board form:

Spin-offs Divestitures Carve outs. Spin-offs and carve outs create new legal entities while divestitres do not.

Ownership and Control The third major area encompassed by the term corpoate restructuring is that of ownership and control. It has been wrested from the current board, the new managemt willl often embark on a full or partial liquidatin strategy involving the sale of assets. The leveraged buyout preserves the integrity of the firm as legal entity but consolidates ownership in the hands of a small groups. In the 1980s, many large publicly tradedd firms went private and employes a similar strategy called a leveraged buyout or LBO.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite.

Mergers and Acquisitions : Valuation matters Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company . Here are just a few of them: Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.

Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill capital expenditures cash taxes - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. Mergers and Acquisitions : Break Ups As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very attractive options for companies and their shareholders. Advantages The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the whole." These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A breakup can also boost a company's valuation by providing powerful incentives to the people who work in the separating unit, and help the parent's management to focus on core operations. Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might

attract more investors and, ultimately, more capital. Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company. For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options in the parent often provide little incentive to subsidiary managers, especially because their efforts are buried in the firm's overall performance. Disadvantages That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm may mean it has less representation on major indexes, making it more difficult to attract interest from institutional investors. Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division of expenses such as marketing, administration and research and development (R&D) into different business units may cause redundant costs without increasing overall revenues. Restructuring Methods There are several restructuring methods: doing an outright sell-off, doing an equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages and disadvantages for companies and investors. All of these deals are quite complex. Sell-Offs A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the board decide that the subsidiary is better off under different ownership.

Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late 1980s and early 1990s, corporate raiders would use debt to finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are unsuccessful. Equity Carve-outs More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a subsidiary public through an initial public offering (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder value.

The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the parent and is lacking an established track record for growing revenues and profits.

Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties. Spinoffs A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct management and board. Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases, spinoffs unlock hidden shareholder value. For the parent company, it sharpens management focus. For the spinoff company, management doesn't have to compete for the parent's attention and capital. Once they are set free, managers can explore new opportunities. Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spinoff shares are issued to parent company shareholders, some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation. Tracking Stock A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. The stock allows the different segments of the company to be valued differently by investors. Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies and share marketing, administrative support functions, a headquarters and so on. Finally, and most importantly, if

the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions. Corporate debt Restructuring Corporate debt restructuring can be difficult at the best of times. This difficulty has been heightened due to the effects of the recent global crisis that has presented some unprecedented debt pressures in corporate, household and financial sectors, evolving also into sovereign debt pressures.  Debt deleveraging has taken place on a global scale as financial institutions, corporates and households are forced to reduce their debt burdens.  The write down of assets and concerns of counterparty risk have driven liquidity pressures on banks and other financial institutions.  Financial distress in the banking sector has constrained credit to corporates and households.  Economic downturn has reduced corporate revenues and household incomes.  Reversals in capital flows have further constrained liquidity and exacerbated exchange rate pressures.  Exchange rate depreciation in some countries with high incidence of FX denominated debt has accelerated defaults in the corporate and household sectors.  Conversely, the effect of contractionary policies, motivated by the objective of maintaining the nominal exchange rate in some countries, has reduced debt servicing capacity.  Governments may have both institutional limits and fiscal space constraints on intervening to resolve private sector debt problems.  Furthermore, large scale intervention by governments e.g., involving the injection of liquidity and assuming or subsidizing private sector debt has the potential to lead to unsustainable public sector debt burdens. Debt restructuring refers to the reallocation of resources or change in the terms of loan extension to enable the debtor to pay back the loan to the creditor. It is an adjustment made by

both the debtor and the creditor to smooth out temporary difficulties in the way of loan repayment. It can be categorized into two types, and there are many ways to carry out the restructuring process. PROCESS OF CORPORATE DEBT RESTRUCTURING A number of companies are now taking a good look at business debt restructuring to resolve their unmet financial obligations. This is often a preferable solution to bankruptcy probably because it is less expensive and more discreet. But just like bankruptcy, company debt restructuring involves a systematic process.
y The consultation process

Because business debt restructuring is nothing but an aggregate loan agreement, the lender seeks a series of consultation sessions with the borrower. During these meetings, the lender assesses the company's overall financial situation. It is at this point that all the company's financial obligations are evaluated against the expected regular cash flow. Primarily because of this, small business debt restructuring works differently than that of a big corporate account.
y The negotiation process.

