Corporate Restructuring.pdf

SEMINAR ON INSOLVENCY LAWS

Cor   por ate  R  R estr uctur ing: General Legal Framework, Challenges and way forward

Submitted to: Dr. T. Raghvendra Rao Author: Abhishek Gupta 2015-1LLM-52

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ACKNOWLEDGEMENT

At the outset, I would like to thank National Academy of Legal Studies and Research (NALSAR) for incorporating this Seminar Course under the curriculum of the LL.M course and giving the opportunity to students to participate in some practical research work.

I would also like to thank Dr. T. Raghvendra Rao for his guidance and support. Without his kind support, this submission could not have been possible in time.

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METHODOLOGY AND RESEARCH DESIGN

Type of Research This paper is the product of analytical and applied research on the topic. A very practical approach has been taken while dealing with the subject. A lot of reading has been done  before even arriving at the decision of choosing the sub - theme. Fortunately, our library and the internet provided a lot of material for the topic. Significance of the Research This research paper may give to others a deep understanding of our present scenario regarding Corporate Restructuring. With the globalisation of economy, the issues relating to corporate restructuring have assumed greater significance and a need has been felt for long for bringing about reforms in this branch of law. Moreover, with the Indian economy having  been opened up for investment by foreign creditors and, internationally, the Indian corporate also making investments in companies outside, the realm of cross-border insolvency law has multiplied colossally.  Research Process The research had been started on the day theme was given by the subject teacher. There was a task to choose the sub-theme. I went through some material provided on the internet to get the basic idea of the theme. The next step was the selection of the sub theme which I did in the form of framing questions in my mind. After that, I started collecting the material from library and internet. I studied and filtered what I wanted. Sometimes, I jotted them down in my copy to get a rough draft. Then a systematic arrangement of that study was done. This synopsis is a tentative scheme of my research work.

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HYPOTHESIS The researcher is of the opinion that it is impossible to conceive a business that is completely insolvency free. Laws relating to Insolvency and Restructuring helps to restore the debtor, and establish a fair and equitable system of claims, distribution of assets and mechanism to deal with the failure. Thus the paper will deal with the analysis of proper legal framework which will enable sustainable economic reform and help corporation in long term.

RESEARCH OBJECTIVE: The main object is to understand the various legal framework of Restructuring of Corporations existing. The issues and complexity relating to such laws in present scenario. How can we simplify such system to work for the general inte rest of business? A way forward.

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CONTENTS: Table of Contents Introduction .............................................................................................................................. 6 Meaning………………………………………………………………………………………..6 Business Strategy……………………………………………………...………………………7 History…………………………………………………………………………………………7 Components of Corporate Restructuring …………………………………………………..9

Business Portfolio Restructuring………………………………………………………………9 Financial Restructuring……………………………………………………………...……….10 Organizational Restructuring………………………………………………………………...10 Legal and Regulatory Framework ………………………………………………………...11

Company Law……………………………………………………………………………….11 Amalgamation……………………………………………………………………………….12 Demerger …………………………………………………………………………………….13 Slump Sale…………………………………………………………………………………...13 SEBI (Substantial Acquisition and Takeovers) Regulations.1997………………………14

Public Announcement for Multiple Methods of Acquisition………………………………..15 Public Announcement in case of Acquisition by way of a Preferential Issue ……………….16 Acquisitions during Offer Period…………………………………………………………….16 Disclosures on Acquirer’s Holding falling below 5%..............................................................16 Buyback of Shares……………………………………………………...…………………….17 Competition Act, 2002………………………………………………………………………18 Indian Scenario…………….………………………………………………………………..20 Case Study…………………………………………………………………………………...21 Suggestions…………………………………………………………………………………..24 Conclusion…………..……………………………………………………………………….26 Bibliography……………………………………………………………………………….

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1.0 INTRODUCTION:

There are primarily two ways of growth of business organization, i.e. organic and inorganic growth. Organic growth is through internal strategies, which may relate to business or financial restructuring within the organization that results in enhanced customer base, higher sales, increased revenue, without resulting in change of corporate enti ty.1 Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling it to skip few steps on the growth ladder. Restructuring through mergers, amalgamations etc. constitute one of the most important methods for securing inorganic growth. The business environment is rapidly changing with respect to technology, competition, products, people, geographical area, markets, and customers. It is not enough if companies keep pace with these changes but are expected to beat competition and innovate in order to continuously maximize shareholder value. Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size quickly, employ new technology with respect to products, people and processes. Thus the inorganic growth strategies are regarded as fast track corporate restructuring strategies for growth.

