Corporate Restructuring Under Companies Act 2013 Author: Anannya Bera | Volume II Issue II |

1. ABSTRACT

The term corporate restructuring is an like an umbrella which includes various methods used by the companies for internal as well as external purpose for acquiring corporate control. This research work would enlighten this term in its broadest extent.It would also deal with the types of capital restructuring,the need and scope of it and how is it efficient from a company’s perspective.This paper would also throw some light on its historical background and also emphasis on various kinds of capital restructuring with respect to the Companies ACT , 2013. It would also include briefly explaining the terms such as merger,demerger, acquisition, amalgamation and compromise,combination through different examples and try to critically analyse how each of them are different from the other. Would also focus on the advantages and disadvantages of corporate restructuring and give an overview of the legal compliance other than the Companies Act, 2013.

Keywords: Corporate Restructuring,merger,compromise,amalgamation,acquisition.

1. HISTORICAL BACKGROUND AND PRESENT SCENARIO

In earlier years, the economy of India was mostly dominated in a centralized way by the government intervention and participation and regulated the economy.Economy was closed as economic forces that is demand and supply did not have the full liberty to rule the market, there was no scope of realignments and the economy was restricted hence in such a situation the scope and mode of corporate restructuring was very limited or no such scope because of the restricted government policies and rigid regulatory framework. But the scenario changed with the upcoming of financially strong entrepreneurs such as Ram Prasad Goenka, M.R. Chabria, Sudarshan Birla, Srichand Hinduja, Vijay Mallya and Dhirubhai Ambani[1] who were phenomenal in undertaking certain major corporate restructuring activities.

  Now coming to the present scenario, the economic and liberalization reforms have been transformed the business scenario all over the globe.[2]”The concept of restructuring is becoming popular in the corporate sector all over the world,by undertaking both big and small entities, comprising old economy businesses, conglomerates and new economy companies and even the infrastructure and service sectors. From banking to oil exploration and 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 are being transformed drastically mainly after the 1991” where the real economy started opening up and thus leading to arrangements or transactions such as mergers, amalgamations, acquisitions,combination and takeovers and these expressions have become too common and familiar in the corporate sector.These terms would later dealt in the paper in detail.Hence the government controlled economy is no more the situation, in order to cope with the global competition it is being realized that corporate restructuring is a necessity.

III.INTRODUCTION

According to Oxford dictionary restructuring means, “to give a new structure to, rebuild or rearrange”. The term corporate restructuring means a slight change in the ownership structure without a change in the original business for greater business decision and achieving higher efficiency, so that the company is viable for a long run.It is a process by which firms or companies does an analysis of itself at a point of time and alters what it owes and owns and refocuses itself to specific tasks of performance improvements.The corporate restructuring of a company includes the activities which tries to make the organization more balanced, profitable and enable the company to achieve its objectives more efficiently.Hence the following features or characteristic of corporate restructuring can be listed as follows :

• Change of ownership and management
• Achieving efficiency
• Achieving economies of scale
• Core business doesn’t change.
• Reducing financial and operational risk.

Continuous improvement in shareholders value.

• It leads to transaction such as merger,acquisition,amalgamation,takeover,combination.

Therefore, from the above mentioned characteristic it can be drawn that corporate restructuring is a multifaceted trend that management has to concentrate on, whereby every company has to either choose to diversify or to refocus on core business activities in order to achieve greater efficiency. Thus the rationale behind a corporate restructuring is that in the neoclassical viewpoint, all the decisions of the firm including those relating to restructuring are made with the goal of maximizing the value of shareholder’s wealth or capital.Restructuring is a process through which a firm or company conducts an analysis of self to achieve consistent growth & profitability and abandon the activities that are no longer in the interest of the company and its owners, by altering the company’s capital structure, asset mix and the organization so as to enhance the value of the company. Thus, the rationale behind corporate restructuring is-

• To achieve consistent profitability & growth by transferring company’s strategic capability and providing superior value to consumers.
• When company’s objectives are no longer compatible within the scope of the current portfolio, then change it.
• Enhancing the shareholder’s value and capital.