Once the assessment procedure is finished, the lender then settles an agreement with all the borrower's creditors and vendors. The main idea is to arrive at a solution that is acceptable to all the parties involved. When that is achieved, the lender can proceed to implement the solution agreed upon.
y The liquidation of assets.

The liquidation of the business's assets, if found to be necessary by all parties concerned, is the next step in the process. In some cases, restructuring your existing debt may require you to pay a large amount of money up front. If your lender can't

cover that, you have no other choice but to liquidate some assets. But most of the time, the liquidation strategy is only used to get the profitability of the business back.
y The restructuring process starts.

This is the step where the contract is signed and the agreement is enforced. The borrower, and in this case the business, agree to the aggregate loan amount and to other details including the monthly payment obligation, the interest rate, and the term of payment. After everything is accounted for, the business is now officially under a debt-restructuring program is expected to make payments as stipulated. This is the last level of debt help available to the business before a filing for bankruptcy. These are the steps involved in a business debt restructuring procedure. Simple as it may seem, businesses should not leap into the plan immediately without careful consideration. Company debt restructuring is a process that has to be critically evaluation to ensure the ultimate fate of the business involved.

APPROACHES TO CORPORATE DEBT RESTRUCTURING Key objectives of comprehensive corporate debt restructuring strategies following a financial crisis have been to support an economy-wide recovery through: (i) facilitating the exit of nonviable firms (i.e., firms without a reasonable prospect of achieving sustainable profitability); (ii) enabling the timely restructuring of debt and access to sufficient financing to sustain viable firms.

Corporate debt restructuring can take many forms directed to the debt and capital structure of a firm; it can include debt reschedulings, interest rate reductions, debt-for-equity swaps and debt forgiveness. To be successful in securing the longer term viability of corporates, debt restructuring will often be accompanied by operational restructuring addressing the structure and efficiency of the firm s business through closures and

reorganization of productive capacity.

A point of departure in designing corporate debt restructuring strategies in the context of a financial crisis should be to recognize the distinction between the crisis containment phase and the subsequent debt restructuring phase. During the height of a financial crisis typically involving an uncertain macroeconomic path, falling asset prices and frozen credit markets judgments on individual firm viability necessary to inform debt restructuring are virtually impossible. Any attempts at debt restructuring during this phase tend to be marginal, involving measures such as extension of repayment terms and waivers of payment defaults. Such tinkering at the margins cannot address deeper problems of debt structure and overhang.

The focus of policy measures in the crisis containment phase should be to establish a reasonably predictable macro path, including through restoration of the banking system. This would provide an economic platform for debt restructuring to take off in earnest and to be sustained through the debt restructuring phase, which would in turn further support economic recovery. While there is no bright line between the crisis containment and debt restructuring phases, the effectiveness of policy responses are generally enhanced by attention to the different priorities and feasible objectives in these two phases.

While measures in the debt restructuring phase would evolve, three broad categories of approaches to corporate debt restructuring in the aftermath of a financial crisis can be identified, distinguished by varying degrees of government involvement. The categories reflect the center of gravity of the measures from case by case market solutions to across the board government-determined solutions, or an intermediate approach between the two.

A case by case, market-based, approach has been used in which private sector debtors and creditors are generally left to determine the nature, scope and terms of the burden sharing on a case by case basis and principally relying on market solutions While this approach is essentially market-oriented, the government would

still have an important role through implementing legal reforms to encourage timely market-driven restructuring. Furthermore, fiscal support in this approach would be on an indirect basis through support of the financial sector (e.g., use of public funds to recapitalize domestic banks that meet certain soundness requirements, and thereby strengthen the capacity of those banks to absorb losses within debt restructuring). An across the board approach involves direct government involvement that determines the method and distribution of burden sharing among relevant parties. Under this approach, the relevant solutions are generally applicable across the board to all economic agents in the pre-specified category, regardless of individual factors There are two alternative characteristic features of this approach. The first is direct fiscal support to corporates, which could range from a predetermined amount of support for specified purposes (e.g., to protect against foreign exchange rate risk), to tax and other fiscalrelated incentives for firms that engage in restructuring The second is a legislatively mandated absorption of losses by creditors; such a strategy should be avoided given the risks of legal challenge and undermining the credit culture of a country. An intermediate approach has been applied that relies on case by case negotiations, supported by government financial incentives, bolstered by legal and regulatory reforms, and establishment of public entities to galvanize debt restructuring.