1.1 Meaning:

Restructuring as per Oxford dictionary means “to give a new structure to, rebuild or rearrange". As per Collins English dictionary, meaning of corporate restructuring is a change in the business strategy of an organization resulting in diversification, closing parts of the  business, etc., to increase its long-term profitability. Corporate restructuring is defined as the  process involved in changing the organization of a business. Corporate restructuring can involve making dramatic changes to a business by cutting out or merging departments. It implies rearranging the business for increased efficiency and profitability. In other words, it is a comprehensive process, by which a company can consolidate its business operations and

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Corporate Restructuring, http://forbesindia.com/article/ie/corpo-rate-restructuring-five-common pitfalls/39003/1

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strengthen its position for achieving corporate objectives-synergies and continuing as competitive and successful entity. 1.2 Business Strategy:

Corporate restructuring is the process of significantly changing a company's business model, management team or financial structure to address challenges and increase shareholder value. Restructuring may involve major layoffs or bankruptcy, though restructuring is usually designed to minimize the impact on employees, if possible. Restructuring may involve the company's sale or a merger with another company. Companies use restructuring as a business strategy to ensure their long-term viability. Shareholders or creditors might force a restructuring if they observe the company's current business strategies as insufficient to  prevent a loss on their investments. The nature of these threats can vary, but common catalysts for restructuring involve a loss. 1.3 History:

In earlier years, India was a highly regulated economy. Though Government participation was overwhelming, the economy was controlled in a centralized way by Government  participation and intervention. In other words, economy was closed as economic forces such as demand and supply were not allowed to have a full-fledged liberty to rule the market. There was no scope of realignments and everything was controlled. In such a scenario, the scope and mode of Corporate Restructuring were very limited due to restrictive government  policies and rigid regulatory framework.2  These restrictions remained in vogue, practically, for over two decades. These, however, proved incompatible with the economic system in keeping pace with the global economic developments if the objective of faster economic growth were to be achieved. The Government had to review its entire policy framework and under the economic liberalization measures removed the above restrictions by omitting the relevant sections and provisions. The real opening up of the economy started with the Industrial Policy, 1991 whereby 'continuity with change' was emphasized and main thrust was on relaxations in industrial licensing, foreign investments, and transfer of foreign technology etc. With the economic liberalization, globalization and opening up of economies, the Indian corporate sector started restructuring to meet the opportunities and challenges of competition. 2

 Prasad G Godbole, Mergers, Acquisitions and Corporate Restructuring,(Vikas Publication House, Mumbai, pg 2009

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The economic and liberalization reforms, have transformed the business scenario all over the world. The most significant development has been the integration of national economy with 'market-oriented globalized economy'. The multilateral trade agenda and the World Trade Organization (WTO) have been facilitating easy and free flow of technology, capital and expertise across the globe. A restructuring wave is sweeping the corporate sector the world over, taking within its fold both big and small entities, comprising old economy businesses, conglomerates and new economy companies and even the infrastructure and service s ector. 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. With the increasing competition and the economy, heading towards globalisation, the corporate restructuring activities are expected to occur at a much larger scale than at any time in the past. Corporate Restructuring play a major role in enabling enterprises to achieve economies of scale, global competitiveness, right size, and a host of other benefits including reduction of cost of operations and administration. Globalization gives the consumer many choices  –   technologies are changing, established  brands are being challenged by value  –   for money products, the movement of goods across countries is on the rise and entry barriers are being reduced. As markets consolidate into fewer and larger entities, economies become more concentrated. In this international scenario, there is a heavy accent on the quality, range, cost and reliability of product and services. 3Companies all over the world have been reshaping and repositioning themselves to meet the challenges and seize the opportunities thrown open by globalization. The management strategy in turbulent times is to focus on core competencies  –   selling loss making companies and acquiring those, which can contribute to profit and growth of the group. The underlying objective is to achieve and sustain superior performance. In fact, most companies in the world are merging to achieve an economic size as a means of survival and growth in the competitive economy. There has been a substantial increase in quantum of funds flowing across nations in search of restructuring and takeover candidates.

