Introduction to Corporate Governance,

Corporate Restructuring, Revival of

Sick Units
Corporate GovernanceWorkshop
Bhaviktisha Singla
CM14210
Chemical B.E.+MBA
5th Year
Introduction to Corporate Governance:
Corporate Governance is a set of processes, customs, policies and laws affecting the way in
which a corporation is directed, administered or controlled. Corporate Governance is not just
corporate management; it is something much broader to include a fair, efficient and transparent
administration to meet certain well-defined objectives.

It is a system of structuring, operating and controlling a company with a view to achieve long-
term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers and
complying with the legal and regulatory requirements, apart from meeting environmental and
local community needs.

Its fundamental objective is not mere fulfillment of requirements of law but in ensuring
commitment of the Board and its senior officers in managing the company in a transparent
manner for, inter alia maximizing long term shareholders value. The need of the hour is not more
rules, bylaws and laws but effective enforcement. The company is responsible to a wider
constituency of stakeholders. All this can be achieved only when the act of those managing the
company stems from the heart and a feel good factor.

The framework of corporate governance itself is an important component affecting the long-term
prosperity of companies. It forms a part of the larger system of governance i.e. National
Governance, Human Governance and then Corporate Governance. Effectiveness of corporate
governance system cannot be merely legislated by law neither can any system of corporate
governance be static.

As competition increases, technology speeds up communication, the environment in which the

company operates, also changes. The markets are endlessly innovative. New corporate structures
are formed. New entities are created. New types of financial instruments with new types of risks
are introduced. In this context it is important to overhaul the corporate market practices to ensure
that they respond appropriately to the changing environment. In this dynamic environment, the
systems of corporate governance also need to evolve.

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Corporate Restructuring
Corporate Restructuring is the process of making changes in the composition of a firm’s one
or more business portfolios in order to have a more profitable enterprise. Simply, reorganizing
the structure of the organization to fetch more profits from its operations or is best suited to the
present situation.

Reasons for Corporate Restructuring:

Corporate restructuring is implemented under the following scenarios:

 Change in the Strategy: The management of the troubled company attempts to improve
the company’s performance by eliminating certain subsidiaries or divisions which do not
align with the core focus of the company. The division may not seem to fit strategically
with the long-term vision of the company. Thus, the company decides to focus on its core
strategy and sell such assets to the buyers that can use them more effectively.

 Lack of Profits: The division may not be profitable enough to cover the firm’s cost of
capital and cause economic losses to the firm. The poor performance of the division may
be the result of the management making a wrong decision to start the division or the
decline in the profitability of the division due to the increasing costs or changing
customer needs.

 Reverse Synergy: This concept is in contrast to the M&A principles of synergy, where a
combined unit is worth more than the individual parts together. According to reverse
synergy, the individual parts may be worth more than the combined unit. This is a
common reasoning for divesting the assets. The company may decide that more value can
be unlocked from a division by divesting it off to a third party rather than owning it.

 Cash Flow Requirement: A sale of the division can help in creating a considerable cash
inflow for the company. If the company is facing some difficulty in obtaining finance,
selling an asset is a quick approach to raising money and reduce debt.

Forms of Corporate Restructuring

The most common forms of corporate restructuring are mergers/amalgamations,

acquisitions/take overs, financial restructuring, divestitures/demergers and buy-outs. It is
essentially the process of redesigning one or more aspects of the company.

(A) Mergers and Amalgamation – A merger is a combination of two or more distinct

entities into one, the desired effect being accumulation of assets and liabilities of district

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 entities and several other benefits such as, economies of scale, tax benefits, fast growth,
synergy and diversification etc. The merging entities cease to be in existence and merge
into a single servicing entity.

Amalgamation is an arrangement, whereby the assets and liabilities of two or more

companies become vested in another company (amalgamated company) – without giving
proportional ownership to the shareholders of the acquired company. The amalgamating
companies all lose their identity and emerge as an amalgamated company, though in certain
transaction
structures the amalgamated company may or may not be the original
companies.