Without exception, all country experiences of wide scale corporate debt restructuring have been mixed and have involved lengthy and difficult processes. While any approach needs to be tailored to the circumstances of a country including macroeconomic conditions, composition of debt and legal/institutional framework the experience with corporate debt restructurings in the aftermath of systemic crises indicates that a properly designed intermediate strategy would generally be expected to make the best use of limited fiscal resources and avoid shifting the burden of restructuring unsustainably to creditors.

The intermediate approach would tend to be more effective than the case by case

approach in optimizing debt restructuring where the scale of the debt distress is beyond the capacity of the court system and the market place to resolve in a timely manner. The advantage of the intermediate approach over across-the board solutions is that it seeks to leverage private resources (such as they exist) and to contain dead weight losses implied by full across the board interventions. Notably, the substantial reliance on across the board measures in the Chile and Mexico strategies proved costly to public debt sustainability and contributed to the need for sovereign debt restructurings to restore the public sector balance sheets. Furthermore, across the board measures, without distinction based on firm viability, would disadvantage more efficient firms and dampen procompetitive forces in the economy.

However, in determining whether an intermediate approach is preferable in any given strategy, the dead weight losses of full across the board interventions need to be weighed against the inefficiencies from the potential grid-lock faced where the number of debt default cases is substantially higher than the institutional capacity can handle. Countries could also adopt more than one approach in parallel, for example, an across the board approach for categories of SMEs (due to the number and small size of claims) and an intermediate approach for larger corporate

DESIGN AND IMPLEMENTATION OF A CORPORATE DEBT RESTRUCTURING STRATEGY Tailoring a corporate debt restructuring strategy to individual country circumstances requires attention to a number of key factors:  policy coordination;  analysis of data to assess the dimensions of the debt problem;  consideration of reform of the legal and institutional framework for enforcement of credit, particularly the corporate insolvency law;  government support to facilitate out-of-court restructurings;  potential innovations to facilitate voluntary standstills;  careful assessment of the rationale for government financing (if any) to individual firms; consideration of different treatment for SMEs; and

 coordination with financial sector restructuring, particularly with respect to banks.

Debt restructuring policy in Axis Bank

y

y y y y y y y y y

No account shall be taken up for restructuring unless the financial viability is established and there is a reasonable certainty of repayment from the borrower as per the terms of restructuring package. Borrowers indulging in frauds and malfeasance shall not be eligible for restructuring. Wilful defaulters shall also not generally be considered for restructuring. Where strong justifiable reasons exist for considering restructuring the accounts of a wilful defaulter, it should be ensured that the borrower has taken satisfactory steps to rectify the wilful default. BIFR cases are not eligible for restructuring without their express approval. Restructuring cannot be done with retrospective effect. If restructuring is takenup, the same should be implemented within 90 days from date of receipt of application. The repayment period of restructured advance including the moratorium, if any, does not exceed 10 years. Promoters margin of minimum 15% of Bank?s sacrifice should be brought in before implementation of the restructuring package. Personal guarantee of the promoters should be available The restructuring should not be a ?repeated restructuring?. The restructuring package should have right of recompense clause The Bank should have the right to prepone repayment instalments if projections are over achieved.

Debt Recovery Tribunal Keeping in line with the international trends on helping financial institutions recover their bad Debt quickly and effeciently, the Government of India has constituted thirty three Debt Recovery Tribunal and five Debt Recovery Appellate Tribunal across the country. The Debt Recovery Tribunal are located across the country. Some cities have more than one Debt Recovery Tribunal located therein. New Delhi and Mumbai have three Debt Recovery Tribunal. Chennai and Kolkata have two Debt Recovery Tribunal each. One Debt Recovery Tribunal each has been constituted at Ahmdabad, Allahabad, Arungabad, Bangalore, Chandigrah, Coimbatore, Cuttack, Ernakulam, Guwahati, Hydrabad, Jabalpur, Jaipur, Lucknow, Nagpur, Patna, Pune, Ranchi and Vishakapatnam. Depending upon the number of cases a Debt Recovery Tribunal is constituted. There are a number of States that do not have a Debt Recovery Tribunal. The Banks & Financial Institutions and other parties in these States have to go to Debt Recovery Tribunal located in

other states having jurisdiction over there area. Thus the territorial jurisdiction of some Debt Recovery Tribunal is very vast. For example, the Debt Recovery Tribunal located in Guwahati has jurisdiction over all the seven North Eastern States. Similarly, the territorial jurisdiction of the Debt Recovery Tribunal located at Chandhigarh too has a very wide jurisdiction over the States of Punjab, Harayana, Chandhigarh. The setting up of a Debt Recovery Tribunal is dependant upon the volume of cases. Higher the number of cases within a territorial area, more Debt Recovery Tribunal would be set up.

