Organic Restructuring

ORGANIC RESTRUCTURING: AN
EFFECTIVE MODE OF
CORPORATE RESTRUCTURING

SUBMITTED TO :
Dr. Yamala Paparao
(Faculty, Corporate Hons.)

SUBMITTED BY:
Himanshu Kunjam
ROLL NO. 60
SEMESTER- X

Hidayatullah National Law University

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ACKNOWLEDGEMENT

I, Suhail Bansal, feel myself highly elated, as it gives me tremendous pleasure to come out with
work on the topic,“Organic Restructuring- An effective mode of corporate restructuring”

I am thankful to my teacher, Dr. Y. Paparao, who gave me a chance to research on this topic. I
am highly obliged for his guidance in doing all sorts of researches, suggestions and discussions
regarding my project topic by devoting his precious time.

I thank to HNLU for providing Computer, library facility. And last but not the least I thank my
friends and all those persons who have helped me in the completion of this project.

Thanks,

Himanshu Kunjam

Xth Semester.

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TABLE OF CONTENTS

INTRODUCTION……………………………………………………………………..................................................7

CHAPTER I: MEANING AND SCOPE OF RESTRUCTURING..………………………………………………....10

I.AMEANING………………………………………………………………………….10

I.BORGANIC RESTRUCTURING................................................................................12

I.CINORGANIC RESTRUCTURING…………………………………………............13

CHAPTER 2: EXPLAINING THE TERMINOLOGY…………………………........................................................14

II.A: MEANING OF RESTRUCTURING......................................................................14

II.A.1: MEANING OF COMPROMISE…………………………..……………15

II.A.2: MEANING OF ARRANGEMENT……………………………………..15

II.B: RECONSTRUCTION: HOW AND WHY?.............................................................16

CHAPTER III: LEGAL PROVISIONS………………………………………………………………........................20

III.A:COMPROMISE AND ARRANGEMENT (SECTIO230).......................................20

III.B: OBJECTIONS TO COMPROMISE & ARRANGEMNET....................................22

III.C:MAJOR HIGHLIGHTS OF SECTION 230............................................................22

CHAPTER IV: REDUCTION OF SHARE CAPITAL................................................................................................24

IV.A: REASONS FOR CAPITAL REDUCTION...........................................................24

CHAPTER V: BUY BACK OF SHARES ..................................................................................................................26

CHAPTER VI: EMPLOYEE STOCK OPTION PLAN..............................................................................................29

CHAPTER VII: ISSUES AND IMPACT....................................................................................................................32

CONCLUSION………………………………………...……………………………………......................................33

REFERENCES……………………………………………...…….................................................………………......35

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OBJECTIVES

Following are the objectives of this project:


 To understand the concept of reconstruction
 To study the meaning, nature and kinds of organic restructuring
 To understand the various methods of restructuring 
 To understand the nature and scope of compromise and arrangements as an effective
mode of restructuring
 To examine the nature of procedure for organic restructuring



NATURE OF STATISTICS

The methodology adopted in this project work is based on doctrinal method of research. The
present project work is on “Organic Restructuring”. This project is doctrinal, descriptive and
analytical in nature. Secondary sources have been used in making of this project like books,
online articles and blogs.
Websites, dictionaries and articles have also been referred, footnotes are provided wherever
required.

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SCHEME AND HYPOTHESIS

The research paper would first provide the general introduction of the topic i.e. Concept of
Restructuring of a Company. It will study the concept into three parts i.e. Compromise,
arrangement and reconstruction.

Then the concept of reconstruction will be studied focusing on why reconstruction is necessary
and how reconstruction can be effected.

Further, part of this paper would discuss the concept of compromise and arrangement and its
procedure under Indian Companies Act, 2013.

Thereafter, it will examine the power of the tribunal and Central Government in reconstruction
of a company as prescribed by the 2013 Act.

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RESEARCH QUESTIONS

1. What is the concept of restructuring and why is it done?

2. What are the types of restructuring?
3. What is the meaning and types of organic structuring?
4. What is meant by reduction and buyback?
5. What is ESOP?
6. What are impacts of organic restructuring?

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INTRODUCTION

Corporate restructuring is partial dismantling or otherwise re-organisig a company for the

purpose of making it more efficient and therefore more profitable. The process of corporate
restructuring often occurs after buy-outs, corporate mergers and acquisitions, demerger,
bankruptcies etc.
Restructuring is widely used in both the developed and developing countriesnowadays.
Companies and economies are restructuring to achieve a higher level ofperformance or to
survive when the given structure becomes dysfunctional. Restructuring takes place at different
levels. At the level of the whole economy, it is a long-term response to market trends,
technological change, and macroeconomic policies. At the sector level, restructuring causes
change in the production structure and new arrangements across enterprises. At the enterprise
level, firms restructure through new business strategies and internal reorganization in order to
adapt to new market requirements.
The term ‘restructuring’ is used altogether undifferentiated, and is a generic term for all kinds of
significant changes in an organisation. Processes such as restructuring, reorganisation and
change management are characterised by the fact that they question existing structures and
routines and seek to change them through targeted and explicit interventions – this happens
especially during periods of high organisational dynamics. Decisions are weighed with
particularly high uncertainties due to the questioning of routinesand structures. A characteristic
feature of all forms of organizationalchange processes is the openness of outcomes.Although it is
about intentionally designed interventions, thecomplexity is so great that a positive assessment of
intendedand unintended effects cannot be achieved solely by a cogentreform idea.
Restructuring is the corporate management term for the act of rearranging the legal, ownership,
operational, or other structures of a organization for the rationale of making it more beneficial, or
better structured for its current needs. Other reasons for restructuring include a change of
ownership or ownership structure, demerger, or a response to a crisis or chief alteration in the
business such as insolvency, repositioning, or buyout. Restructuring may also be described as
corporate restructuring, debt restructuring and financial restructuring.

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Restructuring involves diverse activities such as divestiture of underperformingbusiness, spin-

offs, acquisitions, stock repurchases and debt swaps, which are all aone time transaction, but also
structural changes introduced in day-to-daymanagement of the business.

Corporate restructuring generally means acquisitions, amalgamations, mergers or reconstruction

consequent to a compromise or arrangement ('arrangement' includes reorganization of the share
capital of a company by the consolidation or division of shares into shares of different classes or
both) and may according be through an organic or non-organic restructure. A compromise or
arrangement may require the order of the National Company Law Tribunal.

Corporate laws cover a wide ambit of laws relating to legal entities in India. Such laws deal with
companies, SEBI (the Securities and Exchange Board of India) laws governing securities, FEMA
(Foreign Exchange Management Act), laws relating to industries and labour, laws relating to
foreign trade and contributions, etc. For the purposes of this site, this note addresses other
considerations and concepts.

Organic restructure means internal change without a change in the corporate entity such as
restructuring of capital or business, internal rationalization steps of the entity. A growth due to
organic restructuring is 'organic growth'.

In a non-organic restructure, the corporate entity itself undergoes a change such as acquiring new
enterprises and / or amalgamating or merging with another corporate entity or sale of the whole
of an undertaking. A growth due to acquisition, amalgamation or merger is 'inorganic growth'.

In a restructure, the corporate entity itself undergoes a change such as acquiring new enterprises
and / or amalgamating or merging with another corporate entity or sale of the whole of an
undertaking. A growth due to acquisition, amalgamation or merger is 'inorganic growth'. In non-
organic restructuring, a new entity may emerge in the form of a new company, sale of an
undertaking to another entity, de-merger, takeover, amalgamation or merger can occur by capital
restructuring and by business (work force, spin off of undertakings, acquisitions of trade lines,
new markets and conversion on type of legal entity) restructuring. The entity itself changes due
to restructuring of capital or business. Section 230-240 of the 2013 Act contains the provision
related to M&A as compared to Section 390- 396A of the Companies Act 1956 ("1956 Act").
Mergers, amalgamation and restructuring are very important features of the modern capitalist.

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The history of big modern corporations is a clear testimony of the importance of mergers and
restructuring in the corporate world and has unquestionably played an important part in the
growth of most of the leading corporations of the world.

The 2013 Act seeks to simplify the overall process of acquisitions, mergers and restructuring,
facilitate domestic and cross-border mergers and acquisitions, and thereby, make Indian firms
relatively more attractive to PE investors. The 2013 Act provides for the constitution of the
National Company Law Tribunal (NCLT) as the single authority for all schemes relating to
restructuring. However, there is no clarity on the time that will be taken for the NCLT to be
constituted and become operational. Practical difficulties are expected in implementation of
provisions relating to restructuring till the MCA provides clarity on these issues.

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I: MEANING AND SCOPEOF

RESTRUCTURING
I.A: Meaning of Restructuring

“The word structure used in an economic context implies a specific, stable relationship among
the key elements of a particular function or process. To restructure means the (hopefully)
purposeful process of changing the structure of an institution (a company, an industry, a market,
a country, the world economy, etc.)” This structure defines the constraints under which
institutions function in their day-to-day operations and their pursuit of better economic
performance. Restructuring can therefore be interpreted as the attempt to change the structure of
an institution in order to relax some or all of the short-run constraints. Restructuring is concerned
with changing structures in pursuit of a longrun strategy. Crum & Goldberg define restructuring
of a company as “a set of discrete decisive measures taken in order to increase the
competitiveness of the enterprise and thereby to enhance its value”. we define restructuring as a
change in the operational structures, investment structures, financing structures and governance
structure of a company. The objective of restructuring is to transform the company into an
enterprise that is of high value to its owners.

Change to an existing organisational structure is known as reorganisation / restructuring.

Reasons for reorganisation are,e.g., shifts in the environment or in the production programof a
company, and personnel changes through entry or exit of agents1. Literally,reorganisation refers
to the reconstruction of a unitor the procedures and responsibilities within a unit. Unlike
restructuring,reorganisation is also known as a neutral changemeasure, which may include staff
reductions but does not have to. A restructuring wave is sweeping the corporate world.
Takeovers, mergers and acquisitions activities continue to accelerate. From banking to oil
exploration, telecommunication to power generation, petrochemicals to aviation, companies are
coming together as never before. Not only this, new industries like e-commerce and
biotechnology have been exploding and old industries are being transformed. Corporate
restructuring through acquisitions, mergers, amalgamations, arrangements and takeovers has
become integral to corporate strategy today.
1
GablerWirtschaftslexikon, 2012

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Restructuring is the corporate management term for the act of rearranging the legal, ownership,
operational, or other structures of a organization for the rationale of making it more beneficial, or
better structured for its current needs. Other reasons for restructuring include a change of
ownership or ownership structure, demerger, or a response to a crisis or chief alteration in the
business such as insolvency, repositioning, or buyout. Restructuring may also be described as
corporate restructuring, debt restructuring and financial restructuring.

Corporate Restructuring has become a major component in the financial and economic
environment all over the world. It is the process of redesigning one or more aspects of
acompany. The process of reorganizing a company may be implemented due to a numberof
different factors, like positioning the company to be more competitive, survive acurrently
adverse economic climate, or poise the corporation to move in an entirely newdirection and
many more. Corporate restructuring is needed to counter challenges incompetitive business
environment. Most of the organizations carry out corporaterestructuring as per the needs of the
business. Some do it through mergers, acquisitions,and some by demergers as well; while some
others make structural changes and carryout resource optimization in the organization.