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 Globalization: Trends, Challenges and Opportunities for countries in Transition (Mo jmir Mrak, 2000) para 8.1.1

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2.0 COMPONENTS OF CORPORATE R ESTRUCTURING:

Corporate restructuring involves a three-pronged approach –   business portfolio restructuring, a financial restructuring and organizational restructuring. 2.1 Business Portfolio Restructuring

The key to strategic management is business portfolio restructuring. The doctrine involves “matching business requirements with internal capabilities”, “having strategically balanced  portfolio”, “achieving and sustaining competitiveness” and “developing long-term internal and core competencies”. The concept of ‘core competency’ is central to the resource -based  perspective on corporate strategy. The resource-based view of strategy is that sustainable competitive advantage arises out of a company’s possessing some special skills, knowledge, resources or competencies that distinguishes it from its competitors. Core competency is a  bundle of a company-specific knowledge; skills, technologies, capabilities and organization that enables it to create value in a market, which other competitors cannot do in the short term. These include manufacturing flexibility, responsiveness to market trend and reliable service. The three important criteria of business portfolio restructuring are  –  ‘distinctive competence’, ‘competitive advantage’ and ‘core competence’. The underlying idea of distinctive competence criteria is that a company, out of its various strengths, should focus on those which give it an edge over competitors. 4  The essence of competitive advantage is that a company should stay in those businesses where it has a competitive edge over its competitors, both existing and new. 5 According to Prof. C.K.Prahlad, “Core competence is the `collective learning in the organization especially how to coordinate diverse production skills and integrated multiple streams of technologies......The guiding principle of core competence is that a company should stay in business where it has built up core skills over years and acquired added advantage.6 The business portfolio restructuring strategy in turbulent times is to focus on core competencies - selling loss making companies and acquiring those, which can contribute for 4

 Learned, Edumund P.et.al. Business Policy –  Text and Cases, Irwin, Illinois, 1965  Porter, Michael,Competitive Advantage, Free Press, Glencoe, 1985 6  Gary Hamel and Prahlad CK, Competing for the Future, Boston, Harvard Business School Press, 1994 5

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 profit and growth of the group. There is heavy accent on the quality, range, cost and reliability of products and services. 2.2 Financial Restructuring

The key to financial restructuring is managing money with growth. What is needed is the vision to enlarge the size of the cake to increase the share for the equity holder. It requires evolving appropriate mix of debt and equity to ensure competitive cost structure and optimizing return on investment. In fact, increase in turnover and profitability should be reflected in higher value for shareholders in terms of financial reward. The touchstone of financial restructuring is to enhance the intrinsic worth of equity shares. 2.3 Organizational Restructuring

Organizational restructuring involves continuous examination of the requirement of competent management and manpower at all levels and matching the same through induction, training and development. Manpower Planning and restructuring enable companies to sustain higher level of competitive advantage. At the same time, dead wood is removed by golden handshake. Business, being dynamic in nature, organizational restructuring is an on-going exercise in line with change in the nature of business.

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3.0 LEGAL AND R EGULATORY FRAMEWORK :

The basic legal and regulatory framework of corporate restructuring in India comprises in the Companies Act, 2013, the Securities and Exchange Board of India Act, 1992, and the Competition Act, 2002. The salient features of amalgamation, merger, demerger, slump sale and takeover are discussed below. 3.1 Company Law:

Sections 390 to 394 of the CA 1956 (the “Merger Provisions”) and Section 230 to 234 of CA 2013 govern mergers and schemes of arrangements between a company, its shareholders and creditors. However, considering that the provisions of CA 2013 have not yet been notified, the implementation of the same remains to be tested. The currently applicable Merger Provisions are in fact worded so widely, that they would provide for and regulate all kinds of corporate restructuring that a company can possibly undertake, such as mergers, amalgamations, demergers, spin-off/hive off, and every other compromise, settlement, agreement or arrangement between a company and its members and/or its creditors. The salient features are as under: a) Amalgamation of companies is done through a scheme of an arrangement approved  by the shareholders and or creditors of the companies concerned,  b) The application in the court for approval of amalgamation is made by the company or creditors or members of the company. c) At the time of filing the petition, the company has to file all material facts, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company, status of any pending investigation and other matters covered by the matters under consideration. d) The Court can order giving directions as to the holding of a general meeting of the company. e) The Court appoints Chairman of the meeting and gives directions as to how the meeting is to be conducted viz. how, when and to whom the notice is to be issued, the quorum for the meeting, how the poll is to be conducted, how the voting is to be recorded and such other issues as are necessary. f) If majority in number representing 3/4th in value of the creditors or class of creditors or members or class of members present and voting agree to the arrangement, the

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Court would pass its orders confirming the arrangement as approved by the members or creditors as the case may be. g) The Court can sanction a compromise or arrangement proposed between a company and either its shareholders or class of shareholders and/or its creditors or class thereof. h) The court has supervisory powers in sanction reconstructions of companies and may give certain directions as part of the order sanctioning the scheme of compromise or arrangement or by a subsequent order.