IV.REASONS BEHIND A CORPORATE RESTRUCTURING

“The basic reason behind a corporate restructuring are can be as follows:

1.The globalization of business has compelled companies to open new export houses to meet global competition.

2. Changed fiscal and government policies like deregulation/decontrol has led many companies to go for newer markets and customer segments.

3.Revolution in information technology has made it necessary for companies to adopt new changes for improving corporate performance.

4.Many companies have divisionalized into smaller businesses. Wrong divisionalization strategy has led to revamp themselves.

5. Improved productivity and cost reduction has necessitated downsizing of the work force – both at works and at managerial level.
6. Convertibility of rupee has attracted medium-sized companies to operate in the global markets.
7. Competitive business necessitated to have sharp focus on core business activities, to gain synergy benefits, to minimize the operating costs, to maximize efficiency in operation and to tap the managerial skills to best advantage of the firm.
8. Economies of scale can be achieved by consolidating the capacities and by expansion of activities.
9. By diversification of business activities, the minimization of business risks is possible and it will enable the firm to achieve at least the minimum target rate of return.
10. By restructuring the enterprise, a sick company can be successfully revived and rehabilitated, and can be brought back to profitable lines.
11. With the integration of sick unit into the successful unit, the adjustment of not absorbed depreciation and write-off of accumulated loss is possible, there by the successful unit can have strategic tax planning.
12. Corporate restructuring includes financial reorganization, by bringing the company to achieve a desired balance of debt and equity, thereby reduce the overall cost of capital and financial risks.
13. The restructuring process will facilitate to have horizontal and vertical integration, thereby the competition is eliminated and the company can have access to regular raw materials and reaching new markets and accessibility to scientific research and technological developments.
14. The application of information technology and responsibility accounting concepts will facilitate to divide the total enterprise into strategic business units, a better way of achieving the corporate goals.”[3]

V.UNDERSTANDING THE SCOPE AND NEED OF A CORPORATE RESTRUCTURING

The scope of corporate restructuring is a very wide as it may encompasses global scenarios as well as national scenarios in order for a corporate to strive in the competition world.It also aims at exploiting the strategic assets accumulated by a business like goodwill natural monopolies. The main need or scope for any corporate restructuring is achieving economies of scale and synergies. Economies of scale means achieving of efficiency at a reduced cost , and synergies means the sum total of two companies are merged as a result of which higher efficiency is achieved or higher productivity is achieved.

Before understanding the need of corporate restructuring we can take a simple illustration to understand it. “We can assume ABC ltd is engaged in manufacture of injection molding machines. hence it will be serving the needs of consumers of such machinery. It means that ABC Ltd is engaged in a capital goods activity and hence the demand for its goods will vary from time to time and therefore it might be seen that there is not a regular flow of cash arising from its operations or working. Let us assume, there is another company named XYZ ltd in the same group engaged in manufacture of plastic molded goods. It deploys the injection molding machines for manufacturing the molded goods. Its supplies are to the consumers and therefore it has a regular cash flow. And suppose if both of them merge, the resultant company could utilize the benefit of regular cash flow in its one unit and overcome the cash flow problem in the other. If the merger does not take place, one company would see its cash bells ringing on a daily basis while in other there will be defaults in servicing the banks and financial institutions, payment of wages, settlement of dues to creditors, defaults in meeting delivery schedule and in addition the employees and staffs of such a company will undergo a lot of stress and strain affecting their health and career.”

Thus following the above illustration we can infer that corporate restructuring aims at mainly the following listed below :

• To focus on core strengths, operational synergy and efficient allocation of managerial and infrastructural capabilities.
• Consolidation and economies of scale by expansion and diversion to exploit domestic and global markets to its greatest extent.
• Revival and rehabilitation of a loss making company by adjusting losses of that unit with profits of a healthy company.
• Acquiring constant supply of raw materials and access to scientific research and technological developments for thriving through competition .
• Capital restructuring can improve return on capital employed by appropriate mixing of loan and equity funds and by reducing the cost of servicing .

Corporate restructuring helps in improving the corporate performance by bringing it at par with competitors by accepting the technological and other changes.

1. SOME OF MERITS AND DEMERITS OF CORPORATE RESTRUCTUREING

Ø  MeritsOf Restructuring

“If a business downsizes during restructuring, its operational costs may decrease.When a business eliminates layers of management during its restructuring, communication and decision-making often improve. Simplifying management reorders the organizational hierarchy of a company, opening the lines of communication and removing barriers to productivity.Finally, businesses restructuring to introduce new technologies may enjoy increased operational efficiency.

Ø  Demerits Of Restructuring

Though restructuring can promote productivity in some ways, it may detract from it in others. If a business downsizes during restructuring, the loss of highly skilled workers may result in a loss of productivity. Workers remaining after a downsizing often feel insecure about their jobs, which may lead to low worker morale and poor customer service. If a company’s restructuring involves new technology or changes in employee responsibilities, productivity may suffer while employees learn their new roles.”[4]

VII.KINDS OF RESTRUCTURING

There can be mainly four types of restructuring and they are as follows:

1. Financial restructuring-involves the irestructuring of ithe capital and iraisingifinance ifor inew i This involves decisions relating to acquisitions, mergers, joint ventures and strategicalliances.
2. Technological restructuringdeals with restructuring so as to exploit technological expertise either within the business group or with other companies.
3. “Market restructuring involves decisions making in respect to the product market segment, where the company is planning to do business based on its core competencies.”
4. “Organizational restructuring involves setting up internal structures and procedures to improve the organization’s staff capacity to respond to changes. In order to facilitate and execute the above three forms of restructuring, this form of restructuring is necessary. Such adjustments require the cooperation of all staff levels to ensure effective restructuring.[5]

Some of the icommonly used methods of icorporate irestructuring iare iamalgamation, imerger, idemerger, islump isale, iacquisition, ijoint iventure, idisinvestment, istrategic ialliances iand ifranchise undergone by an organization..

Among which some of the terms are going to be discussed in detail in the following sub topics.

VIII.FORMS OF CORPORATE RESTRUCTURING

In the recent time the words like Mergers,acquisitions, Amalgamations, takeovers has become day to day activity and have become so familiar.As per the White Industry’s Case “ Mergers and Acquisitions are a collective term for different business transactions where companies merger or they change ownership respectively. It is a great way to achieve strategic goals and economies of scale. With the globalization and liberalization andgrowing competition many mergers and amalgamations are taking place all over the world. And somehow we all are a bit acquainted with these words.But if we take a close look all the forms of corporate restructuring is some kind of an arrangement. Before going into the forms of corporate restructuring it is necessary to have a broad idea about the terms,compromise and arrangement. An arrangement can be explained as where parties agree to do something, not withstanding the fact there was no dispute between the parties and any scheme other than a scheme by way of compromise or reconstruction which affects the right of creditors or any class of members of the company. Therefore the word arrangement has an inclusive definition and contemplates an arrangement to be not only reorganization of share capital. The expression arrangement would also include acquisition of shares of a subsidiary by the dominant shareholders by the holding company in lieu of the shares of the subsidiary , transferred by the holding company. Also It was well held in one of the case[6] that “An arrangement , as the expression used in the act embraces a wider class of agreements than a compromise therefore it can include modification of rights above which there are no disputes and can also include a reorganization of share capital of the company by consolidation of shares of different classes or division of shares or by both the methods “ As these two terms are not defined in the Companies Act, 2013, yet from the concept of the arrangement, we can have a vivid idea about the term compromise , that it is, compromise is a much narrower term or it has a constrictive and restrictive approach as compared to arrangement. An arrangement is something which does not include any scheme of compromise. From the wordings of the Act it can be understood that, a scheme of compromise is specifically related or concerned with the settlement with the creditors and some kind of dispute is required for such a settlement. Whereas arrangement having a wider scope is mainly concerned with the rights of the members and shareholders, an arrangement is made fora modification in the share purchase agreement and for an arrangement to take place no dispute is necessary. 

