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Corporate Restructuring

Corporate restructuring is one of the most complex and fundamental phenomena that

management confronts. Each company has two opposite strategies from which to choose: to

diversify or to refocus on its core business. While diversifying represents the expansion of

corporate activities, refocus characterizes a concentration on its core business. From this

perspective, corporate restructuring is reduction in diversification.

Corporate restructuring is an episodic exercise, not related to investments in new plant and

machinery which involve a significant change in one or more of the following Pattern of

ownership and control

Composition of liability Asset mix of the firm.

It is a comprehensive process by which a company can consolidate its business operations and

strengthen its position for achieving the desired objectives:

Synergetic Competitive Successful

It involves significant re-orientation, re-organization or realignment of assets and liabilities of

the organization through conscious management action to improve future cash flow stream

and to make more profitable and efficient.

Meaning and Need for corporate restructuring

Corporate restructuring is the process of redesigning one or more aspects of a company. The

process of reorganizing a company may be implemented due to a number of different factors,

such as positioning the company to be more competitive, survive a currently adverse economic

climate, or poise the corporation to move in an entirely new direction. Here are some examples

of why corporate restructuring may take place and what it can mean for the company.

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Restructuring a corporate entity is often a necessity when the company has grown to the point

that the original structure can no longer efficiently manage the output and general interests of

the company. For example, a corporate restructuring may call for spinning off some

departments into subsidiaries as a means of creating a more effective management model as

well as taking advantage of tax breaks that would allow the corporation to divert more revenue

to the production process. In this scenario, the restructuring is seen as a positive sign of growth

of the company and is often welcome by those who wish to see the corporation gain a larger

market share.

Corporate restructuring may also take place as a result of the acquisition of the company by

new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a

merger of some type that keeps the company intact as a subsidiary of the controlling

corporation. When the restructuring is due to a hostile takeover, corporate raiders often

implement a dismantling of the company, selling off properties and other assets in order to

make a profit from the buyout. What remains after this restructuring may be a smaller entity

that can continue to function, albeit not at the level possible before the takeover took place

In general, the idea of corporate restructuring is to allow the company to continue functioning

in some manner. Even when corporate raiders break up the company and leave behind a shell

of the original structure, there is still usually a hope, what remains can function well enough for

a new buyer to purchase the diminished corporation and return it to profitability.

Purpose of Corporate Restructuring

To enhance the share holder value, The company should continuously evaluate its:

Portfolio of businesses, Capital mix, Ownership &Asset arrangements to find opportunities to increase the share holders

value.

To focus on asset utilization and profitable investment opportunities. To reorganize or divest less profitable or loss making businesses/products.

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The company can also enhance value through capital Restructuring, it can innovatesecurities that help to reduce cost of capital.

Characteristics of Corporate Restructuring

To improve the companys Balance sheet, (by selling unprofitable division from its corebusiness).

To accomplish staff reduction ( by selling/closing of unprofitable portion). Changes in corporate management. Sale of underutilized assets, such as patents/brands. Outsourcing of operations such as payroll and technical support to a more efficient 3rd

party.

Moving of operations such as manufacturing to lower-cost locations. Reorganization of functions such as sales, marketing, & distribution. Renegotiation of labor contracts to reduce overhead. Refinancing of corporate debt to reduce interest payments. A major public relations campaign to reposition the company with consumers.

Financial Restructuring

Financial restructuring is the process of reshuffling or reorganizing the financial structure, which

primarily comprises of equity capital and debt capital. Financial restructuring can be done

because of either compulsion or as part of the financial strategy of the company. This financial

restructuring can be either from the assets side or the liabilities side of the balance sheet. If one

is changed, accordingly the other will be adjusted.

The two components of financial restructuring are;

Debt Restructuring Equity Restructuring

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Debt restructuring

Debt restructuring is the process of reorganizing the whole debt capital of the company. It

involves reshuffling of the balance sheet items as it contains the debt obligations of the

company. Debt restructuring is more commonly used as a financial tool than compared to

equity restructuring. This is because a companys financial manager needs to always look at the

options to minimize the cost of capital and improving the efficiency of the company as a whole

which will in turn call for the continuous review of the debt part and recycling it to maximize

efficiency.

Debt restructuring can be done based on different circumstances of the companies. These can

be broadly categorized in to 3 ways.

A healthy company can go in for debt restructuring to change its debt part by making

use of the market opportunities by substituting the current high cost debt with low cost

borrowings.

A company that is facing liquidity problems or low debt servicing capacity problems can

go in for debt restructuring so as to reduce the cost of borrowing and to increase the

working capital position.

A company, which is not able to service the present financial obligations with the

resources and assets available to it, can also go in for restructuring. In short, an

insolvent company can go for restructuring in order to make it solvent and free it from

the losses and make it viable in the future.

