Corporate Restructuring in India

In an asset sale, the buyer has the advantage of acquiring a specific asset. Hence through this process, the buyer can cherry-pick the assets of a company. capital restructuring is defined as altering the of a firm One of the advantages of an asset sale is the buyer can leave the liabilities with the seller and only purchase the important assets of the target company.

capital restructuring is defined as altering the of a firm

The failing company tries to reach an agreement with its creditors that will permit it to lengthen the time for meeting its obligations. Appropriate discount rate at which to capitalize the earning may be difficult to determine. Uncertainty as to estimating the price the company’s assts will bring at auction. Thus when a firm faces technical insolvency its assets are still greater than the liabilities but the firm is confronted with liquidity crisis. In Altman’s initial study of 33 bankrupt companies, Z-scores for 95 % of these companies pointed to trouble or imminent bankruptcy. The Z-score was developed from an analysis of 33 – Bankrupt manufacturing companies with average assets of $6.4 million, and, as controls, another 33 companies with assets between $1 million and $25 million.

Capital Structure

Other industries, like banking and insurance, use huge amounts of leverage and their business models require large amounts of debt. Economic value added – It is the measure of a Company’s financial performance. It represents the excess of operating profits of the Company over and above its Cost of Capital. The next stage is data collection which will include sources such as annual report of Companies before and after restructuring, stock market information and other published data.

capital restructuring is defined as altering the of a firm

In fact the appropriate course of action depends on whether the business failure is permanent or temporary. Thus if the failure is temporary the firm may have to be liquidated and if the failure is permanent the firm may have to take steps to the speed the company’s return to business. Research shows that as a company enters the final stage prior to failure – a pattern may develop in terms of – changing financial ratios which prove to be useful indicators of an impending disaster. Consequent upon the raid of DCM Limited and Escorts Limited launched by Swaraj Paul, the role of the financial institutions became quite important. In fact, Swaraj Paul’s bids were a forerunner and constituted a ‘watershed’ in the corporate history of India. Financially strong entrepreneurs made their presence felt as industrialists – Ram Prasad Goenka, M.R.Chabria, Sudarshan Birla, Srichand Hinduja, Vijay Mallya and Dhirubhai Ambani and were instrumental in corporate restructuring.

Additional capital structure resources

The company can even perform restructuring which will help in the matter of reduction of wastage. In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Corporate restructuring is the process of redesigning one or more aspects of a company. Here are some examples of why corporate restructuring may take place and what it can mean for the company. Restructuring can happen following insolvency, continue changing markets, or upon approving further structural improvements such as merging with another enterprise.

The absence of strict regulations about the size and volume of business encouraged the enterprises to opt for mergers and amalgamations so as to produce on a massive scale, reduce costs of production, make prices internationally competitive etc. In such a situation, corporates which are capable of restructuring can contribute towards economic revival and growth. Despite the sluggish economic scenario in India, merger and amalgamation deals have been on the increase.

The screenshot below shows how two companies are combined and recapitalized to produce an entirely new balance sheet. In the year 2000, Bajaj Auto announced buyback of shares of over Rs. 720 crores at a tender price of Rs 400, the prevailing market price at that time was only Rs 376 per share and represented a premium more than 6%. The core purpose of the buyback as stated by the management was to provide a good exit to investors looking to do, while at the same time protecting the interest of the existing shareholders. However, the post buyback share price of the Company was Rs. 360, which was even lower than the pre-buyback price indicating shareholder wealth erosion and a negative overall return. Recognizing the failure of its expansion, the Company went into a debt restructuring activity in Feb 2001.

Restructuring costs can add up quickly for things such as reducing or eliminating product or service lines, canceling contracts, eliminating divisions, writing off assets, closing facilities, and relocating employees. Alexandra Twin has 15+ years of experience as an editor and writer, covering financial news for public and private companies. The Standard also prescribes certain disclosures to be made in the first financial statements prepared following the amalgamation.

capital restructuring is defined as altering the of a firm

In order to optimize the structure, a firm can issue either more debt or equity. The new capital that’s acquired may be used to invest in new assets or may be used to repurchase debt/equity that’s currently outstanding, as a form of recapitalization. Management’s target to materialize positive effects of debt restructuring over a short to medium term period and hence a three to four-year period for the analysis is considered reasonable. The whole research can be divided into four major stages namely Background Studies, Data Collection, Analysis and Conclusion. Background studies include literature survey relating to capital restructuring in in general, major forms of restructuring and studies relating to measuring the success of capital restructuring.