Hence the following can be the types of corporate restructuring, they are :

• I Mergers i and i Amalgamation
• iAcquisition I and I Takeover
• iDivestiture
• iDemerger (spin off / split up / split off)
• i Reverse merger
• Reduction of Capital
• i Joint Ventures
• i Buy back of Securities

Now going in detail what exactly these term mean.

“Merger and Amalgamation: A merger is a combination of two or more companies into one business. It can also be understood as an arrangement by which two (or more) companies ‘ assets are transferred to or controlled by one company.Therefore, a merger where one of the two existing undertakings loses its legal identity after the transfer of all its property, liabilities and other assets to the other under an agreement authorized by all or a statutory majority of the investors of the two undertakings at their respective general meetings and permitted by the court. Hence, merger can be by two means they are:

• Merger through Absorption:- An absorption is a merger of two or more companies into an’ existing business.’ In such a merger, all firms, except one, lose their identity. For example, absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemicals Ltd(TCL).
• Merger through Consolidation:- A consolidation is a combination of two or more businesses into a’ new business.’ Both companies are legally dissolved in this form of merger and a new entity is formed. The acquired business here transfers its assets, liabilities and equity for cash or stock exchange to the acquiring company. The merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, India Software Company Ltd, for example

Other than these two means by which a merger can takes place, merger can be of basically four types namely, horizontal merger, vertical merger, conglomerate merger and triangular merger.

Amalgamation: Amalgamation is a legal process by which two or more companies are merged together to form a new corporation and one or more companies are to be combined or mixed with another and as a result the amalgamating company loses its identity and its shareholders become the owners of the new company or the amalgamated company.

The terms merger and amalgamation can also be referred as combination when it comes under the purview of the Competition Act,2002 whereby combination means “The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises,”

As these two terms are not defined under the Companies Act ,2013, there is not much difference between these two words they are used interchangeably in most cases yet in strict senses few differences can be pointed out such as, merger is commonly used for the fusion of two companies. Merger is normally a strategic vehicle to achieve expansion, diversification, entry into new markets whereas Amalgamation is an arrangement for bringing the assets of two companies under the control of one company, which may or may not be one of the original two companies. Amalgamation signifies the transfer of all or some part of the assets and liabilities of one or more existing business entities to another existing or new company.

Acquisitions and Takeovers:An acquisition might be characterized as a demonstration of procuring powerful control by one organization over resources or the executives of another organization with no mix of organizations. Along these lines, in an obtaining at least two organizations may stay free, separate legitimate substances; however there might be an adjustment responsible for the organizations. Acquisition can be mainly of three types they are, acquisition of shares , slump sale or business transfer agreement whereby there is a transfer of all the assets of the transferor company to the transferee company and the lastly is acquisition by partial sale , that is a part of the assets are being transferred. Takeover is another type of restructuring. When a bidder company takeover the management of target company with permission of its Board, it is termed as Friendly takeover. When a company secretly acquires the control over Target Company against wish of their management, it is termed as Hostile takeover. The term acquisitions is mostly related to private companies whereas takeovers is mostly associated with listed companies.For example, in 2018 The Walt Disney Company buys Twenty-First Century Fox, Inc. for $71.3 billion,here the synergy of the transaction was to increase readership, paid circulation, and monthly unique visitors to the site, as well as expand Meredith’s reach with the Millennial generation.

Divestiture: Divestiture means an out sale of all or substantially all the assets of the company or any of its business undertakings / divisions, usually for cash (or for a combination of cash and debt) and not against equity shares. In short, divestiture means sale of assets, but not in a piecemeal manner. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

Demerger: Demerger is a form of corporate restructuring in which an entity’s business operations are segregated into one or more components.