Components of debt restructuring

The components of debt restructuring are as follows

Restructuring of secured long-term borrowings Restructuring of unsecured long-term borrowings Restructuring of secured working capital borrowings Restructuring of other term borrowings

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same category is to change the equity capital in to redeemable preference shares or

loans.

Restructuring of equity share capital can be done by writing down the share capital by

certain appropriate accounting entries. This will help in reducing the amount owed by

the company to its shareholders without actually returning equity capital in cash.

Restructuring can also be done by reducing or waiving off the dues that the

shareholders need to pay.

Restructuring can also be done by consolidation of the share capital or by sub division of

the shares.

Reasons behind equity restructuring

The following are the reasons for which equity restructuring is done:

Correction of over capitalization Shoring up management stakes To provide respectable exit mechanism for shareholders in the time of depressed

markets by providing them liquidity through buy back.

Reorganizing the capital for achieving better efficiency To wipe out accumulated losses To write off unrecognized expenditure To maintain debt-equity ratio For revaluation of the assets For raising fresh finance

Corporate Restructuring

Corporate restructuring, out of all emerging concepts of findings ways to serve shareholders

better, has been a very successful concept abroad and its been followed all the more in high

context cultures like India. The rapidity with corporate finance due to external factors like

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increased price volatility, a general globalisation of the markets, tax asymmetric, development

in technology, regulatory change, liberalisation, increased competition and reduction in

information and transaction costs and also intrafirm factors like liquidity needs of business,

capital costs and growth perspective have lead to practice of corporate restructuring as a

strategic move to maximise the shareholder's value.

The "Corporate restructuring" is an umbrella term that includes mergers and consolidations,

divestitures and liquidations and various types of battles for corporate control. The essence of

corporate restructuring lies in achieving the long run goal of wealth maximisation.

The term corporate restructuring encompasses three distinct, but related, groups of activities;

expansions including mergers and consolidations, tender offers, joint ventures, and

acquisitions; contraction including sell offs, spin offs, equity carve outs, abandonment of

assets, and liquidation; and ownership and control including the market for corporate control,

stock repurchases program, exchange offers and going private (whether by leveraged buyout or

other means). Mergers and acquisitions (M&A) and corporate restructuring are a big part of the

corporate finance world. One plus one makes three: this equation is the special alchemy of a

merger or an acquisition. The key principle behind buying a company is to create shareholder

value over and above that of the sum of the two companies. Two companies together are more

valuable than two separate companies - at least, that's the reasoning behindM&A.

This rationale is particularly alluring to companies when times are tough. Strong companies will

act to buy other companies to create a more competitive, cost-efficient company. The

companies will come together hoping to gain a greater market share or to achieve greater

efficiency. Because of these potential benefits, target companies will often agree to be

purchased when they know they cannot survive alone.

We will briefly look at each of the three major categories of restructuring in the section which

follow as:

Expansions:

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Expansions include mergers, consolidations, acquisitions and various other activities which

result in an enlargement of a firm or its scope of operations. There is a lot of ambiquity in the

usage of the terms associated with corporate expansions.

AMerger involves a combination of two firms such that only one firm survuves. Mergers

tend top occur when one firm is significantly larger than the other and the survivor is

usally the larger of the two.AMerger can take the form of :

Horizontal merger involves two firms in similar businesses. The combination oftwo oil companies or two solid waste disposal companies, for example would

represent horizontal mergers.

Vertical mergers involves two firms involve in different stages of production ofthe same end product or related end product.

Conglomerate mergers involves two firms in unrelated business activities.

A consolidations involves the creation of an altogether new firm owning the assets of

both of the first two firms and neither of the first two survive. This form of combination

is most common when the two firms are of approximately equal size.

The joint ventures, in which two separate firms pool some of their resources, is another such

form that does not ordinarily lead to the dissolution of either firm. Such ventures typically

involve only a small portion of the cooperating firms overall businesses and usually have limited

lives.

The term acquisitions is another ambiguous term. At the most general, it means an

attempts by one firm, called the acquiring firm to gain a majority interest in another

firm called the target firm. The effort to gain control may be a prelude to a subsequent

merger to establish a parent subsidiary relationship, to break up the target firm and

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dispose of its assets or to take the target firm private by a small group of investots.

There are a number of strategies that can be employed in corporate acuisitions like

friendly takeovers, hostile takeovers etc.The specialist have engineered a number of

strategies which often have bizarre nicknames such as shark repellents and poison pills

terms which accurately convey the genuine hostility involved. In the same vain, the

acquiring firm itself is often described as a raider. One such strtegy is to emply a target

block repurchase with an accompaying stanstill agreement. This combination sometimes

describes as greenmail.