Corporate restructuring is a multifarious phenomenon that management has to deal with. Every
company has to choose either to diversify or to refocus on core business activities. Diversifying
in simple terms is expansion of business domains while refocus is a deliberate attempt made by
companies to become more alert on core business activities. From this point of view, corporate
restructuring is thoughtful reduction followed by diversification. Corporate restructuring is an
experience in itself which requires one or more of the following:
 Pattern of ownership and control
 Composition of liability

The term ‘restructuring’ is not specifically defined in the Companies Act. The Oxford dictionary
gives the meaning of reconstruct as “ construct again, repair, restore to former condition or
appearance, construct a new in mind.”2
Corporate reconstruction can broadly be classified as:

2
www.eurofound.europa.eu/emcc/index.htm

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 Organic Restructuring
 Inorganic Restructuring

I.B: Organic Restructuring

By ‘organic restructuring’ we refer to an internal change without a change in the corporate entity
which it own. Organic restructuring could be undertaken to take full advantage of the strengths
available within the corporate entity and achieving further growth or to remedy some
inefficiencies in the existing structure or steps taken to weed out the existing ‘defective’ referred
to as ‘rationalisation’ and the latter referred to as ‘diversification’ as a part of organic
restructuring.
Organic restructuring can occur by capital restructuring and by business (work force, spin off of
undertakings, acquisitions of trade lines, new markets and conversion on type of legal entity)
restructuring. The entity itself changes due to restructuring of capital or business.

Organic restructuring of a corporate body could be broadly divided into two categories:
 Capital restructuring like issuing Employee Stock Option Scheme, buy back of shares or
reduction of shares
 Business restructuring like rationalisation of work force

I.C: Inorganic Restructuring

In non-organic restructuring, a new entity may emerge in the form of a new company, sale of an
undertaking to another entity, de-merger, takeover, amalgamation or merger. can occur by
capital restructuring and by business (work force, spin off of undertakings, acquisitions of trade
lines, new markets and conversion on type of legal entity) restructuring. The entity itself
changes due to restructuring of capital or business3.

In this type of restructuring there is an overall change in the corporate entity of the company.
Unlike organic restructuring, there is an element of third party involved, in that either a new
company is formed to carry on the same business of the corporate body restructured, sale of an
undertaking to another company, demerger- disposal of an undertaking to another company in
lieu of obtaining shares in that company, acquisition of another company- either through friendly

3
http://www.yangworld.com/archives/corplaws.html, as accessed on 04.09.2015.

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or hostile takeover, amalgamation of one or more companies with the corporate body or the
merger of the corporate body with another company.
In the corporate market national or international, corporate restructuring whether organic or
inorganichelps in securing survival, growth, expansion and globalization of the enterprise and
achieving multitude of objectives.
This project will primarily focus on the types of organic restructuring.

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II. EXPLAINING THE TERMINOLOGY

II.A: Meaning of Reconstruction

Reconstruction occurs when a company transfers the whole of its undertaking and property to a
new company consisting substantially of the same shareholders. The object of reconstruction is
to re-organize capital and variations of the right of investors. Reorganization or arrangement is
said to have taken place only when one company is involved. The term “reconstruction” includes
reorganization, arrangement, amalgamation, etc., and thus is a term of wide import.

A reconstruction is commonly said to have taken place when a company resolves to wind up its
business and it is proposed to form a new company, with only the old shareholders as its
members to take over its undertaking, the rights of shareholders in the old company being
satisfied by their being allotted shares in the new company. In that case, the old company ceases
to exist in point of law, and its assets are transferred to the new company. It would be,
nonetheless, a reconstruction even if all the assets might not pass to the company, or all the
shareholders of the transferor company might not be shareholders in the transferee company, or
all the liabilities of the transferor company might not be taken over by the transferee company.
According to section 391, a compromise or arrangement may be proposed between-
 A company and its creditors or any class of them
 A company and its members or any class of them

 Meaning of Capital restructuring

Capital restructuring means change in the capital structure of the company through public issue,
fresh issue, debentures or bonds, reduction of share capital, buy back options, employee stock
options and reorganization through compromise or arrangement.

 Meaning of Business Restructuring

Under business restructuring, there would be a rationalization of work force which includes
administrative, sales, marketing and managerial work force as well as workmen. Rationalization

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essential means focusing and taking advantage of the strengths available within a company and
achieving further growth. Rationalization of work force brings into play re-location, re-
designation, re-defining responsibilities, replacement, re-grouping, voluntary retirement and
retrenchment. These issues, with the exception of retrenchment, are controllable by the company
by negotiations and / or terms of employment. Retrenchment would be a subject matter of the
Industrial Disputes Act. Matters relating to retrenchment and voluntary retirement schemes
would also trigger the provisions of the Indian Income Tax Act.

II.A.1: Meaning of Compromise


It means an amicable settlement of differences by mutual concessions by the parties to dispute or
differences by agreeing not to try it out. In Sneath v Valley Gold Ltd 4 , ‘compromise’ was
described as an agreement terminating a dispute between parties as to the rights of one or more
of them, or modifying the undoubted rights of a party which he has difficulty in enforcing. The
result of this case is that there can be no compromise unless there is some dispute e.g. as to the
power to enforce rights or as to what those rights are.

In a compromise, “the parties agree to try to settle it between themselves by a give-and-take

arrangement”. For the purpose of a compromise, it has been held that it is but essential that each
party thereto should be empowered to make the necessary concession. Dani Chand & Co. vs.
Narain Das & Co.5 Thus, compromise envisages the existence of a dispute, e.g. one relating to
rights. But the word “arrangement” is of wide import and its meaning should not be limited to
something analogous to a compromise.

