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 Birds 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.
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.

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 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.
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.

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

infrastructure and service sector. Mergers, amalgamations, acquisitions, consolidation and takeovers have become are an integral formed to part of

new economic paradigm.

Conglomerates

being

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 Hindujas 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 Teas 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 demerger. De-merger wave started in India from 2000-01 for availing huge amount of tax benefits, increasing corporate control and enhancing share holders 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 simplisticbut 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.