Contractions:

Contraction, as the term implies, results in a maller firm rather than a larger one. If we ignoe

the abondanment of assets, occasionally alogical course of action, coporate contraction occurs

as the result of disposition of assets. The disposition of assets, sometimes called sell-offs, can

take either of three board form:

Spin-offs

Divestitures

Carve outs.

Spin-offs and carve outs create new legal entities while divestitres do not.

Ownership and Control

The third major area encompassed by the term corpoate restructuring is that of ownership and

control. It has been wrested from the current board, the new managemt willl often embark on

a full or partial liquidatin strategy involving the sale of assets. The leveraged buyout preserves

the integrity of the firm as legal entity but consolidates ownership in the hands of a small

groups. In the 1980s, many large publicly tradedd firms went private and employes a similar

strategy called a leveraged buyout or LBO.

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Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies

in how the purchase is communicated to and received by the target company's board of

directors, employees and shareholders.

Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of the new business.

Synergy takes the form of revenue enhancement and cost savings. By merging, the companies

hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider

all the money saved from reducing the number of staff members from accounting,

marketing and other departments. Job cuts will also include the former CEO, who

typically leaves with a compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new

corporate IT system, a bigger company placing the orders can save more on costs.

Mergers also translate into improved purchasing power to buy equipment or office

supplies - when placing larger orders, companies have a greater ability to negotiate

prices with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller

company with unique technologies, a large company can maintain or develop a

competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach new

markets and grow revenues and earnings. A merge may expand two companies'

marketing and distribution, giving them new sales opportunities. A merger can also

improve a company's standing in the investment community: bigger firms often have an

easier time raising capital than smaller ones.

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That said, achieving synergy is easier said than done - it is not automatically realized once two

companies merge. Sure, there ought to be economies of scale when two businesses are

combined, but sometimes a merger does just the opposite.

Mergers and Acquisitions : Valuation matters

Investors in a company that is aiming to take over another one must determine whether the

purchase will be beneficial to them. In order to do so, they must ask themselves how much the

company being acquired is really worth.

Naturally, both sides of anM&A deal will have different ideas about the worth of a target

company: its seller will tend to value the company at as high of a price as possible, while the

buyer will try to get the lowest price that he can.

There are, however, many legitimate ways to value companies. The most common method is to

look at comparable companies in an industry, but deal makers employ a variety of other

methods and tools when assessing a target company . Here are just a few of them:

Comparative Ratios - The following are two examples of the many comparative metrics on

which acquiring companies may base their offers:

Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an

offer that is a multiple of the earnings of the target company. Looking at the P/E for all the

stocks within the same industry group will give the acquiring company good guidance for what

the target's P/E multiple should be.

Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an

offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other

companies in the industry.

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Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target

company. For simplicity's sake, suppose the value of a company is simply the sum of all its

equipment and staffing costs. The acquiring company can literally order the target to sell at that

price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble

good management, acquire property and get the right equipment. This method of establishing

a price certainly wouldn't make much sense in a service industry where the key assets - people

and ideas - are hard to value and develop.

Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis

determines a company's current value according to its estimated future cash flows. Forecasted

free cash flows (operating profit + depreciation + amortization of goodwill capital

expenditures cash taxes - change in working capital) are discounted to a present value using

the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right,

but few tools can rival this valuation method.

Mergers and Acquisitions : Break Ups

As mergers capture the imagination of many investors and companies, the idea of getting

smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very

attractive options for companies and their shareholders.

Advantages

The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the

whole." These corporate restructuring techniques, which involve the separation of a business

unit or subsidiary from the parent, can help a company raise additional equity funds. A break-

up can also boost a company's valuation by providing powerful incentives to the people who

work in the separating unit, and help the parent's management to focus on core operations.

Most importantly, shareholders get better information about the business unit because it issues

separate financial statements. This is particularly useful when a company's traditional line of

business differs from the separated business unit. With separate financial disclosure, investors

are better equipped to gauge the value of the parent corporation. The parent company might

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attract more investors and, ultimately, more capital. Also, separating a subsidiary from its

parent can reduce internal competition for corporate funds. For investors, that's great news: it

curbs the kind of negative internal wrangling that can compromise the unity and productivity of

a company. For employees of the new separate entity, there is a publicly traded stock to

motivate and reward them. Stock options in the parent often provide little incentive to

subsidiary managers, especially because their efforts are buried in the firm's overall

performance.

Disadvantages

That said, de-merged firms are likely to be substantially smaller than their parents, possibly

making it harder to tap credit markets and costlier finance that may be affordable only for

larger companies. And the smaller size of the firm may mean it has less representation on major

indexes, making it more difficult to attract interest from institutional investors. Meanwhile,

there are the extra costs that the parts of the business face if separated. When a firm divides

itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance,

the division of expenses such as marketing, administration and research and development

(R&D) into different business units may cause redundant costs without increasing overall

revenues.

