Corporate restructuring as the name suggests is changing of aspects of a corporation, which may include changes relating to structural, managerial and operational functions within that corporation. This “corporate restructuring” may take place in two ways, either voluntary or involuntary. This change is done for altering the capital structure, for addressing the problems arising from the company, like financial distress, and for rejuvenate/reviving the several units in the corporation.
This paper uses doctrinal form of research on the various secondary data available online and in articles, collected and analysed in respect of different objectives of the proposed study.
It throws light on the types of corporate restructuring and the factors leading to such change. It also enshrines on the difference between corporate restructuring and mergers and acquisitions.
It addresses the several issues related to such corporate restructuring, and thereby concludes by pointing out the current position of India in this area/domain.
KEYWORDS: Corporate restructuring, reviving, rejuvenating, mergers and acquisitions
INTRODUCTION
Corporate restructuring[1] is a method used by the businesses to alter their operations due to problems arising from financial distress. This may not only include changes relating to the current business model but also altering the company’s mission statement. It may include cutting down on staff and unnecessary costs, and thereby helping in getting the company back on track.
The ultimate aim of corporate restructuring is to revive the company through structural changes and to reduce the losses for shareholders and creditors.
The two types of restructuring are voluntary and involuntary. While the former is initiated by the company itself, and involves financial distress, the latter is usually ordered by the court under bankruptcy laws. The Ministry of Corporate affairs under the Indian government has defined it as a tool for reviving or resurrecting the dead units, so as to rejuvenate all the units under the organization.
Corporate restructuring is divided into two types, financial and organisational restructuring.
- Financial restructuring: This is a kind of restructuring which mainly occurs because of poor financial conditions and sudden downfall in the general deals. This may require alteration in the corporate design, functions, commitment plan and property valuation, which is done for supporting the productivity of the organization.
- Organisational restructuring: This refers to adjustments in the organizational structure, which may include alteration in the working positions and reporting authorities. Also upgradation of the staff member for fulfilling the business obligations and reducing the expenses.
There are various reasons for corporate restructuring, but some of the most important reasons are lack of profits, change in strategy and cash flow requirements.
- Lack of profits: This is a situation where the profits earned by a particular venture may not be sufficient enough to take care of the numerous expenses of the organization resulting in financial distress. The increasing costs and poor performance of the venture may decrease productivity, and hence profits.
- Change in strategy: This refers to the alteration in policies not at par with the core system of the organization. Thus, the branches or divisions which do not fit the organization’s mission statement are to restructured to meet the desired vision.
- Cash flow requirements: Eliminating useless ventures can increase the cash flow within the organization.
Reverse synergy[2] is another such reason for corporate restructuring.
There are a number of qualities which corporate restructuring possesses. Some of the most important ones are as follows:
- Checking the balance sheet regularly, for changing the organizational structure according to its needs
- Removing unfruitful staff and assets from the organization
- Reorganizing the various projects and arrangements
- Reducing cost expenses for certain projects or assignments
Some of the major types of corporate restructuring strategies are mergers, demergers, reverse mergers, disinvestments, acquisitions, joint ventures and strategic alliances.
- Merger: When two or more business organizations are joined to form a single entity then it is termed as merger, which is mainly done by trading of protections between the securing and objective organization.
- Demerger: This is a method by which two or more business organizations are consolidated to gain advantage arising out of such activity.
- Reverse merger: This is a method in which the unlisted public organizations have an opportunity to turn into a listed public organisation without any sort of initial public offering (IPO).
- Disinvestment: This is when an organization sells out its assets or withdraws to make an investment.
- Joint venture: When two or more organizations are combined into a single one for sharing of both profits and risks then it is known as a joint venture. The costs incurred and profits earned are shared in proportions by the respective organizations.
- Acquisition: This is a procedure where the procuring organization takes over liability for the procured organization (private acquisition[3]). Buying back of assets or shares may also be termed as acquisition.
- Strategic alliance: When two or more organizations, with their mutual consent, form a strategy to achieve certain goals, then it is termed as a strategic alliance[4].
LAWS GOVERNING CORPORATE RESTRUCTURING
There are certain laws or acts governing such corporate restructuring like:
- Companies Act 1956
- Companies Act 2013 (For example: Section 233 of Companies Act)
- Insolvency and Bankruptcy Code 2016 (IBC)[5]
- Securities and Exchange Board of India Act (SEBI) (For example: Reverse merger)
RESTRUCTURING PROCEDURE
The procedure for restructuring[6] of an organization has been divided into five steps, which are to be followed:
- Determination
- Identification
- Implementation
- Post implementation analysis
- Evaluation
CONCLUSION
India is a developing country and the financial restructuring sector has improved a lot over the years. But when it comes to debt restructuring, it is still being developed. And although today India’s economy is not as strong as it https://solutionemconsequendam.com/2022/07/20/merger-and-demerger/should be, but it is striving each day to overcome the issues.
In the light of such issues, India needs to develop its own legal system for corporate restructuring, since many legal systems have been borrowed from other countries.
REFERENCES
- Corporate Restructuring – Meaning, Types, and Characteristics Updated on: Jul 28, 2021 – 07:01:21 PM (https://cleartax.in/s/corporate-restructuring)
· Corporate Restructuring: Types and Importance by Taxmann Last Updated on 10 May, 2022
https://solutionemconsequendam.com/2022/07/20/merger-and-demerger/ https://solutionemconsequendam.com/2022/07/20/merger-and-demerger/
[1] Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operations significantly. Generally, corporate restructuring happens when a corporate entity is experiencing significant problems and is in financial jeopardy.
[2] REVERSE SYNERGY –This idea is as opposed to the standards of cooperative energy, where the worth of a combined unit is more than the worth of individual units by and large. According to invert cooperative energy, the worth of a singular unit might be more than the blended unit. This is one of the normal explanations behind stripping the resources of the organization. The concerned element might conclude that stripping a division to an outsider can bring more worth instead of claiming it.
[3] Private Acquisitions: A private acquisition is a process when a company acquires another company. This process is also known as a takeover. A takeover process can be either a friendly takeover or a hostile takeover. In this transaction, there are three parties. The parties are the buyer, seller, and the target company. Private acquisitions normally occur due to increased benefits such as synergies, economies of scale, and economies of scope.
[4] Strategic Partnership/Alliance: Strategic Partnership is also known as an alliance. In a strategic partnership, the companies partner to carry out business. However, a strategic partnership is effectuated through one or more contracts. The partnership is binding on the parties. However, a strategic partnership does not have the effect of a normal partnership or a registered company.
[5] Insolvency and Bankruptcy Code, 2016- When speaking about debt restructuring and financial restructuring, the IBC code deals with the aspects of resolution and liquidation.
[6] Restructuring an organization is a complex task. The form of restructuring would depend on the main aims of the organization. If the company is paying off a debt, then a different restructuring process will be used. If a company getting merged with another organisation, then the criteria would be different. The following steps have to be followed in a restructuring process: