This article is written by Vivek Sanghi, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

It is widely believed that the way a business grows could be classified either as organic or inorganic growth. Organic growth occurs through routine and special internal business strategies, tactics, and decisions that enhance sales figures, revenues numbers, customer base, and profit margins. Such decisions do not impact the corporate structure of the business entity.

Sometimes businesses attempt to grow at an accelerated pace through inorganic growth by identifying synergies and opportunities in other enterprises and acquiring such targets. Such growth may cause a change in the corporate entity.

However, sometimes a business simply cannot generate enough revenue and for a variety of other reasons, might be hurtling towards failure and probable demise. Even in such situations, a business can be saved from total closure through corporate restructuring strategies that salvage the value that exists in a failing business and give it a new lease of life albeit in an altered corporate structure.

What is corporate restructuring?

Corporate restructuring is the process involved in changing the organisation of a business. This involves significantly changing an entity’s business model, financial structure, or management team, to address challenges and increase value for stakeholders. The corporate restructuring may involve employee retrenchment at any scale, or bankruptcy or both. Restructuring processes are usually designed to reduce the impact on employees, and statutory laws are also designed to protect the interest of the employees first. 

Scope of corporate restructuring

The scope of corporate restructuring includes cost reduction, enhancing the economies of scale, improving efficiency, and generating greater profits. Sometimes, to grow or even survive, a business may need to restructure itself and focus on competitive advantage. The corporate restructuring may mean different processes and strategies at different times for different companies and the common goal in every case of restructuring is to eliminate the disadvantages and consolidate the advantage. Therefore, corporate restructuring is employed both as a correction strategy and as a growth strategy.

Forms of corporate restructuring

Comparison of various commentaries on a conceptual study of corporate restructuring could be confusing because what one author may refer to as ‘type’ of corporate restructuring, the other may refer to as a ‘strategy’ of corporate restructuring, and none of them may be incorrect, therefore it is paramount to keep this in mind while studying works of different authors on this subject.

Financial restructuring

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” -Warren Buffet.

Restructuring of the financial aspects of a business may be undertaken when the going is not good and there is a fall in the revenues, possibly because of adverse economic conditions and other externalities or sometimes even internalities. Management may choose to change its equity patterns, debt servicing schedule, cross-holding pattern, to sustain the market, survive, reduce costs, and return to profitability. Some other initiatives under financial restructuring include, but are not limited to:

• Reduction of tax liability,
• Divestment of unproductive assets,
• Outsourcing,
• Relocation of operations (to reduce costs),
• Renegotiation of contracts,
• Debt Refinancing.

Organisational restructuring 

“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.” -Warren Buffet.

Businesses may function efficiently, turn more profitable, and run better due to well-planned and executed organisational restructuring. It means changing the organisational structure, for example reducing the levels of hierarchy, redesigning job positions, removing excess or under-performing employees, changing reporting structure. Some other initiatives under organisational restructuring include, but are not limited to:

• Regrouping of business,
• Decentralization,
• Portfolio Restructuring,
• Corporate Strategy.

Corporate restructuring strategies

• Mergers: Merger is a strategy wherein two or more businesses are merged either by way of amalgamation or absorption. Mergers may be: – (i) horizontal, (ii) vertical, (iii) co generic, and (iv) conglomerate.
• Demerger: In a Demerger, certain business operations of an entity are segregated into one or more entities. A demerger strategy is undertaken to unlock the value of a particular business and enable it to operate smoothly with more focus.
• Reserve Merger: According to the explanation provided by the Institute of Company Secretaries of India, a reverse merger is a strategy where a private company acquires the majority shares of a public company, under its name and in the process becomes a public listed company itself without causing an initial public offering.
• Disinvestment: Disinvestment is a strategy where an entity, a conglomerate, or a government sells or liquidates an asset or a business unit. 
• Takeovers: Takeover is also known as acquisition. In a takeover/acquisition the acquirer attempts to gain control of the target company to achieve market supremacy. It may be a friendly or a hostile takeover.
• Joint Venture: A joint venture is a corporate strategy wherein an entity is formed by two or more companies to undertake a financial activity together. The companies agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company. Joint ventures are set up for fixed periods and they may be either project-based or functional-based.
• Strategic Alliance: Strategic alliance is an agreement between two or more parties to collaborate, to achieve certain objectives while continuing to remain independent organizations.
• Slump Sale: It is the transfer of one or more businesses or undertakings as a ‘going concern’ and for a lump-sum sale value without specific values being assigned to the individual assets and liabilities.

Corporate restructuring : the process

“Risk comes from not knowing what you’re doing.” -Warren Buffet.

Below is a general overview of the process mostly adopted in routine corporate restructuring cases and this is not applicable for restructuring that is mandatorily caused under the force of the law.

