Corporate Restructuring

Meaning: To give a new structure, to rebuild or rearrange Restructuring is corporate management term for the take action of incompletely dismantling or else reorganizing a company for the purpose of making its well-organized and consequently more profitable.

Need for corporate restructuring

Corporate restructuring may also get place as a result of the acquisition of the business by new owners. The acquisition may be in the type of a leveraged buyouts, a hostile takeover, or a merger of some form that keeps the business whole as a subsidiary of the controlling company. When the restructuring is due to a hostile takeover, corporate raider often apply a dismantling of the company, selling-off properties and other assets in order to make a profit from the buyout. What remains following this restructuring may be a minor entity that can carry on functioning, although not at the level possible before the takeover took position.

Characteristics of Corporate Restructuring

To improve the companys Balance sheet, (by selling unprofitable division from its core business). To accomplish staff reduction ( by selling/closing of unprofitable portion). Changes in corporate management. Sale of underutilized assets, such as patents/brands. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party. Moving of operations such as manufacturing to lower-cost locations. Reorganization of functions such as sales, marketing, & distribution. Renegotiation of labor contracts to reduce overhead. Refinancing of corporate debt to reduce interest payments. A major public relations campaign to reposition the company with consumers.

Main forms of corporate restructuring

Merger Consolidation Acquisition Divestiture Demerger Joint venture Reduction of capital Buy-back of securities Delisting of securities Carve out 1

These are discussed in details below Merger

Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Consolidation or amalgamation Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers of many smaller companies into much larger ones. Acquisition In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). Divestments The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. Divesture is a deal through which a company sells a section of its assets or a division to another company. It involves selling some of the assets or separation for cash or securities to a third party which is an outsider. Divestiture is a form of reduction for the selling company. means of expansion for the purchasing company. It represents the sale of a section of a business (assets, a product line, a subsidiary) to a third party for cash and or securities. Joint Venture

Joint ventures is a business enterprise for profit, in which two or more parties share responsibilities in an agreed manner, by providing risk capital technology patent trademark brand name to access to market. Reduction of capital This is a legal process u/s 100 to 104 of the Companies Act, 1956 .There are three ways of doing it * By extinguishing or reducing the liability in respect of share capital not paid up( since not called as yet). * By writing off or canceling the capital which is lost. * By paying off or returning excess capital that is not Buy-back of securities

The company is having excess cash.The company does not have any further investment proposal for capacity creation. In such a phase the stock market is quite bearish and the interest rate comes down, so the idle cash does not fetch any good returns. Delisting of securities

When we refer to delisting of a company as a form of corporate restructuring, we are mainly referring to delisting of its equity shares from all stock exchanges.Required by the company.

Equity carve outs

A agreement in which a parent company offers some of a subsidiaries common stock to the general public, to bring in a cash combination to the parent without loss of control. In other words equity carve outs are those in which a number of of a subsidiaries shares are offered for a sale to the general public, bringing an combination of cash to the parent firm without loss of control. Equity carve out is also a way of reducing their contact to a riskier line of business and to increase shareholders value.

Methods of corporate restructuring

1. Joint ventures 2. Sell off 3. Spin off 4. Divestitures 5. Equity carve out 6. Share repurchase 7. Leveraged buy outs 8. Management buy outs 9. Master limited partnerships 10. Employee stock ownership plans 1. Joint Venture Joint ventures is a business enterprise for profit, in which two or more parties share responsibilities in an agreed manner, by providing risk capital technology patent trademark brand name to access to market. 2. Spin-offs Spin-offs are a method to get rid of underperforming or non-core company divisions that can draw down profits. The common definition of spin-offs is when a division of a business or organization becomes an independent business Spin-out "spin-out" business takes assets, intellectual property, technology, and/or existing products from the parent company. Some times the management team of the new company is from the same parent company. Spilt off Spilt off is a transaction in which some, but not all, parent company shareholders receive shares in a subsidiary, in return for relinquishing their parent companys share. In other words a number of parent company shareholders receive the subsidiary shares in come back for which they must give up their parent company shares.

