under Companies Act, 2013
What is the meaning and definition of Corporate Restructuring?
Corporate means a Company and Restructuring is a method of changing the organizational structure.
Is the Growth Related to Corporate Restructuring?
- Growth means a positive change in size often over a period of time.
- To achieve the ultimate objective of the company for the purpose it is formed, growth is the major requirement.
How can Growth be classified ?
- Growth can be classified as:-
- Organic Growth –
- Its occurrence is from Internal Sources
- Internal Sources can be – Capital Restructuring which are of 3 types such as Reduction of Capital, Alteration of Capital and Buy back of shares.
- Inorganic Growth – Its occurs from External Sources which can be Mergers, Acquisition and takeovers.
- Business Restructuring
- Organic Growth –
Why Corporate Restructuring needed for the Companies?
The need for Corporate restructuring is to focus on the following prospects:-
- To focus on Core strengths of the company (purpose for which company is forms)
- To achieve expansion
- To have constant supply of Raw materials
- Technological advancement
- Allocation of Managerial capabilities.
What are different Kinds of Corporate Restructuring?
Corporate Restructuring can be of following types–
- Financial Restructuring –
- Financial Restructuring helps to raise finance in the company for new projects. Such decision takes place when companies undergo Mergers, acquisition, Joint ventures, Strategic Alliances etc.
- Technological Restructuring
- Whenever a company requires Technology up gradation and requires expertise in product development Technological Restructuringtakes place.
- Market Restructuring
- In order to marketize the product segment, on the basis of core competencies (specific knowledge, skills, technologies, capabilities) of the company. The company adopts the Marketing strategies which help them to achieve their sales, while making known to the customers.
- Organizational Restructuring
- To improve the capabilities of the employees/Organizational personnel
What are the Modes of Corporate Restructuring?
There are several modes by which Corporate Restructuring can take place in a company which are as follows:-
- Merger –
It is a fusion/absorption of one company by another or the assets of two or more companies gets transferred to another company or the assets of two or more companies come under the control of one company (which may or may not be original two Companies) [Section 2(1B) of Income-tax Act, 1961]. Example – McDowell and Co. Ltd. Formed into new entity McDowell Spirits Ltd.
- Amalgamation –
In Amalgamation, legal process is involved where two or more companies joined together to form new entity or one or more companies absorbed by another or one or more company blended with another where amalgamating company loses its identity and the shareholders of Amalgamating company becomes the shareholder of Amalgamated Company/New Company. Example – Bijli Holdings Pvt Ltd amalgamated with Multiplex operator PVR Ltd.
It is an act of constructing again whereby transfer of business takes place from one company to another company, specially formed for purpose, wherein old company goes into liquidation and instead of repaying of shares to the shareholders of old company, Old company shares are allotted in new company to those of older company shareholders. Though new company may have different capital structure but membership would be substantially same as that of old company. Reconstruction of Companies can be to two types namely Internal Reconstruction and External reconstruction.
External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities to a newly formed company which is generally owned and named alike. Existing company is wound up by selling its business to the newly formed company which is generally similarly named and owned by the same shareholders to a great extent. Example – Maruti motors (India) and Suzuki(Japan) were amalgamated to form Maruti Suzuki.
Internal reconstruction is a method of corporate restructuring where an arrangement is made by the company of the organization, the changes occurs in the assets and liabilities of the company having the purpose to improve the financial position without liquidating the company or transferring the ownership to external party. It can be Alteration of share capital, Reduction of share capital, Compromise or arrangement, surrender of shares.
Takeover occurs when one company makes a bid to assume the control of or have an intention to acquire another company, often by purchasing a majority stake in the target company. In the takeover process, the company making the bid is the acquirer while the company it wishes to take control of is called the target. Example – Emami, a leading personal healthcare company acquired the shares in 100-year-old Zandu Pharmaceutical Works.
It is sale or liquidation of assets by the government, i.e., Central and state public sector enterprises, projects, or other fixed assets. The government undertakes disinvestment to reduce the fiscal/financial burden, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources. In some cases, disinvestment may be done to privatise assets. However, not all disinvestment is privatisation. Disinvestment allows a larger share of PSU ownership in the open market, which in turn allows for the development of a strong capital market in India. Example – Oil and Natural Gas Corporation Limited purchased shares of Gail Limited.
- Joint Venture
It is a business arrangement in which two or more parties/entities agreed to share their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests. Example – BMW and Toyota co-operate on research into hydrogen fuel cells, vehicle electrification and ultra- lightweight materials.
- Slump Sale
Where Board of Directors sell whole or substantially whole (majorly) of undertaking (business) of company. Where a company owns more than one undertaking (business), Board of Directors can sell only with the consent of shareholders of the company to be taken in General Meeting by passing Special Resolution (Postal Ballot In case of Listed Company) [Section 180 read with section 110 of Companies Act, 2013]. Example – JSW Steel has acquired Heidelberg Cement India’s 0.6 million tonnes per annum (mtpa) cement grinding facility in Raigad, Maharashtra, “as a going concern on slump sale basis.