II.A.2: Meaning of Arrangement

An arrangement as an expression is used in the Act, embraces for a wider class of agreement
than a compromise. It includes agreements which modify rights about which there is no dispute.
Section 390(b) provides the reorganization of the share capital of the company by the
consolidation of shares of different classes or by division of shares or by both methods. It
4
( 1893) 1 Ch 447.
5
(1947) 7 Comp. Case 195 F.B.

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involves only one company.

An arrangement may also involve debenture holders being given an extension of time for
payment, releasing their security in whole or in part or exchanging their debentures for the
claims and the balance in shares or debentures of the company; preference shareholders giving
up their rights to arrears of dividends, further agreeing to accept a reduced rate of dividend in the
future, etc.

II.B Reconstruction: How and why?

Corporate restructuring is the process of reorganizing the ownership and legal operational
structures of a company in order to make it more profitable, so that it is better organized than at
present. It is corporate management's term for the act of partially dismantling and reorganizing a
company in order to make it more efficient and therefore more profitable. It generally involves
making major sacrifices by selling off parts of the company and making severe staff reductions.
Corporate restructuring becomes necessary when a company must improve its profitability and
efficiency. There are a number of reasons corporations require restructuring. It may be necessary
due to change of ownership, buy-outs, bankruptcy or takeovers. Corporate restructuring is also
described as debt restructuring and financial restructuring as it usually involves the restructuring
of the company's assets and liabilities.
Restructuring can be accomplished by various methods. It can involve dismantling and
rebuilding areas within the company, which requires special attention from management as well
as from the CEO. Those involved in the restructuring effort usually hire financial and legal
advisers to assist in the negotiations and transaction details.
An improving economic outlook and pent-up demand can create new opportunities for
executives who want to improve their corporation's bottom line through corporate restructuring,
mergers and acquisitions. Capturing the maximum value requires a thorough understanding of
debt and corporate restructuring options. It also requires a keen ability to identify strategic
opportunities to improve competitive position.
Selling off portions of the company, such as a division that is no longer profitable or which has
taken too much of management's time and not letting them concentrate on their core business,
can greatly improve the company's balance sheet. Staff can be reduced by selling or closing

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unprofitable parts of the company and by consolidating and outsourcing parts of the company
that perform non-profit-producing work, such as payroll, human resources, etc.
Some characteristics of restructuring are:
• Changes in corporate management; holding on to corporate management on an "as needed" or
"stay bonus" basis
• Sale of underutilized assets, including patents and brands
• Moving operations such as manufacturing to lower-cost locations, outsourcing operations such
as payroll and technical support to a more efficient third party and reorganizing functions such as
sales, marketing and distribution
• Restructuring with stockholder; refinancing of corporate debt in order to reduce interest
payments
• Renegotiating labor contracts in order to reduce overhead
From a social point of view, takeovers create genuine suffering for individuals whose jobs are
eliminated or whose lifelong careers are ruined. Entire communities can experience abrupt
economic devastation. A corporation is a sociological institution as well as a collection of
financial assets and, while employees understand that corporate change is necessary for
corporate survival, they will not accept abrupt, radical change imposed from outside that has
nothing to do with current business conditions.
Politicians are also unlikely to accept a craze for takeovers. In the United States, anti-takeover
laws have been passed at the state level. The Supreme Court handed down an important
securities law decision in March 1988, designed to protect investors from stock manipulation.
The law prohibits a public company from making untrue, misleading or incomplete statements
about facts that are "material" to its fortunes. Companies must disclose merger talks immediately
rather than wait until such talks reach fruition. A wrong move can invite challenges from the
Securities and Exchange Commission (SEC) and from stockholders who say they were misled.
Because shareholder lawsuits are often brought as class actions, the potential damages could
amount to millions of dollars.
Legislation that has been passed to restrict takeovers has been relatively ineffective. Those who
support takeovers argue that such laws favor existing management no matter how inefficient or
self-serving. The board of directors can hardly be expected to rectify this situation; after all it
was chosen by management and will challenge or dismiss management only in the most extreme

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situations. Problems posed by ineffectual or self-serving management should be addressed in a

manner that keeps politicians out of the process. Stockholders need protection from this type of
management, and workers, executives and communities need protection from corporations being
torn apart.
The process of restructuring lies in the establishment of a detailed strategy to transform the
existing operations into an ideal operation. The process must be performed carefully to ensure
that it will have the least adverse effect on the operation and, most importantly, on the
individuals who have worked in the company for many years.

II.B.1 Why Reconstruction?

A reconstruction may be necessary for the following purposes:

(1) To extend the operations of the company: If the shares are fully paid up and further capital is
desired to be raised, the shareholders in the old company may be issued only partly paid shares in
the new company so that by calling up the uncalled amount the company would have the funds it
would require for carrying on its business.
(2) As a method for altering the Memorandum of Association: When such an alteration cannot
be undertaken under Section 17 i.e., in a case where the new company desires to have “objects”,
in its memorandum, over and above those in the old company.
(3) For purpose of Reorganisation: The term “reorganisation” is usually applied to an
arrangement to alter or modify the rights of shareholders or creditors, or both.
(4) In order to amalgamate with one or more companies: Amalgamation is the blending of two
or more companies into a single undertaking, the shareholders of each such company becoming
substantially the shareholders in the new company which is to carry on the blended undertaking.
To achieve this objective, either a new company may be formed to take over the business of the
existing companies or the business of one or more existing companies be taken over by one of
the existing companies.
(5) Reconstruction or Arrangement undertaken for bringing the capital structure of companies
into line with the requirements of the Act: The Act requires that the capital of a company must
consist only of equity and preference shares. Companies having deferred or other forms of

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capital, therefore, are obliged to conform to the legal requirement as to their capital structure by a
scheme of reconstruction.