3.2 Amalgamation

In amalgamation, two or more existing transferor companies merge together or form a new company, whereby transferor companies lose their existence and their shareholders become the shareholders of the new company. In merger, two or more existing companies combine into one company. The transferor company merges its identity into the transferring company  by transfer of its running business (assets and liabilities). Merger not only creates significant shareholder value, but also positions the combined company to compete vigorously with other companies. An essential feature of the scheme of merger is that the transferor company does not receive the consideration, but the acquiring company pays the consideration directly to the shareholders of the transferor company. The shareholders of the transferor company receive shares in the merged company in exchange for the shares held by them in the transferor company as per the agreed exchange ratio. No distinction is, however, made  between equity, preference and other category of shareholders. As such, cross allotment is  possible for the consideration paid partly or in combination of shares, debentures and cash. Mergers are of two types  –   horizontal and vertical. In horizontal mergers, two or more companies, dealing in similar line of activities, merge to achieve economic size. For example, a steel manufacturing company, to ensure continuous supply of raw material, merges with an iron ore mining company. In case of vertical merger a company acquires its ‘upstream’ or ‘downstream’ units or a pharmaceutical company acquiring a basic chemicals and formulations company. The object in both the cases is to achieve cost reduction and efficient marketing. Vertical merger is further classified as backward merger and forward merger. In backward merger, a company with advanced technology merges with a company with backward technology. For example, a petrochemical company merging with an oil refining company for 12 | P a g e

achieving integrated production and distribution of petroleum products. On the other hand, in forward merger a technologically backward company merges with a technically advanced company to achieve optimum use of the production facilities. 3.3 Demerger

In demerger, the transferor company sells and transfers one or more of its unprofitable undertakings to the resultant company (an existing or new company) for an agreed consideration. The resultant company allots its shares at the agreed exchange ratio to the shareholders of the transferor company. 3.4 Slump Sale:

In slump sale, a company sells or disposes of its whole or substantially the whole of the undertaking for a lump sum predetermined price. In slump sale, an acquiring company may not be interested in buying the whole company, but one of its divisions or a running undertaking on a going concern basis. When a sale is made for a lump sum price, such a price cannot be bifurcated towards individual assets. The business to be hived-off is transferred from the transferor company to an existing or a new company. A “bus iness transfer agreement” (Agreement) is drafted containing the terms and conditions of transfer. The agreement provides for transfer by the seller company to the buyer company, its business as a going concern with all immovable and movable properties, at the agreed consideration, called “slump price”. It may be noted that courts have supervisory powers in approving schemes of compromises, arrangements and reconstructions by companies. The Supreme Court in Hindustan Lever  Limited v. State of Maharashtra7   ruled that while exercising its power in sanctioning a scheme of arrangement, the court has to examine as to whether the provisions of the statute have been complied with. Once the court finds that the parameters set out in section 394 of the Companies Act 1956 have been met then the court would have no further jurisdiction to sit in appeal over the commercial wisdom of the class of persons who with their eyes open give their approval, even if, in the view of the court a better scheme could have been framed. Two broad principles underlying a scheme of amalgamation are that the order passed by the court amalgamating the company is based on a compromise or arrangement arrived at  between the parties; and that the jurisdiction of the company court while sanctioning the 7

 (2003) 117 Comp Cas SC 758.

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scheme is supervisory only. Both these principles indicate that there is no adjudication by the court on merits as such.

4.0 SEBI (SUBSTANTIAL ACQUISITION AND TAKEOVERS) REGULATIONS, 1997

In India the regulatory framework of takeovers of company is contained in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Regulations). The Securities and Exchange Board of India (SEBI) is the regulator responsible for ensuring adherence to the Regulations by companies. The Regulations are applicable to listed companies. However, if the acquisition of an unlisted company leads to indirect change in the control of a listed company, the transaction would be covered by the Regulations. In addition, the Regulation is also attracted if an acquirer company acquires the foreign parent company of a listed company. 8 ‘Takeover’ is a part of business strategy whereby an individual or group of individuals or a company, directly or indirectly, acquires shares or voting rights in a target company to gain control over the decision-making power of management. ‘Acquirer’ is any individual or company, who intends or acquires adequate number of shares or voting rights of the target company for control over its management. The target company is a company whose shares or voting rights are acquired and whose control is taken over by the acquirer. 9 ‘Control’ includes the right to appoint majority of directors on the Board of a target company or to control management or important policy decisions in Target Company. The object of takeover of a company is to acquire and exercise control over the management of the target company and not the company or its assets. This is to achieve synergy in operation and to consolidate and acquire large share of the market. If the management is managing a company well, the share price of the company will reflect the fact, and, the cost of hostile takeover will  be rendered prohibitive. But in case of poorly managed companies, the price of shares is

