Corporate Restructuring

C H A P T E R O B J E C T I V E S

On completion of this chapter, you will able to learn:

Meaning of Corporate Restructuring

Historical Background

Present Scenario – National and Global

Need & Scope of Corporate restructuring

Corporate Restructuring tools

Regulatory Framework for Corporate Restructuring- a Bird’s eye view

Important aspects in Corporate Restructuring

Meaning and reason for Cross Border Mergers

Introduction

A business organization may grow its business either by internal expansion or by

external expansion. In the case of internal expansion, a firm grows gradually over

time in the normal course of the business, through acquisition of new assets,

replacement of the technologically obsolete equipments and the establishment of

new lines of products. It is otherwise called ‘Organic Growth’ of business and can

be through more deployment of men, money, materials and machines. But in

external expansion (i.e. inorganic growth), a firm acquires a running business

and grows overnight through corporate combinations. These combinations are in

the form of mergers, acquisitions, amalgamations and takeovers and have now

become important features of corporate restructuring. They have been playing an

important role in the external growth of a number of leading companies the world

over. They have become popular because of the enhanced competition, breaking

of trade barriers, free flow of capital across countries and globalization of

businesses.

In the wake of economic reforms, a restructuring wave is sweeping the corporate

world. Takeovers, mergers and acquisition activities continue to accelerate. From

banking to oil exploration, telecommunication to power generation,

petrochemicals to aviation, companies are coming together as never before. Not

only this new industries like e-commerce and biotechnology have been exploding

and old industries like steel etc. are being transformed. Corporate Restructuring

through acquisitions, mergers, amalgamations, arrangements and takeovers has

become integral to corporate strategy today. Indian industries have also started

Growth can be organic or inorganic:

A Company is said to be growing organically when it is increasing the turnover of its existing business.

Inorganic growth is the rate of growth of business by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions and takeovers and other restructuring Strategies.

restructuring their operations around their core business activities because of

their increasing exposure to competition both domestically and internationally.

Meaning and Definitions

The term ‘corporate restructuring’ is a wide and varied term. It has no legal

definition as the term has not been defined in any legal legislation. Hence,

neither it has clear and precise meaning nor can it be defined with precision.

Etymologically the term “Restructuring” means   ‘giving new structure or rebuild

or rearrange’. In this perspective, ‘Corporate Restructuring’ is defined as a

process of rearranging the organizational or business structure of the company

for increased efficiency and profitable growth. Simply stated,  Corporate

Restructuring is a comprehensive process by which a company can consolidate

or rearrange its organizational set up or business operations   and strengthen its

position  so as to achieve its short-term or/and long term objectives and establish

itself as a synergetic, dynamic, continuing as well as successful independent

corporate entity in the competitive environment.

In the words of Justice Dhananjaya Y Chandrachud “Corporate Restructuring is

the means that can be employed to meet challenges which confronts

businesses”.

Sander et al are of view that “Restructuring is an attempt to change the structure

of an institution in order to relax some or all of the short-run constraints. It is

concerned with changing structures in pursuit of a long run strategy”.

Crum and Goldberg define restructuring of a company as “a set of discrete

decisive measures taken in order to increase the competitiveness of the

enterprise and thereby to enhance its value”.

To conclude, it is a process undertaken by a business/corporate/any other such

entity whether proprietorship or partnership for the purpose of bringing about

changes for better and to make the business competitive.  

Historical Background

In earlier years, India was a highly regulated economy. Though Government

participation was overwhelming, the economy was controlled in a centralized way

by Government participation and intervention. In other words, economy was

closed as economic forces such as demand and supply were not allowed to have

a full-fledged liberty to rule the market. To set-up an industry various licenses

and registration under various enactments were required. The scope and mode

of corporate restructuring was, therefore, very limited due to restrictive

government policies and rigid regulatory framework. These restrictions remained

in vogue, practically, for over two decades. These, however, proved incompatible

with the economic system in keeping pace with the global economic

developments if the objective of faster economic growth were to be achieved.

The Government had to review its entire policy framework and under the

economic liberalization measures removed the above restrictions by omitting the

relevant sections and provisions.

Today, a restructuring wave is sweeping the corporate sector over the world,

taking within its fold both big and small entities, comprising old economy

businesses conglomerates and new economy companies and even the

Note: A Restructuring exercise is not undertaken only by business

enterprises which are run in the form of a company registered under the Companies Act, 1956.