RestructuringMethods

There are several restructuring methods: doing an outright sell-off, doing an equity carve-out,

spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages and

disadvantages for companies and investors. All of these deals are quite complex.

Sell-Offs

A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally,

sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy.

The market may be undervaluing the combined businesses due to a lack of synergy between

the parent and subsidiary. As a result, management and the board decide that the subsidiary is

better off under different ownership.

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Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay

off debt. In the late 1980s and early 1990s, corporate raiders would use debt to finance

acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to

service the debt. The raiders' method certainly makes sense if the sum of the parts is greater

than the whole. When it isn't, deals are unsuccessful.

Equity Carve-outs

More and more companies are using equity carve-outs to boost shareholder value. A parent

firm makes a subsidiary public through an initial public offering (IPO) of shares, amounting to a

partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling

stake in the newly traded subsidiary.

A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing

faster and carrying higher valuations than other businesses owned by the parent. A carve-out

generates cash because shares in the subsidiary are sold to the public, but the issue also

unlocks the value of the subsidiary unit and enhances the parent's shareholder value.

The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent

retains some control. In these cases, some portion of the parent firm's board of directors may

be shared. Since the parent has a controlling stake, meaning both firms have common

shareholders, the connection between the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but because

it is a burden. Such an intention won't lead to a successful result, especially if a carved-out

subsidiary is too loaded with debt, or had trouble even when it was a part of the parent and is

lacking an established track record for growing revenues and profits.

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Carve-outs can also create unexpected friction between the parent and subsidiary. Problems

can arise as managers of the carved-out company must be accountable to their public

shareholders as well as the owners of the parent company. This can create divided loyalties.

Spinoffs

A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes

shares of the subsidiary to its shareholders through a stock dividend. Since this transaction is a

dividend distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm

needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal

entity with a distinct management and board.

Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases,

spinoffs unlock hidden shareholder value. For the parent company, it sharpens management

focus. For the spinoff company, management doesn't have to compete for the parent's

attention and capital. Once they are set free, managers can explore new opportunities.

Investors, however, should beware of throw-away subsidiaries the parent created to separate

legal liability or to off-load debt. Once spinoff shares are issued to parent company

shareholders, some shareholders may be tempted to quickly dump these shares on the market,

depressing the share valuation.

Tracking Stock

A tracking stock is a special type of stock issued by a publicly held company to track the value of

one segment of that company. The stock allows the different segments of the company to be

valued differently by investors. Let's say a slow-growth company trading at a low price-earnings

ratio (P/E ratio) happens to have a fast growing business unit. The company might issue a

tracking stock so the market can value the new business separately from the old one and at a

significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-off

or carving-out its fast growth business for shareholders? The company retains control over the

subsidiary; the two businesses can continue to enjoy synergies and share marketing,

administrative support functions, a headquarters and so on. Finally, and most importantly, if

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the tracking stock climbs in value, the parent company can use the tracking stock it owns to

make acquisitions.

Corporate debt Restructuring

Corporate debt restructuring can be difficult at the best of times. This difficulty has

been heightened due to the effects of the recent global crisis that has presented some

unprecedented debt pressures in corporate, household and financial sectors, evolving also into

sovereign debt pressures.

Debt deleveraging has taken place on a global scale as financial institutions,corporates and households are forced to reduce their debt burdens.

The write down of assets and concerns of counterparty risk have driven liquiditypressures on banks and other financial institutions.

Financial distress in the banking sector has constrained credit to corporates andhouseholds.

Economic downturn has reduced corporate revenues and household incomes. Reversals in capital flows have further constrained liquidity and exacerbated

exchange rate pressures.

Exchange rate depreciation in some countries with high incidence of FXdenominated debt has accelerated defaults in the corporate and household sectors.

Conversely, the effect of contractionary policies, motivated by the objective ofmaintaining the nominal exchange rate in some countries, has reduced debt

servicing capacity.

Governments may have both institutional limits and fiscal space constraints onintervening to resolve private sector debt problems.

Furthermore, large scale intervention by governmentse.g., involving the injectionof liquidity and assuming or subsidizing private sector debthas the potential to

lead to unsustainable public sector debt burdens.

Debt restructuring refers to the reallocation of resources or change in the terms of loan

extension to enable the debtor to pay back the loan to the creditor. It is an adjustment made by

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both the debtor and the creditor to smooth out temporary difficulties in the way of loan

repayment. It can be categorized into two types, and there are many ways to carry out the

restructuring process.

PROCESS OF CORPORATEDEBT RESTRUCTURING

A number of companies are now taking a good look at business debt restructuring to resolve

their unmet financial obligations. This is often a preferable solution to bankruptcy probably

because it is less expensive and more discreet. But just like bankruptcy, company debt

restructuring involves a systematic process.

yThe consultation process

Because business debt restructuring is nothing but an aggregate loan agreement, the

lender seeks a series of consultation sessions with the borrower.During these

meetings, the lender assesses the company's overall financial situation. It is at this

point that all the company's financial obligations are evaluated against the expected

regular cash flow. Primarily because of this, small business debt restructuring works

differently than that of a big corporate account.

yThe negotiation process.

