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CORPORATE

RESTRUCTURING

PGDM-FS

Group 3 Ajinkya Ganechari (05), Ayush


Agarwal(12), Bharat Gupta (13), Himanshu Govil
(23), Mihir Hadawale (29), Smriti Mehta (46)

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.
Reasons behind Restructuring
1) In case of growth of the company when company acquires large market
share
Restructuring becomes necessary If the firm has grown to the point that the
original structure can no longer efficiently manage the output and general
interests of the company. In this case, the company might spin off some
departments into subsidiaries to create an effective management model
2) Drop in Sales due to sluggish economy
The corporation may need Financial Restructuring in order to keep the company
operational through this rough time. Costs may be cut by combining divisions
or departments, reassigning responsibilities and eliminating personnel, or
scaling back production at various facilities owned by the company. With this
type of restructuring, the focus is on survival in a difficult market rather than on
expanding the company to meet growing consumer demand.
3) Mergers & Acquisitions
Corporate restructuring may take place as a result of the acquisition of the
company by new owners. The acquisition could 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.
In general, the idea of 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
the hope that what remains can function well enough for a new buyer to
purchase the diminished corporation and return it to profitability.

Most Common Methods of Restructuring


1. Operational restructuring - includes changes in the core business operations.
Profit or operating loss is reflected in changes in the level and structure of
business assets:

Marketing Restructuring - involves changes leading to increased sales,


strengthening position in the market by keeping flexible pricing policy, etc.
Product restructuring - includes changes to the existing range of products,
Restructuring of the company's resources - is aimed to increase the efficiency of
real property and human resources to meet the success criteria prevailing in the
market,
Technological restructuring - merge changes to the product offer of the
company and means to manufacture this products,
Restructuring of employment - changes in the employment structure leading to
lower costs and it's adaptation to the needs of the enterprise,
Organizational restructuring and changes in enterprise management system involves customizing of the internal structure of the company to comply with
the implementation of the strategies adopted.
2. Financial Restructuring - includes activities in the financial management
systems leading to greater financial gains or in case of loss of liquidity to
restore the company solvency:

Restructuring of the debt (debt reduction) - the pursuit of a settlement between


the creditor and debtor,
Restructuring of assets - through the sale, lease, and through strategic alliances
or continuous transfer of resources between partners,
Restructuring of capital - increases the efficiency of invested capital.
3. Dynamic Restructuring aims at diversification and modernization of the
company. In this the main goal is to improve the organization and operation
of such an extent that it reaches the economic performance compared to the
original state. The dynamic restructuring involves looking for ways of
development of such companies, which would lead to a higher result than
satisfactory or good.

Jaypee Groups Rs 61,285 crore debt problem

Url: http://www.livemint.com/Companies/zKDlLjtKiKrlDrCg9r1hFL/JaypeeGroups-Rs61285-crore-debt-problem.html
In the above story, Manoj Gaur, executive chairman of Jaypee Group discusses
about the Debt Restructuring strategy used by the organization in order to cope
up with the sluggish infrastructure growth.
Jai Prakash Associates is a well diversified infrastructure conglomerate with
business interests in Engineering & Construction, Power, Cement, Real Estate,
Hospitality, Expressways etc.
The group witnessed a phenomenal
rise between 2000 and 2006, riding
on the the real estate and
infrastructural boom. Revenues of JP
Associates ltd notched by CAGR of
32.08% in between 1999-2000 and
2014-15. Also, debt has grown 20
times in this period. This shoot up
the aspirations of JP Associates, their
businesses were expanding and bank
were putting money in their every

venture. And then, the global


financial meltdown reached the
Indian shores and the Real Estate
prices nosedived followed by dip in
demand for cement. Debt-saddled
Jaiprakash associates downgraded
its debt rating to a default category
from BB to D. The reason behind
this is the delay in debt servicing on
account of weak liquidity.

