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An in-depth analysis of corporate restructuring strategies, their meanings, and their importance in the business world. It discusses various types of restructuring strategies such as mergers, acquisitions, and demergers, and their benefits. The document also highlights the compliance requirements under several statutes and the need for approvals from various authorities. It is a valuable resource for students and professionals interested in understanding corporate restructuring and its impact on business growth.
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Corporate restructuring has no become one of the significant elements which play a very important role for a company to keep track with the environment. A strategy of corporate restructuring survives around Mergers, Demergers, Reverse Merger, Disinvestment, Take Overs, Acquisitions, Strategic Alliance etc., and while doing Corporate Restructuring, a company must comply with the compliances under several statutes like The Companies Act, , Income Tax Act, The Indian Stamp Act, The Competition Act etc., and moreover it also requires approvals from various authorities like NCLT, SEBI, Ministry of Corporate Affairs. In this paper the author has tried to explain the concept of corporate restructuring by explaining its Historical Background, its Business Strategy, Need & Scope, Benefits, Regulatory Framework or Legal Aspects in detail.
Corporate Restructuring, Merger, Companies, Competition.
There are basically two ways of expansion or growth of business entities, i.e., organic and inorganic growth. Organic growth is through the internal strategies, which may relate to business or financial restructuring within an organization that results in enhanced & better customer base, higher sales, increased revenue, without resulting in change of corporate entity. Inorganic growth provides an organization with a method for attaining hasten growth accrediting to skip few steps on the growth ladder. Restructuring through mergers, amalgamations, etc., constitute one of the most important techniques for securing inorganic growth. A company is growing organically when the growth is through the internal sources without change in the corporate entity. Organic growth can be done through capital rebuilding or business restructuring. Inorganic growth is the rate of growth of the business by which there is an increasing in output and business reach, acquiring new businesses by way of mergers, acquisitions and take-overs and other corporate rebuilding Strategies which may create a change in a corporate entity. The business environment is quickly changing with respect to technology, competition, products, people, geographical area, markets, customers. It will not be enough if companies keep pace with these changes but are expected to beat competition and institute in order to continuously maximize shareholder value. Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important mechanism that help companies to enter new markets, expand customer base, cut competition, integrate and grow in size quickly, enlist new technology with respect to products, people and processes. Thus, the inorganic growth strategies are regarded as accelerated corporate restructuring strategies for growth for a company.
reduction of profit margins or decrease in the power of their corporate value. Thus, Restructuring is an inorganic growth strategy.^1
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. There was no scope of realignments and everything was controlled. In such a scenario, the scope and mode of Corporate Restructuring were 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. The real opening up of the economy started with the Industrial Policy, 1991 whereby 'continuity with change' was emphasized and main thrust was on relaxations in industrial licensing, foreign investments, transfer of foreign technology etc. With the economic liberalization, globalization and opening up of economies, the Indian corporate sector started restructuring to meet the opportunities and challenges of competition. The economic and liberalization reforms, have transformed the business scenario all over the world. The most significant development has been the integration of national economy with 'market-oriented globalized economy'. The multilateral trade agenda and the World Trade Organization (WTO) have been facilitating easy and free flow of technology, capital and expertise across the globe. A restructuring wave is sweeping the corporate sector the world over, 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. From banking to oil exploration and telecommunication (^1) Corporate Restructuring, Valuations, & Insolvency, Professional Programme, ICSI, Module - 3
to power generation, petrochemicals to aviation, companies are coming together as never before. Not only these new industries like e-commerce and biotechnology have been exploding and old industries are being transformed. With the increasing competition and the economy, heading towards globalisation, the corporate restructuring activities are expected to occur at a much larger scale than at any time in the past. Corporate Restructuring play a major role in enabling enterprises to achieve economies of scale, global competitiveness, right size, and a host of other benefits including reduction of cost of operations and administration.^2
The Corporate Restructuring process aims at enhancing economies of scale and attainment of efficiency. The survival and growth of companies in the competitive environment depends on their ability to pool all their resources for optimum use of maximize the value. For example, a new big company is created out of merger of small companies that can achieve economies of scale. Further, the enhanced corporate status allows it to leverage the same to its own advantage in the form of tapping national or international capital markets for funds at low cost. This availability of funds at lower rate certainly makes the company more comfortable and competitive. Therefore, the needs for corporate restructuring exercise are as follows: (i) To focus on core strengths. (ii) To achieve economies of scale by expanding to national and international markets. (iii) Attainment for operational synergy and efficient allocation of managerial capabilities and infrastructure. (iv) Ensuring constant supply of raw materials and access to R&D (v) Helps in reducing cost of capital (vi) Helps in revival & the rehabilitation of sick companies by adjusting losses of the sick units with profits of a healthy unit. (^2) Corporate Restructuring, Liquidation, Insolvency & Winding-Up, Professional Programme, ICSI, Module – 2, Corporate Restructuring, Valuations, & Insolvency, Professional Programme, ICSI, Module – 3, Merger Acquisition & Corporate Restructuring – Strategies & Practices, Taxmann, 3rd^ Edition.