Demerger can take three forms[7]:

• Spin-off -company distributes its shareholding in subsidiary to its shareholders thereby not changing the ownership pattern. For example, Air India formed Air India Engineering Services Limited by spinning off its engineering department.
  
  
• Split-up- is the form of demerger where shareholders of existing company form a new company to takeover specific division of existing company. When existing company is dissolved to form few new companies, it is called as Split-up.
  
  
• Split-off-takes place when company sells its non-profit making division.

Reverse Merger -When financially weak company absorbs financially strong company it is corporate restructuring made in the form of Reverse Merger. Merging of large sized company into small sized company is also form of Reverse Merger. For example ,merger of Corus with Tata. Now-a-days, public companies opt route of reverse merger for merging with private companies to avoid lengthy procedure of merger.

Reduction of Capital: Reduction of Capital is a mechanism whereby a corporation is allowed to extinguish or reduce responsibility for any of its shares in respect of unpaid share capital, or is permitted to cancel any paid-up share capital that is reported or is permitted to pay any paid-up capital that exceeds its requirements.

Joint Venture: Joint Venture is an agreement where two or more firms (known as joint venture partners) contribute in a pre-decided proportion to the equity capital of a new company (known as a joint venture). For example. Suzuki’s Maruti

Buy back of Securities: If a company holds excess cash, which it does not need in the medium term (say three to five years); the company is cautious in returning this excess cash to its investors. Securities buy-back is one of the ways in which the excess cash is returned to its owners. Securities purchasing can take two forms to call or put option. The call option allows the company to purchase Back the shareholders ‘ shares and the controlling shareholders make the call. So putting alternative is where an investor sells their shares to a third party. These two approaches can also be referred to as the dissenting shareholders ‘ exit mechanism if they do not agree to an agreement scheme”[8]

IX.LEGAL PROVISIONS FOR SANCATIONING A SCHEME OF COMPROMISES,ARRANGEMENTS, MERGERS AND AMALGAMATIONS WITH RESPECT TO COMPANIES ACT , 2013

“Before any scheme of arrangement or compromise is laid down before the NCLT for its approval, certain steps are required to be followed. One of the most important step before any merger or acquisition is fixing a potential investor or targeting a competitor, then conducting the due diligence process and preparing a due diligence report upon which the investor company decides whether to invest or not, once after reviewing the due diligence report they set the conditions subsequent and conditions precedent which are required to be complied with through out the process and even after the transaction takes place.Then the companies which will be undergoing a change in the capital structure or ownership would call a meeting of the creditors or the members, who will be getting affected by such a reorganization. Along with compliance with the provisions of the Companies Act, the companies are also required to comply with certain general and specific laws which can be either a pre compliance or a post compliance.Along with all these compliance the memorandum of association and article of association of the companies are also required to be amended. A brief note on the provisions of the Companies Act which deals with the transactions of compromise,arrangements and amalgamations.

Chapter XV of the Companies Act,2013 comprising section 230 to section 240 contains provision on “ Compromises, arrangements and amalgamations “. The scheme of Chapter XV goes as follows[9]:

Section 230-231 of the Companies Act, 2013 deals with compromise or arrangements.

Section 232 of the Companies Act, 2013 deals with mergers and amalgamation including demerger.

Section 233 of the Companies Act, 2013 deals with amalgamation of small companies.

Section 234 of the Companies Act, 2013 deals with amalgamation of company with foreign company.

Section 235 of the Companies Act, 2013 deals with acquisition of shares of dissenting shareholders.

Section 236 of the Companies Act, 2013 deals with purchase of minority shareholding.

Section 237 of the Companies Act, 2013 deals with power of Central Government to provide for amalgamation of companies in public interest.

Section 238 of the Companies Act, 2013 deals with registration of offer of schemes involving transfer of shares.

Section 239 of the Companies Act, 2013 deals with preservation of books and papers of amalgamated companies.