The group witnessed a phenomenal rise between 2000 and 2006, riding on the
the real estate and infrastructural boom. Revenues of JP Associates ltd notched
by CAGR of 32.08% in between 1999-2000 and 2014-15. Also, debt has grown
20 times in this period. This shoot up the aspirations of JP Associates, their
businesses were expanding and bank were putting money in their every venture.
And then, the global financial meltdown reached the Indian shores and the Real
Estate prices nosedived followed by dip in demand for cement. Debt-saddled
Jaiprakash associates downgraded its debt rating to a default category from
BB to D. The reason behind this is the delay in debt servicing on account of
weak liquidity.
Some interesting figures are tabulated below.
All
figures in
Crores
Jaiprakash
Associate

Gross
Debt

EBITD
A

EBIT PAT

Interes Debt/EBITD
t Cover A

Debt/Equit
y

75,16
3

6,138

4,45
1

0.6

7.1

1,72

16.8

Debt-Restructuring by Selling Assets


Jaypee had to cut down its debt by selling the cement business, thermal and
hydroelectric power plants and land that came under the groups unit Jaiprakash
Associates. Jaypees debt, at the group-level, as of 31 March 2015, stood at Rs.
85,726 crores. Of this, the company expects to shave off Rs. 24,441 crores
through asset sales by September. The company does not want to make any
capital expenditure for the next five years, according to two people familiar
with the development. The people, who arent a part of the group, said the focus
will be on improving shareholder value.
In the past years, the Jaypee Group has sold several assets and brought down its
debt by Rs. 20,000 crores. It also sold a 300-acre plot along the Yamuna
Expressway in May 2013 to the national capital region-based real-estate
developer Gaursons India Ltd for Rs. 1,500 crores. In December, two of
Jaypees cement factories and associated power plants were sold to UltraTech
Cement Ltd for Rs. 5,400 crores. The group also sold its entire 74% stake in a
Bokaro-based joint venture with steelmaker Steel Authority of India Ltd
(SAIL) for Rs.690 crores in March this year.
Jaypee Group also decided to enter into business of manufacturing microchips
in a venture with IBM. But, due to fund crunch Jaiprakash Associates couldnt
sail its boat in this sector.

Bharti Airtel: 4G, Africa growth key triggers


Url: http://www.business-standard.com/article/opinion/bharti-airtel-4g-africagrowth-key-triggers-116022200725_1.html
Airtel entered the African market in 2010 by acquiring telecom business of
Kuwait-based Zain Telecom in 17 countries for $10.7 billion (roughly Rs.
73,211 crores). It transformed the 53 year old Mittal into a global entrepreneur.
And it made Airtel the 5th largest mobile operator in the world, with a footprint
in 19 countries.
But, exactly a year later, things look drastically different. Airtel's profits have
fallen for five quarters in a row, unprecedented for a company that set
benchmarks for record growth and profits in the past.
Most recently, in the third quarter ended December 31, 2015, Africa unit posted
net loss of $74 million (roughly Rs 506 crores) as compared to $136 million
(roughly Rs 930 crores) in the corresponding quarter last year. On the contrary,
Africa revenues grew by 3.1 percent to $1,026 million (roughly Rs 7,020
crores) as compared to $995 million (roughly Rs 6,807 crores) in the
corresponding quarter of last year.
Airtel had (and still have) 5 major challenges,
1. People. Airtel Africa needs more local talent to cut costs and dependence
on overseas staff.
2. Process. Managing businesses in 16 countries, with different
governments, rules and cultures.
3. Logistics. Poor roads, ports are major issues. As are import curbs and tax
inconsistencies.
4. Planning. It set ambitious targets on both costs and timelines that were
difficult to meet.
5. Strategy. Airtels India success was based on centralisation, outsourcing.
It faces challenges in multi-country operations.
Africa with 16 countries is far more complex than India. One size fits all
couldnt have worked there. Airtel took a simplistic approach which led them to
their failure.
Airtel has restructured its Africa operations for the second time since the Indian
company has acquired the assets in 2010. According to the new cluster-based
design, the 15 African operating firms will be classified into eight clusters
headed by Raghunath Mandava. Airtel moved its director of Customer
Experience, India and South Asia Raghunath Mandava as Chief Operating
Officer, Airtel Africa, where he will be fully responsible for commercial
operations.