Vodafone) iii. Reduced Competition – Horizontal merger helps companies in reduction of competition. Competition is the prime factor & the most common and strong grounds for mergers and acquisitions. (Ex: - HP and Compaq) iv. Tax benefits – Companies also use mergers and amalgamations for tax benefits. Mainly, where there is merger between profit making and lossmaking companies. Most of the income tax benefit arises from set-off and carry forward provision under the Income-tax Act, 1961.^4 v. Strong brand – Creation of the brand is a long process; hence, companies choose to obtain an established brand and take advantage of it to earn high profits. (Ex: - Tata Motors and Jaguar) vi. New Technology – Companies need to pay attention on technological developments and their business applications. The Acquisition of smaller companies helps the enterprises to control distinctive technologies and prosper a competitive edge over other companies. (Ex: - Dell and EMC ) vii. Domination – Companies get engaged in mergers and acquisitions to become a superior player or market leader in their particular sector. However, such supremacy shall be subject to regulations of the Competition Act,
Corporate restructuring strategies depends on the nature of business, type of diversity required and results in maximization of profit through merging of resources in effective manner, utilization of the idle resources, effective management of competition etc.,. Planning the type of restructuring requires detailed business study, expected business demand, available resources, utilized/idle portion of resources, competitor analysis, environmental impact etc., The bottom line is that the right restructuring strategy provides optimum synergy for the (^4) Section 72, Income Tax Act, 1961
organizations involved in the restructuring process. It involves examination of various aspects before and after the restructuring process.^5
There are various types of Corporate Restructuring which includes: -
1. MERGER Merger is the combination of two or more companies by way of amalgamation or absorption. It means that two companies get merged to earn high profits. Merger can be done in many ways: - i. Horizontal Merger - Two companies that are in direct competition and share the same product lines and markets i.e., it results in the consolidation of firms that are direct rivals. E.g., Exxon and Mobil, Ford and Volvo, Volkswagen. ii. Vertical merger- A customer and company or a supplier and company i.e., merger of firms that have actual or potential buyer-seller relationship e.g. Ford- Bendix. iii. Conglomerate merger- Generally a merger between companies which do not have any common business areas or no common relationship of any kind. Consolidated firm a may sell related products or share marketin g. iv. Concentric Mergers - Concentric mergers take place between firms that serve the same customers in a particular industry, but they don’t offer the same products and services. Their products may be complements, product which go together, but technically not the same products. For example, if a company that produces DVDs mergers with a company that produces DVD players, this would be termed as concentric merger, since DVD players and DVDs are complements products, which are usually purchased together. 2. DEMERGER Under this corporate rebuilding procedure, at least two organizations are joined into a solitary organization to get the advantage of cooperative energy emerging out of such merger. 3. REVERSE-MEREGER (^5) PP- CRVI - 2014, LESSON – 1 CORPORATE RESTRUCTURING – INTRODUCTION & CONCEPTS.
The following below mentioned is the scheme of Chapter XV. a. Section 230-231 deals with compromise or arrangements. b. Section 232 deals with mergers and amalgamations including demergers. c. Section 233 deals with amalgamation of small companies (also called fast track mergers). d. Section 234 deals with amalgamation of foreign companies (also called as cross border mergers). e. Section 235 deals with acquisition and dissenting of shareholders. f. Section 236 deals with purchase of minority shareholding. g. Section 237 deals with power of central government to provide for amalgamation of companies in public interest. h. Section 238 deals with registration of offer of schemes involving transfer of shares. i. Section 239 deals with preservation of books and papers of amalgamated companies. j. Section 240 deals with the liability of officers in respect of offences committed prior to merger, amalgamation etc. Salient Features of Companies Act, 2013: -
Stamp duty provisions are regulated by “The Indian Stamp Act,1899 ” which is a Central enactment and the States are vested with powers either to adopt the said Stamp Act (with amendments, if any) or enact their own legislations governing payment of stamp duty on instruments. Section 3 of the Stamp Act is the main section which provides for levy of stamp duty on execution of an instrument. Three important factors for computing stamp duty are : a) There has to be an instrument b) Proper execution c) Rate of stamp duty applicable in the State where instrument is executed. JUDICIAL PRONOUNCEMENT OVER STAMP DUTY
Corporate Restructuring focuses on rebuilding a company & bring a significant change in structure of the organisation. It indicates towards revival of sick companies which are in loss for many years & corporate restructurings helps in reviving the companies & earning high profits. So, to restructure the company we need to know all the rules, regulations, needs & wants, acts, etc. The Paper reveals all the needs, Scope, types, historical background, regulatory framework or legal aspects of Corporate Restructuring. (^29) 2004(9) SCC 438