II.B.2 How Reconstruction is effected?

Reconstruction may be carried out:

(a) By sale of the company under the powers contained in its Memorandum of Association;
(b) By a scheme of arrangement under section 230;
(c) By acquiring all or a majority of the shares in another company under section 235;
(d) By a compulsory amalgamation of companies in the public interest by an order of the
Central Government under section 237;
(e) By a sale under section 319 (members voluntarily winding up); by a special resolution.
(f) By a scheme of arrangement with creditors only; under section 321 (voluntary winding up
both by members and creditors, a special resolution and consent of three-fourths in value of
creditors are necessary.
(g) Buy back of shares
(h) Reduction of capital

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III: LEGAL PROVISIONS

Chapter XV (Section 230 to 240) of Companies Act, 2013(the Act) contains provisions on
‘Compromises, Arrangements and Amalgamations’, that covers compromise or arrangements,
mergers and amalgamations, Corporate Debt Restructuring, demergers, fast track mergers for
small companies/holding subsidiary companies, cross border mergers, takeovers, amalgamation
of companies in public interest etc. The procedural aspects involved such as format of
application to be made to National Company Law Tribunal (the Tribunal), form of notice and the
procedural aspects involved with respect to the substantive law are covered under the Rules
made under Chapter XV of the Act.
Section 230-231 deals with compromise or arrangements.

III.A: Compromise or Arrangement with members or creditors (Section 230)

When a compromise or arrangement is proposed—

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the

(i) company or
(ii) of any creditor or
(iii) member of the company, or
(iv) in the case of a company which is being wound up, of the liquidator, order a meeting
of the creditors or class of creditors, or of the members or class of members, as the
case may be, to be called, held and conducted in such manner as the Tribunal directs.

The application to the tribunal to disclose by affidavit—

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(a) all material facts relating to the company, such as the latest financial position of the company,
the latest auditor’s report on the accounts of the company and the pendency of any investigation
or proceedings against the company;

(b) reduction of share capital of the company, if any, included in the compromise or
arrangement;

(c) any scheme of corporate debt restructuring consented to by not less than seventy-five per
cent. of the secured creditors in value, including—

(i) a creditor’s responsibility statement in the prescribed form;

(ii) safeguards for the protection of other secured and unsecured creditors;
(iii) report by the auditor that the fund requirements of the company after the corporate
debt restructuring as approved shall conform to the liquidity test based upon the
estimates provided to them by the Board;
(iv) where the company proposes to adopt the corporate debt restructuring guidelines
specified by the Reserve Bank of India, a statement to that effect; and
(v) a valuation report in respect of the shares and the property and all assets, tangible and
intangible, movable and immovable, of the company by a registered valuer.

Notice of the meeting called in pursuant to the order of the tribunal shall be sent to all the
creditors or class of creditors and to all the members or class of members and the debenture-
holders of the company, individually at the address registered with the company which shall be
accompanied by

1. a statement disclosing the details of the compromise or arrangement,

2. a copy of the valuation report, if any, and

3. explaining their effect on creditors, key managerial personnel, promoters and non-promoter
members, and the debentureholders and

4. the effect of the compromise or arrangement on any material interests of the directors of the
company or the debenture trustees, and

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5. such other matters as may be prescribed: Such notice and other documents shall also be placed
on the website of the company, if any, and in case of a listed company, these documents shall be
sent to the Securities and Exchange Board and stock exchange where the securities of the
companies are listed, for placing on their website and shall also be published in newspapers in
such manner as may be prescribed:

When the notice for the meeting is also issued by way of an advertisement, it shall indicate the
time within which copies of the compromise or arrangement shall be made available to the
concerned persons free of charge from the registered office of the company.

III.B: Objections to Compromise or Arrangement

Any Objection to the compromise or arrangement shall be made only by person holding not less
than ten percent of the shareholdings or having outstanding debt amounting to not less than five
percent of the total outstanding debt as per the latest audited financial statement.

This means all other person haveonly two options: yes or no.

III.C: Major Highlights of Section 230 of the Companies Act, 2013

 Section 230 of the 2013 Act provides for detailed disclosures tobe made, one of the
disclosures also mandates the applicant todisclose whether the scheme contains a
reduction of capital or acorporate debt restructuring.
 The applicant who desires to restructure a corporate debt has toprovide a report by
auditors on the position of liquidity and alsoas to whether the corporate debt restructuring
is in line with theguidelines provided by the Reserve Bank of India.
 The extensive disclosures are in addition to the disclosuresrequired by s.393 of the 1956
Act. The intent of increaseddisclosures is to ensure transparency and empower
stakeholdersby allowing them to take informed decisions.
 Introduction of voting by way of postal ballot (in addition to acourt convened meeting),
which will ensure larger publicparticipation, the concept of dispensation by providing
athreshold for the dispensation of creditors meetings are awelcome measures.
 The 2013 Act also requires that notices be sent to variousstatutory authorities with regard
to a scheme, arrangement orrestructuring. This measure may evoke mixed reactions but

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isaimed to invite the participation of various regulators to assist theTribunal to take an

informed decision.
 The new section also enables the takeover of listed companiesthrough a scheme of
compromise or arrangement and placesemphasis on the pricing guidelines which the
Securities andExchange Board of India would prescribe ensuring thatuniformity in law is
maintained.

III.C.1: Effect of the Scheme

Where (i) majority of persons representing three – fourth in value of the creditors or class of
creditors or members or class of members agree to compromise or arrangement and (ii)
sanctioned by the Tribunal by an order; the scheme shall be binding on the company; all
creditors or class of creditors or members or class of members or in case of a company being
wound up, on the liquidator and the contributories of the company.