The Indian telecom major is reducing its footprint in Africa to improve financial
performance. In January Airtel announced sale of its operations in Burkina Faso
and Sierra Leone to France-based Orange.
Airtel in July last year announced entering into an agreement with Orange to
sell its four subsidiaries Burkina Faso, Chad, Congo Brazzaville and Sierra
Leone, in Africa. The agreements for the remaining two countries have lapsed.
RBI Framework
In an effort to help banks quickly clean up their balance sheets, the Reserve
Bank of India has overhauled its guidelines pertaining to revitalising stressed
assets in the economy.
The Reserve Bank of India (RBI) in its circular dated 26th February 2014, on
Framework for Revitalizing Distressed Assets in the EconomyGuidelines on
Joint Lenders Forum (JLF) and Corrective Action Plan, envisaged change of
management as a part of restructuring of stressed assets. The circular states that
the general principle of restructuring should be that the shareholders bear the
first loss rather than the debt holders.
Strategic Debt Restructuring Scheme
The Strategic Debt Restructuring (SDR) has been introduced by RBI with a
view to ensuring more stake of promoters in reviving stressed accounts and
providing banks with enhanced capabilities to initiate change of ownership,
where necessary, in accounts which fail to achieve the agreed critical conditions
and projected viability milestones. The scheme gives the right to lenders, at
their discretion, to undertake strategic debt restructuring by converting loan
dues to equity shares. This scheme is based on the general principle of
restructuring that the shareholders bear the first loss rather than the debt
holders.
Some of the features of the SDR scheme is as below:
At the time of initial restructuring, the lenders are required to incorporate, in the
terms and conditions attached to the restructured loan/s agreed with the
borrower, an option to convert the entire loan (including unpaid interest), or part
thereof, into shares in the company in the event the borrower is not able to
achieve the viability milestones

The decision on invoking the SDR by converting the whole or part of the loan
into equity shares should be taken by the JLF as early as possible but within 30
days from the above review of the account.
According to the fresh guideline ,standard asset classification benefit will be
available to lenders provided they divest a minimum of 26 per cent (against 51
per cent now) of the shares of the company to the new promoters within the
stipulated 18 months and the new promoters take over management control of
the company.
The RBI allowed regulatory forbearance on asset classification of restructured
accounts, whereby standard accounts were allowed to retain their asset
classification and accounts classified as non-performing were allowed not to
deteriorate (downgrade) further in asset classification on restructuring.
Lenders will thus have the option to exit their remaining holdings gradually, as
the company turns around. Lenders should grant the new promoters the Right
of First Refusal for the subsequent divestment of their remaining stake. The
required provision should be made in equal instalments over the four quarters
and it shall be reversed only when all the outstanding loans in the account
perform satisfactorily during the 'specified period' after transfer of ownership
control to new promoters.
While the earlier norms exempted lenders from the requirement of periodic
mark-to-market of equity shares acquired and held by banks under strategic debt
restructuring, the lenders should periodically value and provide for depreciation
of these equity shares.
The proportion of lenders, by number, required for approving the corrective
action plan (CAP), which entails decision on either rectification, restructuring or
recovery of a borrower account, has been reduced to 50 per cent against 60 per
cent of creditors by number in the Joint Lenders Forum.
The RBI has put in place an incentive structure relating to asset classification
and provisioning for banks to communicate their decision on the agreed CAP in
a time-bound manner.
Corporate Debt Restructuring Scheme
Corporate Debt Restructuring (CDR) is an effective financial tool for
minimizing the adverse effects of default on the borrowers as well as lenders.
This is especially important, as the credit portfolio of banks and financial

institutions are created mainly out of the resources raised from the general
public.
In India, Corporate Debt Restructuring System was evolved by Reserve Bank of
India (RBI), and detailed guidelines were first issued in 2001 for
implementation by banks. The CDR Mechanism covers only multiple banking
accounts, syndication/consortium accounts, where all banks and institutions
together have an outstanding aggregate exposure of Rs. 100 million and above.
It is a voluntary non-statutory system based on Debtor-Creditor Agreement and
Inter-Creditor Agreement and the principle of approvals by majority of 75%
creditors (by value) which makes it binding on the remaining 25% to fall in line
with the majority decision.

Reference to CDR Mechanism may be triggered by:


Any one or more of the creditors having minimum 20% share in either working
capital or term finance, or
By the concerned corporate, if supported by a bank/FI having minimum 20%
share as above.
The CDR mechanism is not available to cases in which the debtor is involved in
fraud or misfeasance, even in a single bank. However, CDR Core Group, after
reviewing the reasons for classification of the borrower as wilful defaulter, may
consider admission of exceptional cases for restructuring after satisfying itself
that the borrower would be in a position to rectify the wilful default provided it
is granted an opportunity under CDR mechanism.

Structure of CDR System: The CDR Mechanism is a three-tier structure:


CDR Standing Forum
CDR Empowered Group
CDR Cell
Conclusion
The CDR mechanism has since inception till 30th Sept. 2015 approved 530
cases for restructuring out of which 189 cases have failed and 257 cases are at
various stages of implementation. Only 87 cases have been successfully
implemented. In view of the substandard performance of CDR mechanism,
SDR scheme is a right step by RBI to put pressure on defaulting borrowers.
However, it needs to be seen whether SDR scheme will be able to make wilful
defaulters repay the loans or risk losing the ownership of their companies.