• Identifying potential targets: This stage of the process involves identification and preliminary review of external targets, in case of acquisition strategy. However, this process may also be internally looking wherein the management tries to identify internal business units, group companies, or subsidiaries for integration or spin-off via demerger, reverse merger, or other possible restructuring strategies.
• Due Diligence: Once a target has been engaged, the important stage of deep investigation of the target is undertaken. All relevant facts and information are gathered, research and analysis are carried out and a due diligence report is prepared for management decision support. Such investigation helps determine the real value of the subject and reveals whether the target is really what it looks like. Due diligence is most helpful for the management of the acquirer if it is a 360-degree process covering financial, legal, human resource, and business aspects of the target.
• Business Valuation: Business valuation or assessment includes the examination and evaluation of both the present and future market value of the target company. This stage of the process is different from due diligence because due diligence involves investigation and reporting while this stage involves evaluation, projection, and estimations.
• Planning: The stage of planning is not necessarily after business valuation nor is it chronologically glued to the present position. Planning is an ongoing process, but the finalisation of this process needs to happen now because the next stage in the process will involve the implementation of the plan. Planning the structuring of the deal, the steps of compliance and the deadlines for each such step, the process of integration, the plan to deal with the employees, retrenchment packages if applicable and accompanying regulatory compliances, fresh employment contracts, novation of contracts, assignments of contracts, planning for registration and et all must be done now and kept ready.
• Executing the deal: Time to put all that planning into practice, put in the hard work and improvise in the face of uncertainty, all while also implementing innovative marketing and outreach campaigns to allay apprehensions of customers, suppliers, and external stakeholders of the target.
• Integration: This stage comprises preparation and execution of the final contracts, and post-restructuring processes come into play from this stage for completing the integration or spin-offs and set the stage for successful day to day functioning in the new avatar. 

Corporate restructuring : the panacea?

When businesses are facing losses, economic downturns, reducing customer base, severe competition, corporate restructuring is often pressed into service as a rescue tool. The Covid-19 pandemic induced worldwide slowdown in yet another scenario when corporate restructuring will play a major role in reviving and rescuing various businesses all over the world. Research has shown that delisting risk increases when companies undertake repetitive restructurings, large-scale retrenchments, massive asset downsizing, high levels of debt and failure to cut costs and focus on core competency.

In India, even the companies that file for bankruptcy, now have additional avenues of corporate restructuring through the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), except for financial services companies such as banks, non-banking financial companies (NBFCs), and investment funds. The object of the IBC is to attempt to give another chance to failed and sinking companies. Before the inception of this code, there was no clear direction and a large number of statutes (i.e., The Indian Partnership Act, 1932, The Central Excise Act, 1944, The Customs Act, 1962, The Income-tax Act, 1961, The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, The Finance Act, 1994, The Sick Industrial Companies (Special Provisions) Repeal Act, 2003, The Limited Liability Partnership Act, 2008, The Payment and Settlement Systems Act, 2007, and The Companies Act, 2013) were involved in the insolvency proceedings along with archaic laws such as Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, and bankrupt businesses had limited chances of revival.

Corporate restructuring under CIRP can be initiated by the creditors of the concerned business or by the business entity itself. Under this process, licensed insolvency professionals work with the creditors and the corporate debtor to come up with a plausible restructuring plan that gets implemented after due approval by the National Company Law Tribunal (NCLT). 

Under the present system. in cases of restructuring and resolution of distressed/defaulting companies, four process routes are available in India:

• For a defaulting company, resolution through CIRP, failing which, liquidation under the IBC;
• Enforcement or recovery against a defaulting company and its assets or guarantees by way of statutory mechanisms under the applicable laws;
• For distressed companies (i.e., companies that have defaulted on their debt obligations for 30 – 60 days), restructuring by RBI-regulated institutions under the relevant circulars issued by the RBI; and
• Voluntary restructuring of assets and liabilities under a scheme of arrangement under the Companies Act 2013. 

The concepts of IBC, CIRP, pillars of IBC along with each of the aforementioned routes are large subjects and the contents thereof are beyond the scope of this article. 

Case studies

Reliance Industries Limited (2005)

Reason for restructuring

Incompatibility between promoter-successors.

Reliance Industries Limited (erstwhile ‘RIL’) was restructured (split) in June 2005 due to incompatibility between the two successors, Mr Mukesh and Mr Anil. The RIL restructuring was all about the complicated distribution of wealth to the tune of ₹ 1000 billion. 

The RIL board approved a demerger in August 2005, whereby both brothers, Mr Mukesh and Mr Anil– headed different businesses and five companies emerged from the said demerger by January 2006.