Once the assessment procedure is finished, the lender then settles an agreement with

all the borrower's creditors and vendors. The main idea is to arrive at a solution that is

acceptable to all the parties involved. When that is achieved, the lender can proceed

to implement the solution agreed upon.

yThe liquidation of assets.

The liquidation of the business's assets, if found to be necessary by all parties

concerned, is the next step in the process. In some cases, restructuring your existing

debt may require you to pay a large amount of money up front. If your lender can't

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cover that, you have no other choice but to liquidate some assets. But most of the

time, the liquidation strategy is only used to get the profitability of the business back.

yThe restructuring process starts.

This is the step where the contract is signed and the agreement is enforced. The

borrower, and in this case the business, agree to the aggregate loan amount and to

other details including the monthly payment obligation, the interest rate, and the

term of payment. After everything is accounted for, the business is now officially

under a debt-restructuring program is expected to make payments as stipulated. This

is the last level of debt help available to the business before a filing for bankruptcy.

These are the steps involved in a business debt restructuring procedure. Simple as it may seem,

businesses should not leap into the plan immediately without careful consideration. Company

debt restructuring is a process that has to be critically evaluation to ensure the ultimate fate of

the business involved.

APPROACHES TO CORPORATEDEBT RESTRUCTURING

Key objectives of comprehensive corporate debt restructuring strategies following a

financial crisis have been to support an economy-wide recovery through:

(i) facilitating the exit of nonviable firms (i.e., firms without a reasonable prospect ofachieving sustainable profitability);

(ii) enabling the timely restructuring of debt and access to sufficientfinancing to sustain viable firms.

Corporate debt restructuring can take many forms directed to the debt and capital

structure of a firm; it can include debt reschedulings, interest rate reductions, debt-for-equity

swaps and debt forgiveness. To be successful in securing the longer term viability of

corporates, debt restructuring will often be accompanied by operational restructuring

addressing the structure and efficiency of the firms business through closures and

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reorganization of productive capacity.

A point of departure in designing corporate debt restructuring strategies in the context

of a financial crisis should be to recognize the distinction between the crisis containment

phase and the subsequent debt restructuring phase. During the height of a financial crisis

typically involving an uncertain macroeconomic path, falling asset prices and frozen credit

marketsjudgments on individual firm viability necessary to inform debt restructuring are

virtually impossible. Any attempts at debt restructuring during this phase tend to be marginal,

involving measures such as extension of repayment terms and waivers of payment defaults.

Such tinkering at the margins cannot address deeper problems of debt structure and overhang.

The focus of policy measures in the crisis containment phase should be to establish a

reasonably predictable macro path, including through restoration of the banking system. This

would provide an economic platform for debt restructuring to take off in earnest and to be

sustained through the debt restructuring phase, which would in turn further support economic

recovery. While there is no bright line between the crisis containment and debt restructuring

phases, the effectiveness of policy responses are generally enhanced by attention to the

different priorities and feasible objectives in these two phases.

While measures in the debt restructuring phase would evolve, three broad categories of

approaches to corporate debt restructuring in the aftermath of a financial crisis can be

identified, distinguished by varying degrees of government involvement. The categories

reflect the center of gravity of the measures from case by case market solutions to across the

board government-determined solutions, or an intermediate approach between the two.

A case by case, market-based, approachhas been used in which private sector

debtors and creditors are generally left to determine the nature, scope and terms of the

burden sharing on a case by case basis and principally relying on market solutions

While this approach is essentially market-oriented, the government would

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still have an important role through implementing legal reforms to encourage timely

market-driven restructuring. Furthermore, fiscal support in this approach

would be on an indirect basis through support of the financial sector (e.g., use of

public funds to recapitalize domestic banks that meet certain soundness requirements,

and thereby strengthen the capacity of those banks to absorb losses within debt

restructuring).

An across the board approach involves direct government involvement that

determines the method and distribution of burden sharing among relevant parties.

Under this approach, the relevant solutions are generally applicable across the board

to all economic agents in the pre-specified category, regardless of individual factors

There are two alternative characteristic features of this approach. The first is direct fiscal

support to corporates, which could range from a predetermined amount of support for

specified purposes (e.g., to protect against foreign exchange rate risk), to tax and other fiscal-

related incentives for firms that engage in restructuring The second is a legislatively mandated

absorption of losses by creditors; such a strategy should be avoided given the risks of

legal challenge and undermining the credit culture of a country.