Each Debt Recovery Tribunal is presided over by a Presiding Officer. The Presiding Officer is generally a judge of the rank of Dist. & Sessions Judge. A Presiding Officer of a Debt Recovery Tribunal is assisted by a number of officers of other ranks, but none of them need necessarily have a judicial back ground. Therefore, the Presiding Officer of a Debt Recovery Tribunal is the sole judicial authority to hear and pass any judicial order. Each Debt Recovery Tribunal has two Recovery Officers. The work amongst the Recovery Officers is allocated by the Presiding Officer. Though a Recovery Officer need not be a judicial Officer, but the orders passed by a Recovery Officer are judicial in nature, and are appealable before the Presiding Officer of the Tribunal. The Debt Recovery Tribunal are governed by provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, also popularly called as the RDB Act. Rules have been framed and notified under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. After the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SRFAESI Act or SRFAESIA for short) borrowers could become first applicants before the Debt Recovery Tribunal. Earlier only lenders could be applicants. The Debt Recovery Tribunal are fully empowered to pass comprehensive orders like in Civil Courts. The Tribunal can hear cross suits, counter claims and allow set offs. However, they cannot hear claims of damages or deficiency of services or breach of contract or criminal negligence on the part of the lenders. The Debt Recovery Tribunal can appoint Receivers, Commissioners, pass ex-parte ordes, adinterim orders, interim orders apart from powers to Review its own decision and hear appeals against orders passed by the Recovery Officers of the Tribunal.

The recording of evidence by Debt Recovery Tribunal is some what unique. All evidences are taken by way of an affidavit. Cross examination is allowed only on reqeust by the defense, and that too if the Tribunal feels that such a cross examination is in the interest of justice. Friviolous cross examination may be denied. There are a number of other unique features in the proceedings before the Debt Recovery Tribunal all aimed at expediting the proceedings.

Asset Reconstruction
The concept of asset reconstruction business is of recent origin. Its genesis is rooted in the collective policy response to the problem of huge stock of non-performing assets (NPAs), nestling in the country s financial asset pool covering the entire spectrum, wholesale & retail, across all sectors. Waste formation in the financial system ultimately manifesting as NPAs is natural phenomenon; only its degree of accumulation may vary with changes in the economic & financial ambience, external & internal. One of the challenges before the various players dotting the financial space is to ensure that this contagion of impairment does not impact its overall health. Quarantining these assets and transferring them to an institutional platform like Asset Reconstruction Companies (ARCs) has been perceived to be a viable option answering to this tough challenge. The necessary legislative, regulatory and other policy framework was put in place as a result, paving the way for the creation of ARCs. Presently there are four ARCs actively engaged in this business. Leading the pack is Asset Reconstruction Company of (India) Limited (Arcil) the outfit promoted by the country s financial behemoths like PNB, SBI, IDBI Bank & ICICI Bank, accounting for as much as 80% of market share (The past year it acquired assets of Rs. 27,000 Cr from 39 lenders, resolved 334 cases covering total dues of Rs. 15,600 Cr and recovered & distributed amount of Rs. 1,900 Cr). It s footprints across the whole business spectrum is getting firmer with the passage of time which is likely to continue at least in the foreseeable future. Asset reconstruction business constitutes essentially in unlocking the values embedded in the NPAs and sharing these in an equitable manner with various stakeholders. Theoretically, this is tailor-made for the common weal of all the concerned players and by now the market should have been abuzz with frenetic action on this front. If this not happened on the scale anticipated, the reasons can be the following. * The concept is relatively new and its philosophy and practice have not seeped firmly in the minds of the players, especially the lenders. With the fear of the unknown stalking their minds, they are understandably wary of taking the kind of plunge that is necessary for giving a discernable fillip to this business.

