Decision to undertake corporate restructuring of a firm may encompass a broad range of activities and include acquisition and divesture of lines of business and assets, acquiring controlling shares in other companies, alteration in capital structure through a variety of financial engineering initiatives, and also effecting internal streamlining and business process re-engineering to improve efficiency and effectiveness of the firm. In other words, corporate restructuring can lead to changes along one and more of the three directions, viz. (i) assets and portfolio, (ii) capital structure and (iii) organization and management. Assets and portfolio structure can get significantly ...view middle of the document...
During this period, the Indian industry also felt the pressure from various stakeholders to pay greater attention to such areas as enhancement of shareholder value, ensuring focus in business portfolio, acquiring greater market power and size in every product category, building brands and distribution capability, professionalism of family business and privatization of public sector enterprises. All these signaled the need for extensive restructuring the Indian corporate sector. The scale and size of corporate efforts that we have seen in India, particularly during the last decade, have far exceeded the level that was experienced during the pre-1991 phase. However, a lot more needs to be done if India Inc. wishes to become globally competitive and shareholders are to be rewarded handsomely.
CORPORATE RESTRUCTURING--- PRE-1992
The pre-1992 restructuring efforts were modest. Also, the focus was mainly on M&A and divestures and not so much on financial engineering and internal streamlining.
A number of corporate restructuring ventures were initiated by the Board of Industrial Finance and Reconstruction (BIFR). Most of these restructurings were institutionally driven and the terms and conditions were designed to suit the creditors and lending institutions. Some well-known BIFR cases during the early 1990s in which a healthy company took over a sick company were: VAM Organic Chemical taking over Ramganga Fertilizer, Straw products taking over Orissa Synthetic, and Voltas Ltd. taking Over Miami Pharma Ltd. In all these cases, BIFR sanction helped the transferee companies enjoy the benefits of carry forward losses of the transferor companies, even though these restructurings were not reverse mergers. As at 1994, BIFR could arrange a merger of only 4.3 percent of total cases referred to it. The list of approval of BIFR as at 1991 also included merger of two sick public sector companies viz. Bharat Refractories Ltd. and Indian Fire Bricks & Insulation Co. Ltd. The reconstruction proposals included, among others things, writing off of about Rs. 50 crore of interest.
A number of reverse mergers took place during the pre-1992 phase whereby a healthy unit was merged with a sick company, as a result of which the former lost its identity. However, following a lapse of a few days or months, the name of the sick unit was usually changed to that of the healthy unit, thereby restoring the original position of the healthy company. As a result of such reverse mergers, under section 72A of the Indian Income Tax Act, the healthy company could take advantages of sick company’s carry forward of losses- including unabsorbed depreciation and investment allowance-and use the same as a tax shield. Companies under the same management were also eligible to use such benefits as available under section 72A.
The above in a nutshell is the extent of corporate restructuring that took place during the pre-economic reforms period. That not much was done is not surprising given the...