An intermediate approachhas been applied that relies on case by case negotiations,

supported by government financial incentives, bolstered by legal and regulatoryreforms, and establishment of public entities to galvanize debt restructuring.

Without exception, all country experiences of wide scale corporate debt restructuring

have been mixed and have involved lengthy and difficult processes. While any approach

needs to be tailored to the circumstances of a countryincluding macroeconomic conditions,

composition of debt and legal/institutional frameworkthe experience with corporate debt

restructurings in the aftermath of systemic crises indicates that a properly designedintermediate strategy would generally be expected to make the best use of limited fiscal

resources and avoid shifting the burden of restructuring unsustainably to creditors.

The intermediate approach would tend to be more effective than the case by case

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approach in optimizing debt restructuring where the scale of the debt distress is beyond the

capacity of the court system and the market place to resolve in a timely manner. The

advantage of the intermediate approach over across-the board solutions is that it seeks to

leverage private resources (such as they exist) and to contain dead weight losses implied by

full across the board interventions. Notably, the substantial reliance on across the board

measures in the Chile and Mexico strategies proved costly to public debt sustainability and

contributed to the need for sovereign debt restructurings to restore the public sector balance

sheets. Furthermore, across the board measures, without distinction based on firm viability,

would disadvantage more efficient firms and dampen procompetitive forces in the economy.

However, in determining whether an intermediate approach is preferable in any given

strategy, the dead weight losses of full across the board interventions need to be weighed

against the inefficiencies from the potential grid-lock faced where the number of debt default

cases is substantially higher than the institutional capacity can handle. Countries could also

adopt more than one approach in parallel, for example, an across the board approach for

categories ofSMEs (due to the number and small size of claims) and an intermediate

approach for larger corporate

DESIGN AND IMPLEMENTATION OF A CORPORATEDEBT RESTRUCTURING STRATEGY

Tailoring a corporate debt restructuring strategy to individual country circumstances

requires attention to a number of key factors:

policy coordination; analysis of data to assess the dimensions of the debt problem; consideration of reform of the legal and institutional framework for enforcement of

credit, particularly the corporate insolvency law; government support to facilitate out-of-court restructurings; potential innovations to facilitate voluntary standstills; careful assessment of the rationale for government financing (if any) to individual firms;

consideration of different treatment for SMEs; and

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coordination with financial sector restructuring, particularly with respect to banks.

Debt restructuring policy in Axis Bank

y No account shall be taken up for restructuring unless the financial viability is established andthere is a reasonable certainty of repayment from the borrower as per the terms ofrestructuring package.

y Borrowers indulging in frauds and malfeasance shall not be eligible for restructuring. Wilfuldefaulters shall also not generally be considered for restructuring. Where strong justifiable

reasons exist for considering restructuring the accounts of a wilful defaulter, it should be

ensured that the borrower has taken satisfactory steps to rectify the wilful default.

y BIFR cases are not eligible for restructuring without their express approval.y Restructuring cannot be done with retrospective effect.y If restructuring is takenup, the same should be implemented within 90 days from date of

receipt of application.

y The repayment period of restructured advance including the moratorium, if any, does notexceed 10 years.

y Promoters margin of minimum 15% of Bank?s sacrifice should be brought in beforeimplementation of the restructuring package.

y Personal guarantee of the promoters should be availabley The restructuring should not be a ?repeated restructuring?.y The restructuring package should have right of recompense clausey The Bank should have the right to prepone repayment instalments if projections are over

achieved.

Debt Recovery Tribunal

Keeping in line with the international trends on helping financial institutions recover their bad

Debt quickly and effeciently, the Government of India has constituted thirty three Debt

Recovery Tribunal and five Debt Recovery Appellate Tribunal across the country.

The Debt Recovery Tribunal are located across the country. Some cities have more than one

Debt Recovery Tribunal located therein. New Delhi and Mumbai have three Debt Recovery

Tribunal. Chennai and Kolkata have two Debt Recovery Tribunal each. One Debt Recovery

Tribunal each has been constituted atA

hmdabad,A

llahabad,A

rungabad, Bangalore,Chandigrah, Coimbatore, Cuttack, Ernakulam, Guwahati, Hydrabad, Jabalpur, Jaipur, Lucknow,

Nagpur, Patna, Pune, Ranchi and Vishakapatnam.Depending upon the number of cases a Debt

Recovery Tribunal is constituted.

There are a number ofStates that do not have a Debt Recovery Tribunal. The Banks & Financial

Institutions and other parties in these States have to go to Debt Recovery Tribunal located in

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other states having jurisdiction over there area. Thus the territorial jurisdiction of some Debt

Recovery Tribunal is very vast. For example, the Debt Recovery Tribunal located in Guwahati

has jurisdiction over all the seven North Eastern States. Similarly, the territorial jurisdiction of

the Debt Recovery Tribunal located at Chandhigarh too has a very wide jurisdiction over the

S

tates of Punjab, Harayana, Chandhigarh.