Debt – Restructuring Case Analysis

This requires in the first instance that they reorient their internal organization, changing production layout, introducing new methods of quality assurance and instituting processes to ensure continuous improvement. For three decades after world war two most economies around the world witnessed historically unparalleled progress. However after the early 1970s growth in most of industrialized economies began to slow down, affecting much of the developing world particularly adversely during the 1980’s and 1990’s. There were a variety of causes of this change in the trajectory of growth some of a macro economic nature and others rooted in the structure of corporate organization and in inter-firm linkages.

D) Cash Merger- A cash merger is a process in which one of the companies acquires the other company for a specific amount of cash. Restructuring can also be done by reducing or waiving off the dues that the shareholders need to pay. Another important aspect of the bankruptcy procedures involves what to do with the failing firm. Just as in case of informal alternatives a decision has to be made about whether a firm’s value as a going concern is greater than its liquidation value. Generally if this is so a suitable plan of reorganization can be formulated and the firm is reorganized otherwise it is liquidated. A firm that consistently reports losses at operational level would experience decline in market share and eventual closure.

  • ForeclosureForeclosure refers to the legal action taken by the lender when the borrower fails to repay the amount due against the mortgage loan.
  • Thus, the equity owners are playing a high-risk game and the principle of leverage being a double-edged weapon becomes evident.
  • In many cases firms have resorted to debt for equity swaps to prevent hostile takeovers.
  • Carve-outs however if not handled well may result in to conflict between the parent and subsidiary, as the subsidiary now also has responsibility towards its public shareholders.
  • The endeavour may not be making sufficient benefit required to take care of the capital expenses of the organization and may cause financial misfortunes.
  • Crossings as an independent advisory has gained a significant role in the restructuring of companies in cases of financial distress.

Reduces both its debt and its equity while maintaining a constant debt-equity ratio. Increases its debt-equity ratio while maintaining a constant debt-to-asset ratio. Most of the scandals surfacing these days point to the gaps and voids in fair and ethical corporate governance. Structuring/ re-structuring strengths apart, the need of the hour , in my view, is in a package of good governance, ethics in business and concern for the soceity wherein the corporates operate and get their bread and butter.. Thanks Mr R Kumar and TAXGURU for this crisp and comprehensive article ,touching upon the theory and practice of corporate governance. If a voluntary remedy such as an extension or composition is not workable a company can declare or be forced by its creditors into bankruptcy.

Share Buy Back Case Analysis

In many cases firms have resorted to debt for equity swaps to prevent hostile takeovers. However, the firm should study the effects of higher leverage before going into such a swap. Wastage of resources in a business can affect it adversely but if taken in stride the business can make it into an opportunity. Wastage can result in the downfall of a company and so it is very important to check that there is less or no wastage. The management needs to conduct periodic checks of all its processes and assets which will help reduce the wastage of resources.

Here, the corporate substance may modify its value design, obligation adjusting plan, the value property, and cross-holding design. This is done to support the market and for the benefit of the organization. Is viewed as critical to kill the entire monetary emergency and upgrade the organization’s presentation. The administration of the concerned corporate element confronting the monetary crunches employs a budgetary and lawful master for warning and help with the exchange and the exchange bargains. As a rule, the concerned element may monitor obligation financing, activities decrease, and any other area of the organization to intrigued speculators. Is to move made by the corporate element to alter fundamentally either its capital structure or its tasks.

How long does the restructuring process take?

After employees adjust to the new environment, the company can be in a better position for achieving its goals through greater efficiency in production; however, not all corporate restructurings end well. Sometimes, a company may need to admit defeat and begin selling or liquidating assets to pay off its creditors before permanently closing. Restructuring is an action taken by a company to significantly modify the financial and operational aspects of the company, usually when the business is facing financial pressures. The comprehensive IFI training course will equip you with all the fundamental skills and competencies required for a successful career performing capital restructuring of corporations. Following the IFI syllabus, you will master financial accounting and learn to perform valuations and build financial models.