Types of Mergers →

Horizontal Merger – It takes place when two or more corporate firms dealing in similar
lines of activity combine together.
Vertical Merger – It occurs when a firm acquires firms upstream from it and/or
downstream from it. It involves combination of two or more stages of Production/distribution
that are usually separate. Usually, it occurs between companies producing different products
for one specific finished product.
Conglomerate Merger – It takes place between firms which have unrelated business
activities. It is a combination in which a firm established in one industry combines with a
firm from an unrelated industry (firms engaged in different unrelated activities combine
together).
Concentric Merger – It takes place between two companies which share some common
expertise that may be mutually advantageous.

(B) Acquisition/Takeovers – It implies acquisition of controlling interest in a company by

another company. It does not lead to dissolution of company whose shares are acquired. It can
assume three forms.

◊ Negotiated friendly – It is organized by the incumbent management with a view to parting

with the control of management to another group through negotiation.
◊ Open market/hostile – The taking over company acquire shares from the open
market/financial institutions/mutual funds and willing shareholders at a price higher than
prevailing market price.
◊ Bail out takeover – It is a takeover of a financially weak company by a profitable
company. Both the holding company and subsidiary retain separate legal entities and
maintain their separate book of accounts.

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(C ) Demerger – It is a form of corporate restructuring in which a company
transfers one or more of its undertakings to another company in such a
manner that –
 All the property/liabilities of the undertaking being transferred, becomes the part of
the resulting company.
 All property/liabilities of the undertakings are transferred at values appearing in the
books of account.
 The resulting company issues, its shares on a proportionate basis to the share holders
of the demerged company.
 Shareholders holding not less than 3/4thin the value of shares in the demerged
company become shareholders of the resulting company.
 The transfer of undertaking is on a going concern basis.
 The demerger is in accordance with the conditions, under Sec 27 A by the Central
Government.
Divestitures – It is a form of corporate restructuring which involves sale of segment of a
company for cash or securities. It involves sale of only some assets of the firm. These assets
may be a plant, division, product line, subsidiary and so on.

Split up – Split or division of a company

Sell off – Selling off assets of a company in a declining market
Spin Off – It is the division of company into wholly owned subsidiary of parent company by
distribution of all its shares of the subsidiary company on a pro-rata basis. (New company
from existing company).

(D) Financial Restructuring – It is carried out internally with the consent of the various
stakeholders by corporate which have accumulated substantial losses. It is a suitable model for
corporate firms accumulating losses over a number of years. It is achieved by formulating
appropriate restructuring scheme involving a number of legal formalities. It implies significant
change in the financial/capital structure of a firm, leading to the change in the payment of fixed
financial charges and change in the pattern of ownership and control.

(E) Buy outs – The Management Buy outs (MBO) involves the sale of the existing firm to the
management. The management may be from the same firm, from outside or may assure a hybrid
form. When debt forms a substantial part of the total financing form outsiders the buy out
transaction is called Leveraged buy out. Leveraged buy out implies acquisition of a firm that is
financed principally by borrowing on a secured basis.

(F) Strategic Alliance – It is a voluntary formal agreement between two companies to pool their
resources to achieve a common set of objectives while remaining independent entities.

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REVIVAL & RESTRUCTURING OF SICK UNITS:

SICK UNITS:

According to Sick Industrial Companies Act, 1985

o It was registered for at least 7 year.

o It incurred cash from losses for the current and the preceding year.

According to RBI

A sick unit is one which incurs cash losses for one year and in the judgment of the bank it is
likely to continue to incur cash losses for the current year as well as for the year.

Objective Of SICA

The SICA had been deal in the public interest to deal with the problems of industrial sickness
with regard to the crucial sectors where public money is locked up.

It contains special provisions for timely detection of sick and potentially sick industrial
companies, speedy determination and enforcement of preventive, remedial and other measures
with respect to such companies.