It is a division of different undertaking businesses which are in common corporate umbrella. Where one company transfers the business to the Resulting Company. Example DEN Networks Limited and the Skynet Cable Network Private Limited (a wholly owned subsidiary of the Company), for demerger of Broadband/ Internet Service Provider (“ISP”) Business Undertaking into Skynet.
- Strategic Alliances
Strategic alliance is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance agreement could help a company develop a more effective process. Strategic alliances allow two organizations, individuals or other entities to work toward common or correlating goals. Example – Barnes & Noble, partnering with Starbucks. Starbucks has become synonymous with coffee. With a Starbucks location in most (if not all) Barnes & Noble bookstores, customers have twice the reason to shop there. Coffee break, and browse the latest bestsellers shelf all in one stop.
In its simplest form, a divestiture is the disposition or sale of an asset by a company for the purpose to liquidate the cash and reduce debt burden when company undergoing into loses. Example – Google’s divestiture of Motorola by acquiring smart phone manufacturer ‘Motorola’. Less than three years later, Google sold off pieces of Motorola while creating a patent portfolio that it is now being licensed to Lenovo, Google presented the deal as a success.
- Equity Restructuring
To reshuffle capital and reserve appearing in the balance sheet which can be done through alteration of capital, reduction of capital or buy-back of shares.
- Debt Restructuring
It involves reduction of debt. It also help in changing in terms and conditions for extension of payment of the company’s debt. Debt capital includes Long term Secured(Loan, mortgage etc.) and Unsecured debts (credit cards, medical bills, utility bills, and other instances in which credit was given without any collateral requirement) for the purpose to increase cash flow for sick company.
What are the aspects involved while planning or implementing Corporate Restructuring strategies?
- Restructuring process involves various types of Aspects during and after Corporate Restructuring:-
- Valuation and funding Aspect
- Legal and Procedural Aspect
- Taxation and Stamp Duty Aspect
- Accounting Aspect
- Competition Aspect
- Human and Cultural Aspect
How is Merger different form Amalgamation?
- Meaning – Two or more companies combined together either to form a new company or one company taking over the another is called Merger whereas Amalgamation is a type of merger in which two or more companies combine together to form new entity/company.
- No. of entities required – In Merger Minimum – 2 entities required , One company absorbed by another company on the other hand Amalgamation requires minimum – 3 entities required, Amalgamation of two companies to form new entity.
- Resulting Entity Identity – In Merger one of the existing company may absorb the Target Company, where one company retains its identity whereas Existing Company loses its identity and a new company is formed whereas In case of Amalgamation Existing Company loses its identity and a new company is formed.
- Example – Merger – Tata Steel (Indian Company)+ Corus Group (UK Co.)[lost identity) = Tata Steel, whereas Amalgamation Brooke Bond India Ltd. + Lipton India Ltd. = Brooke bond Lipton India Ltd.
What is the Emergence of Corporate Restructuring in Global and National Perspective?
Takeover, mergers, acquisition etc., accelerating in Global & National market. Free economies like U.S.A and European Countries, where hundred(s) of Mergers are taking place. It is a hyper competitive era where technology is changing dynamically and merger, acquisitions etc., are the best route to reach size Comparable to Global Companies to effectively compete them.
Why Companies go for International Acquisition?
Cross Border Mergers (where Borders of the Countries are crossed either to get merged or acquired or any other mode of corporate restructuring). It is easier to invest through Merger or acquisition. International Mergers provide Infrastructure and customer base in a country which is quite difficult to build from Scratch. It also helps in access to local market of different Countries.
Which are the Approache(s) mentioned in Companies Act, 2013 for Corporate Restructuring?
Chapter XV of Companies Act, 2013 (Section I.e., Compromise and Arrangement & Amalgamation (Section 230 – 240)) deals with Merger, Amalgamations, Cross Border Mergers, Purchase of Minority shareholding, Corporate Debt Restructuring, demergers. The procedural aspects involved such as format of application to be made to National Company Law Tribunal (the Tribunal), form of notice and the procedural aspects involved with respect to the substantive law are covered under the Rules made under Chapter XV of the Act.
How is COVID 19 impacted Mergers, Amalgamation/Corporate Restructuring?
- Several Sectors across the world are affected during and after Locked down due to COVID 19 Pandemic.
- During COVID-19, following are the amalgamation(s)/mergers took place in India on the basis of Business, Technology and Human Integration:-
- United Bank of India & Oriental Bank of Commerce merged with Punjab National Bank.
- Syndicate Bank merged with Canara Bank
- Allahabad Bank Merged with Indian Bank
- Andhra Bank and Corporation bank with Union Bank of Indiaa
- Foreign Direct Investment are coming to India through Automatic & Approval Route
- During Covid -19, the Government has amended its Foreign Direct Investment policies which shall come to India through approval Route from seven countries sharing Land Border which are :- China , Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan.
- The purpose of making mandatory approval is to curb hostile takeover of Indian Companies.
Restructuring strategies helps in enhancing economy. A company wants to grow or survive in a competitive environment, it needs to restructure and focus on its competitive strategies. Henceforth, the merger and acquisition strategies have been derived to improve general economic well-being of all the Companies in the corporate sector.
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