CORPORATE RESTRUCTURING I

Corporate restructuring is defined as the process involved in changing the organization of a

business. It implies rearranging the business for increased efficiency and profitability.

In other words, it is a comprehensive process, by which a company can consolidate its

business operations and strengthen its position for achieving corporate objectives and continuing as
competitive and successful entity

Reasons of corporate restructuring:

There are a good number of reasons behind corporate restructuring. Corporate restructure their firms
with a view to:

Induce Higher Earnings: The prime goal of financial management is to maximize profit there by
firm's value. Firm may not be able to generate constant profits throughout its life. When there is
change in business environment, and there is no change in firm's strategies.

Leverage Core Competence: Core competence was seen as a capability or skill running through a
firm's business that once identified, nurtured, and developed throughout the firm became the basis for
lasting competitive advantage.

Ensure Clarity in Vision, Strategy and Structure: Corporate restructuring should focus on vision,
strategy and structure. Companies should be very clear about their goals and the heights that they plan
to scale. A major emphasis should also be made on issues concerning the time frame and the means
that influence their success.

Provide Proactive Leadership: Management style greatly influences the restructuring process. All
successful companies have clearly displayed leadership styles in which managers relate on a one-to-
one basis with their employees.

Empowerment of Employees: Empowerment is a major constituent of any restructuring process.

Delegation and decentralized decision making provides companies with effective management
information system.

Reengineering Process: Success in a restructuring process is only possible through improving

various processes and aligning resources of the company. Redesigning a business process should be
the highest priority in a corporate restructuring exercise.

Objectives of Corporate Restructuring

(i) To focus on core strengths, operational synergy and efficient allocation of managerial
capabilities and infrastructure.
(ii) Consolidation and economies of scale by expansion and diversion to exploit extended domestic
and global markets.
(iii) Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a
healthy company.
(iv) Acquiring constant supply of raw materials and access to scientific research and
technological developments.

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(v) Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of
servicing and improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting the radical
changes brought out by information technology.

Characteristics of Corporate Restructuring

 To improve the Balance Sheet of the company (by disposing of the unprofitable division from its
core business)
 Staff reduction (by closing down or selling off the unprofitable portion)
 Changes in corporate management
 Disposing of the under-utilized assets, such as brands/patent rights.
 Outsourcing its operations such as technical support and payroll management to a more efficient
3rd party.
 Shifting of operations such as moving of manufacturing operations to lower-cost locations.
 Reorganizing functions such as marketing, sales, and distribution.
 Renegotiating labor contracts to reduce overhead.
 Rescheduling or refinancing of debt to minimize the interest payments.
 Conducting a public relations campaign at large to reposition the company with its consumers.

Asset Restructuring

Asset restructuring is an initiative in order to ensure that the unpaid loans or bad loans converted to
non-performing assets are converted into liquid cash and are ploughed into the banks to continue their
banking operations.

Process of Restructuring

Steps Content
1 The borrower who is the customer of the bank after to the bank for a loan.
2 He will have an underlying asset which he will pledge or mortgage to the bank.
3 Loan will be sanctioned by the bank and the process of borrowing will end.
4 Amount of loan and interest will be converted into equity monthly instalments.
5 In case if the EMI is not paid for 90 days, the pledged or mortgaged assert will convert
itself as non-performing asset.
6 Non-performing asset blocks the liquidity Bank as the amount of loan is not converted
to cash.
7 Asset reconstruction companies will purchase these non-performing assets.
8 They allow Bank to do only banking activities by helping the banks by purchasing the
non performing assets.
9 This asset restructuring companies will recover the debt from the customer as they are
specialised in doing it.

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 10 This asset restructuring companies will purchase net present value at book price which
is obtained after deducting provisions.
11 This will help Bank in continuing the operations and asset reconstruction companies
will pay 15% in cash and balance in security receipts.

Benefits of Restructuring

LETHARGICITY OF BANKS: This leads to problems of laziness that is created in the banks. The
accountability of managers will be reduced which in turn leads to operational inefficiency.

CREDIT CREATION: This leads to credit creation without any kind of Regulation and logic, asset
Reconstruction Company convert the loans into cash which facilitate constant up gradation of credit
with the banks.

BAD LOANS: ENCOURAGES possibility of fraud by the bank staff themselves, it is for this
purpose the organisation asset reconstruction company’s permissions were delayed.

CLEANED BALANCE SHEET: Asset liability management is quite a common functionality

performed by the banks, these ARC will ensure that the balance sheet of banks is cleaned, which may
become difficult for regulator's to find out the position of the bank in terms of their non-operating
assets.

