Corporate Debt Restructuring

CORPORATE RESTRUCTURING

MEANING“The process involved in changing the

organisation of a business.” Redesigning one or more aspectsImplemented due to certain factors: To be more profitable, survive economic

conditions, address challenges & increase shareholders value.

NEED & OBJECTIVES OF CORPORATETo improve competitive positionTo rearrange the activities to be more

profitableCost reductionUtilisation of strategic assetsEliminate competitorsTo have an access to R & DFocus on core strengths

Revive and rehabilitate a sick unitConstant supply of resourcesTax benefitsImprove corporate performance

BROAD AREASFINANCIAL RESTRUCTURING

OPERATIONAL RESTRUCTURING

MANAGERIALRESTRUCTURING

ASSETRESTRUCTURING

Reduction of capital, reorganising the equity and debt base, buy back of shares.

Product restructuring

Market restructuring

Improving the manpower

New investments, technological changes, asset reduction, sale and lease back transactions.

TECHNIQUESEXPANSION /GROWTH TECHNIQUES

CONTRACTION /DIVESTMENTTECHNIQUES

OTHERTECHNIQUES

Mergers Takeover/ Acquisition Strategic Alliance Joint Venture Franchising Licensing Wholly owned Subsidiaries

Demerger / Spin off Disinvestment Slump Sale Buy out Leveraged Buy out Sell off

Reverse Merger Debt Equity Swaps Buyback of Shares Asset Securitisation

FINANCIAL RESTRUCTURING Restructuring is a combination of two words ‘re’ and ‘structure’

where ‘re’ means again and ‘structure’ means construct or arrange. Thus when the organization have to rearrange or rebuild its internal structure to bring more efficiency and competitiveness, it is called restructuring of the organization.

MEANING OF FINANCIAL RESTRUCTURING Every company has two main sources of finance i.e. debt and

equity and a successful organization always creates a perfect balance of debt and equity in its capital structure. Sometimes the capital structure may get off balance due to certain changes which are beyond the control. This balance is thus restored by financial restructuring.

CAUSES OF FINANCIAL RESTRUCTURINGMISAPPROPRIATION OF FUNDS OBSOLETELACK OF OPTIMUM UTILISATION OF RESOURCESSHIFT IN CONSUMER PREFERENCESINEFFIOCIENT MANAGEMENTEXTERNAL FACTORSDISSATISFIED WORKERS, STRIKES,LOCK OUTS

ETC

NEED OF FINANCIAL RESTRUCTURINGAt the time of promotion and incorporation of the

company.At the time of expansion of an existing company.At the time of amalgamation and absorption of two or

more companies.At the time of re-organization of capital of the company.

It is the desire of every company to have a fairly capitalized situation i.e. neither over-capitalization nor under –capitalization

The over capitalized company can be restructured by:

a)Buy back of shares

b)Redemption of preference shares

c)Reduction of funded debts

d)Reorganisation of equity capitalAn under capitalization can be correctd By

a)Fresh issue of shares

b)Issue of bonus shares

c)Increasing par value of shares

FINANCIAL RESTRUCTURING SHOULD NOT BE ENCOURAGED IN FOLLOWING CASES

TO ELIMINATE COMPETITIONTO OVER PROTECT THE COMPANY FROM

COMPETITIONTO COMPENSATE THE INEFFICIENCY OF THE

MANAGEMENTTO PROTECT THE INDUSTRY AT THE COST OF

QUALITY

STEPS IN FINANCIAL RESTRUCTURING

Corporate Debt Restructuring Corporate debt restructuring helps in

restructuring the existing debt obligations by delaying the repayment time or converting the debt into equity shares or reducing the rate of interest to be paid on these obligations.

This process is voluntary and non regulatory.

In simple wordsCorporate Debt Restructuring (“CDR”)

mechanism is a voluntary non statutory mechanism under which financial institutions and banks come together to restructure the debt of companies facing financial difficulties due to internal or external factors, in order to provide timely support to such companies.

Definition

Debt restructuring is a process that allows a private or public company, or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts in order to improve or restore liquidity so that it can continue its operations.

Features

Voluntary mechanismNon statutory processAllows public and private companies both

to restructureReorganizes the debt obligationsHelps in reviving the sick companiesHelps in restoring the liquidity of the

companies stuck in debt trap.

ImportanceHelps the business to control their finances

Improves credibility

Help from third party

Satisfy creditors

Protects the company from bankruptcy

Helps in reviving a sick unit

Reduces NPA of various financial institutions

Improves economic condition

Alternatives to BIFR The Board for Industrial and Financial Reconstruction (BIFR) is

an agency of the government of India, part of the Department of Financial Services of the Ministry of Finance. Its objective is to determine sickness of industrial companies and to assist in reviving those that may be viable and shutting down the others.

CDR STRUCTURECDR was introduced in 2001 as a voluntary

and non statutory system and is based on the system prevalent in London where the company is saved from insolvency through Debtor Creditor Agreement (DCA) and Inter Creditor Agreement(ICA)

RBI issued guidelines in 2012 to deal with both CDR as well as non-CDR

THREE TIER STRUCTURE

CDR is implemented through three tier structure :

1. CDR Standing Forum and its Core Group2. CDR Empowered Group3. CDR Cell

CDR STANDING FORUMThis is the topmost layer of the CDR system

and helps in smooth functioning of the Self Empowered Group.

There is also a CORE GROUP which helps in taking decisions relating to policy.

This core group is responsible for laying down guidelines and monitoring the process of CDR .

CDR EMPOWERED GROUPThe first layer deals with general guidelines,

the next layer consists of specific cases as per guidelines of STANDING FORUM

The company will have to apply for the CDR to CDR Cell which will examine the request filed by the company

The cell will then check the feasibility of request on the basis of Standing Forum guidelines

CDR CELLThe CDR Cell helps CDR Standing Forum and

Empowered Groups in performing functions and work out a plan within 30 days with the help of other creditors and experts.

According to the proposal final decision is taken by Empowered Group.

METHODS OF CDR

1. Increasing the term of loans 2. Converting the debt into equity 3. Reducing share capital or changing its

composition4. Extension of repayment period of the existing

debt and rescheduling 5. Reduction of high interest on the loan 6. Re-phasing recovery programs

7. Reducing margins 8. Reassessing credit facilities such as working capital9. Procuring extra money10. Conversion of the unpaid interest 11. Conversion of the compound interest into simple interest

TRENDS IN CDR The CDR progress reports indicate 285 live

cases dealing with the debt of Rs. 286405 crores

Infrastructure ,Iron and Steel , textiles etc. are some of the main sectors which are resorting to CDR mechanism

Therefore CDR in India has shown higher trend and its demand has been increasing since its inception