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RESTRUCTURING
PGDM-FS
Corporate Restructuring
Corporate restructuring is the process of redesigning one or more aspects of a
company. The process of reorganizing a company may be implemented due to a
number of different factors, such as positioning the company to be more
competitive, survive a currently adverse economic climate, or poise the
corporation to move in an entirely new direction.
Reasons behind Restructuring
1) In case of growth of the company when company acquires large market
share
Restructuring becomes necessary If the firm has grown to the point that the
original structure can no longer efficiently manage the output and general
interests of the company. In this case, the company might spin off some
departments into subsidiaries to create an effective management model
2) Drop in Sales due to sluggish economy
The corporation may need Financial Restructuring in order to keep the company
operational through this rough time. Costs may be cut by combining divisions
or departments, reassigning responsibilities and eliminating personnel, or
scaling back production at various facilities owned by the company. With this
type of restructuring, the focus is on survival in a difficult market rather than on
expanding the company to meet growing consumer demand.
3) Mergers & Acquisitions
Corporate restructuring may take place as a result of the acquisition of the
company by new owners. The acquisition could be in the form of a leveraged
buyout, a hostile takeover, or a merger of some type that keeps the company
intact as a subsidiary of the controlling corporation. When the restructuring is
due to a hostile takeover, corporate raiders often implement a dismantling of the
company, selling off properties and other assets in order to make a profit from
the buyout.
In general, the idea of restructuring is to allow the company to continue
functioning in some manner. Even when corporate raiders break up the
company and leave behind a shell of the original structure, there is still usually
the hope that what remains can function well enough for a new buyer to
purchase the diminished corporation and return it to profitability.
Url: http://www.livemint.com/Companies/zKDlLjtKiKrlDrCg9r1hFL/JaypeeGroups-Rs61285-crore-debt-problem.html
In the above story, Manoj Gaur, executive chairman of Jaypee Group discusses
about the Debt Restructuring strategy used by the organization in order to cope
up with the sluggish infrastructure growth.
Jai Prakash Associates is a well diversified infrastructure conglomerate with
business interests in Engineering & Construction, Power, Cement, Real Estate,
Hospitality, Expressways etc.
The group witnessed a phenomenal
rise between 2000 and 2006, riding
on the the real estate and
infrastructural boom. Revenues of JP
Associates ltd notched by CAGR of
32.08% in between 1999-2000 and
2014-15. Also, debt has grown 20
times in this period. This shoot up
the aspirations of JP Associates, their
businesses were expanding and bank
were putting money in their every
The group witnessed a phenomenal rise between 2000 and 2006, riding on the
the real estate and infrastructural boom. Revenues of JP Associates ltd notched
by CAGR of 32.08% in between 1999-2000 and 2014-15. Also, debt has grown
20 times in this period. This shoot up the aspirations of JP Associates, their
businesses were expanding and bank were putting money in their every venture.
And then, the global financial meltdown reached the Indian shores and the Real
Estate prices nosedived followed by dip in demand for cement. Debt-saddled
Jaiprakash associates downgraded its debt rating to a default category from
BB to D. The reason behind this is the delay in debt servicing on account of
weak liquidity.
Some interesting figures are tabulated below.
All
figures in
Crores
Jaiprakash
Associate
Gross
Debt
EBITD
A
EBIT PAT
Interes Debt/EBITD
t Cover A
Debt/Equit
y
75,16
3
6,138
4,45
1
0.6
7.1
1,72
16.8
The Indian telecom major is reducing its footprint in Africa to improve financial
performance. In January Airtel announced sale of its operations in Burkina Faso
and Sierra Leone to France-based Orange.
Airtel in July last year announced entering into an agreement with Orange to
sell its four subsidiaries Burkina Faso, Chad, Congo Brazzaville and Sierra
Leone, in Africa. The agreements for the remaining two countries have lapsed.
RBI Framework
In an effort to help banks quickly clean up their balance sheets, the Reserve
Bank of India has overhauled its guidelines pertaining to revitalising stressed
assets in the economy.
The Reserve Bank of India (RBI) in its circular dated 26th February 2014, on
Framework for Revitalizing Distressed Assets in the EconomyGuidelines on
Joint Lenders Forum (JLF) and Corrective Action Plan, envisaged change of
management as a part of restructuring of stressed assets. The circular states that
the general principle of restructuring should be that the shareholders bear the
first loss rather than the debt holders.
Strategic Debt Restructuring Scheme
The Strategic Debt Restructuring (SDR) has been introduced by RBI with a
view to ensuring more stake of promoters in reviving stressed accounts and
providing banks with enhanced capabilities to initiate change of ownership,
where necessary, in accounts which fail to achieve the agreed critical conditions
and projected viability milestones. The scheme gives the right to lenders, at
their discretion, to undertake strategic debt restructuring by converting loan
dues to equity shares. This scheme is based on the general principle of
restructuring that the shareholders bear the first loss rather than the debt
holders.
Some of the features of the SDR scheme is as below:
At the time of initial restructuring, the lenders are required to incorporate, in the
terms and conditions attached to the restructured loan/s agreed with the
borrower, an option to convert the entire loan (including unpaid interest), or part
thereof, into shares in the company in the event the borrower is not able to
achieve the viability milestones
The decision on invoking the SDR by converting the whole or part of the loan
into equity shares should be taken by the JLF as early as possible but within 30
days from the above review of the account.
According to the fresh guideline ,standard asset classification benefit will be
available to lenders provided they divest a minimum of 26 per cent (against 51
per cent now) of the shares of the company to the new promoters within the
stipulated 18 months and the new promoters take over management control of
the company.
The RBI allowed regulatory forbearance on asset classification of restructured
accounts, whereby standard accounts were allowed to retain their asset
classification and accounts classified as non-performing were allowed not to
deteriorate (downgrade) further in asset classification on restructuring.
Lenders will thus have the option to exit their remaining holdings gradually, as
the company turns around. Lenders should grant the new promoters the Right
of First Refusal for the subsequent divestment of their remaining stake. The
required provision should be made in equal instalments over the four quarters
and it shall be reversed only when all the outstanding loans in the account
perform satisfactorily during the 'specified period' after transfer of ownership
control to new promoters.
While the earlier norms exempted lenders from the requirement of periodic
mark-to-market of equity shares acquired and held by banks under strategic debt
restructuring, the lenders should periodically value and provide for depreciation
of these equity shares.
The proportion of lenders, by number, required for approving the corrective
action plan (CAP), which entails decision on either rectification, restructuring or
recovery of a borrower account, has been reduced to 50 per cent against 60 per
cent of creditors by number in the Joint Lenders Forum.
The RBI has put in place an incentive structure relating to asset classification
and provisioning for banks to communicate their decision on the agreed CAP in
a time-bound manner.
Corporate Debt Restructuring Scheme
Corporate Debt Restructuring (CDR) is an effective financial tool for
minimizing the adverse effects of default on the borrowers as well as lenders.
This is especially important, as the credit portfolio of banks and financial
institutions are created mainly out of the resources raised from the general
public.
In India, Corporate Debt Restructuring System was evolved by Reserve Bank of
India (RBI), and detailed guidelines were first issued in 2001 for
implementation by banks. The CDR Mechanism covers only multiple banking
accounts, syndication/consortium accounts, where all banks and institutions
together have an outstanding aggregate exposure of Rs. 100 million and above.
It is a voluntary non-statutory system based on Debtor-Creditor Agreement and
Inter-Creditor Agreement and the principle of approvals by majority of 75%
creditors (by value) which makes it binding on the remaining 25% to fall in line
with the majority decision.