Govt. Concessions and Incentives:

The Government of India provided various concessions and incentives to the Sick sector for their
sustained growth

 Assisting new Sick units on soft terms by lending institutions.

 Reservation of Certain Industries for the SSI sector.
 Incentives related to land/shed financing, machinery and raw-materials.
 Provision of facilities within the Industrial Estates, and
 Excise duty exemption and price preference.

Major causes of sickness of industrial companies

1. Inability of management to keep a constant vigil over competitive forces

2. Inability of management to focus on continued viability of the industrial unit

3. Inability of management to introduce dynamic changes to suit the development taking

place in the industry

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 4. Lack of serious efforts to combat sickness at the initial stage and to take efforts to revive
it

5. Lack of adequate and quality manpower

6. Lack of funds required for meeting replenishment and much needed modernization and
up gradation programmes

7. Technological obsolescence

8. Sweeping changes across the industry

9. Political and economic factors

10. Change in consumer behaviour

11. Lack of timely government support

12. Mismanagement by directors

13. Diversion and misapplication of funds

14. Reckless investments in other businesses

15. Disproportionate investments

Reasons for Industrial Sickness

A) Internal Causes:

1) Project related - under estimation of project cost, non availability of critical information
having a vital bearing on the project, delayed project implementation and resultant cost
escalation

2) Human resource related – poor quality management, excessive commitment to non

appropriate policies, poor financial/marketing/management control, management succession
problems, poor inter-personal and inter-departmental coordination

3) Performance related – faulty choice of product/technology, under utilisation of available

resources, inadequacy of working capital, diversion of funds, inadequate market forecast

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B) External Causes

1) Non cooperative government policies

2) Recession/adverse economic conditions

3) Powerful competitors in market

4) Non availability and shortage of inputs

5) Regional and industry-wise phenomena

6) Technological advancement

7) Delayed financial assistance

Why Revival Should Be Undertaken

Revival should be undertaken as winding up of a company would result in:

A) Closing down of unit which provided some goods or services

B) It would throw out of employment numerous persons resulting in grave hardship

C) Loss of revenue to the state

D) Scarcity of goods and diminishing employment opportunities

Sick Industrial Company

It means an industrial company (being a company registered for not less than 5 years, which has
at the end of any financial year accumulated losses equal to or exceeding its entire “net worth”.(
Means sum of the paid up capital and free reserves.)

Preparation and Sanction of Scheme for Revival

Where an industrial company, has become a sick industrial company, the Board of directors of
such company shall make a reference to the Tribunal and prepare a scheme of its revival and
rehabilitation and submit the same to the Tribunal along with an application containing such

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particulars as may be prescribed for determination of the measures which may be adopted with
respect to such company:

If the Tribunal appoints an operating agency in order to conduct an enquiry that a company has
become a sick industrial company, then the industrial agency is required to prepare and submit a
schedule in respect of referred company by providing the following measures:

A) Financial reconstruction

B) Proper management of sick industrial company by change in, or takeover of

C) The amalgamation of the sick industrial company or vice-versa

The Tribunal may finalize the scheme on the suggestion of the operating agency and thereafter
formally sanction the scheme referred to as “sanctioned scheme”.

Winding Up of Sick Industrial Company

Where the Tribunal, after making inquiry under section 424B and after consideration of all the
relevant facts and circumstances and after giving an opportunity of being heard to all concerned
parties, is of the opinion that the sick industrial company is not likely to make its net worth
exceed the accumulated losses within a reasonable time while meeting all its financial
obligations and that the company as a result thereof is not likely to become viable in future and
that it is just and equitable that the company should be wound up, it may record its findings and
order winding up of the company.

For the purpose of winding up of the sick industrial company, the Tribunal may appoint any
officer of the operating agency, if the operating agency gives its consent, as the liquidator of such
industrial company and the officer so appointed shall for the purpose of the winding-up of such
sick industrial company be deemed to be, and have all the powers of, the official liquidator under
this Act.