Buyback under Compromise or Arrangement:

Any buyback of securities under scheme shall be in accordance with the provision of Section
68 other the Tribunal shall not sanction the scheme of compromise or arrangement.

Takeover under Compromise or Arrangement:

Any takeover under the scheme of compromise and arrangement shall confirm the Rules, in case
of unlisted companies and SEBI Regulations in case of listed companies.Any aggrieved party
may make application to the Tribunal with respect of takeover offer of the unlisted companies
and the Tribunal may on application pass such order as it may deem fit.

Reduction of Capital under Compromise or Arrangement:

The provision of Section 66 shall not apply in case of reduction of share capital affected in
pursuance of the order of the Tribunal for compromise or arrangement.

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IV.REDUCTION OF SHARE CAPITAL

The share capital of a company is the only security on which the creditors rely. Any reduction of
share capital, therefore, diminishes the fund out of which they are to be paid. For these specific
reasons the companies limited by shares are not allowed to reduce the capital. But sometimes
there may be some genuine reasons for the reduction of share capital.The process of decreasing a
company’s shareholder equity through share cancellations and share repurchases. Companies for
numerous reasons including increasing shareholder value and producing a more efficient capital
structure do the reduction of capital. The need of reducing capital may arise in various
circumstances, for example, accumulated business losses, assets of reduced or doubtful value,
etc. As a result, the original capital may either have become lost or a company may find that it
has more resources that it can profitably employ. In either of these cases, the need may arise to
adjust the relation between capital and assets.

IV.A: Reasons for Capital Reduction

The need for reducing the capital may arise on account of various reasons like to distribute assets
to shareholders, to remedy deficit, to reduce the basis for taxes, make up for trading losses, heavy
capital expenses, etc. Also, sometimes companies may have more capital resources and reserves
than they can profitably employ, giving rise to the need to readjust the relation between capital
and assets by reduction of capital. When a company has been making losses, the financial
position does not present a true and fair view of the state of the affairs of the company. The
assets are overvalued, and assets side of the balance sheet consists of fictitious assets with debit
balance in profit and loss account. Such situation does not depict what a real net worth ought to
be. In short, the company is over capitalized6.Such a situation brings the need for reconstruction.
Here, scheme of reduction will be to write-off that portion of capital that is already lost and to
make balance sheet healthy. Reconstruction is a process by which affairs of a company are
reorganized by revaluation of the assets, reassessment of liabilities and by writing off the losses

6
http://www.ey.com/Publication/vwLUAssets/Assocham_White_paper_Companies_Act/$

File/Assocham_White_paper_Companies_Act.pdf

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already suffered by reducing the paid up of shares and or varying rights attached to the
Reduction of share capital different classes of shares. The object of the reconstruction is usually
to recognize capital or to compound with creditors or to effect economies. Such a process is
called as Internal Reconstruction which is carried out without liquidating the Company. The
aforesaid comprise is an agreement between a company and its members and outside liabilities
when the company faces financial problems. Such arrangement involves sacrifice from
shareholders or creditors or by all. Accounting effect of the scheme along with other is detailed
below. However, there may be external reconstruction which is altogether different and involves
liquidation of the Company. The most common reasons why a company may want to reduce its
capital are:

1. To increase or to create distributable reserves to enable future dividends to be

paid to shareholders
2. To return surplus capital to shareholders
3. To facilitate a share buyback or redemption of shares, or
4. As part of a scheme of arrangement

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V: BUY BACK OF SHARES

Companies evolve their policies continuously in order to adapt to managerial decisions,

competition, politics, etc. Restructuring, therefore, becomes inevitable for operational, financial
and managerial dimensions. It may be done via expansion, sell-offs, corporate control, and
changes in ownership structure. One of the most important strategies in restructuring is share
repurchase, or buy-back, where the company purchases its own securities from the market to
either increase their or to eliminate any threats by shareholders who may be looking for a
controlling stake. This also provides a one-time return of cash, and may, on the downside, send
negative signals to the market regarding the company’s profit ventures, risking insolvency. Buy-
back can be done via tender offer, open market purchases, and privately negotiated repurchases.
These domains of company law are covered by S. 68-70 of the Companies Act 2013, which
permit buy back, issue regulations, impose certain formalities, and so on. It varies vastly from
the regime that had been imposed by the Companies Act, 1956.

Competitive pressures, shareholders’ demands, management decisions and regulatory and

political environment, all warrant that companies keep on reinventing themselves and adapt to
change. Operational, managerial and financial dimensions may therefore, often be subject to
restructuring. Approaches of restructuring that a company may adopt include expansion, sell-
offs, corporate control, and changes in ownership structure.

Capital restructuring is a type of business operational strategy that is employed to make changes
to the capital structure of a company, usually as a way to deal with shifts in the marketplace that
have impacted the financial stability of the business. Share repurchase or buy-back is one of the
most important strategies that a firm uses. The procedure by which a company purchases its own
securities from the market is termed as buy back of shares. The objective behind buy back may
be either to increase the value of shares still available (reducing supply), or to eliminate any
threats by shareholders who may be looking for a controlling stake. A company can use the share
repurchase route when it has excess cash. The excess cash therefore, can be made to work on a

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better investment. The company can also buy back its shares from the market to thwart a hostile
takeover bid.

Share repurchases or buy back may provide many benefits to companies. Share repurchases are
one-time returns of cash. Rather than paying dividends companies can utilise excess cash to buy-
back their shares. Apart from this, share buy-backs can be affected in a short time facilitating fast
capital restructuring. However, on the flip side it is possible that repurchase of shares might send
negative signals; because the market might think that the company has no profitable ventures to
invest in. Since repurchases erode cash resources, the company might also lose on growth
opportunities. Lastly, if the repurchase decision is mismanaged, the company could risk
insolvency.