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See Take over Regulation, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Ma%20Lab/Takeover%20Code%20Dissected.pdf 9  Acquisitions and Takeovers (A Damodaran, 2008) para 21.3

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 below the optimal level and shareholders prefer to sell their shares to the predator.10 This is how takeovers are facilitated in the overall interest of the company and to enhance shareholders’ value. Takeovers are of two types – ‘friendly’ and ‘hostile’. In a friendly takeover, the acquirer first approaches the promoters/ management of the target company for negotiating and acquiring the shares. Friendly takeover is for the mutual advantage of acquirer and acquired companies. On the other hand, ‘hostile takeover’ is against the wishes to the management of the target company. Acquirer makes a direct offer to the shareholders of the target company, without the prior consent of the existing promoters and management. There are three stages in hostile takeover. In the first stage, the management of the acquiring company starts accumulating shares of a target company up to the prescribed ceiling. In the second stage, the management of the acquirer company discloses to the statutory authorities his proposal of acquisition of shares and the move comes into l imelight in the stock market. 11 In the third stage, the management of the acquirer enters into a bidding war for the shares of the target company. Ultimately, shareholders by selling or withholding their shares, decide whether the existing management or the new owner would control their company. The Securities and Exchange Board of India (SEBI) has issued a notification on 26 March 2013 amending the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations). This update aims to capture the key highlights of the said amendments are: 1.  PUBLIC ANNOUNCEMENT FOR MULTIPLE METHODS OF ACQUISITION A new Regulation 13 (2A) has been inserted in the Takeover Regulations. This provides that in case of a public announcement, referred to in Regulation 3 and Regulation 4 of the Takeover Regulations, for a proposed acquisition of shares or voting rights in or control over the target company through a combination of (i) an agreement and any one or more modes of acquisition referred to in Regulation 13(2); or (ii) otherwise through any one or more modes of acquisition referred to in Regulation 13(2), would be required to be made on the date of the first of such acquisitions. This means that the acquirer cannot wait for making a public 10

 An Analysis of SEBI T akeover Code by, Pavan Kumar Vijay, Managing Director Corporate Professionals Group 11  The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical Framework(John Armour, Jack B.Jacobs, Curtis J.Milhaupt, 2011) para 54.2

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announcement till the open offer trigger is actually crossed in a series of successive acquisitions. Further, the acquirer is tasked with having to disclose the details of proposal to make all subsequent acquisitions in such public announcement. 12

2.  PUBLIC ANNOUNCEMENT IN CASE OF ACQUISITION BY WAY OF A  PREFERENTIAL ISSUE: Regulation 13(2) (g) of the Takeover Regulations, which provides for public announcement in case of preferential issue of shares, has been amended. It is now provided that the public announcement in such a case would be made on the date when the board of directors of the target company authorizes such resolution. The erstwhile requirement was that public announcement would be made on date of passing of special resolution approving the  preferential issue.

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Further, an amendment has also been made to Regulation 23 which

 provides for withdrawal of open offer in certain circumstances. Regulation 23(1) (c) has been amended by adding a proviso which provides that in case the acquisition through preferential issue is not successful, the open offer would still not be withdrawn. 3.  ACQUISITIONS DURING OFFER PERIOD: A new Regulation 22 (2A) has been inserted providing that where the acquisition is proposed through preferential issue or through stock market settlement process other than bulk/block deals, the acquirer can acquire such shares while the open offer is in process. However, such shares would need to be kept in an escrow account and the acquirer would not be permitted exercise voting rights on such shares. The shares in the escrow account may, however, be released after 21 working days of the public announcement if the acquirer deposits 100% of the open offer amount assuming full acceptance as provided in Regulation 22 (2). 4.  DISCLOSURES ON ACQUIRER’S HOLDING FALLING BELOW 5%: Regulation 29(2) of the Takeover Regulations has also been amended by the said notification. In addition to the requisite disclosure of change in shareholding or voting rights exceeding 2% in the target company by persons acting in concert already holding 5% or more shareholding or voting rights, the amendment requires disclosure to be made even in case of a

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 Public Mergers and Acquisitions in India:Take over Code Dissected (Nishith Desai Advocate, 2013)

