You are on page 1of 22

Financial & organizational

restructuring
• Financial restructuring involves changes in the
capital structure and capital mix of the company to
minimize its cost of capital.
• It deals with infusion of financial resources to
facilitate mergers, acquisitions, joint ventures,
strategic alliances, LBOs, and stock buyback.
• All these initiatives depend on availability of free
cash flows, takeover threats faced by the company,
and concentration of equity ownership.
• Companies opt for financial restructuring for the
following reasons:
• Generate cash for exploiting available investment
opportunities
• Ensure effective use of available financial resources
• Change the existing financial structure to reduce
cost of capital
• Leverage the firm
• Prevent attempts at hostile take over.
• (JV with rivals of the bidder, share repurchase,
increase leverage, buy assets, Use excess cash, pay
or declare higher dividends, entering into
international partnerships)
• Financial restructuring is the reorganization of
the financial assets and liabilities of a corporation in
order to create the most beneficial financial
environment for the company.
• The process of financial restructuring is often
associated with corporate restructuring, in that
restructuring the general function and composition
of the company is likely to impact the
financial health of the corporation.
• When completed, this reordering of corporate
assets and liabilities can help the company to
remain competitive, even in a depressed economy.
• Every business goes through a phase
of financial restructuring at one time or
another.
• In some cases, the process
of restructuring takes place as a means of
allocating resources for a new marketing
campaign or the launch of a new product line.
• When this happens, the restructure is often
viewed as a sign that the company is
financially stable and has set goals for future
growth and expansion.
• The process of financial restructuring may be
undertaken as a means of eliminating waste from
the operations of the company.
• For example, the restructuring effort may find that
two divisions or departments of the company
perform related functions and in some cases
duplicate efforts. Rather than continue to
use financial resources to fund the operation of
both departments, their efforts are combined. This
helps to reduce costs without impairing the ability
of the company to still achieve the same ends in a
timely manner.

• In some cases, financial restructuring is a strategy
that must take place in order for the company to
continue operations. This is especially true when
sales decline and the corporation no longer
generates a consistent net profit.
• A financial restructuring may include a review of the
costs associated with each sector of the business
and identify ways to cut costs and increase the net
profit. The restructuring may also call for the
reduction or suspension of production facilities that
are obsolete or currently produce goods that are
not selling well and are scheduled to be phased out.
• All businesses must pay attention to matters of
finance in order to remain operational and to also
hopefully grow over time. From this
perspective, financial restructuring can be seen as a
tool that can ensure the corporation is making the
most efficient use of available resources and thus
generating the highest amount of net profit possible
within the current set economic environment.
• Financial Restructuring
a.Change in Debt Structure
b.Change in Capital Base
• c.Change in Group Structure
• Change in Capital Base .

1. Buy Back Shares - The main reasons for following


this route are return of surplus cash to the
shareholders, increasing underlying share value,
supporting share prices during temporary
weakness, and preventing or blocking hostile
takeovers.
• Buy back is also used as a financial strategy by
corporates for streamlining their capital structure,
as well as for reducing the number of shareholders
to reduce the cost for servicing them, etc.
• 2. Reduction in Capital - This occurs when a
borrower makes a lump sum payment towards the
capital owed on a mortgage. There are two
circumstances in which this might take place. These
are:
• I. Where future operations of the company are
expected to be on a reduced scale so that a smaller
level of finance will be required; and
• ii. Where it has to be accepted that past revenue
losses can never be made good and that they
amount to a permanent loss of capital
• Change in Group Structure .

1. Merger and De-merger within the Group Companies -


• i.
• Merger - A legal action resulting in the unification of two or
more legal entities. Such an event can be advantageous
because of Economies of Scale and also give a competitive
edge by synergies derived from the unification
ii.
• De-merger - The splitting of a company often originally formed
as a result of a merger, into two or more separate companies.
It gives the existing shareholders shares in both companies
2.
• Amalgamation - The combination of two or more commercial
companies into one unit
• Organizational Restructuring
• Organizational restructuring has become a very common practice
amongst the firms in order to match the growing competition of
the market.
• This makes the firms to change the organizational structure of the
company for the betterment of the business.
• Some of the prime reasons for organizational restructuring are
as follows:

