Forms of Capital Restructuring

A change as enormous as such can have various implications for the company. In most cases, it can result in either downsizing or upsizing employees, changes in staffing requirements, etc. This is because a restructure can take place for many different reasons. So, what is this big change called organizational restructuring? The changes in the business world are some of the most testing times for a company to withstand.

• Arvind Mills invested in a massive expansion of its denim facility in the 1990’s, although other producers were diversifying away from denim fabrics due to slowdown in demand.
• Corporate Restructuring is a means of significantly changing the company’s business model, management team by cutting out and merging departments.
• While taking this decision, you must be careful as massive layoffs will stir up emotions and disrupt an environment.
• Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets.
• Corporate takeovers in India were started by Swaraj Paul when he tried to take over Escorts.
• For example, merger of Brooke Bond and Lipton has formed a new entity called Brooke Bond Lipton India Limited.

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 response to these pressures contingent liability journal entry 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.

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But once it is completed, restructuring should result in smoother, more economically sound business operations. Organizational restructuring is often implemented for financial reasons as well but focuses on altering the structure of the company rather than its financial arrangements. Two common examples of restructuring are in the sales tax and property tax arenas. Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress. If you need help with capital restructuring, you can post your legal need on the UpCounsel marketplace. UpCounsel accepts only the top 5 percent of lawyers on its site.

Even though the environmental change which warrants corporate restructuring is a gradual process, corporate restructuring is often an episodic and convulsive exercise. Typically an organization can tolerate only one vision of future, articulated by its chief executive and it takes time to communicate that vision and mobilize collective commitment. Once the strategy and structure that reflect that vision are in place, they acquire a life of their own. A constituency develops with a vested interest in that strategy and structure which resists change unless it becomes inescapable.

Causes of Capital Restructuring

The Board approved the over Rs 120 crores buyback on the stated objective of maximizing shareholder wealth. The post buyback share price of the Company was Rs 344 per share, although much below the tender price, was still higher than its pre-buyback price of Rs 333 per share. Also considering the paucity of time to analyze, we have considered instances of only two companies under each form of restructuring to demonstrate the effect of capital restructuring on shareholder value creation. Francisco J. López Lubián argued that IRR is a superior measure to return on equity , since IRR measures the free cash flows generated for the shareholders. He argued that ROI is not always practical and understandable – an increase in ROI is not always good for the shareholders, while an increase in EVA is always good for the shareholders. Debt- equity restructuring is done to increase profitability and to improve or restore liquidity.

• Authentic Databases, Books, Journals, Practice Modules, Exam Platforms, and More.
• Such synergy effect makes the value of the combined companies greater than the sum of the two parts.
• Restructuring is a type of corporate action taken that involves significantly modifying the debt, operations, or structure of a company as a way of limiting financial harm and improving the business.
• You can hold a seminar on the new direction that your company is going and clearly put forward the new strategies.
• It includes reshuffling of the shareholders capital and the reserves that are appearing in the balance sheet.

However, the post buyback share price of the Company was Rs. 360, which was even lower than the pre-buyback price indicating shareholder wealth erosion and a negative overall return. The analysis is expected to provide insight on the impact of capital restructuring on shareholder wealth. The analysis will be done for each company separately and then be compared with companies adopting similar form of restructuring in order draw inferences on success or failure of such restructuring. After reviewing the literature, we have identified 2 cases each of companies having employed capital restructuring through demerger, debt reduction and share repurchase of successful as well as unsuccessful companies. A successful corporate restructuring is an arduous task and takes up a great deal of senior management’s time. Companies today are challenged with ever changing external realities to sustain and grow and truly enhance shareholder value in the longer term.

This has the effect of increasing the amount of debt and decreasing the amount of equity on the balance sheet. A firm’s total cost of capital is a weighted average of the cost of equity and the cost of debt, known as the weighted average cost of capital . A company usually uses a share repurchase route when it has surplus cash. Surplus cash is applied for buying back its own shares and thus reducing the total number of outstanding shares, which consequently results in a higher earnings per share . A share repurchase may also help avert a hostile takeover bid.

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Economic value added is a better indicator of business performance compared to the return on investment . Post the restructuring, the stake of the Ruia’s in the Company would come down to 40%. State Bank of India, would take over 34% of the shareholding by converting part of its debts into equity. While Ruia’s will sell 26% of the Company to private equity investor Farallon Capital for Rs. 1,700 crores. There has to be consistent plan to improve the company’s liquidity, financial planning has to be consistent, debt negotiation and restructuring should not be equated, etc. Robbins and Pearce suggest that as the seriousness of financial decline enhances, restructuring options move away from cost reduction to asset reduction.

Normally, If the going-concern value exceeds the liquidation value the company needs to be reorganized otherwise it should be liquidated. The company creditors also may petition to courts and get the company involuntarily declared bankrupt. Thus when a firm faces technical insolvency its assets are still greater than the liabilities https://1investing.in/ but the firm is confronted with liquidity crisis. If the project fails the probability of insolvency is greatly increased. Names and general nature of business of the amalgamating companies. The Standard also prescribes certain disclosures to be made in the first financial statements prepared following the amalgamation.

SKILLS REQUIRED TO WORK ON CAPITAL RESTRUCTURINGS

The out-of-court restructuring, which was approved by the company’s board of directors, includes refinancing a $700 million first-lien loan and lowering the retailer’s interest costs. Under the deal, the company’s existing term loan holders get paid in full, while senior noteholders swapped their debt for equity. Restructuring can be a tumultuous, painful process as the internal and external structure of a company is adjusted and jobs are cut.

The tender offer usually sets forth the number of shares that the company wishes to repurchase as well as the price at which it will repurchase the shares. The tender offer is also a time-bound offer and states the period for which the offer would be extended. Wastage of resources in a business can affect it adversely but if taken in stride the business can make it into an opportunity.

Impact of Capital Restructuring on Business Performance

Capital restructuring is an operational approach primarily used to deal with changes that impact a business’s financial stability. However, it can also be used to rearrange capital assets to position the company to take advantage of growth opportunities. Finally, after deciding on the organizational structure, job roles, and workforce, comes the part of effective workplace communication. A restructuring process is a tough one, especially on the employees. In this regard, the key lies in understanding what will be the organizational structure post restructuring and planning accordingly. You must have this structure laid out before the restructuring process to have a clear idea of which employees you want.

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Restructuring does mean financial changes but that is not all, there are other aspects related to it like asset management, improving the scope of firm and capital structure. Creates significant shareholder value especially in case of conglomerates when done correctly, as it unlock share price gains. The rise in uncertainty and dynamic business environment has resulted in increase in capital restructuring cases in the recent years. The major aim of restructuring is to significantly modify the current structure, operations, or debt of a company as a potential way to improve the business as a whole and eliminate or reduce financial harm. Capital restructuring works along the same lines to improve the finances and function of a business in a bid to make it more appealing to investors.