Corporate Restructuring in India
Corporate Restructuring is the process of making changes in the composition of a firm’s business portfolios. This is done to make it a more profitable enterprise. Simply by reorganizing the structure of the organization, the organization can generate more profits from its operations.
Corporate Restructuring takes place in two forms:
- Financial Restructuring:
Financial Restructuring takes place due to a drastic fall in the sales because of the adverse economic conditions. Here, the organization may change the equity pattern, cross-holding pattern, debt-servicing schedule and the equity holdings. All this is done to sustain the profitability of the organization and sustain in the market. Generally, financial or legal advisors are hired to assist the organization in the negotiations.
- Organizational Restructuring:
Organizational Restructuring means changing the structure of an organization, such as reducing the hierarchical levels, downsizing employment, redesigning the job positions etc. This is mainly done to cut the cost and pay off the outstanding debt to continue with the business operations of the organization.
Objectives of the Corporate Restructuring:
Corporate Restructuring is concerned about placing business activities of the organization as a whole in order to accomplish certain prearranged objectives. The objectives encompass the following:
- Orderly redirection of organization’s activities;
- Positioning extra cash flow from a profitable business to a loss-making business to finance its profitable growth;
- Misusing inter-dependence amongst current or potential businesses within the organization’s portfolio; — risk reduction; and
- Development of core competencies in the organization.
Types of Corporate Restructuring Strategies:
A merger is the combination of two or more companies that are merged together either by way of amalgamation or absorption or by the formation of a new company. The merger of two or more companies is generally done by offering the stockholders of one company the securities of the acquiring company in exchange for the surrender of their stock.
Kinds of Mergers:
- Horizontal Merger: It is a merger of two or more companies that directly compete in the same market and hence the merger of such companies expands the firm’s operations in the same industry.
- Vertical Merger: It is a merger that takes place during a combination of two companies that operate in the same industry but at diverse stages of production or distribution system. Any company that takes over its supplier/producers of raw materials, then it results in backward integration. Any company that agrees to take over the retailer or Customer Company then it results in forwarding integration.
- Congeneric Merger: Here, two companies in the same or related industries merge. They do not offer the same products, but related products and may share similar distribution channels, providing synergies for the merger.
- Conglomerate Merger: In a conglomerate merger, there aren’t any important common factors between companies in production, marketing, research and development, and technology. Conglomerate mergers are mainly done to bring various types of businesses under one flagship company.
A demerger is a type of corporate restructuring wherein entity’s business actions are separated into one or more different organizations.
3. Reverse Merger
A reverse merger is an opportunity for an unlisted company to become a public listed company, without opting for Initial Public offer (IPO). Here, the private company acquires majority shares of a public company with its own name.
Disinvestment is the act of an organization or a company or the government for selling or liquidating an asset or subsidiary. It is also known as “divestiture”.
Takeover occurs when an acquirer or an acquiring company takes over the control of a target company. This is also known as the acquisition.
6. Joint Venture (JV)
A joint venture is a business arrangement where two or more parties agree to pool their resources for the purpose of accomplishing a specific task.
7. Strategic Alliance
An agreement between two or more organizations to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called strategic alliance.
Franchising is defined as an arrangement wherein one party (franchiser) allows another party (franchisee) the right to use its trade name along with definite business systems and procedure, to produce and market the goods or services along with certain specifications. The franchisee generally pays the franchiser a one-time franchise fee and a percentage of sales revenue in terms of royalty and gains.
9. Slump sale
Slump sale is the transfer of one or more undertakings because of a sale in exchange for a lump sum consideration, deprived of values being allocated to each and every individual assets and liabilities in such sales.
Needs for Corporate Restructuring:
The need for undertaking Corporate Restructuring are as follows:-
- To focus on the basic strengths, operational synergy & other effective allocation of managerial capabilities and infrastructure in an organization.
- Consolidation and economies of scale by expansion and diversion to exploit the extended domestic and global markets.
- Revival and rehabilitation of sick units in the organization by adjusting losses of the sick units with profits of a healthy company.
- Acquiring a constant supply of raw materials, access to scientific research and technological developments.
- Capital restructuring of the organization by a suitable combination of loan and equity funds to decrease the cost of servicing and to improve the return on capital employed.
- Improvement of corporate performance by bringing it at par with competitors and by adopting the radical changes brought out by information technology.
Corporate Restructuring is very important in the development of the organization to reach its Goals, improve productivity and reduce and control overheads and costs. The need for a corporate restructuring arises due to adverse economic conditions.
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