Even after getting a massive setback due to unprecedented Covid-19 crisis in March 2020, Indian economy was steadily moving towards recovery, however, second wave has badly hit since the last quarter due to which many businesses have been struggling for survival. With the predictions about third wave in nearby future, there would be more challenges for revival and growth. In this background, restructuring can be helpful and customised strategy can be devised considering various operational and financial factors related to the company. Corporate restructuring primarily entails any fundamental change in a company’s business while financial restructuring relates to improvements in the capital structure of the organisation. In this article, an attempt is made to discuss various corporate restructuring strategies which can help to increase overall efficiency levels at organisation besides maximizing value for different stakeholders.
Corporate restructuring is often initiated when the company is in a bad shape due to operational, financial or other problems. In order to get optimum benefits, following important factors need to be duly considered while launching corporate restructuring process:
1. Accounting practice & policy
2. Taxation & stamp duty cost
3. Human & cultural synergy
4. Valuation & funding plan
5. Legal & statutory aspect
6. Competitive landscape
7. Technological system
8. Organisational value
9. Integration issues
Popular Strategies & Success Stories
Following are some of the most popular restructuring strategies adopted by the corporate houses:
Success of the corporate restructuring process is dependent upon the positive outcome whereby time and costs can be saved however, it may get affected due to various factors viz. statutory provisions, support from stakeholders, legal non-compliances, outstanding liabilities, technology, integration issues, etc. Every business enterprise is unique and hence, it needs to have different strategy. There are 4 major restructuring strategies which are further divided in different sub-stategies
1) Takeover: Takeover is the most popular form of acquisition strategy wherein a company takes over majority stake and management control of another running company, however, both the companies continue to operate simultaneously. Such acquisitions are usually made to eliminate competition and also to enhance product offerings across larger territory. While acquiring a listed company, the acquirer has to comply with SEBI Takeover Code, however, in case of unlisted company the transaction will be consummated as per contractual arrangement.
Example: Poonawalla Group acquired Magma Fincorp after complying with SEBI Takeover Code and then renamed it as Poonawalla Fincorp
2) Management Buy Out (MBO): In case of MBO, the company’s management executives buy out the assets and / or operations of the company which they manage. Such strategy is appealing to professional managers because of superior potential rewards as well as control due to ownership rather than employment and usually, support is available from private equity funds for promising companies.
Example: MBO by management of Sesa Seat its promoters
3) Leveraged Buy Out (LBO): Acquisition of company using debt funding which will be serviced through normal operations. While MBO is equity driven, LBO is debt driven.
Example: Tata Tea had successfully acquired Tetley with LBO
4) Forward Merger: Under this option, target company amalgamates in acquirer with the approval of Hon’ble National Company Law Tribunal (NCLT) u/s 230-232 of Companies Act, 2013. Usually, the consideration is payable in the form of exchange of shares for getting benefits under Indian Tax laws.
Example: Bank of Madura merged with ICICI Bank
5) Reverse Merger: Reverse merger has been extremely popular strategy in various developed countries including USA but it is also gaining popularity in India. In order to avail benefits under tax laws, a large profitable company gets merged with loss making company. Similarly, in some cases a large unlisted company had got listed with a small listed company which facilitated listing without opting for IPO. Given the listing status, prior approval of SEBI is needed. Further, there have been instances of using this strategy for business consolidation purposes too.
Example: Godrej, Videocon, Jindal Group
6) Fast Track Merger: Considering the ever increasing workload on NCLT, Indian Government has introduced ‘Fast Track Merger’ scheme in 2016 and now, selective categories of companies can be amalgamated with the approval of Regional Director without even approaching NCLT. Besides saving resources, it puts restructuring process on fast track and hence, many companies including listed companies have taken benefit of this scheme.
Example: Onelife Capital, Quess Corp, FCS Software,
7) Demerger: A strategy whereby a company is divided into two or more parts, or in which a resulting company is separated from a larger company i.e. demerged company with the approval of NCLT. In order to get tax benefits, the consideration is usually in the form of exchange of shares instead of cash payment. In case of listed companies, prior approval of SEBI is needed for demerger. Many large business houses have used this strategy successfully and maximized value for their shareholders.
Example: Larsen & Toubro, Reliance, Bajaj Group
8) Slump Sale: Each asset is sold separately in case of itemised sale, however, in case of slump sale, the company sells entire undertaking on lumpsum basis irrespective of value of individual assets or liabilities. Usually, the consideration is settled by cash instead of issuing shares and so, direct liquidity is possible. Several listed companies had used slump sale mechanism in the past.
Example: Hindustan Unilever, GE Power, Rolta India
9) Divestment: An action of selling out stake or liquidating any subsidiary is known as divestment. In order to meet budgetary deficits, government often divests stakes in public sector undertakings.
Example: Divestment of VSNL which was acquired by TATA Group
10) Joint Venture: Two or more companies form a new entity in joint venture to undertake commercial activity together with pre-defined roles and responsibilities of each party while both the entities continue to retain their original corporate identities. Capital is contributed in mutually agreed proportion by all the parties and thereafter, profits & losses are also shared in similar proportion.
Example: Tata Marcopolo, Tata Hitachi Construction Company
11) Strategic Alliance: Under such arrangements, 2 or more entities come together to collaborate with each other in order to achieve certain goals. In fact, there has been a new trend of ‘Peer Partnership’ in order to survive where competitors are entering into an informal alliance by limiting their presence / activities to aptly utilise available resources while reducing overall costs.
Example: Tata Power & HPCL joined hands to set-up electric vehicle charging centres
Successful Restructuring = Improved Performance
Numerous companies have successfully undertaken corporate restructuring exercise for varied reasons, however, each of them had a common objective of maximizing value for their stakeholders.
Business enterprises having corporate structure may have better chances of successfully undertaking corporate restructuring exercise but due to very low level of corporatisation in India, there is a need to spread awareness among the businessmen about various benefits of corporatisation.
Vital Role of Finance & Corporate Professionals
With the unprecedented economic turmoil since March 2020, time bound strategy is essential for corporate restructuring which will help to reduce costs, improve profits and maximize valuation. With the domain expertise in finance, taxation and corporate laws, corporate professionals are best placed to support across entire value cycle:
1. Devise suitable restructuring strategy in a cost-efficient manner
2. Propose suitable transaction structure on analysing all options and draft various documents keeping in mind objective of transaction
3. Identify suitable company, if needed to meet the requirements of client
4. Carry out independent due diligence to assess liabilities and level of compliance
5. Assist the management to carry out valuation and get expert opinions, if needed from other professional agencies
6. Address queries raised by the regulators and get their approval
7. Comply with various provisions under different corporate & other laws to give effect to corporate restructuring
8. Maintain good investor & public relations to avoid any confusion about exercise
9. Provide post-transaction support services, particularly related to accounting, finance and tax function, if necessary
10. Ensure smooth integration process with workforce for superior productivity
With sound auditing framework and improved corporate governance standards, Indian corporates are well positioned to grow globally and if they properly adopt corporate restructuring strategies then their stakeholders can be rewarded handsomely. However, in the event of any lapses in execution, the companies may have to bear very high costs and it can even adversely pose a threat to their existence. Moreover, penalties for non-compliance may also be steep & so, time bound would be is essential. Therefore, in order to get desired results, utmost care needs to be taken while judiciously executing chosen strategy under the supervision of experienced corporate & finance professionals.
Afterall, Mr Harper Lee has rightly mentioned – “Many receive advice, only the wise profit from it.”
Author Mr. Amar Kakaria and Shri Deep Sharma are qualified CAs with multiple qualifications and have got over 20 years of experience each.