The buy-back methods include repurchase tender offer, open market purchases, and privately
negotiated repurchases. The firm might issue a cash tender offer in the open market to repurchase
its shares. The tender offer usually sets forth the number of shares that the company wishes to
repurchase as well as the price at which it will repurchase the shares. The tender offer is also a
time-bound offer and states the period for which the offer would be extended. Tender offers are
mostly used for large equity repurchases.

In developed markets open market repurchases occur more often than tender offers because they
are much cheaper to administer. Open market purchases can also be spread over longer time
periods than tender offers. Open market purchases offers are most often used for small equity
repurchases.

Negotiated purchases might be used to thwart the actions of a raiding company, which is trying
to mop the shares of the target company from the market. Negotiated purchases involve a small
number of investors who hold significant chunks of a firm’s shares.

Thus, the repurchase methods include:

 Capital restructuring through repurchase tender offer

 Capital restructuring through open market purchases
 Capital restructuring through privately negotiated repurchases

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Besides being a strictly financial decision, share buy-back is also an information signal to the
market. For example, if the firm offers to buy-back its shares at a very high premium, it might
send a signal that the firm believes that its stock is undervalued. The decision to go for share
buy-back or invest the spare cash in other activities is a tough one. Usually, managers and
shareholders have different views on the issue. However, the management-shareholder conflict
can be resolved when there are large shareholders who can monitor and discipline the
management.

Ss. 77A, 77AA and 77B of the Companies Act,1956 as inserted by the Companies (Amendment)
Act,1999 were the provisions regulating buy back prior to 2013. The Securities and Exchange
Board of India (SEBI) framed the SEBI(Buy Back of Securities) Regulations,1999 and the
Department of Company Affairs framed the Private Limited Company and Unlisted Public
company (Buy Back of Securities) Rules,1999 pursuant to Section 77A(2)(f) and (g)
respectively.The Companies Act of 2013 prescribes extensive guidelines for buy back of shares
within Ss. 68-70.

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VI. EMPLOYEE STOCK OPTION PLAN

An employee stock option plan (ESOP) is an employee-owner program that provides
a company's workforce with an ownership interest in the company. In an ESOP, companies
provide their employees with stock ownership, often at no up-front cost to the employees.
ESOP shares, however, are part of employees' remuneration for work performed. Shares are
allocated to employees and may be held in an ESOP trust until the employee retires or leaves the
company. The shares are then sold.

Some corporations are majority employee-owned; the term employee-owned corporation often
refers to such companies. Such organizations are similar to worker cooperatives, but unlike
cooperatives, control of the company's capital is not necessarily evenly distributed. Compared
with cooperatives, ESOP-centered corporations allow for company executives to have greater
flexibility in governing and managing the corporation. Most corporations, however, utilize stock
ownership plans as a form ofin-kind benefit, as a way to prevent hostile takeovers, or to maintain
a specific corporate culture. These plans generally prevent average employees from holding too
much of the company's stock.

The respective provisions of the Act and the Rules can be read in two perspectives i.e. provisions
governing –

 Issue of ESOPs and

 Trust set-up, funding and operation for administration of ESOPs.
The provisions relating to issue of ESOPs are common for all the unlisted Companies
irrespective of their status being Private or Public; whereas the provisions on Trust set-up,
funding, etc. are relevant for an unlisted Public Company which is dealt with in the later part.

The provisions relating to issue of ESOPs applicable for all unlisted Companies are:

i. Employee under an ESOP Scheme – Rule 12(1) read with Section 2(37), 197(7) of the
Companies Act, 2013 defines the term to mean any permanent employee or Director whether a
whole-time or not and whether working in India or not. The employees and Directors of the
Holding, Subsidiary and Associate Company are also covered. The specific exclusions are:

a) An Independent Director;

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b) An employee who is a Promoter or belongs to the Promoter Group; and

c) A Director who directly or indirectly holds more than 10% of outstanding equity shares of the
Company.

ii. Procedural requirements – Rules 12(1), 12(2) and 12(4) read with section 62(1)(b) of the
Companies Act, 2013 require:

a) Approval of the ESOP Scheme by the members of the Company by way of a special
resolution;

b) There shall be separate resolutions in case of grant of ESOPs to employees of the Subsidiary
or Holding Company or in case of grant of ESOPs to identified employees equal to or exceeding
1% of the issued capital; and

c) The explanatory statement shall disclose prescribed details namely total number of ESOPs to
be granted, appraisal process, requirements of vesting, exercise price or pricing formula, exercise
period, lock-in period, method of accounting, etc.

iii. Other requirements – Rest of the Sub-rules of Rule 12 besides giving the flexibility to the
Company to determine the exercise price and lock-in of shares, require:

a) Variation of terms of the ESOPs to be carried out by way of members’ approval by way of a
special resolution provided it is not prejudicial to the interests of the employees;

b) Minimum vesting period of 1 year;

c) Non-transferability of the ESOPs;

d) Unvested ESOPs to vest in case of death or permanent incapacity of an employee;

e) Disclosure of prescribed details in the Directors’ Report; and

f) Maintenance of an ESOP Register.

In the context of ESOP, SEBI has notified on October 28, 2014, Securities and Exchange Board
of India (Share Based Employee Benefits) Regulations, 2014.