The setting up of a Debt Recovery Tribunal is dependant upon the volume of cases. Higher the

number of cases within a territorial area, more Debt Recovery Tribunal would be set up.

Each Debt Recovery Tribunal is presided over by a Presiding Officer. The Presiding Officer is

generally a judge of the rank ofDist. & Sessions Judge. A PresidingOfficer of a Debt Recovery

Tribunal is assisted by a number of officers of other ranks, but none of them need necessarily

have a judicial back ground. Therefore, the Presiding Officer of a Debt Recovery Tribunal is the

sole judicial authority to hear and pass any judicial order.

Each Debt Recovery Tribunal has two Recovery Officers. The work amongst the Recovery

Officers is allocated by the Presiding Officer. Though a Recovery Officer need not be a judicial

Officer, but the orders passed by a Recovery Officer are judicial in nature, and are appealable

before the Presiding Officer of the Tribunal.

The Debt Recovery Tribunal are governed by provisions of the Recovery ofDebt Due to Banks

and Financial Institutions Act, 1993, also popularly called as the RDB Act. Rules have been

framed and notified under the Recovery ofDebts Due to Banks and Financial InstitutionsAct,

1993.

After the enactment of the Securitisation and Reconstruction of Financial Assets and

Enforcement ofSecurity Interests Act (SRFAESI Act or SRFAESIA for short) borrowers could

become first applicants before the Debt Recovery Tribunal. Earlier only lenders could be

applicants.

The Debt Recovery Tribunal are fully empowered to pass comprehensive orders like in Civil

Courts. The Tribunal can hear cross suits, counter claims and allow set offs. However, they

cannot hear claims of damages or deficiency of services or breach of contract or criminal

negligence on the part of the lenders.

The Debt Recovery Tribunal can appoint Receivers, Commissioners, pass ex-parte ordes, ad-

interim orders, interim orders apart from powers to Review its own decision and hear appeals

against orders passed by the Recovery Officers of the Tribunal.

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The recording of evidence by Debt Recovery Tribunal is some what unique. All evidences are

taken by way of an affidavit. Cross examination is allowed only on reqeust by the defense, and

that too if the Tribunal feels that such a cross examination is in the interest of justice. Friviolous

cross examination may be denied. There are a number of other unique features in the

proceedings before theD

ebtR

ecovery Tribunal all aimed at expediting the proceedings.

Asset Reconstruction

The concept of asset reconstruction business is of recent origin. Its genesis is rooted in the

collective policy response to the problem of huge stock of non-performing assets (NPAs),

nestling in the countrys financial asset pool covering the entire spectrum, wholesale & retail,

across all sectors. Waste formation in the financial system ultimately manifesting as NPAs is

natural phenomenon; only its degree of accumulation may vary with changes in the economic

& financial ambience, external & internal.One of the challenges before the various players

dotting the financial space is to ensure that this contagion of impairment does not impact itsoverall health. Quarantining these assets and transferring them to an institutional platform like

Asset Reconstruction Companies (ARCs) has been perceived to be a viable option answering to

this tough challenge. The necessary legislative, regulatory and other policy framework was put

in place as a result, paving the way for the creation ofARCs.

Presently there are four ARCs actively engaged in this business. Leading the pack is Asset

Reconstruction Company of (India) Limited (Arcil) the outfit promoted by the countrys financial

behemoths like PNB, SBI, IDBI Bank & ICICI Bank, accounting for as much as 80% of market

share (The past year it acquired assets ofRs. 27,000 Cr from 39 lenders, resolved 334 cases

covering total dues ofRs. 15,600 Cr and recovered & distributed amount ofRs. 1,900 Cr). Its

footprints across the whole business spectrum is getting firmer with the passage of time which

is likely to continue at least in the foreseeable future.

Asset reconstruction business constitutes essentially in unlocking the values embedded in the

NPAs and sharing these in an equitable manner with various stakeholders. Theoretically, this is

tailor-made for the common weal of all the concerned players and by now the market should

have been abuzz with frenetic action on this front. If this not happened on the scale

anticipated, the reasons can be the following.

* The concept is relatively new and its philosophy and practice have not seeped firmly in the

minds of the players, especially the lenders. With the fear of the unknown stalking their minds,

they are understandably wary of taking the kind of plunge that is necessary for giving a

discernable fillip to this business.

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* The more daunting issue to grapple with is the emotional mooring NPAs provide to the

employees of the lenders presently engaged in husbanding these impaired assets. This is more

pronounced among public sector outfits, accounting for a lions share in this business, and not

subject to the kind of tough business targets of asset resolution as are mandated by their

foreign and private sector counterparts.

