CORPORATE RESTRUCTURING- OVERVIEW
In recent years there has been an increase in the number of corporate restructuring in India and around the world.
Growth has been a very important factor for every company or organization. There are two ways of growth- Organic growth and Inorganic growth. When a company grows with the help of internal strategies like financial restructuring within an organization which helps in increasing the sales, increase in revenue without any change in the corporate entity, it is referred to as organic growth.
Restructuring through merger, amalgamation, demerger constitutes inorganic growth. In inorganic growth, businesses try to increase output and business reach by the above-mentioned strategies. These strategies create a change in a corporate entity.
It modifies the structure or operations of the company. Inorganic growth is on the rise as it is easier to acquire, demerge, amalgamate while organic growth takes a long time and a lot of effort.
Section 230-240 of Companies Act, 2013 read with Compromise and Arrangement Rules, 2016 deals with aspects of Corporate Restructuring.
Why is corporate restructuring gaining so much importance?
There are many reasons due to which corporate restructuring is gaining momentum. Some of them are mentioned below-
- Business synergies
- Economics of scale
- Diversification of business activities
- Reduction of risk
- Deployment of surplus cash
- Technological development
- Enlarging market share of the company
- Revival of sick units
- Transfer of property among group companies and savings in stamp duty payment
Types of corporate restructuring
1. Financial restructuring- In this type of restructuring the corporate entity makes an alteration in its equity pattern, equity holdings, and cross-holding patterns. There is a fundamental change in the financial structure of the company to strengthen the financial position of the company and increase the company’s value to shareholders.
2. Organizational Restructuring- It refers to change in the organizational structure like designing job positions, changing reporting relationships, etc. It is usually done to reduce the cost and clearing outstanding debts.
Characteristics of corporate restructuring
- It helps in improving the balance sheet of the company by disposing of unprofitable division.
- Reduction in staff.
- Changing corporate management.
- Disposing of underutilized assets.
- Outsourcing of the operations to third parties.
- Reorganizing function of corporate.
- Rescheduling of debts.
- Reduction in overhead expenses.
Types of corporate restructuring strategies-
MERGER- It is a process by which two or more business entities are clubbed together either by amalgamation, absorption, or formation of a new company. It is usually done by exchanging securities.
Mergers can also be of various kinds-
- Horizontal Merger- When two or more companies who are in the same industry or are direct competitors of each other merge together to grow their operations and to achieve economies of scale along with a reduction in competition in the market it is known as a horizontal merger.
- Vertical Merger- When two companies that are operating in the same industries but are at different levels or stages of production merge together it is known as a vertical merger. When a company takes over its supplier then it is called backward integration and when the company takes over its consumers or retailers, it is called forward integration.
- Co generic Merger- When two companies are in the same industries but do not deal with the same product and might share similar distribution channels, merges together it is known as a congeneric merger. It provides synergy and the potential is very high.
- Conglomerate Merger- In this type of merger companies who are in unrelated types of activities either horizontally or vertically are merged together.
- Demerger- It Is not defined under the Companies Act 2013. Generally, it is a restructuring process under which operations of any business are segregated into one or two components. It is done so that the companies can operate smoothly.
Reverse Merger- It helps unlisted companies to become listed companies by acquiring such listed companies without going for an initial public offer.
DISINVESTMENT- when an organization sells or liquidates assets of its subsidiary.
TAKEOVER OR ACQUISITION-Takeover happens when an acquirer takes over the control over the target company. Takeovers can be friendly or hostile. A friendly takeover happens when it is done with the permission of the management of the target company. Hostile takeover happens when it is done against the wish of management of the target company.
JOINT VENTURE- When two or more companies agree to contribute to equity to form a new company. In joint ventures, companies decide to share revenue, expenses, and control over the company. It can either be project-based or functional-based.
STRATEGIC ALLIANCE- It is an agreement between two or more parties to collaborate with each other in order to achieve a predetermined objective and at the same time to remain independent organizations.
FRANCHISING- It is an arrangement in which one party which is known as the franchisor grants permission to another party known as the franchisee right to use the trade name and business system and processes to produce and market goods or services taking into consideration certain specifications. Usually, the franchisee pays one-time fees and percentage of sales revenue as royalty to the franchisor.
SLUMP SALE (Section 2(42c) of Income Tax Act)- It means the transfer of one or more undertakings at a lump sum sale consideration without assigning specific values to each individual asset and liability. Slump sale is done when the company sells or disposes of entire or substantially entire undertaking for a lump sum consideration.
Following are the aspects which are to be considered while planning corporate restructuring strategies-
- Funding and valuation
- Legal issues
- Taxation aspect
- Stamp duty act
- Accounting concerns
- Competition aspect
- Human synergy
It is a complex process and it requires help from various professionals like Chartered Accountant, Cost Accountants, Company Secretary, Lawyers, Valuers. In today's era, the rate at which a number of companies are going for corporate restructuring is on the rise. It has increased the demand for professionals to make it successful.
It can make or break the future of companies going for such restructuring. If it is done in the right way, it can make the business achieve great heights and help in surviving competition.
EDITED BY MINU MISHRA
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