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It is to provide for regulation of all schemes by companies for the benefit of their employees
involving dealing in shares, directly or indirectly, with a view to facilitate smooth operation of
such schemes while preventing any possible manipulation and matters connected therewith or
incidental thereto.7

Scheme may be implemented

 either directly
 By setting up an irrevocable trust(s) – the same has to be decided upfront at the time of taking
approval of the shareholders for setting up the schemes.
Mandation for trust route, if the scheme involves secondary acquisition or gift or both

Single Trust

In case of a single trust, it shall keep and maintain –

 proper books of account,

 records and documents
for each such scheme so as to explain its transactions and to disclose at any point of time the
financial position of each scheme and in particular give a true and fair view of the state of affairs
of each scheme.

Trust Deed

 SEBI may specify the minimum provisions to be included in the trust deed
 Deed shall be mandatorily filed with the stock exchange in India where the shares of the
company are listed.
Non-eligibility for being a trustee if the person

 is a director, key managerial personnel or promoter of the company or its holding, subsidiary or
associate company or any relative of such director, key managerial personnel or promoter; or
 beneficially holds ten percent or more of the paid-up share capital of the company.

7
http://taxguru.in/company-law/esop.html#sthash.HYJ8o47E.dpuf

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VII. ISSUES AND IMPACT

VII.A: Issues

 Due to involvement of so many authorities / agencies the speed of Compromises may get
affected.
 No specific provision for dispensation of the meetings of the members or class of
members unlike that of creditors hence, giving an impression that a compulsory meeting
of shareholders would have to be convened.
 The reading of sub-section 5 of s. 230 of the 2013 Act gives an impression that the
notices are to be sent “if necessary”. Thus, there may be a possibility that the notices to
the statutory authorities may be dispensed with on a case to case basis. (“if necessary”
may be going with CCI alone).
 Scope and grounds of intervention of the regulatory authorities is vague and unclear – If
the views are not expressed within the period of 30 days then the section states that it
will be assumed that they have no representation to make on the proposals. It is unclear,
if this would mean that it is understood that they have granted consent of the scheme of
compromise or arrangement.

VII.B: Impact

 Internal Restructuring will increase due to separate provision for Small Companies (Only
Private Companies) and Holding and Wholly Owned Subsidiary Company under Fast
Track Merger
 Only relevant issue on Compromise and Arrangement will be raised due to prescribed
limit for objecting the scheme
 Dissenting Shareholder will easily exit the Compromise and Arrangement
 There will be more Cross- Border transactions in form of Mergers and Amalgamation
 Role of other authority like Income Tax, Reserve Bank of India, etc. becomes important.

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CONCLUSION
To conclude, the overall impact of the 2013 Act on mergers, compromises and arrangements is
to introduce certain simplistic and forward-looking concepts, and also codify in law certain
concepts (such as dispensation, statutory auditor certificates and demerger accounting), which
were followed in practice, put not contained in law. As of now, the full impact of the law is not
very clear, since many matters will be governed by rules.

Restructuring is widely used in both the developed and developing countries nowadays. Companies and
economies are restructuring to achieve a higher level of performance or to survive when the given
structure becomes dysfunctional.

Restructuring is the corporate management term for the act of rearranging the legal, ownership,
operational, or other structures of a organization for the rationale of making it more beneficial, or better
structured for its current needs. Other reasons for restructuring include a change of ownership or
ownership structure, demerger, or a response to a crisis or chief alteration in the business such as
insolvency, repositioning, or buyout.

Organic restructure means internal change without a change in the corporate entity such as restructuring
of capital or business, internal rationalization steps of the entity. A growth due to organic restructuring is
'organic growth'.

In a non-organic restructure, the corporate entity itself undergoes a change such as acquiring new
enterprises and / or amalgamating or merging with another corporate entity or sale of the whole of an
undertaking. A growth due to acquisition, amalgamation or merger is 'inorganic growth'.

‘organic restructuring’ we refer to an internal change without a change in the corporate entity
which it own. Organic restructuring could be undertaken to take full advantage of the strengths
available within the corporate entity and achieving further growth or to remedy some
inefficiencies in the existing structure or steps taken to weed out the existing ‘defective’ referred
to as ‘rationalisation’ and the latter referred to as ‘diversification’ as a part of organic
restructuring.
Organic restructuring of a corporate body could be broadly divided into two categories:
 Capital restructuring like issuing Employee Stock Option Scheme, buy back of shares or

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reduction of shares
 Business restructuring like rationalisation of work force

On the whole, the 2013 Act is a step toward bringing greater transparency and accountability in
corporate restructure, thereby visibly making the Indian Corporate Law relatively friendlier and
more acceptable in the global arena.

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BIBLIOGRAPHY
 
 BOOK REFERRED:

 Kapoor G.K. and othrs.,Company Law and Practice, Taxmann publication, 19th ed.,
2014. 
 Creating value through corporate restructuring, Stuart. C Gilson, 2nd edition
 Corporate Restructuring, Bhagaban Das, Himalayan Publishing House


 
WEBLIOGRAPHY:

 http://corporaterestructuringfundamentals.blogspot.in/
 http://www.yangworld.com/corplaws.html

 http://www.ey.com/Publication/vwLUAssets/Assocham_White_paper_Companies_Act/$

File/Assocham_White_paper_Companies_Act.pdf

 http://cn.lakshmisri.com/News-and

Publications/Publications/Articles/Corporate/ Changing-contours-of-mergers-

and-acquisitions-under-Companies-Act-2013

 http://www.mondaq.com/india/x/299644/M+A+Private%20equity/Merger+And+Acquisit

ion+Transformed+Rules+Of+The+Game

 http://indiamicrofinance.com/companies-act-2013-mergers-acquisitions-2014.html

 http://www.ey.com/Publication/vwLUAssets/Assocham_White_paper_Companies_Act/$
File/Assocham_White_paper_Companies_Act.pdf
 http://www.mca.gov.in/MinistryV2/chapter10.html

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