Introduction to Corporate Restructuring

DEFINITION
a. Corporate restructuring can be defined as any change in the business
capacity or portfolio that is carried out by an inorganic route or
b. Any change in the capital structure of a company that is not a part of
its ordinary course of business or
c. Any change in the ownership of or control over the management of
the company or a combination thereof.
a.1 Any change in the business capacity or portfolio carried out by
inorganic route.
Tata Motors launched Sumo and later, Indica-leading to an expansion of
its business portfolio. However, these products were launched from Tata
Motors own manufacturing capacity in through an organic route.
Hence, it would not qualify as corporate restructuring
Tata Motors acquisition of Jaguar Land Rover from Ford, through
Jaguar Land Rover Limited is corporate restructuring
Grasims acquisition of Larsen & Toubros (L&T) cement division
through UltraTech Cement Limited is an example of corporate
restructuring
a.2 Change in the business portfolio could also be in the nature of
reduction of business handled by a company.
In the case of Grasim and L&T, the demerger of L&Ts cement business
into UltraTech Cement Limited was reduction of its business portfolio
and thus, amounted to corporate restructuring of L&T.

b. Any change in the capital structure of a company that is not in the

ordinary course of its business.
This can be further explained with the help of the following diagram:
(a) Car finance loan
(b) Scheduled repayment of a term loan, etc. keeps on changing the
debt-equity ratio within planned or targeted range. Such changes do not
qualify as Corporate Restructuring.
(a) An initial public issue
(b) Follow-on public issue
(c) buy-back of equity shares may alter the capital structure of a
Company permanently. Such activities are not in the ordinary course of
business of a company- Hence amounts to corporate restructuring
(a) Borrowing of a significant amount as term loan
(b) Issue of five year nonconvertible debentures, etc. Such changes may
alter the debt-equity ratio significantly but still these do not qualify as
leading to corporate restructuring.
Capital structure refers to the debt equity ratio, i.e., the proportion of
debt and equity in the total capital of a company.
This capital structure is never static and changes almost daily.
If the debt/equity ratio fluctuates within a targeted or planned range,
such changes in the capital structure do not amount to capital
restructuring.
o Borrowing of a significant amount of term loan or an issue of five
year non-convertible debenture does not qualify to be called
corporate restructuring.

o An initial public issue, or a follow-on public issue or buy-back of

equity shares would permanently alter the capital structure of a
company and thus, would amount to corporate restructuring
c. Any change in the ownership of a company or control over its
management
Merger of two or more companies belonging to different promoters
Demerger of a company into two or more with control of the
resulting company passing on to other promoters
Acquisition of a company
Sell-off of a company or its substantial assets
Delisting of a company
All these would qualify to be called exercises in corporate
restructuring.
III. THE ACTIVITIES OR CHANGES WHICH ARE NOT
TERMED CORPORATE RESTRUCTURING
(a) Initial creation of a company
Here, an instructor should explain the concept and distinguish between
- a limited company
- a proprietary concern and a company
- a partnership firm and company
- a private company and a public company
Its various examples are:
1. Incorporation of a limited company

2. Conversion of a proprietary concern into a company

3. Conversion of a partnership firm into a company
4. Conversion of a private company into a public company
(b) Change in the internal command structure or hierarchy: The
command structure of an organization or its hierarchy simply means the
reporting relationships among the employees, managers, top
management and their various functions.

Functional organization

Divisional organization

Matrix organization
With businesses having become more complex along with the
acceptance of newer concepts of organization building such as tutorship,
mentorship, etc., the hierarchies have stopped strictly falling into one of
the three types mentioned above.
Any migration of an organization from functional to divisional or to
matrix type or to any new or hybrid type or vice-versa would not be a
case of corporate restructuring.
(c) Change in the business process
Re-engineering is the fundamental rethinking and redesign of business
processes to achieve dramatic improvement in critical, contemporary
measures of performance such as, cost, quality, service and speed.
Thus, It refers to the radical redesigning of business processes and not to
the ownership and control or to the capital structure of the organization.
(d) Downsizing
It is another form of organizational change in which the business
organization substantially cuts down on its manpower, recurring cost

and/or capital expenditure, either as an objective itself or as a result of

re-engineering.
(d) Other Activities: Since there is no standard definition of corporate
restructuring, activities such as outsourcing, enterprise resource
planning, total quality management, licensing, etc., have not been
termed as corporate restructuring activities.
IV. MAIN FORMS OF CORPORATE RESTRUCTURING

Major Forms of Corporate Restructuring:

Merger
Consolidation
Acquisition
Divestiture
Demerger (spin-off/split-up/split-off)
Carve-Out
Joint Venture
Reduction of Capital
Buy-back of Securities
Delisting of Securities/Company