Split up

Spilt up is a transaction in which a corporation spin-offs all of its subsidiaries to its shareholders & ceases to exist. -The whole firm is broken up in a series of spin-offs. -The parent firm no longer exists and -Only the new offspring survive. 3. Sell-off In a strategic planning process, which a company can take decision to concentrate on core business activities by selling off the non core business divisions. 4. Divestments The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. 5. Equity carve outs A agreement in which a parent company offers some of a subsidiaries common stock to the general public, to bring in a cash combination to the parent without loss of control. In other words equity carve outs are those in which a number of of a subsidiaries shares are offered for a sale to the general public, bringing an combination of cash to the parent firm without loss of control. Equity carve out is also a way of reducing their contact to a riskier line of business and to increase shareholders value. 6. Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. 7. Leveraged Buyout LBO The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. 8. Management buyout (MBO) Management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company. The purpose of such a buyout from the managers' point of view may be to save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team. They may also want to maximize the financial benefits they receive from the success they bring to the company by taking the profits for themselves. This is often a way to ward off aggressive buyers. 9. Master Limited Partnership MLP. A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the

party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture. 10. Employee Stock Ownership Plan (ESOP) Employee Stock Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the ownership of stocks in the company. It is one of the profit sharing plans. Employers have the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides for tax benefits to the employers.

If you are looking to avail yourself of a corporate debt restructuring option:

The consultation process Because business debt restructuring is nothing but an aggregate loan agreement, the lender seeks a series of consultation sessions with the borrower. During these meetings, the lender assesses the company's overall financial situation. It is at this point that all the company's financial obligations are evaluated against the expected regular cash flow. Primarily because of this, small business debt restructuring works differently than that of a big corporate account. The negotiation process .Once the assessment procedure is finished, the lender then settles an agreement with all the borrower's creditors and vendors. The main idea is to arrive at a solution that is acceptable to all the parties involved. When that is achieved, the lender can proceed to implement the solution agreed upon. The liquidation of assets. The liquidation of the business's assets, if found to be necessary by all parties concerned, is the next step in the process. In some cases, restructuring your existing debt may require you to pay a large amount of money up front. If your lender can't cover that, you have no other choice but to liquidate some assets. But most of the time, the liquidation strategy is only used to get the profitability of the business back. The restructuring process starts. This is the step where the contract is signed and the agreement is enforced. The borrower, and in this case the business, agree to the aggregate loan amount and to other details including the monthly payment obligation, the interest rate, and the term of payment. After everything is accounted for, the business is now officially under a debt-restructuring program is expected to make payments as stipulated. This is the last level of debt help available to the business before a filing for bankruptcy.

These are the steps involved in a business debt restructuring procedure. Simple as it may seem, businesses should not leap into the plan immediately without careful consideration. Company debt restructuring is a process that has to be critically evaluation to ensure the ultimate fate of the business involved. The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.200 million and above. It covers all categories of assets in the books of member-creditors classified in terms of 5

RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. Reference to CDR Mechanism may be triggered by:

Any or more of the creditors having minimum 20% share in either working capital or term finance, or By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.

It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System. However, Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided he is granted an opportunity under CDR mechanism.

Structure of CDR System:

The edifice of the CDR Mechanism in India stands on the strength of a three-tier structure:

CDR Standing Forum CDR Empowered Group CDR Cell

Legal

Basis

of

CDR

The legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR Mechanism which is the critical element of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors. Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or at the time of original loan documentation (for future cases). The DCA has a legally binding stand still agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to stand still and commit themselves not to take recourse to any legal action during the period. Stand Still is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. However, the stand still is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action. Besides, the borrower needs to undertake that during the stand still period the documents will stand extended for the purpose of limitation and that he would not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the stand still period. 6

