Corporate restructuring: Analysis of select Indian cases

Abstract

Corporate restructuring is defined as redesigning the structure of company’s ownership or control, or business portfolio or financial structure which is designed to increase the value or net worth of the company. Corporate financial restructuring is the process of restructuring the assets and liabilities of corporations, including their debt?to?equity structures to be in line with their cash?flow needs to promote efficiency, to change their positioning, to survive an adverse financial situation, support growth, and maximize the value to shareholders, creditors and other stakeholders. The vast and dynamic changes in the external environment for an Indian company in the last decade have lead to companies using corporate restructuring more often as a strategic tool to enhance the shareholder’s value. These external influences might come in the form of price volatility, plummeting exchange rates, interest rate fluctuations, changes in liberalization, privatization and globalization policies by government or even the general market sentiments. We intend to do this project as an attempt to come at certain conclusions about the effects of restructuring by doing an empirical study on the shareholder returns/ company’s performance in the short term and long term whenever restructuring was undertaken. We are looking at the major 4 types of restructuring that happens commonly by analyzing some examples of such instances in the Indian context. The most common types of restructuring that happens in India are: 1) Share Repurchase. 2) Mergers and acquisitions. 3) Debt Restructuring. 4) Demerger. Buyback of shares relates to the company buying back its shares which it has issued earlier from the market. There has been a spate of announcements of share buybacks in India since passing of Securities regulation in 1998. Whenever there is not enough opportunities in their businesses share buyback is often used as a tool to return the idle funds to the shareholders. As per this buyback can result in increased EPS (Earnings per share) provided it does not jeopardize the firm’s ability to fund promising investment avenues that may arise in the future. That is, it is expected that the firm’s future earnings and cash flows after a share buyback would increase or, at least, remain same after buyback is completed. Since the number of outstanding shares has decreased the EPS is expected to grow more. But there have been instances when the share buyback was used a strategy to increase the share prices or to mask poor performance. This might turn out to be difficult for the company if the company finds it difficult to replace the equity with cheap debts especially for companies with debt heavy balance sheets.