SHARE MARKET TURMOIL: This may lead to share market turmoil and the values of the banks
are completed which may lead to unnecessary demand in market.

Securitisation

Securitisation is a process of converting the underlying asset after packaging and pooling it which are
homogenous in nature into tradable securities with an intention to convert to liquid cash.

Process of Securitisation

Steps Content
1 The borrower who is the customer of the bank after to the bank for a loan.
2 He will have an underlying asset which he will pledge or mortgage to the bank.
3 Loan will be sanctioned by the bank and the process of borrowing will end.
4 The bank will convert the complete mortgage security into pool of assets.
5 Contact special purpose entities who are the specialised organisations in purchasing
these pooled securities.
6 Special purpose entities will contact the credit rating Agencies and give details about
the assets that are pooled.
7 Credit rating agencies will provide the ratings based on which the securities will be
created and sold in the market.
8 Securities with grading will be sold at low rate of interest and vice-versa.

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 9 This insures reconversion of cash buy the assets that are pledged or mortgaged.
10 Special purpose entities will charge commission for the service rendered and remit the
balance amount to the banks to continue operations.

Uses of Securitisation

Cash flow: Securitization provides cash flow into the system of the economy and helps the wheel of
the economy to turn on a positive flow of cash.

Safe mortgage: It provides safe mode cage as the securities that are pledged with the bank is rated by
the credit agencies.

Credit rated: Credit rating is 10 which will ensure the proper fixation of interest on the converted
debts.

Safe: It is safe for the public to invest in these debts as it is fulfilling the nomenclature of being one of
the safest Investments.

Conduit between Surplus to Deficit: The complete process of securitization is financial

intermediaries that are created to collect money from the surplus spending units and lend the same to
the deficit spending units.

Sale and Lease Back

Process of Sale and Lease Back

Steps Content
1 The corporate organisation which is registered can enter into a sale and leaseback
agreement.
2 Corporate organisation holding large chunk of similar asset will proceed with the
agreement.
3 Corporate sells assets to those Agencies which are not involved in the similar kind of
business that is carried by them.
4 They realise money in the form of cash and convert their illiquid asset into liquid asset.
5 The effect is now reused by corporate in the form of lease.
6 For the purpose of utilisation of the Asset the corporate will pay annual rent.

Uses of Sale and Lease Back

LIQUID CASH: Corporate holding large assets can convert their assets into liquid cash
without disturbing their operational efficiency.

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 DEFERRED PAYMENTS: It facilitates deferred payments by ensuring annual rent fixation
even with utilisation of assets.

TITLE DEEDS OF ASSETS: The title deeds of the assets are with the lease organisation
which helps the corporates to derecognise the Asset.

UTILISATION OF RESOURCES: This helps in prominent utilisation of resources and

ensuring the working capital needs are met without any kind of additional borrowings.

SPECIALISED PROCUREMENT THROUGH LEASE: It's specialised procurement

through an agreement which ensures that the leased assets are put in to perfect utility.

Problems of Sale and Lease Back

SERVICE ORIENTATION: It is only a service oriented organisations which are going to

not facilitate creation of any new assets in the organisations.

NO ECONOMIC GROWTH: Since it is a tool to exchange the existing asset from

ownership to lease the concept of economic growth is not entertained as the demand for a new
product is not created.

TOOL TO CONVERT TO LIQUID ASSET: It is at toll to convert the liquid asset into
liquid asset which leads to lethargy city in certain management decision.

Financial Restructuring

Financial restructuring is a mechanism that is developed by the company to restructure the

operations with regard to the long term funds that is raised for the operations.

Financial restructuring are classified into Equity Restructuring and Debt Restructuring.

Equity restructuring is done where by the companies will consolidate shares with an
intention to convert the small face value share into a large face value share. It can also be
done through the process of buying back of shares where by the organisation wants to reduce
the number of shareholders involved in management decisions.

Debt restructuring is a process followed by the company to reduce the interest of

applications that are to be met by them. It is done by replacing the existing debentures with
new debentures or redeem the existing debentures by raising new debentures.

Relevance of Financial Restructuring

Over capitalization: Overcapitalization is a situation whereby the company will have more
money than the necessary capital, this leads to unnecessary procurement of assets which
remains idle over a period of time.

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 Change debt equity mix: Financial restructuring is done by the organisations to change the
debt equity mix and migrate from traditional financing to modern financing

Write-off unrecognized expenditure: Restructuring is done with an intention to write of

certain unrecognised expenditures which are pending in the balance sheet for a period of time.

