Corporate Debt Restructuring CORPORATE RESTRUCTURING MEANING The process

Corporate Debt Restructuring

CORPORATE RESTRUCTURING

MEANING “The process involved in changing the organisation of a business. ” �Redesigning one or more aspects �Implemented due to certain factors: To be more profitable, survive economic conditions, address challenges & increase shareholders value.

NEED & OBJECTIVES OF CORPORATE �To improve competitive position �To rearrange the activities to be more profitable �Cost reduction �Utilisation of strategic assets �Eliminate competitors �To have an access to R & D �Focus on core strengths

�Revive and rehabilitate a sick unit �Constant supply of resources �Tax benefits �Improve corporate performance

BROAD AREAS FINANCIAL RESTRUCTURIN G OPERATIONAL RESTRUCTURIN G MANAGERIAL RESTRUCTURIN G ASSET RESTRUCTURIN G Reduction of capital, reorganising the equity and debt base, buy back of shares. Product restructuring Improving the manpower New investments, technological changes, asset reduction, sale and lease back transactions. Market restructuring

TECHNIQUES EXPANSION / GROWTH TECHNIQUES CONTRACTION / DIVESTMENT TECHNIQUES OTHER TECHNIQUES § 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 RESTRUCTURING �MISAPPROPRIATION OF FUNDS �OBSOLETE �LACK OF OPTIMUM UTILISATION OF RESOURCES �SHIFT IN CONSUMER PREFERENCES �INEFFIOCIENT MANAGEMENT �EXTERNAL FACTORS �DISSATISFIED WORKERS, STRIKES, LOCK OUTS ETC

NEED OF FINANCIAL RESTRUCTURING �At 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 capital �An 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 COMPETITION �TO OVER PROTECT THE COMPANY FROM COMPETITION �TO COMPENSATE THE INEFFICIENCY OF THE MANAGEMENT �TO PROTECT THE INDUSTRY AT THE COST OF QUALITY

STEPS IN FINANCIAL RESTRUCTURING

Corporate Debt Restructuring Ø 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. ØThis process is voluntary and non regulatory.

�In simple words Corporate 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 mechanism �Non statutory process �Allows public and private companies both to restructure �Reorganizes the debt obligations �Helps in reviving the sick companies �Helps in restoring the liquidity of the companies stuck in debt trap.

Importance q. Helps the business to control their finances q. Improves credibility q. Help from third party

q. Satisfy creditors q. Protects the company from bankruptcy q. Helps in reviving a sick unit q. Reduces NPA of various financial institutions

q. Improves economic condition q. 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 STRUCTURE �CDR 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 Group 2. CDR Empowered Group 3. CDR Cell

CDR STANDING FORUM �This 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 GROUP �The 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 CELL �The 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 Increasing the term of loans Converting the debt into equity Reducing share capital or changing its composition Extension of repayment period of the existing debt and rescheduling 5. Reduction of high interest on the loan 6. Re-phasing recovery programs 1. 2. 3. 4.

7. Reducing margins 8. Reassessing credit facilities such as working capital 9. Procuring extra money 10. 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