• Changing nature of the markets


• The continuous innovations in technology, product, work
processes, materials, organizational culture and structure
• Various actions of work force values, global competitors,
demands and diversity
• Ethical constraints and regulations
• Individual transition and development of the business
• The most common features of organizational
restructures are:
Regrouping of business
• This involves the firms regrouping their existing
business into fewer business units. The
management then handles theses lesser number of
compact and strategic business units in an easier
and better way that ensures the business to earn
profit.
• Downsizing
• Often companies may need to retrench the surplus
manpower of the business. For that purpose offering
voluntary retirement schemes (VRS) is the most useful tool
taken by the firms for downsizing the business's workforce.
• Decentralization
• In order to enhance the organizational response to the
developments in dynamic environment, the firms go for
decentralization. This involves reducing the layers of
management in the business so that the people at lower
hierarchy are benefited.
• Outsourcing
• Outsourcing is another measure of organizational
restructuring that reduces the manpower and transfers the
fixed costs of the company to variable costs.
• Enterprise Resource Planning
• Enterprise resource planning is an integrated management
information system that is enterprise-wide and computer-base. This
management system enables the business management to
understand any situation in faster and better way. The advancement
of the information technology enhances the planning of a business.
• Business Process Engineering
• It involves redesigning the business process so that the business
maximizes the operation and value added content of the business
while minimizing everything else.
• Total Quality Management
• The businesses now have started to realize that an outside
certification for the quality of the product helps to get a good will in
the market. Quality improvement is also necessary to improve the
customer service and reduce the cost of the business.
• The perspective of organizational restructuring may
be different for the employees. When a company
goes for the organizational restructuring, it often
leads to reducing the manpower and hence
meaning that people are losing their jobs. This may
decrease the morale of employee in a large manner.
Hence many firms provide strategies on career
transitioning and outplacement support to their
existing employees for an easy transition to their
next job.
Banks approve Air India's financial
restructuring plan
• A consortium of 19 banks, led by State Bank of India, has approved
the financial restructuring plan of Air India. The plan, which includes debt
restructuring of Rs 18,000 crore by the banks and a committed equity
infusion by the government, will require Cabinet approval in April 2012
• Of the Rs 22,000-crore high-cost working capital debt of the airline, banks
will restructure nearly Rs 18,000 crore — Rs 10,500 crore will be converted
into long-term debt with a repayment period of 10-15 years and the
remaining Rs 7,400 crore (approximately) will be repaid to banks through a
government-guaranteed bond issue.
• “The restructuring plan has been approved by the banks and we
hope Cabinet approval will come by the middle of April. That will help
reduce our interest outlay substantially in the first year, as we get a
moratorium on the loan for the first year,” said a senior Air India official, who
did not wish to be identified.
• The official said the amount of Rs 7,400 crore would have a moratorium of 12
months and the Rs 10,500 crore of six months. “We will be able to save around
Rs 1,000 crore immediately in the first year after the restructuring plan is
implemented,” he added. Air India has debt of over Rs 43,000 crore — Rs 22,000
crore short-term and Rs 21,000 crore long-term. It has an annual interest outlay
of Rs 2,700 crore. Of the Rs 2,700 crore, Rs 1,600 crore goes to service working
capital loans and the rest to service low-cost loans taken for aircraft acquisition.
• In the second stage of the financial restructuring plan, the government has to
infuse equity in the airline till 2020-21. A Group of Ministers (GoM), headed by
finance minister Pranab Mukherjee, had recommended an infusion of Rs 23,000
crore in the airline till 2020-21.
• As part Rs 4,000 crore for its dues. It has to clear dues of Rs 2,500 crore to oil
companies; Rs 1,200 crore is due to be paid to airport operators and Rs 580
crore in employees’ salaries.
• This is the second time that banks have approved a debt
restructuring plan for Air India. In the plan approved
earlier, banks had to convert Rs 10,500 crore of short-
term loans into long-term and convert Rs 7,400 crore
into equity shares. The banks later objected to converting
debt into equity in the carrier, as they were not sure
about the company’s revival and the finance ministry had
rejected any board-level representation for banks.
• Air India has accumulated losses of Rs 20,000 crore. It is
losing Rs 15 crore a day.
• Nov 2015:
• Air India, which has a total debt of around Rs 50, 000 crore, will be able to repay its entire
aircraft-related debt which amounts to Rs 19,000 crore by 2019. As result of the fund infused
by the government, the debt-to-equity ratio of Air India has been reduced to 2:1 from the
previous 10:1.
• “We are expecting to make an operational profit of around Rs 6 crore in the financial year
2015-16 and the management of the national carrier has taken a decision to induct 15 Airbus
A320 aircraft on lease to improve the domestic operations,” Venkat told FE on the sidelines of
the event.
• Air india is also expected to induct six more Dreamliners in the year financial year 2017-18.
The event was also attended by Go Air CEO Wolfgang Prock-Schauer and Airbus India MD
Srinivasan Dwarkanath.
• Go Air’s Prock-Schauer said the total passenger carried in 2015 is expected to be around 80
million, as against 70 million last year. “There are airports in places like Nashik, Pondicherry
and Surat and we plan to increase our operations in those routes. We should have a
predictable aviation policy and it should help everyone and promote growth,” added Prock-
Schauer, during his speech at the event.