Corporate Restructuring: Meaning, Types, Reason and Strategies

What is Corporate Restructuring?

The process of rearranging a company’s management, finances, and activities to increase the business’s efficacy and efficiency is known as Corporate Restructuring. A company can cut expenses, improve productivity, and enhance the level of quality of its goods and services by making changes in this area. In addition, it can help a business in meeting the demands of its customers and investors more effectively. Company Restructuring may also result in the sale of underperforming or unprofitable company units. In cases, when a business is having financial difficulties and needs to restructure its debts with its creditors, corporate restructuring acts as a last resort to maintain the solvency of the business. The process involves selling off non-essential assets and restructuring the company’s debt to continue running the business. The concerned company can consider debt financing, operations downsizing, or selling a portion of the company to prospective investors.

Geeky Takeaways:

• Corporate Restructuring includes making significant changes in its financial or operational structure, which can ultimately lead to the effective functioning of the business.
• This is an important strategy that can be a lifeline for companies on the verge of insolvency. These restructuring methods aim to create synergy. This synergy effect makes the value of the combined firms greater than the sum of their individual values.
• This synergy effect leads to increased sales or reduced costs, which can lead to creating a competitive position in the market.
• The need for Corporate Restructuring arises from a shift in a company’s ownership structure.
• This shift in the ownership structure of the company can occur from a takeover, merger, unfavorable business conditions, buyouts, insolvency, and a lack of coordination between the divisions, etc.

Types of Corporate Restructuring

1. Financial Restructuring:

This restructuring occurs with the need to make changes in the company’s financial structure. It includes raising funds, issuing additional shares, or refinancing debt. It can also occur due to a decrease in overall sales due to the unfavorable economic environment. In this case, the corporate entity can change its cross-holding pattern, equity holdings, debt-servicing schedule, and equity pattern. It is done to sustain the market and maintain the profitability of the company. This can ultimately improve the financial health of the company.

2. Operational Restructuring:

This restructuring occurs with the need to make changes in the company’s operational structure. It includes installing new technologies, outsourcing non-core activities, or restructuring departments. The main aim of this type of restructuring is to expand a company’s scope of action and improve the performance of its employees. It provides service and operational improvements that can help companies get back on their feet. This can ultimately enhance the efficiency and effectiveness of the company.

3. Organizational Restructuring:

This restructuring occurs with the need to make changes in the company’s organizational structure. It includes decreasing the number of employees in the organization, making changes in the job positions, lowering the hierarchy level in the organisation structure, and altering the reporting relationship. The main aim of this type of restructuring is to reduce the cost and pay off any unpaid debt to carry on the business functioning in a certain way.

4. Strategic Restructuring:

This restructuring occurs with the need to make changes in the company’s overall strategy. It includes moving to new markets or leaving unprofitable ones. The main aim of this type of restructuring is to increase profitability by tapping into different markets and the long-term growth of the company.

Reasons for Corporate Restructuring

1. Lack of Profits: The main reason for the corporate restructuring is that the company is unable to make enough profits, which is required for the survival of the company. Sometimes, the management makes wrong decisions regarding the new product or new division, which leads to poor performance, or with the change in customer needs, there is a decline in the profit level, which can lead to restructuring.

2. Cash Flow Requirement: Generally, the sale of an unproductive project can result in a significant cash inflow for the company. If the company is facing difficulty in getting finance, it can dispose of its assets to raise money and reduce debt.

3. Changing Strategy: Sometimes, the struggling organisation tries to improve its performance by reducing divisions and subsidiaries that are inconsistent with the main strategy of the company. These divisions and subsidiaries can not strategically fit into the long-term vision of the company. Thus, the company must focus on the core functions and dispose of its assets to buyers.

4. Long-Term Growth: The restructuring helps the company achieve long-term success by positioning itself by expanding its product range, accessing new markets, or acquiring new technology.

5. Improves Financial Performance: Restructuring helps the company improve its financial performance by decreasing costs, improving revenue, or enhancing profitability.

Legal Requirements for Corporate Restructuring

Several laws control the operation of mergers, acquisitions, and downsizing of business, as these are crucial to the development and expansion of the business. These activities are governed by several statutes, regulations, rules, orders, and notifications, and they are implemented by several sectoral regulators, which include the Central Government, RBI, SEBI, CCI, RoC, etc. The requirements are as follows:

1. Corporate Restructuring under the Companies Act, 2013:

Under Sections 230-240 of the Companies Act, 2013 there are provisions regarding the compromise, arrangements, and amalgamations of businesses. These activities promote the growth of the company or help in utilizing the advantage of the economic synergy then. Section 232 includes the process to be followed by the business during merger or amalgamation. Section 233 provides the fast track mode to certain companies, including small companies, their holding companies, and subsidiary companies at the time of merger or amalgamation. Usually, the Central Government approves the fast-track method and imposes certain conditions if required. The company has to consider the process as per Sections 230-232 for mergers and acquisitions.

2. Corporate Restructuring under the Competition Act, 2002:

The Competition Act, 2002 provides about the economic aspects of mergers and combinations. This act establishes a commission to control the marketplace by protecting the economy from activities that could significantly affect competition. The Competition Act refers to mergers and acquisitions as a combination. Section 6 of the Act regulates combinations. This act states that notification of the proposed combination is to be submitted to the commission within 30 days after receiving the board of directors’ approval.