Revaluation of assets: Revaluation of assets based on certain values will either in plate or
reduced the value of the balance sheet which necessitates the financial restructuring by the
organisations.

Rising of new finance: Today's the new finance company has to restructure their capital base,
attracting the fresh investors either in the form of debt or equity necessitates financial
restructuring.

Increasing the management stakes: Management does financial restructuring to increase

their Stake and reduce the participation of outsiders in decision making.

Capital Structure

Capital structure refers to the combination of borrowed funds and owned funds that are
employed in the organisation. It is the long term sources of funds that are employed to ensure
that the Asset liability management is taken care on a positive note in the company.

Optimum capital structure

Optimum capital structure is the best capital structure that can be obtained with the proper
debt-equity mix in prevailing countries like India. The optimum capital structure can be
decided by analysing the leverages to study the impact of interest portion and tax portion on
overall earnings of the organisation.

Designing Capital Structure

It is a process to ensure the higher wealth maximization to the shareholders measured in terms
of earnings per share, when an organisation has obtained or contracts it will enjoy more
billings through which it will enjoy more profits which ensures that they pay interest on time
to the debt capital and obtain the tax benefit. In case if the organisation with more business
doesn't raise money throughout it capital they waste the benefit of tax that is provided by the
Government so, the right mix of text and equity as to be undertaken in the structure.

Redesigning capital structure

Optimum capital structure equation in the company sometimes changes when the business
becomes low, the sale value decreases followed with less liquid funds and the payment of
interest at the time becomes a turn on the part of the organisation which forces them to switch
over to equity from the mode of debt, this creates a situation where they have to compromise
with lower earnings per share.

Restructuring of Loss Making Company

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 ALTERATION IN SHARE CAPITAL: According to the Companies Act 2013, a limited
company can alter its share capital, if so authorized by its Articles, by passing an ordinary
resolution in the general meeting and duly confirmed by the Tribunal. The provisions of the
relevant sections of Companies Act will be applicable. Alteration of share capital can be made
in the following form:

 Increase in share capital.

 Consolidation of shares into shares of a larger amount.
 Sub-division of shares.
 Conversion of fully paid shares into Inventories and reconversion.
 Cancellation of unissued shares.

Such alteration must be notified and a copy of the resolution should be filed with the
Registrar of Companies within 30 days after date of passing of such resolution.

VARIATION IN SHAREHOLDERS RIGHT: As per the Companies Act, 2013 provides

that when a company has issued different classes of shares with different rights or privileges
attached to such shares, for example; rights as to dividend, voting rights etc., any of such right
may be changed in any manner. The provisions will be applicable as per the Companies Act
2013.

REDUCTION IN SHARE CAPITAL: Reduction of Capital means a reduction of a

company's share capital in accordance with the provisions of the Company Act, 2013, which
states that "a company limited by shares or limited by guarantee and having a share capital
may be with special resolution, reduce the share capital in any manner, share capital may
subject to the confirmation by the Tribunal on an application of the company.

COMPROMISE ADJUSTMENTS: A scheme of compromise and arrangement is an

agreement between a company and its members and outsider liabilities when the company
faces financial problems. Such an arrangement therefore also involves sacrifices by
shareholders, or creditors or debenture holders or by all of them.

SURRENDER OF SHARES: Under this method, shares are divided into shares of smaller
denominations and then the shareholders are made to surrender their shares to the company.
These shares are then allotted to debenture holders and creditors so that their liabilities are
reduced. The unutilized surrendered shares are then cancelled by transferring them to
Reconstruction Account.

Requirements for Restructuring

Authorization by Articles of Association: The Company must be authorized by its articles
of association to resort for capital reduction. Articles of association contain all the details
regarding the internal affairs of the company and mention the clause containing manner of
reduction of capital.

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 Passing of Special Resolution: The Company must pass the special resolution before
resorting to capital reduction. The special resolution can be passed only if the majority (3/4th)
of the stakeholders are assenting to the internal reconstruction. This special resolution must be
get signed by the tribunal and deposited to the registrar appointed under the Companies Act,
2013.

Permission of Tribunal: The Company must get the due permission of the court or tribunal
before starting the process of the capital reduction. The tribunal grants permission only it feels
satisfied with the point that the company is going fair and there is positive consent of every
stakeholder.

Payment of Borrowings: As per Section 66 of the Companies Act, 2013, the company has to
repay all the amounts it gets deposited and also the interest due thereon before going for
capital reduction.