* The more daunting issue to grapple with is the emotional mooring NPAs provide to the employees of the lenders presently engaged in husbanding these impaired assets. This is more pronounced among public sector outfits, accounting for a lion s share in this business, and not subject to the kind of tough business targets of asset resolution as are mandated by their foreign and private sector counterparts. Typically they draw their sense of worth for the organization from continued association with these assets and separating them from these NPAs is huge challenge. More often than not they put up road blocks in the transfer of the assets as viable resolution strategy. Creating an alternative niche for them in the organization before dislodging from this entrenched vestige of self-esteem is the only option for these lenders. DRAWING TOGETHER KEY PRINCIPLES The following principles merit emphasis in tailoring the design of a comprehensive corporate debt restructuring strategy to country circumstances: Sequencing The sequencing and relative prioritization of policy measures relevant to a debt restructuring strategy will need to evolve over the course of a systemic crisis and its aftermath. While it is important that a comprehensive debt restructuring strategy be envisioned at an earlier stage, concerted implementation of that strategy cannot be realistically sustained during the height of a crisis. However, given that changes to insolvency laws and the underlying institutional structure take time to effect, country authorities need to begin diagnosis of the debt problem and to anticipate the legal bottlenecks at an early stage. Furthermore, the onset of a crisis could present an opportunity for the authorities to galvanize relevant stakeholders into reform mode. Early and credible government commitment to engage in this process can reinforce positive expectations of market participants. Such expectations must, however, be managed since wide scale corporate debt restructurings in a wake of a crisis may take many often difficult years. Crisis containment phase Rehabilitation of the financial sector is a first order priority. Specifically, banking system dislocation must be contained and banks need sufficient capital to revive lending and to be in a position to restructure debt in the subsequent restructuring phase. In order to move the process forward, governments would likely need to step in to enforce timely recognition of

losses and to recapitalize banks, where shareholder recapitalization is not feasible. A path towards macroeconomic stability is critical. Debt restructuring can reinforce macro policies. But reasonably predictable asset prices, interest rates, and exchange rates are needed to enable debtors and creditors to make medium term judgments of viability required for restructuring on any sustainable scale. While insolvency law is needed and reforms should be advanced where possible during the crisis containment phase insolvency law is no substitute for macro policy responses. Where feasible, reform of the insolvency and other related laws should focus on provisions to support out of court restructuring. In particular, enabling a court in an expedited manner to make an out-of-court agreement that is accepted by a qualified majority of creditors binding on dissenting creditors is key; as are provisions to support new financing by according it with a legal priority in payment. In extreme cases, government financing to facilitate voluntary standstills on payments could be a useful interim measure in the crisis containment phase, prior to wide scale debt restructuring. Governments could provide limited financial support for working capital as an incentive for temporary standstills agreed between corporate debtors and their respective creditors that would preserve liquidity in the corporate sector while the ground work for debt restructuring is laid. Restructuring phase While all country experiences of wide scale debt restructuring have been mixed, some government intervention moderated to complement case by case negotiations tends to be relatively more effective. Such an intermediate approach should be tailored to the country circumstances, including macroeconomic conditions, composition of debt and legal/institutional framework. A different mix of tools may be needed with respect to SMEs, which may call for more across the board treatment but caution should be exercised against throwing financing at non-viable SMEs in the face of reduced consumer demand. The debt restructuring strategy should respect inter-creditor equity and avoid targeting foreign creditors. The longer term effects of disruption in financial relations

resulting from a crisis could be exacerbated by debt restructuring strategies that overturn predetermined rights (such as the priority ranking of secured creditors). Furthermore, the targeting foreign creditors in debt restructuring strategies would be short-sighted in view of the longer term access to international credit and investment needed to sustain post-crisis economic recovery. Government-sponsored out of court workout guidelines are conducive to maximize debt restructuring for viable firms. To be optimal in the aftermath of a crisis, such guidelines will likely need to operate in a structured framework involving government enhancements, such as regulatory suasion on banks to sign on to the workout principles. AMCs may help to spur corporate debt restructuring. However, the establishment and operation of AMCs present a number of design challenges, in terms of governance structure and pricing of assets. Consideration of AMCs is particularly warranted where the financial and technical capacity of banks are insufficient to address corporate debt restructuring reliably. Liquidation of non-viable firms cannot be avoided. Firms exposed as non-viable should be eased out of the market place through speedy liquidation procedures and their assets recycled to more productive use in the economy. Government intervention directed to salvaging non-viable firms would present an undue drag on public finances and on the efficient recovery of the economy. Risks to public finances from government intervention in debt restructuring should be contained. The scale of financial distress in the corporate (as well as banking and household) sectors and the unreliability of market-based solutions alone, imply that some government financial support for debt restructuring would be inevitable. However, fiscal space limitations cannot be overlooked. A well-designed intermediate approach would leverage private capacity to burden share between debtors and creditors, and conserve use of limited government financial resources.