Section 240 of the Companies Act, 2013 deals with liability of officers in respect of offenses committed prior to merger, amalgamation, etc.  \

X.OTHER LEGAL COMPLIANCES

Other than these provisions which are required to be complied can be listed as :

1. “SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 Regulation 37 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, iprovides that the listed ientity shall not file iany scheme of arrangement iunder sections 391-394 and 101 of the iCompanies Act, 1956 or under iSections 230-234 and iSection 66 of iCompanies Act, 2013, iwhichever applicable, iwith any Court or Tribunal iunless it has obtained iobservation letter or iNo-objection letter from ithe stock exchange(s). iGenerally, stock exchanges iraise several iqueries and on ibeing satisfied that iithe scheme does inot iviolate any laws concerning isecurities such as the Takeover Code or the SEBI (ICDR) Regulations, Stock Exchanges accord their approval. The listed entity shall place the Observation letter or No-objection letter of the stock exchange(s) before the Court or Tribunal at the time of seeking approval of the scheme of arrangement. The validity of the ‘Observation Letter’ or No-objection letter of stock exchanges shall be six months from the date of issuance, within which the draft scheme of arrangement shall be submitted to the Court or Tribunal”.
2. The Indian Stamp Act, 1899,iIt is necessary to irefer to the Stamp iAct to check the istamp duty payable on itransfer of undertaking ithrough a merger or i
3. Competition Act, i2002, The provisions iof Competition iAct and the iCompetition Commission iof India (Procedure in iregard to the iTransaction of iBusiness relating to iCombinations) Regulations, i2011 are to be icomplied with.
4. Income Tax Act, 1961 The Income Tax Act, 1961 includes issues such as tax relief for amalgamated / amalgamated companies, loss forwarding, capital gain tax exemptions, etc. For example, if a merger or demerger scheme includes the merger of a loss-making company or a loss-making division, the relevant provisions of the Income Tax Act need to be reviewed and Rules to ensure, inter alia, the availability of the benefit of carrying forward the cumulative losses and to assess these losses against the Transferee Company’s profits.[10]
5. CONCLUSION

After all ithe detailed discussion about corporate restructure, we got a vivid idea about how the concept of corporate restructuring evolved with times ,then we looked into the need ,the scope and the reason behind such a restructuring and in light of which we discussed what can be the advantages and disadvantages of a corporate restructuring. We also looked into the types of restructuring along with the different types of corporate restructuring and a detailed study on the various types of corporate restructuring and lastly discussed about the legal provisions which are required to complied with for such a transaction to finally get approved by the NCLT and come into effect.

[1]ICSI.in (Oct 15,2019,2:30 PM).

[2]ICSI,Executive Program,Company Law Paper 1.

[3]Rishav B,Term paper on Corporate Restructuring, Financial management (Oct 15,2019,4:30 PM),https://www.businessmanagementideas.com/term-paper/corporate-restructuring-term-paper/term-paper-on-corporate-restructuring-financial-management/14255.

[4]AmandaMcMullen;Advantages and disadvantages of restructuring (Oct 16,2019,5:00PM) https://smallbusiness.chron.com/advantages-disadvantages-restructuring-39914.html.

[5]SiddhartthSingh &Abhay Rajput,CORPORATE RESTRUCTURING: COMPROMISE, ARRANGEMENT, MERGERS AND AMALGAMATION,4 JCIL 45,50-53(2018).

[6]Re Sandwell Park Colliery Co,[1914] 1 CH,431.

[7]Madhura,Typesofcorporaterestructuring(Oct19,2019,8:40PM)https://www.caclubindia.com/articles/types-of-corporate-restructuring-5649.asp.

[8]PriyankaAnand,Types Of Corporate Retructuring,(Oct 19,2019,9:4:40 PM)https://priyankablogthoughts.com/types-of-corporate-restructuring/

[9]Companies Act 3013,Acts of Parliament,2012

[10]Dheerajtyagiclass.com(Oct21,2019,10PM)http://dheerajtyagiclasses.com/dtcadmin/uploads/1492428958Merger,%20De-Merger,%20Amalgamation%20-%20With%20DTC%20Footer.pdf