Section 29 authorises the Competition Commission of India to investigate the accuracy of the information disclosed to it under Section 6 and whether the proposed combination would negatively impact competition. If CCI (Competition Commission of India) has reasonable grounds to suspect that such a transaction will hurt competition, it can issue notice to the parties explaining why any investigation will not be conducted against them. After receiving the receipt of the reply, CCI can ask for the DG’s report within 7 days. The commission may recommend changes even after asking for public suggestions and objections if it determines that the proposed combination will hurt competition. Such a combination will only be approved if the parties agree to the modifications or if the CCI accepts the parties’ proposed amendments. In addition, a penalty under Section 43A of the act will be applied to the person, association of persons, enterprise, or association of enterprises for any failure to provide such notice or declaration.

3. Corporate Restructuring under the Insolvency and Bankruptcy Code, 2016:

The Insolvency and Bankruptcy Code, 2016 establishes a framework and procedures for creditors or corporate debtors that must be followed while resolving debts and reviving the company’s position. Under Chapter II of the act, the provisions related to the Corporate Insolvency Resolution Process (CIRP) are mentioned, and can be commenced by the financial creditors, operational creditors, or corporate debtors. In case, provisions of the Corporate Insolvency Resolution Process (CIRP) are not met, debtors will be settled, and the liquidator can realize and distribute assets.

4. Corporate Restructuring under the Income Tax Act, 1961:

The Income Tax Act, 1961 refers to mergers and acquisitions as “amalgamation,” and merging companies are referred to as Amalgamating Companies. In addition to meeting requirements under the Companies Act, 2013, an amalgamation must be confirmed under specific conditions to be considered tax-neutral.

In the following mentioned cases, the merger is considered an amalgamation under the Income Tax Act, 1961:

• All of the assets and liabilities of the amalgamating company are transferred to the amalgamated company.
• The shareholders of the amalgamating company hold at least 3/4th of the value of the shares and become the shareholders of the amalgamated company.

Section 47 of the Income Tax Act, 1961 provides an exemption from capital gains tax to an amalgamating company when the capital assets of the amalgamating company are transferred to the amalgamated company. When one foreign company merges with another foreign company that holds shares of an Indian company, the capital gain is exempted from taxation if it is not subject to foreign company provisions. However, the remaining 25% of the merging company’s shareholders must continue to hold shares in the amalgamated company. The expenses incurred by the amalgamating company for scientific research that is transferred to an Indian amalgamated company can be carried forward and deducted. If the amalgamated company sells such an asset, any price above cost will be taxed as capital gains, and the asset’s cost will be regarded as business income. For example, if an asset cost ₹15 lakh and is sold for ₹20 lakh, the difference, i.e., ₹5 lakh is taxable as a capital gain.

5. Corporate Restructuring under SEBI Regulations:

SEBI also provides provisions regarding the merger and acquisitions of the listed company. It includes:

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 to regulate the business takeovers;
• SEBI (Issuance of Capital and Disclosure Requirements) Regulations 2018 to regulate capital and disclosure requirements;
• SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 to regulate listing obligations and Disclosure Requirements.

Types of Corporate Restructuring Strategies

1. Mergers: It includes merging two or more business entities by the means of absorbing, merging, or forming a new company. The merger of two or more business entities, includes the exchange of securities between the target and the acquiring company.

2. Reverse Merger: This includes converting unlisted public companies into a listed public company without the use of an IPO (Initial Public Offer). In this strategy, private companies take over the public company (majority shareholding) by themselves, under their own identity.

3. Demerger: Under this, a single company is formed by the merger of two or more companies to benefit from the synergic effect.

4. Strategic Alliance: When two or more companies work independently to achieve their objectives and enter an agreement to collaborate, this is called a Strategic alliance.

5. Joint Venture: Under this strategy, two or more companies are combined to form an entity to carry out a financial act jointly.

Conclusion

There are various methods of Corporate Restructuring, such as mergers, acquisitions, and downsizing. These methods play an important role in the development and growth of Indian markets and promote the effective functioning of businesses. External restructuring occurs through mergers and acquisitions, whereas downsizing usually represents an internal restructuring strategy that includes letting go of ineffective people. These measures are implemented by a company based on a variety of factors which include the company’s profile, stage of development, life cycle, management, objects and motives, etc. The companies must work as per legal frameworks and obtain timely approvals in compliance with industry-specific regulations to optimise the benefits of corporate restructuring. Companies should always ask for professional assistance to make sure that they follow all regulations to avoid heavy penalties for any violations of the law.

Corporate Restructuring – FAQs

Is it true that Restructuring implies layoffs?

Usually, when a business is restructured,  some employees are laidoff. This is because restructurings involve downsizing, which includes closing certain groups, merging others, and generally aiming to reduce expenses and increase efficiency.

What are the different types of Corporate Restructuring?

There are different types of Corporate Restructuring which includes financial restructuring, operational restructuring, organizational restructuring and strategic restructuring.

What are the legal requirements for Corporate Restructuring?

Several laws control the operation of mergers, acquisitions, and downsizing of business, as these are crucial to the development and expansion of the business. These activities are governed by several statutes, regulations, rules, orders, and notifications, and they are implemented by several sectoral regulators, which include the Central Government, RBI, SEBI, CCI, RoC, etc.

Can a company restructure more than once?

A company can restructure as many times as necessary without violating any rules and regulations. A business can make changes in its operations whenever it thinks necessary to decrease expenses and increase efficiency. However, restructuring is a difficult process that needs planning and execution; as such, it cannot be carried out carelessly or frequently.

What are the various reasons for Corporate Restructuring?

There are several reasons for Corporate Restructuring which includes lack of profits, cash requirements, long term growth and improve financial performance of the company.