Consent of Creditors: The written consent of the creditors is required for the company which
is going for capital reduction. The court requires the company to secure the interest of the
dissenting creditors. The company gets the permission. of the court after the court thinks fit
that reduction of capital will not harm the interest of the creditors.

Public Notice: The Company has to make a public notice as per the directions of the tribunal
stating that the company is resorting to capital reduction. Also, the company has to state the
valid reasons for the same.

Restructuring In Case Of Changes In Law

The corporate organisations are exposed to various laws which are operational and to be
complied with based on the deadlines that is set. Any small modifications in the law which is
having an impact on the working of the corporates will require restructuring and emergence
of use trial of restructuring as and when required, latest briefly find out what are the various
laws that are impacting and the possible restructuring that may emerge out of this.

Competition Act: Under the competition act the Government of India takes the responsibility
of fixing the ceiling limit on number of competitors for doing the similar business in the
country at National level to be implemented strictly even at the state level. This creates the
opportunities for companies to look into mergers strategic alliances and other possible ways
of ensuring that they operate under the same banner to avoid competition

Consumer Protection Law: Consumer Protection Act which was enacted to ensure that the
goods are delivered and maintains the required standards which is promised by the seller at
the time of sale. This act opens up the requirement on the part of the corporates to have a
separate department Customer Relationship Management and system designing has to be
altered to meet the requirements of CRM.

Company Act: Companies Act will keep updating itself with various beans which entitle the
company to make changes in their operations on a regular basis; just list of the few the
modifications that company had to undergo with the changes in law from 1956 to 2013 is
inevitable.

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 SEBI: Securities exchange Board of India formulated with an intention of protecting the
investors interest and ensuring smooth operations of secondary markets, the increase in the
Complaints and necessary sharing of data on a regular basis has necessitated restructuring in
creation of a new community called internal compliance committee.

Labour Law: Labour Law enactment and the social security protections to safeguard the
interests of the employees in the organisation has given birth to the various laws, this
mistakes separate operational wing for payroll management and payroll compliance.

With the above changes in the law the companies have to restructure themselves certain
modifications will increase their burden in terms of cost and certain modifications will
decrease it in terms of cost the company has two other variable or without any kind of
compromise as it is the Complaints and their reputation that is at stake.

Buyback of shares
Buyback of shares is a process of permitted and other corporate act to repurchase the issue shares
from the original shareholders to exercise better decision making control by the promoters.

Process of Buyback of shares

Shares issued Company issue shares inviting public to subscribe and become the
member.
Purchased by shareholder Shareholders subscribe the share and become the member by paying
the relevant money.
Claim ownership Once the shares are allotted shareholders claim ownership of the
company.
Company purchases back Once the company is table it decides to repurchase the shares from
from shareholders the holders.

To prevent outside It is done with an intention to reduce the outside participation in

participation in management.
management

Guidelines of Buyback of Shares

AUTHORISED BY ARTICLES OF ASSOCIATION: Buyback of shares has to be authorized by

the Articles of Association of the company. If not, alteration of articles has to be them and then buy
back has to be executed.

SPECIAL RESOLUTION: Buy back of shares should be attested with the special resolution by
calling an extraordinary General Meeting.

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SHOULD BE LESS THAN 25% OF FREE RESERVES AND PAID UP CAPITAL: As per the
guidelines the buyback of shares cannot be in excess of 25% of the paid up value of shares and free
reserves as per the date of buyback.

CANNOT BUY BACK 25% OF NUMBER OF SHARES ISSUED: Clause further is extended to
ensure that 25% or less of the total number of shares issued can only be Re purchased by the
company.

DEBT EQUITY CANOT BE MORE THAN 2:1 AFETR BUY BACK: Debt equity mix cannot
be in excess of 2:1 after the buyback in the sense that meeting this requirement the organisation is
expected to plan their buy back.

ALL SHARES MUST BE FULLY PAID: If at all buyback has to be exercised shares have to be
fully paid up partly paid up shares cannot be repurchased.

SECURUTIES PREMIUM IS PART OF FREE RESERVES: Securities premium which is a part

of buyback of shares is considered as a part of free reserves for the purpose of buyback.

BUY BACK CAN BE FROM FRESH ISSUE OR RESERVES: Buyback of shares can be made
from fresh issue of shares or accumulated reserves, in case if accumulated reserves are utilised the
amount equivalent has to be transferred to refresh account called capital redemption reserve account
and later on this balance can be used only for the purpose of issuing bonus shares to the existing
equity shareholders.

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