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change in the shareholding or voting rights of the acquirer falling below 5% in the target company. This amendment just clarifies the position on disclosure by the acquirer in case of sale of shareholding in the target company. 5.  BUYBACK OF SHARES: Regulation 10(3) of the Takeover Regulations has been amended now providing that where there is an increase in voting rights of a shareholder in a target company triggering an open offer in case of buyback of shares, such shareholder shall be exempt from the obligation to make an open offer provided such shareholder reduces his shareholding such that its voting rights fall below the threshold referred to in Regulation 3(1) within ninety days from the date of closure of said buyback offer by the target company. Prior to this amendment, the reference date of reducing the shareholding was ninety days from ‘on which the voting rights would increase’. The changes relating to disclosures and reference date in buyback of shares by the target company are only clarificatory in nature. However, the changes brought by SEBI in terms of timing of making a public announcement in case of successive and connected acquisitions of shares or voting rights in the target company as well as those concerning timing of public announcement as well as withdrawal of open offer in case of acquisition by way of  preferential issue are quite significant.

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5.0 COMPETITION ACT, 2002

The main object of the Competition Act, 2002 (Act) is to protect the welfare of consumers, shareholders and other stakeholders in a business. The Act ensures that larger companies do not profit unfairly or edge out smaller players from the market. At the same time, it has been ensured that the provisions of the Act lead to certainty in regulatory framework become a tool to economic growth in India. Sections 5 and 6 of the Competition Act, 2002, deal with mergers and regulation of combinations. Under the Act combination means acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise when such person has control over another enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the specified threshold limits. Section 5 of the Act covers combinations, including merger, amalgamation and acquisition of enterprise or control by one or more persons. The section provides a threshold limit in terms of assets or turnover of the entity which will come into existence after acquisition/merger and amalgamation. Section 6 of the Act prohibits certain combinations having adverse effect on competition. It  provides that no person or enterprise shall enter into a combination which causes or likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. It further provides that any person or enterprise who  proposes to enter into a combination shall give notice to the Commission disclosing the details of the proposed combination within 30 days of approval of proposal by the board of directors or execution of agreement relating to me rger or amalgamation. Merger of foreign and Indian Companies The Government of India, in line with the international best practice in business laws, had decided not to allow merger of Indian companies with foreign companies through the route of subsidiary. The apprehension is that direct merger will result in migration of Indian companies into foreign hands. In case a foreign company wants to merge an Indian company with itself, it has to first set up a subsidiary in India and then merge the acquired Indian company with the subsidiary. This would ensure that the subsidiary company would be owned and regulated according to the Indian corporate law. The Government, however,

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approves merger of foreign companies with Indian companies and its foreign shareholders owning shares in the merged company which is registered under Indian laws. The Indian Industry feel that a period of 210 days is far too long a period in the life cycle of a transaction, particularly after companies reach a definitive agreement to go ahead with an M&A plan. In most developed countries merger control regimes give their first-stage decision within 30 days, clearing the way for most transactions to go ahead with closure. The European and the US competition authorities normally pronounce their final decision even for complex transactions within 90 days. Secondly, Industry wants  provision of a ‘deemed approval’ where there is no communication from the CCI within 30 days. Thirdly, industry wants pre-merger consultations, a global best practice, wit h the CCI.

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6.0 INDIAN SCENARIO

The second-generation economic reforms in India have accelerated the trend of corporate restructuring. Indian companies are trying to build up global size operations. The business strategy has been on consolidation and synergy in business operations and optimum use of resources. The underlying objective is efficient and competitive business operations by increasing the market share, brand power and operational synergy to achieve and sustain superior performance and larger share of global market. There is heavy accent on the quality, range, cost and reliability of product and services. In the present situation, M&As reduce the number of competitors and increase their market share. Internally M&As eliminate duplication of administrative and marketing expenses. The main objects of the Indian M&As strategy are: 1. Focus on core strength, operational synergy and efficient allocation of managerial capabilities and infrastructure. 2. Consolidation and economy of scale by expansion and deeper penetration into global markets. 3. Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improving return on capital employed. 4. Acquiring constant supply of raw material and access to scientific research and technological developments. 5. Focus on Research and Development (R&D) to reap the fruits of innovation and new technological developments. Sources of value creation in corporate restructure are given bellow: 1) Review corporate financial structure from the shareholders point of view 2) Increase the efficiency and reduce the after tax cost of capital through judicious use of borrowing. 3) Improve operating cash flow through focusing on wealth creating investment opportunities, profit improvement and overhead reduction programs and divestiture 4) Pursue finally-driven creation using various financing instruments and arrangement 5)

Technological up gradation and reduction in employee related cost.

6) Induction of professional managers.

