By Rajiv Kulkarni, IGNOU.

Financial restructuring is the rearrangement of a business assets and liabilities. The process is often associated with corporate restructuring where an organization’s overall structure and its processes are reanalyzed. It helps to improve the financial stability and increases in prospects for future growth and expansion. While financial restructuring relates to changes in the capital structure of the firm, it also ensures the fundamental change in a company’s business or financial structure with the motive of increasing the company’s value to shareholders or creditors. [1]Corporate restructuring is broadly divided into two parts: financial restructuring and operational restructuring. While financial restructuring relates to changes in the capital structure of the firm, operational restructuring relates to changes in the business model of a firm, with the aim of increasing overall shareholder value. Corporate financial restructuring not necessarily planed during crisis only but some cases, the process of restructuring takes place as a means of allocating resources to achieving growth both vertically and horizontally.

Reasons for Restructuring

As stated earlier in some cases, the process of restructuring takes place as a means of allocating resources for new endeavors. A company may also need to restructure its finances if it merges with or acquires another company. When two firms are merged, their debt and equity are also combined, and the resulting corporation financial health of organization. An acquisition may even be used as a form of financial restructuring, as a company with a low debt-to-equity ratio may target a business with a high ratio as a means of better balancing its finances. Although companies can restructure for any reason, in most cases it is done when there are serious problems with the serious business crisis like insolvency.

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Most businesses also hold liabilities, which are debts or other obligations that arise as a result of past transactions. These economic factors will often have the most significant impact on the success or failure of that business, so financial restructuring is likely to focus on effectively managing assets and reducing liabilities.

Criticism of Financial restructuring regarding corporate debt

CDR (Corporate Debt Restructuring) system with Reserve Bank of India (RBI) support has been fairly effective in facilitating the restructuring of large businesses with multiple lenders having large aggregate dues. The CDR restructurings appear to have facilitated the turnaround of distressed businesses, which turnaround has also been aided by the high growth rates and health of the Indian economy. Clearly, the multiplicity of lenders involved and the large aggregate dues to them results in huge complexity, which the CDR mechanism seeks to handle through the framework provided. While there has been significant progress since CDR was first introduced in India, it is not without its critics. A key criticism of the CDR mechanism relates to its efficacy in adequately considering and balancing the interests of the different stakeholders. Criticism is mounting that the CDR platform designed to bail out businesses affected by external factors are being misused by promoters, resulting in lenders being upset.[2] Crisil, a rating company, estimates that loan restructurings could touch two lakh cores this year. The government has now woken up to stop such unfair practices.

CDR should only be taken where the slippages have been for reasons beyond the control of the management of the company,[3]” the finance ministry wrote to the CDR cell. In case CDR is done that resources of the banking sector are precious and limited and they cannot be allowed to be used in an imprudent way. CDR is a necessity especially when economic upturn and downturn are a way of life and part and parcel of business cycles for individual companies”.

Impact of financial restructuring in India

In India since Post liberalization i.e. from early nineties due to cut throat global competition, lot of industries has started making full-fledged efforts for financial and technical restructuring. There is a continuous increase in the number of sick units because of various reasons as obsolete technology, managerial weakness, change in the pattern of the market, size of the unit, lack of finance at cheaper rate, international competition, over capacity in the field, etc. However, the major reason lies in the failure of any industry seems to be financial and monitory problems. Indian economy has witnessed lot of cyclical changes during last 20 years due to liberalization; privatization and globalization. Many efforts are made to speed up the process of industrialization with an aim of promoting economic development. Because of the globalization as well as interaction of Indian economy with the world economy, new challenges have been open for the corporate sector and they were competent to the external economic environment. The Corporate in India have undergone a remarkable structural transformation regarding implementation, expansion, diversification and sustainability or viability of the project. Whether there is improvement in the corporate performance due to restructuring of its finance.

Path Ahead

While Financial Discipline is Must to save our Future, we must not discount the Remains of the Slowdown period that resulted in a Lot of unfinished activities that were started in Boom period. We should only right-down such activity if and only if we are sure of not returning to bull phase again in the near term. So while everyone’s Frustration needs vent, let us not undermine what could be future opportunities; as what seem Bad (loan) will turn good opportunity with Slight change of Atmosphere so bankers should understand these facts. Corporate restructuring in a developing country like India is one of the most demanding tasks faced by fiscal policymakers. Measures that will assist to assuage the issues related to Corporate Restructuring in India are listed below:

  • It should be unavoidable for the government and management to guide in creating [4]restructuring precedence, discussing market collapse, changes in the legal and tax systems particularly in the come round of financial crisis when business agony is all-encompassing. For doubtful corporate restructuring Significant legal aspects of reorganization security of bank debt during Mergers and Acquisition policies should be properly scrutinized. Restructuring should be based on a impartial and transparent strategy
  • The restructuring proposals should be considered from a purely commercial angle and avoiding to give benefit to doubtful customer. An encouraging legal, regulatory, and accounting background is to be formed. The viability of the project should be established and only after that should any restructuring proposal be considered. For this, it is important that project appraisal standards are significantly enhanced
  • Government should be concerned to take action immediately as a crisis is reviewed by system. Effective measures should be taken rapidly to diminish the social costs of crisis. A uniform approach needs to be adopted for both Standard and NPA accounts while examining the restructuring proposals. Further Finance professionals such as those working in Centrum have an important role to play in this regard. Restructuring should be considered only under certain specific conditions. The need for restructuring should arise only when no other alternatives are available.

Conclusion

Corporate Debt Restructuring has been in existence since early nineties in India, and this system has fulfilled its objectives to a large extent. But unfortunately it is developing as a system evolved against objectives for what it was formulated. Similarly, regulatory control tools which should be used only in the most demanding times. It goes without saying that its future success and failure will depend upon the ethics and integrity of its members and the professionals involved in the restructuring process.  While making the restructuring deals, it is essential not only to make examination of the monetary aspects of the acquiring company but also the cultural and manpower issues of both the concerns for suitable post-acquisition integration.

[1] Jayadev M., Abhijit Gayen and Rakesh K Meena, “Corporate Financial Restructuring: An Analysis of Select Cases

[2] Economics Times21-05-2012 http://articles.economictimes.indiatimes.com/2012-05-21/news/31801204_1_cdr-debt-restructuring-diversion

[3] Economics Times 21-05-2012 http://articles.economictimes.indiatimes.com/2012-05-21/news/31801204_1_cdr-debt-restructuring-diversion

[4] Deepika Dhingra and Nishi aggarwal, “Corporate Restructuring in India: A Case Study of Reliance Industries Limited (RIL)”

 

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