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India: corporate restructuring in unprecedented era – an inevitable proposition


published on 9 June 2021 | reading time approx. 5 minutes


The outburst of the second wave of pandemic having struck India caused a series of unprecedented challenges for the economy. Whilst India witnessed a strong resurgence of Covid-19 in its first phase, the second phase would most likely have a devastating impact. A record rise in Covid-19 cases would slow down the India’s economy recovery, however, the extent of economic loss will primarily depend on how fast the chain of infections can be prevented.



Globally as well, companies are grappling with significant disruptions and uncertainties in terms of managing and operating their businesses. It would thus be imperative to take corrective actions for traversing through such business operation challenges such as foreseeable losses, disrupted supply chains, blocked working capital, liquidity crisis and business continuity risk.


The outbreak has had a material impact on mergers and acquisition transactions globally. A slowdown has been witnessed with the companies having their acquisition and growth plans postponed and moving their attention towards cash management and internal group simplification.


In such challenging times, companies need to assess the possible impact of Covid-19 on their businesses and appropriately plan for the future course of action. Accordingly, it would be important to revisit and re-think strategy for restructuring opportunities to align their businesses, acquisitions and structures for their survival and resurgence. In such scenario, it would be pertinent to explore some of the strategies to create a significant footprint in the new normal which are analysed below:


Internal re-organisation

There may be significant companies in the group which would be in similar, complimentary or supplementary businesses. This may lead to duplicity of cost and restriction in exploiting available resources within the group companies. Alternatively, there could be multiple layer of entities or cross holding structures within the group which would have been in existence due to certain specific purpose or due to earlier acquisitions. Due to the above mentioned reasons, it would become necessary in the present situation to re-assess the necessity of such structures and re-align to optimize costs and utilize available internal resources in a better manner.


The most important factor in current times is that the companies would like to conserve cash within the group companies for better working capital management. On one hand, provision of loan between companies having common directorship are not permitted as per Indian Company Law, whereas on the other, loan between companies with common shareholding are considered as deemed dividend for Indian tax law purposes. Accordingly, it may not be ideal to have multiple entities within a group, particularly in a similar line of business or with minimal business operations. This would possibly attend the liquidity crunches and cash fungibility issues within the group.


Accordingly, it could be considered appropriate to consolidate the operations or entities which shall assist in reduction of number of entities, pooling of resources, achieving synergy in operations, minimising of regulatory compliances and administrative cost.


Possible manner of re-alignment or consolidation of business or entities would be merger of companies.  Mergers are generally an effective tool for achieving such simplification of group structure in a tax efficient manner, pooling of cash resources, elimination of administrative and compliance costs and increasing value of the company. In India, merger are tax neutral transaction upon the satisfaction of certain prescribed conditions. However, a merger requires the approval of the National Company Law Tribunal (NCLT) and/or various concerned regulatory bodies.

Convertibility of debt to equity

Companies which are highly leveraged by borrowing from its overseas group companies would like to reduce the debt level in the company thereby increasing the profitability of the company. This would be relevant where overseas group companies are earning interest income and borrowing company is unable to pay the interest or claim the benefit of deduction for the interest due to losses. It may also result in limitation of interest deduction to 30 per cent of the EBIDTA for tax purposes.


Hence, it may be considered appropriate to convert the existing debt from its overseas group companies into equity or convertible instruments of the company. Alternately, in view of the current slowdown it may be possible to renegotiate the existing borrowings from the overseas group companies so as to stipulate for revised payments schedule or period, moratorium period for interest payment, etc.

Optimal capital structure

In past, profitable companies with significant cash reserves available and envisaging to reward its shareholders could possibly resort to the traditional modes, such as dividend or buy-back of shares, for repatriation of surplus profits or funds to its shareholders. However, with the abolishment of Dividend Distribution Tax (DDT) on the dividend paid by India companies, it has been more lucrative with the availability of treaty benefits and possibility of corresponding credit for the taxes in the home country. In contrast, buy-back of shares still continues to be taxed at 23.296 per cent, however, with the difference between the buyback price and the subscription amount not being substantial, this option may still be a viable one. Thus, it is important to evaluate both the options before arriving at an appropriate conclusion.


Alternatively, companies which have cash reserves but are unable to distribute the same due to lack of accumulated profits may analyse or resort to the option of capital reduction for distributing the surplus cash in the company. Such capital reduction may involve tax implications such as dividend tax and/or capital gains tax for the shareholders. The entire process of capital reduction requires the approval of NCLT and other regulatory bodies as well. 

