Analysis of Financial Restructuring in India

Narendra Kumar

20 Jun, 2019

Financial restructuring is often a last resort, but invariably the most effective one. The environment in which a business must grow is an unpredictable terrain. Rises and dips in markets, sudden technological breakthroughs, and a finicky consumer base can all render a company’s original business model obsolete.

What is a financial Restructuring Company?

Corporate restructuring involves the fundamental change in the company’s business or a financial structure that is designed to increase company’s value to the shareholders or the creditor. Corporate restructuring is often divided into two parts: financial restructuring and operational restructuring.

Why financial Restructuring?

Financial restructuring is done for various business reasons and these could be:

1. poor financial performance
2. external competition
3. Erosion or loss of market share
4. emerging market opportunities etc

Components of financial Restructuring

Financial restructuring can be either from an assets side or liabilities side of balance sheet. If one is changed, accordingly the other will be adjusted

The 2 components of financial restructuring are as follows:

Debt restructuring: It is the process of reorganizing the whole debt capital of the company. It involves the reshuffling of the balance sheet items as it contains the debt obligation of the company.

The company’s financial manager needs to always look at the options to minimize the cost of capital & improving the efficiency of the company as a whole which will in turn call for the continuous review of the debt part & recycling it to maximize efficiency.

It is further divided into:

1. Restructuring of the secured long-term borrowing:

Restructuring of secured long-term borrowings will be done for the reasons such as

• Reducing the cost of capital for healthy companies
• For improving liquidity and increasing the cash flows for a sick company

2. Restructuring of the unsecured long-term borrowings:

Restructuring of the long-term unsecured borrowings will be done depending on the type of borrowing. Such borrowings can be in form of public deposits and/or private loans (unsecured) and privately placed, unsecured bonds or debentures

3. Restructuring of secured working capital borrowings:

Credit limits from commercial banks, demand loans, overdraft facilities, bill discounting and commercial papers fall under the working capital borrowings. All these are secured by the charge on inventory and book debts and also on the charge on the assets.

The restructuring of the working capital borrowing is almost all the same as in case of term loans.

4. Restructuring of other short-term borrowings: the borrowings that are very short in nature are generally not restructured these can indeed be renegotiated with new terms. These types of short-term borrowings include inter-corporate deposits clean bills& clean overdraft

The Equity Restructuring: It is a process of reorganizing the equity capital. It includes a reshuffling of the shareholders capital and the reserves that are appearing on the balance sheet. Restructuring of equity & preference capital becomes complex process involving a process of law and is a highly regulated area.

Reasons behind equity restructuring

1. Correction of overcapitalization
2. To provide respectable exit mechanism for shareholders in the time of depressed markets by providing them liquidity through buyback
3. Reorganizing the capital for achieving better efficiency
4. To wipe out accumulated losses
5. To write off unorganized expenditure
6. To maintained debt-equity ratio
7. for raising fresh finance

Can your business benefit from financial restructuring?

A Financial restructuring is a considerable change in the company’s financial structure, the ownership, the control, designed to upsurge value of ONES financial assets in to create the most financially beneficial environment for the company.