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7.0 CASE STUDY:

7.1 AN OVERVIEW OF INDIA’S BHARTI AIRTEL India’s Bharti Airtel has revealed that it will undertake a restructuring exercise under which it will merge three separate businesses which currently account for around 90% of the company’s revenues, according to the Indian Economic Times. Airtel has said that it will merge its mobile, satellite TV and fixed line and broadband Telemedia units, with the corporate restructure being performed with a view to cutting costs and boosting efficiency at the telco in the wake of falling profits. The only unit not to be included in the merger plans is Airtel’s enterprise arm, which serves corporate and SME customers and has responsibility for the company’s undersea cable offerings. In response to queries regarding the possible impact on jobs at the company, with some estimates that as many as 2,000 positions could be at risk, Airtel said that the restructure would have a ‘minimum impact on people’. It has been suggested that those employees potentially affected by the corporate reshuffle may be given the opportunity to move to one of the group’s other departments or possibly one of its African units, with one unnamed Airtel employee cited as saying that staff may be given the option to move to ‘similar functions within group companies that handle telecom infrastructure, agriculture, retail, value-added services as well as its mobile businesses in 16 African countries. 7.2 RELIANCE INDUSTRIES LIMITED (RIL) In 1958, Shri Dhirubhai Ambani set up a trading company to export spices to Yemen. It was then called Reliance Commercial Corporation. Reliance was one of the first Indian companies to go public in 1977. On 27th June 1985, the name of the company was changed, from Reliance Textile Industries Ltd. To Reliance Industries Ltd. It diversified its business area into telecommunication, power, finance, and transportation. It merged its finance company with another subsidiary Reliance Petrochemicals Ltd. (RPL). RIL diversified further into the areas of biotech, life sciences, mining, and insurance. Mukesh Ambani, elder son of Dhirubhai Ambani, was elected as chairman of RIL on July 31 st  2002. Due to differences between two brothers, RIL split in June 2005. The fight was due to the clash of egos between the brothers, sharing the money and power in running such an empire. This causes restructuring in the

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RIL. In the new structure, Mukesh had been given complete control in the oil exploration, refining, petrochemicals, and textile businesses through a standalone entity in RIL along with IPCL. He got also shares in biotech firm Reliance Life Sciences and Trevira, a company in Europe which manufactures polyester fibers. Whereas Anil got control over financial  businesses power, communication, and through four other companies (Reliance Capital Ventures Ltd., Reliance Energy Ventures Ltd, Reliance Communication Ventures Ltd. And Reliance Natural Resources Ltd.) which came under Anil Dhirubhai Ambani Enterprise (ADAE) as part of the Reliance group. This restructuring causes a jump of 26 per cent increase in share price for every shareholder. Corporate restructuring is designed for enterprise property rights relations and other debt, assets, management, structure of the expanded enterprise restructuring, consolidation and integration process, as a whole and strategic business management to improve the situation, and strengthen competition in the market capacity, promote business innovation. Major corporate restructuring, including restructuring of property rights, debt restructuring, capital restructuring, asset restructuring, organizational restructuring, and, by the corporate restructuring will inevitably lead to the corresponding economic structure and industrial structure of the reorganization. The benefits of corporate restructuring are the following aspects: 1. The stock of assets through restructuring of existing enterprises can optimize the structural elements of various resources to accelerate business innovation, to enable enterprises to government agencies out of control and intervention, full the potential of enterprises and workers to play, and improving the productivity and competitiveness. 2. Maintain the sustainable development of enterprises. For enterprises to get greater efficiency and broader opportunities for further development. 3. The likelihood of corporate restructuring in itself means that a huge and direct economic benefit, property rights can change the existing unitary enterprise, the drawbacks of abstraction. Through the diversification of property rights and to implement specific business property rights, this could make many investors to  participate in and view Note the survival of enterprises so that enterprises can better under new leadership change and development of market economy.

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4. The restructuring of the Chinese enterprises have a more special meaning: for China's enterprises, in the past has been to separate government from enterprises for many years, but the government and enterprises has always been inseparable, the reason one does not seize the property that long-term key the second is not to find ways to solve the problem of enterprise property rights. 5. Corporate restructuring can provide an effective means to this end. Donors and  businesses to achieve the separation of corporate ownership, thus contributing to separation of enterprise operational mechanism, to enable enterprises to get rid of dependence on the line of authority, a city of independent competitors. Challenges for Restructuring Though there are many drivers of restructuring and one can expect increase in the restructuring, there are certainly some challenges the corporations have to deal with: 

Many external shocks such as political instability, higher oil prices and interest rates have potential to affect the dynamics of restructuring. For example the growth rates and access to capital can be affected which are catalysts for mergers and acquisitions.