Stressed business acquisition

The current pandemic situation has brought businesses and corporates to a standstill. Many impacted businesses might either be looking for survival rather than growth or possible modes to avail funding in the companies to recover and compete back in the market during such economic downturn. The companies which are stable and would like to establish their footprints by expansion into several other businesses would have an opportunity worth exploring. Considering, the valuation being at a long time low, it would be appealing to the investor companies to explore such possible propositions for investments.


Such acquisition of shares may have tax impact in case the purchase price paid for shares of such impacted companies are not higher than the fair value of such shares, determined basis the net asset value method, except for certain categories of asset class which requires to be replaced by fair value of such asset class. Further, it would be relevant to assess that any tax attributes or benefits available to the impacted business are not lost due to change in ownership of the company and are carried forward to the group for companies acquiring such businesses.


Right-size of balance sheet

It is generally used as an internal financial restructuring tool by companies to show a true and fair value of the financial position of the company. It indicates to companies which has huge capital base (including securities premium) with unrepresented assets or accumulated losses. As a result, the balance sheet is distended due to a large share capital/premium on the liability side and which is not represented by tangible assets or has accumulated losses on the asset side. Accordingly, setting-off such unrepresented assets/accumulated losses against the share capital/reserves results in “right sizing” of the balance sheet.


Primarily, it does not impact the net worth as such, it generally improves some of the key financial ratios concerning the return on capital employed, book value and earning per share of the company. In addition, the possible benefits could be creating a distributable profits for the company in near future and reduced compliance burden with respect to appointment of whole-time company secretary exceeding prescribed threshold limit of share capital. Often overseas parent companies are committed to provide financial and operational support to its Indian subsidiaries incurring losses and whose going concern have been questioned. In such case, it would be possible to evaluate such restructuring strategy and develop a suitable business plan for the companies moving forward. 

Minority squeeze out

Minority public shareholders in companies could act as possible obstacle in the effective management of the companies of the business owners. Thus, a public unlisted company having minority public shareholders would seek to become a wholly owned subsidiary of the parent entity. In this regards, minority buy-out can be achieved either by way of capital reduction or a purchase of the minority shareholders under a mechanism prescribed under the Indian Company Law. The regulations provide for possible exit scenarios to the public shareholders at the fair valuation, presently on the lower side possibly, at the same time safeguarding the rights and interest of the public shareholders.

Divestment/JV opportunities

Companies involved in diverse businesses would like to monetise an identified business. In order to consummate business sale to an identified purchaser in future without any delay in the process, it would be essential to strategize the segregation of business in an appropriate manner. Separation of business which are impacted due to risk associated with such business with the non-impacted business, would yield better result for companies and the shareholder at large. In order to be M&A ready and achieve tax optimisation, one of the possible manner would be to demerge or slump sale the identified business in a separate entity which can be restructured efficiently depending on the facts of the case. This would enable in achieving the desired objective of the company to generate optimum result in terms of cash flow as well for the purchaser without any adverse impact from a commercial, tax and regulatory perspective.


Companies across the globe, actively looking for diversification of their product portfolio into different sectors would seek for strategic investment in India companies. In the current market scenario, foreign investors are offered considerable incentives and promotion packages which contributes to the growth of India as well as enables the foreign investors to penetrate the India market with their wide presence. This has been reflected by the increase in foreign investment through greenfield investment or brownfield investment in India over the past several years.

Restructuring for regulated business

At present, there have been restrictions imposed by the Government of India on foreign investment into India and on public procurement from bidders for goods and services from countries sharing land borders with India. Indian companies having either economic or beneficial shareholding from such countries are facing difficulties in raising further capital and bidding for such public contracts. According, it has a bearing on the Indian businesses of such foreign shareholders. In light of the present impediments, streamlining of the shareholding structure of the Indian companies to de-link the shareholding of such countries from India would need to be assessed.


Separately, Indian companies primarily engaged into financial activity due to the fact that either their business has been sold off or it has not been able to commence it’s business operation. This may result in possible risk of such entity being classified as Non-banking Financial Company (NBFC) or Core Investment Company (CIC). In such a case, these entities would be regulated by the Reserve Bank of India (RBI) causing the Indian companies to comply with the stringent norms and reporting obligation. Accordingly, it is imperative to closely monitor the activities of such Indian companies and undertaken appropriate resolution measures.      


Albeit the above restructuring exercise may have been anticipated by the companies even during the pre-Covid era but would have been postponed due to certain business or commercial reasons. Certainly, it could be the need for the hour for the group to now revisit their holding structures, growth forecast, optimal combination of debt-equity ratio, etc. to identify potential opportunities and accordingly restructure their businesses. Accordingly, companies would like to take the benefit of the possible restructuring methodologies mentioned above to achieve the desired objective and attain feasibility in the longer duration.

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