Reconstruction is a management decision apparently for achieving the improvement in business profitability. Reconstruction/restructuring is generally carried out in the form of amalgamation/merger/demerger/takeover etc. Restructuring can be carried out in either of the Following 2 ways:
- Financial Restructuring: In this option, the entire focus is placed on finance of the company and the company tries to modify its financial state of affairs either by way of merger or amalgamation or various other ways. This method requires multiple compliances under different statutes such as Companies Act, 2013.
Various methods of financial restructuring is discussed below:
A company which is already running into heavy losses takes helps of another running company to revive its business. For this purpose, the company may opt either for amalgamation or for merger. This method leads to various benefits such as economy of scales, tax benefits, reduced competition etc. Acquiring company induces funds into the acquired company so that it can bring its business on track. Acquiring company may either discontinue the operations of an acquired company and merge its assets in its financial statement or it may allow it to continue running its operations with invested funds.
In this option, a company transfers one of its loss making segments to another company for the purpose of arranging funds for smooth functioning of the remaining company. In case of demerger, entire assets and liabilities of the demerged segment becomes part of the resulting company.
An agreement between the company and its members and outside liabilities due to the financial crisis is known as compromise or agreement. This involves sacrifice by shareholders, creditors, debenture holders, or maybe all of them
In this method, the shares are divided into a smaller denominations and the shareholders are compiled to surrender the shares. These shares are then allotted to creditors and debenture holders for repaying their liability. The unutilized surrendered shares are canceled
- Organisation Restructuring: In this method, the company tries to revive by making changes in internal management such as optimising the hierarchies by removing unnecessary posts, down-sizing the number of employees, reducing the salary scale etc. For this restructuring, the company need to assess internal manpower requirement and then can decide accordingly.