The restructuring could be undertaken by any entity or business unit, whether it is run as a sole proprietorship or partnership or society or in any other form of organization.

infrastructure and service sector. Mergers, amalgamations, acquisitions,

consolidation and takeovers have become an integral part of

new economic paradigm. Conglomerates are being formed to combine

businesses and where synergies are not achieved, Demergers have become the

order of the day. With the increasing competition and the economy, heading

towards globalization, the corporate restructuring activities are expected to occur

at a much larger scale than at any time in the past, and are stated to pay a major

role in achieving the competitive edge for India in international market place.

The financial crisis of the late 1990s devastated emerging market economics and

presented considerable obstacles to achieve a sustainable recovery. The rises in

unemployment, sharp jumps in interest rates, double-digit decline in output and

plummeting exchange rates engendered considerable sufferings; enormous

shifts in the profitability of business activities and a massive overhang of

bankrupt corporations and bad loans on the balance sheets of banks.

Since the announcement of the New Economic policy in July 1991, the Indian

Corporate sector has witnessed several changes and new challenges in the

Indian economy. The tide of liberalizations, privatizations and globalization (LPG)

has been speeded around the globe. In order to keep pace with the global

rhythm of LPG, restructuring the corporate sector form multidimensional angles

has got due importance in the Indian economy. The major policy changes

introduced since July 1991 include:(a) abolition of industrial licensing; (b) lifting of

restrictions on the size of firms; (c) drastic reduction in the areas reserved for the

public sector; (d)disinvestments of Government equity in public sector

undertakings; (e) liberalization of foreign investment regulations; (f) liberalization

of import tariffs; (g) removal of all quantitative restrictions on imports; (h) abolition

of the office of the controller of Capital Issues and freedom to Companies to set

premium on their share issues; (i) freedom granted to the corporate sector to

raise capital from abroad; (j) reducing the central excise and customs duties and

(k) reducing income tax rates both for corporate and individual assesses.

Due to these policy changes corporate restructurings wave started in India from

1994. Of course, it was started by Suaraj Paul when he tried to take over

Escorts. The other major restructuring were that of Ashok Leyland by the

Hinduja’s Shaw Wallace, Dunlop own Falcon Tyres by the Chabbaria Group,

Ceat Tyres by the Goenkas and Consolidated Coffee by Tata Tea, RIL and RPL

merger, Tata Tea’s leveraged buyout of Tetley and restructuring of Dabur India

Ltd and so on.

While presenting the budget for the financial year 1999-2000, the then Finance

Minister of India stressed the need for corporate restructuring “with growing

liberalizations of the economy has come the need for corporate restructuring so

that companies can focus better on their core activities. The corporate sector has

been voicing the need for a flexible fiscal policy for regulating business

reorganizations. In response to this need, I propose a comprehensive set of

amendments in the Income Tax Act to make such business re-organizations fully

tax neutral”. Paragraph 87 of the same budget the Finance Minister focused de-

merger. De-merger wave started in India from 2000-01 for availing huge amount

of tax benefits, increasing corporate control and enhancing share holder’s value.

So share holders value creation is the utmost important in the present backdrop

of corporate restructuring.

The former Chairman and the CEO of Coca Cola, Mr. Roberto C. Goizueta,

made a lengthy statement in favor of value creation through corporate

restructuring which is reproduced below:

“At the Coca Cola Company, our publicly stated mission is to create value over

time for the owners of our business. In fact, in our society, that is the mission of

any business: to create value for its owners. We live in a democratic capitalist

society, and here, people create specific institutions to help meet specific needs.

Governments are created to help meet civic needs. Philanthropies are created to

help meet social needs and companies are created to help meet economic

needs. Business distributes the lifeblood that flows through economic system, not

only in the form of goods and services, but also in the form of taxes, salaries and

philanthropies. Creating value is a core principal on which our economic system

is based; it is the job we owe to those who have entrusted us with their assets.

We work for our shareowners. That is – literally – what they have put us in

business to do. Saying that we work for our share owners may sound simplistic-

but we frequently see companies that have forgotten the reason they exist. They

may even try in vain to be all things to all people and serve many masters in

many different ways. In any event, they miss their primary calling, which is to

stick to the business of creating value for their owners”.

So corporate restructuring is one of the means that can be employed to meet the

challenges which confront business and also enhanced value for share holders.