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The protectionism and nationalist attitude at times hurt the cross-border activity. Such environment needs to be anticipated and managed carefully in case of foreign entity entering a new market.

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Lack of transparency or weak disclosure standards in certain Asian markets could lead to surprises that were not anticipated during due diligence.

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The pace of regulatory change and, in some industries and markets, reversal of regulation is a risk that needs to be assessed and taken into account, as far as possible.

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8.0 SUGGESTIONS

Following suggestions if implemented would enable Indian companies to meet the challenges in the emerging scenario: 

Voluntary remedies to Insolvency:-

Once a firm begins to encounter these difficulties the firm’s owners and management have to consider the alternatives available to failing business. Such a firm has two remedies, Attempt to resolve its difficulties with its creditors on voluntary or informal process. Petition the courts for assistance and formally declare bankruptcy. The company creditors also may  petition to courts and get the company involuntarily declared bankrupt. 

To reorganize or liquidate:-

Regardless of whether a business chooses informal or formal methods to deal with its difficulties eventually the decision has to be made whether to reorganize or liquidate the  business. Before this decision can be made both the business liquidation value and its going concern value has to determine. 

Informal alternatives for failing business:-

Regardless of exact reasons why a business begins to experience difficulties Regardless of the exact reasons why a business begins to experience difficulties the result is often same  –  Cash flow problems. The first step taken by troubled company involves stretching its  payable. In some occasions this can keep the company busy for several weeks of needed time  before creditors take action. If the difficulties are more than just minor and temporary the company may turn to its bankers with request for additional working capital l oans. Another possible action is the company bankers and creditors take up to restructure the company’s debt. 

Organizational restructuring exercise:-

Many firms have begun organizational exercises for restructuring in recent years to cope with heightened competition. The common elements in most organizational restructuring and  performance enhancement programmes are described below,

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• Regrouping of business: firms are regrouping the existing businesses into a few compact strategic business units which are often referred to as profit centers. For example L&T ahs  been advised by Mckinsey Consultants to regroup its twelve businesses into five compact divisions. • Decentralization: to promote a quicker organizational response to dyna mic environmental developments, companies are resorting to decentralization, de-layering,

and delegation

aimed at empowering people down the line. For example, Hindustan lever Ltd., has embarked on an initiative to reduce. 

Portfolio restructurings:-

Mergers, asset purchases, and takeovers lead to expansion in some way or the other. They are  based on the principle of synergy which says 2 +2=5 Portfolio restructuring, on the other hand, involves some kind of contraction through a Divestiture or a De-merger is based on the principle of “synergy” which says 5 -3 = 3 

Corporate strategy :-

Towards reorganizing themselves companies need to develop a strategy. The conditions companies must satisfy if they are to conserve their essential characteristics over time may be summed up as –  

Consistency between their strategy, and

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The characteristics of the external environment in which they operate.

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Owing to technological change and evolution as well as owing to heightened competitive pressures following,

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Market globalization and,

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Deregulation,

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Companies increasingly have to cope with altered conditions of competition. In response they are forced to change their strategic framework.

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Companies also need to change the way they compete and also the basic assumptions underlying the planning criteria that they adopt for their more general strategic design/architecture and those that govern the ways in which they interact with the external environment.

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9.0 CONCLUSION:

Organizations are restructuring themselves to meet changing environment. For three decades after world war two most economies around the world witnessed historically unparalleled  progress. However after the early 1970s growth in most of industrialized economies began to slow down, affecting much of the developing w orld particularly adversely during the 1980’s and 1990’s. There were a variety of causes of this change in the trajectory of growth some of a macroeconomic nature and others rooted in the structure of corporate organization and in inter-firm linkages. The response to these pressures has been a significant change in macroeconomic policies amongst countries. Throughout the world there has been a surge toward deregulation and a feeling of barriers to the global flow of many resources. For some countries this has resulted in significant enhancement to economic growth but for others globalization has done little to enhance living standards and security. Thus the gains from globalization is not automatic they depend on response of producers to the changing competitive environment. One critical area of change is to be found in organization of production. To cope with new competitive pressures firms have to deliver not just low-priced goods and services but also  products of greater quality and diversity. This requires in the first instance that they reorient their internal organization, changing production layout, introducing new methods of quality assurance and instituting processes to ensure conti nuous improvement. The corporate restructuring being a matter of business convenience, the role of legislation is to facilitate restructuring on healthy lines. The legislative intention is that monopoly is not necessarily bad provided ‘market dominance is not abused’.

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