Among the companies of RIL Group, Reliance Capital, and Reliance Energy, were already listed at the exchanges. The remaining four companies got listed by the end of March 2006.

The new RIL structure gave Mr Mukesh absolute control of: 

• Core businesses of RIL along with IPCL (oil exploration, refining, petrochemicals, and textile businesses), 
• Reliance Life Sciences (Biotech firm), 
• Trevira (a company in Europe that manufactures polyester fibres).

Mr Anil got absolute control of power, communication, and financial businesses via four companies and the conglomerate was called Anil Dhirubhai Ambani Enterprise as part of the Reliance group. These four companies were:

• Reliance Capital Ventures Ltd. (later merged with Reliance Capital Ltd.),
• Reliance Energy Ventures Ltd. (later merged with Reliance Energy Ltd.), 
• Reliance Communication Ventures Ltd. (included both Reliance Infocomm and Reliance Telecom),
• Reliance Natural Resources Ltd. (included businesses in gas-based energy undertakings).

Impact of the restructuring

Share prices of the five companies listed at the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) were cited differently after the Demerger. 

Before the restructuring, RIL’s share traded around ₹978 per share, but after the restructuring, the sum of demerged share values of the said five companies at that juncture came to around ₹1235/- unlocking immense value for the shareholders. 

The rest as they say is history.

Satyam Computer Services (2009)

Reason for restructuring

Business failure due to fraud;

• Satyam was among the most admired information technology companies until the year 2008-09 when it became a victim of frauds allegedly perpetrated by its founder(s). Satyam was an award-winning IT company and one of the faces of the Indian IT industry. 
• It had a sound business model and portfolio of large international clients, therefore when calamity struck, the government had to immediately resort to firefighting to save the face of the Indian IT industry on the world stage. A high-level committee of the biggest names in various industries was set up to come up with a restructuring plan for the then-ailing Satyam.
• After the finalisation of the restructuring plan, a formal public auction process was announced, and Tech Mahindra obtained a 46% stake in Satyam and eventually the entity completely merged with Tech Mahindra and came to be known as Mahindra-Satyam. The companies got merged legally on 25 June 2013 and the entity Satyam became history since then.

Yes Bank (2020)

Reason for restructuring

Business failure due to crises induced by alleged fraud;

• When crises struck, the financial position of Yes Bank Ltd deteriorated rapidly, more particularly concerning its liquidity, capital, and some critical parameters The alleged fraud of bank officials and a complete absence of any credible plan by the board and stakeholders for infusion of capital had compelled the Reserve Bank of India (RBI) to intervene and act in the public interest. 
• The losses for Yes Bank stood at ₹185.64 billion for the third fiscal quarter ending December 2019 and Gross Non-Performing Assets had risen to 18.87 per cent in the said quarter as against 2.10 per cent for the previous year and it was clear that the bank would not survive without a capital infusion and clean-up of its bad debts.
• The reconstruction scheme of Yes Bank as announced by the RBI, proposed changes to the authorised capital, and the number of equity shares. Yes Bank itself was placed under a withdrawals moratorium with account holders being permitted to withdraw no more than ₹ 50,000/- from their account during the entire moratorium period. 
• As per the approved reconstruction plan for Yes Bank, the State Bank India (SBI) would invest up to 49 per cent equity in Yes Bank.
• Axis Bank, Bandhan Bank, Federal Bank, Housing Development Finance Corp (HDFC), ICICI Bank, IDFC First, and Kotak Mahindra Bank, joined the investor consortium to invest in Yes Bank.
• As per the approved reconstruction plan, SBI, which invested 49 per cent equity at the time of restructuring, was not permitted to reduce its stake in Yes bank to below 26 per cent for three years, while other investors and shareholders are required to lock in 75 per cent of their investment in Yes Bank for a mandatory period of three years.
• A new, temporary board, constituted by the RBI, was required to remain in force for one year or till such time that an alternate board is constituted by Yes Bank.
• The employees of Yes Bank allegedly continued their services on the same employment terms and salary as was applicable for the previous year.
• All offices and branches of Yes Bank continued to function in the then existing manner and locations. No prohibition was placed on opening new offices and branches or closing the then existing ones.
• The new management of restructured Yes bank continues to recover bad loans and work with asset reconstruction companies and investors to clean the book. Gross non-performing assets for the quarter ending September 2021 fell to 14.97% compared to 15.6% in the previous quarter ending June 2021.
• The restructured Yes Bank is trying to increase the share of retail and MSME lending in its loan portfolio and reduce focus from corporate lending where it burnt its fingers due to defaults.

Report on the status of the Yes Bank restructuring, as on date of publishing this article, maybe read from here.

