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May 2012
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Concept of Corporate Restructuring

How does Corporate Restructuring work ?

  • Any company in business organization undergoes change on a continual basis. Often the change is forced upon the company by external environment, such as competition, technology etc.
  • Wiser Corporations foresee the external changes well in advance & change themselves accordingly. Whereas, not so wiser ones are forced to change in due course of time or else perish.
  • However, not all the changes that a company undergoes would qualify to be termed as “Corporate Re-structuring.”
  • Corporate Re-structuring is defined as:

Any change in the business capacity or portfolio that is carried out by an inorganic route OR

Eg. When Tata Motors launched Sumo & later Tata Indica, though it was expansion in its business portfolio but this example doesn’t qualify for corporate re-structuring, since it was an organic growth. Whereas, acquisition of Jaguar Land Rover from Ford by Tata Motors, qualifies for the definition.

Any change in the capital structure of a company that is not in ordinary course of its business OR

E.g: Capital structure refers to the debt equity ratio. This capital structure is never static & changes almost daily. A small borrowing in the form of car finance or scheduled repayment of a term loan or availing packing credit for a new export etc, will keep changing the debt/equity ratio on a daily basis. Might change from 1.5:1 to 1.6:1. But this doesn’t qualify for the definition. Neither, borrowing of a significant amount of term loan or an issue of five year non-convertible debentures may change D/E to 1.9:1. Such changes are significant, but doesn’t qualify for the definition

But, an IPO or Follow-on public issues or buy-back of equity shares would permanently (or atleast in long run) alter the capital structure of a company. Such activities, which are not in the capital structure of a company, qualify for the definition.

(c)    Any change in the ownership of a company or control over its management, or a combination of any two or all of the above. Eg. Merger, Demerger, Acquisition etc are examples.

The activities or changes which are not termed as corporate restructuring:

  • Incorporation of a limited company.
  • Conversion of a proprietary concern into a company.
  • Conversion of a partnership firm into a company.
  • Conversion of a private company into a public company.
  • Change in the internal command structure or hierarchy.
  • Change in business processes.
  • Downsizing etc.

Most practiced forms of Corporate Restructuring:

(a)    Merger

(b)   Consolidation

(c)    Acquisition

(d)   Divestiture

(e)   Demerger (spin off/ split up/ split off)

(f)     Carve Out

(g)    Joint Venture

(h)   Reduction of Capital

(i)      Buy-back of Securities

(j)     Delisting of Securities/ Company

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