Typically they draw their sense of worth for the organization from continued association with

these assets and separating them from these NPAs is huge challenge. More often than not they

put up road blocks in the transfer of the assets as viable resolution strategy. Creating an

alternative niche for them in the organization before dislodging from this entrenched vestige of

self-esteem is the only option for these lenders.

DRAWING TOGETHER KEY PRINCIPLES

The following principles merit emphasis in tailoring the design of a comprehensive

corporate debt restructuring strategy to country circumstances:

Sequencing

The sequencing and relative prioritization of policy measures relevant to a debt

restructuring strategy will need to evolve over the course of a systemic crisis and its

aftermath. While it is important that a comprehensive debt restructuring strategy be

envisioned at an earlier stage, concerted implementation of that strategy cannot be realistically

sustained during the height of a crisis. However, given that changes to insolvency laws and

the underlying institutional structure take time to effect, country authorities need to begin

diagnosis of the debt problem and to anticipate the legal bottlenecks at an early stage.

Furthermore, the onset of a crisis could present an opportunity for the authorities to galvanize

relevant stakeholders into reform mode. Early and credible government commitment to

engage in this process can reinforce positive expectations of market participants. Such

expectations must, however, be managed since wide scale corporate debt restructurings in a

wake of a crisis may take manyoften difficultyears.

Crisis containment phase

Rehabilitation of the financial sector is a first order priority. Specifically, banking

system dislocation must be contained and banks need sufficient capital to revive lending and

to be in a position to restructure debt in the subsequent restructuring phase. In order to move

the process forward, governments would likely need to step in to enforce timely recognition of

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losses and to recapitalize banks, where shareholder recapitalization is not feasible.

A path towards macroeconomic stability is critical. Debt restructuring can reinforce

macro policies. But reasonably predictable asset prices, interest rates, and exchange rates are

needed to enable debtors and creditors to make medium term judgments of viability required

for restructuring on any sustainable scale. While insolvency law is neededand reforms

should be advanced where possible during the crisis containment phaseinsolvency law is no

substitute for macro policy responses.

Where feasible, reform of the insolvency and other related laws should focus on

provisions to support out of court restructuring. In particular, enabling a court in an

expedited manner to make an out-of-court agreement that is accepted by a qualified majority

of creditors binding on dissenting creditors is key; as are provisions to support new financing

by according it with a legal priority in payment.

In extreme cases, government financing to facilitate voluntary standstills on

payments could be a useful interim measure in the crisis containment phase, prior to

wide scale debt restructuring.Governments could provide limited financial support for

working capital as an incentive for temporary standstills agreed between corporate debtors and

their respective creditors that would preserve liquidity in the corporate sector while the ground

work for debt restructuring is laid.Restructuring phase

While all country experiences of wide scale debt restructuring have been mixed,

some government intervention moderated to complement case by case negotiations tends

to be relatively more effective. Such an intermediate approach should be tailored to the

country circumstances, including macroeconomic conditions, composition of debt and

legal/institutional framework. A different mix of tools may be needed with respect to SMEs,

which may call for more across the board treatmentbut caution should be exercised againstthrowing financing at non-viable SMEs in the face of reduced consumer demand.

The debt restructuring strategy should respect inter-creditor equity and avoid

targeting foreign creditors. The longer term effects of disruption in financial relations

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resulting from a crisis could be exacerbated by debt restructuring strategies that overturn

predetermined

rights (such as the priority ranking of secured creditors). Furthermore, the

targeting foreign creditors in debt restructuring strategies would be short-sighted in view of

the longer term access to international credit and investment needed to sustain post-crisis

economic recovery.

Government-sponsored out of court workout guidelines are conducive to

maximize debt restructuring for viable firms. To be optimal in the aftermath of a crisis,

such guidelines will likely need to operate in a structured framework involving government

enhancements, such as regulatory suasion on banks to sign on to the workout principles.

AMCs may help to spur corporate debt restructuring. However, the establishment

and operation ofAMCs present a number of design challenges, in terms of governance

structure and pricing of assets. Consideration ofAMCs is particularly warranted where the

financial and technical capacity of banks are insufficient to address corporate debt

restructuring reliably.

Liquidation of non-viable firms cannot be avoided. Firms exposed as non-viable

should be eased out of the market place through speedy liquidation procedures and their

assetsrecycled to more productive use in the economy. Government intervention directed to

salvaging non-viable firms would present an undue drag on public finances and on the

efficient recovery of the economy.

Risks to public finances from government intervention in debt restructuring

should be contained. The scale of financial distress in the corporate (as well as banking and

household) sectors and the unreliability of market-based solutions alone, imply that some

government financial support for debt restructuring would be inevitable. However, fiscalspace limitations cannot be overlooked. A well-designed intermediate approach would

leverage private capacity to burden share between debtors and creditors, and conserve use of

limited government financial resources.