Aditya Birla Group

• In 2020, Novelis Inc., a wholly-owned subsidiary of an Aditya Birla Group company named HIL Ltd, acquired a large supplier of rolled aluminium products named Aleris Corp. for US $2.8 billion. The said acquisition made HIL Ltd one of the largest aluminium companies in the world.
• In 2019, GIL (an Aditya Birla Group company) acquired a 100 per cent equity share of Soktas India Private Limited, a subsidiary of a Turkish company dealing in textiles, for ₹ 1.65 billion. GIL also acquired Chlor Alkali, a business vertical of KPR Industries (India) Ltd., for ₹ 2.53 billion, through a slump sale.
• PT Elegant Textile Industry (one of the largest producers of rayon spun yarn in the world), entered into a conclusive agreement for acquiring a 74 per cent stake in a well-established Germany-based textiles company, Spinnerei Lampert Muhle GmbH. This transaction was an outbound acquisition with a motive to enter a new market by growing inorganically in the target market.
• Aditya Birla Fashion and Retail Limited is a ‘pure-play fashion powerhouse’ in India that owns brands such as Allen Solly, Forever21, Louis Philippe, Peter England, Pantaloons and Van Heusen in its portfolio. It acquired a 51 per cent equity stake in a retail firm named M/s Finesse International Design Private Limited that was started by the designer duo ‘Shantanu and Nikhil’.
• Aditya Birla Fashion and Retail Limited also acquired 100 per cent shareholding in an ethnic wear retailer, Jaypore for ₹1.1 billion through a share purchase agreement.
• In 2018 Aditya Birla Group undertook many corporate restructuring projects. One was the acquisition of Binani Cement Ltd. by UltraTech Cements (a group company of Aditya Birla), wherein Binani Cement Ltd became a wholly-owned subsidiary of Ultratech. This acquisition also led to a case cited under Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd. & Ors (Civil Appeal No.10998 of 2018), wherein the Hon’ble Supreme Court forbade discrimination between operational and financial creditors and refused to stay the sale of Binani Cements Ltd to UltraTech Cements.
• In May 2018, the erstwhile Idea Cellular proposed the sale of its business of standalone tower to ATC Telecom Infrastructure Private Limited for ₹ 40 billion.
• In 2018 itself, Idea Cellular merged with Vodafone India, to drive economies of scale and stand a better chance against stiff competition. Though the said merger was announced in the year 2017, it became effective on 31st August 2018. This was a horizontal merger where none of these companies wound up. However, the company was dissolved. 
• The acquisition of JAL and Jaypee Cement Corporation Ltd. by Ultratech is the largest corporate restructuring of UltraTech as well as of the entire cement sector in India. In this deal, UltraTech acquired 21.2 million tonnes per annum capacity of the identified cement plants of both these companies, for  US $2.5 billion.

Conclusion

Corporate restructuring is a broad term that encompasses various strategies used for rescuing failing businesses or unlocking growth potential, and value in others. Corporate restructuring led by CIRP-IBC-NCLT has marked a watershed moment in the field of this subject in India and put India on the world stage, yet several issues need to be ironed out before it is too late. There have been recent accusations of certain elements gaming the CIRP-IBC-NCLT system and defeating the very purpose of IBC and CIRP; the government was quick to realise the shortcomings and is taking appropriate steps to resolve the problem.  A committee of experts has been set up by the government, to explore the idea of adoption of the UNCITRAL Model Law on cross-border insolvency and the matter is being pursued actively by the government with one of the probable outcomes being cross-border enforcement of awards passed in India under the IBC. Therefore, one can expect quality advances in corporate restructuring both under company laws as well as the insolvency laws. The government is keenly aware of the need for limiting the time taken to complete the restructuring, and resolution process of distressed companies, problems faced by the insolvency professional in the course of their work, delays involved in obtaining approvals from the NCLT therefore the RBI and the government seek to empower the Insolvency and Bankruptcy Board of India (IBBI) and insolvency professionals, in that direction.

References

1. https://www.financialexpress.com/industry/banking-finance/idbi-bank-q2-profit-surges-75-to-rs-567-cr/2354106/
2. https://economictimes.indiatimes.com/markets/expert-view/is-the-yes-bank-turnaround-story-complete-prashant-kumar-answers/articleshow/80094928.cms
3. https://www.businesstoday.in/industry/banks/story/rbi-announces-restructuring-yes-bank-sbi-hold-49-percent-stake-251546-2020-03-06
4. https://economictimes.indiatimes.com/markets/stocks/news/yes-bank-restructuring-credible-and-sustainable-says-shaktikanta-das/articleshow/74653608.cms
5. https://rbidocs.rbi.org.in/rdocs/content/pdfs/DraftSoR232020UK.pdf
6. https://www.ripublication.com/gjfm-spl/gjfmv6n9_02.pdf

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