CDR STANDING FORUM The CDR Standing Forum, the top tier of the CDR Mechanism in India, is a representative general body of all Financial Institutions and Banks participating in CDR system. The Forum comprises Chief Executives of All-India Financial institutions and Scheduled Banks and excludes Regional Rural Banks, co-operative banks, and Non-Banking Finance Companies. It is a self-empowered body which lays down policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring and ensures their smooth functioning and adherence to the prescribed time schedules for debt restructuring. It provides an official platform for both creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interest of all concerned. The Standing Forum monitors the progress of the CDR Mechanism. It can also review individual decisions of the CDR Empowered Group and CDR Cell. The Forum can also formulate guidelines for dispensing special treatment to cases which are complicated and are likely to be delayed beyond the time frame prescribed for processing. The Forum meets at least once every six months. CDR Empowered Group The individual cases of corporate debt restructuring are decided by the CDR Empowered Group (EG), which is the second tier of the structure of CDR Mechanism in India. The EG in respect of individual cases comprises Executive Director (ED) level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd., State Bank of India as standing members, in addition to ED level representatives of financial institutions (FIs) and banks which have an exposure to the concerned company. The Boards of all institutions/banks authorize their Chief Executive Officers and/or Executive Directors to decide on the restructuring package in respect of cases referred to the CDR system, with the requisite requirements to meet the control needs. While the Standing Members of EG facilitate the conduct of the Groups meetings, voting is in proportion to the exposure and number of the concerned lenders only. In order to make the Empowered Group effective and broad-based and operate efficiently and smoothly, the participating institutions and banks approve a panel of senior officers to represent them in the CDR EG and ensure that they depute officials only from among the panel to attend the meetings of EG. The representative have general authorization by the Boards of the participating FIs/banks to take decisions on behalf of their organizations regarding restructuring of debts of individual corporates. The EG considers the preliminary Flash Report of all cases of requests of restructuring, submitted to it by the CDR Cell. After the EG decides that restructuring of a companys debts is prima facie feasible and the concerned enterprise is potentially viable in terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring package is worked out by the referring institution in conjunction with the CDR Cell. However, if the referring institution/bank faces difficulties in working out the detailed restructuring package, the participating institutions/banks decide upon the alternate financial institution/bank which would work out the detailed restructuring package at the first meeting of the EG when the Flash Report comes up for discussion. The EG is mandated to look into each case of debt restructuring, examine the viability and8 rehabilitation potential of the company and approve the restructuring package within a specified time frame of 90 days, or at best within 180 days of reference to the EG

The CDR Cell, the third tier of the CDR Mechanism in India, is mandated to assist the CDR Standing Forum and the CDR Empowered Group (EG) in all their functions. All references for corporate debt restructuring by lenders/borrowers are made to the CDR Cell. It is the responsibility of the lead institution/major stakeholder to the corporate to work out a preliminary restructuring plan in consultation with other stakeholders and submit to CDR Cell. The CDR Cell makes initial scrutiny of the proposals received from the lenders/borrowers, in terms of the general policies and guidelines approved by the CDR Standing Forum, by calling for details of the proposed restructuring plan and other information and place for consideration of the CDR EG within 30 days to decide whether restructuring is prima facie feasible. If found feasible, the referring institution/bank takes up the work of preparing the detailed restructuring plan with the help of other lenders, in conjunction with CDR Cell and, if necessary, experts engaged from outside. If not found prima facie feasible, the lenders may start action for recovery of their dues. The EG can approve or suggest modifications to the restructuring plan, but ensure that a final decision is taken within a total period of 90 days. The period can be extended up to a maximum period of 180 days from the date of reference to the CDR Cell, if there are genuine reasons.

Objectives of CDR
By way of CDR there is a hope of preservation of viable corporate that are affected by certain external & internal factors. CDR aims at minimising the loses to creditors & other stockholders through an orderly & coordinates restructuring programme. To support continuing economic recovery.

Conclusion
The CDR mechanism attempts to be one-stop forum for the lenders and creditors to arrive at mutually agreeable terms to secure their interests, however varied they may be. With the involvement of multiple leaders , there is every chance that any restructuring process would face obstacles and time delays. These are the very problems that the RBIs informal CDR system aims to address by setting up a framework for swift and timely action.