Notwithstanding anything contained in Para 2 above, the Tribunal may cause to be sold the
assets of the sick industrial company in such manner as it may deem fit and pass orders for
distribution in accordance with the provisions of section 529A, and other provisions of this Act.

Without prejudice to the other provisions contained in this Act, the winding up of a company
shall, as far as may be, conclude within one year from the date of the order made by Tribunal.

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 CASE STUDY ON NICCO BATTERIES LTD

NICCO Corporation Ltd:

Nicco Corporation Limited (NCL) is the flagship company of the Nicco Group.For nearly over
six decades, NCL has been one of the pioneers in cable manufacturing industry . It produces a
wide range of power, control, instrumentation and telecom cables and provides a spectrum of
engineering services and executes turnkey projects. Established in1942, the US$ 67 million
Nicco Group is a widely respected Indian industrial powerhouse.

NICCO’s PRODUCT:

 Aircraft & Air Field Cables

 Fire Retardant Low Smoke Cables(FRLS)
 Automobile Cables
 Oil Rig Cables
 Copper Conductors
 Cables For Cranes
 Elevator Cables (lift Cables)
 Furnace & High Temperature Cables
 Marine Cables
 Power Cables

NICCO BATTARIES LTD amalgamated with NICCO Corporation LTD (NCL) with effect from
1 April 1994 as per the amalgamation scheme.

In the amalgamation scheme the entire undertaking of NBL shall be transferred to NCL and the
transferee company, that is, the NCL shall issue and allot the share holder of the NBL share in
the transferor company in the proportion of 2 share of the face value of Rs10 each of
the transferee company for 13 equity share of the face value Rs.10.

The rehabilitation-Cum-amalgamation scheme envisages settlement of dues of the bank and the
institution, payment to pressing creditors besides capital expenditure of Rs 163 lacs.

A Cost of the scheme: ( Rs in lakhs)

Capital expenditure 163.00

Settlement of dues of the banks 619.00

Payment of unsecured loans 20.00

Payment of pressing creditors 18.00

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Margin money for working capital 57.00

TOTAL 877.00

B) Means of finance (Rs in lakhs):

Promoter’s contribution out of internal accruals of NCL 477.00

Benefit under section 72 A of IT Act, 1961 400.00

TOTAL 877.00

The scheme for amalgamation of NBL, with NCL shall be under section 72A of the IT Act,1961
and shall be effective from 1 April ,1994 .

The carried forward accumulated loss of NBL is estimated at Rs 1896 lakhs as on31 March
1994.

The estimated tax set –off at the current rates of IT Act , 1961 is restricted to Rs .400 lakhs.

Benefits in the merger of sick units:

 Synergistic operating economies

 Diversification
 Taxation advantages
 Growth advantage
 Production capacity reduction
 Managerial motivate
 Acquisition of specific asset

Risks in the merger of sick unit:

 Dilution of competition in the market

 Actual or a potential competitor, may get eliminated.
 Efficient and growing medium or small-sized undertaking.
 May exercise a market power to the detriment of its customers and suppliers.

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CONCLUSION:

The rehabilitation of sick unit is an important aspect for the economic growth of the country as
well as the growth of the country in the above case of NCL & NBL we can say that the share
exchange ratio is 2 : 13 and the cost of scheme is Rs 877 lakhs . Which is large amount for
merger though this we can conclude that the merger of NBL was the requirement of time and
now it contribute major part of share of NCL.

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 REFERENCES:
1) http://shodhganga.inflibnet.ac.in/bitstream/10603/104165/7/07_chapter%201.pdf
2) http://shodhganga.inflibnet.ac.in/bitstream/10603/1558/10/10_chapter1.pdf
3) https://efinancemanagement.com/corporate-restructuring
4) https://bbamantra.com/corporate-restructuring/
5) https://www.taxmanagementindia.com/visitor/detail_manual.asp?ID=649
6) https://www.scribd.com/doc/17171636/The-Sick-Unit-case-study-NICCO-BATTERIES

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