1.1 Background of the Study
Restructuring
process is employed when a given structure becomes dysfunctional or a level of
performance is expected from firms to survive and grow.
The
increasing competition and globalization along with stringent policies and
practices are causing organizations to struggle for higher efficiency and cost
effectiveness. To achieve the desired results it is required to reframe
corporate strategies and structure for some transformation. To attain this
objective, restructuring is one of the only alternatives available for survival
and growth (Rogovsky, Ozoux, Esser, Marpe, & Broughton, 2005).
Restructuring is transforming company structure and
the relationship between different components, company functions, its processes
and employees and other stakeholderswho participate in these relations.The
structure according to Dubrovski is “the whole, consisting of interconnected
and interdependent components (ingredients) ” (Dubrovski,2011). Restructuring is understood as a
change of a certain organism structure. It can be as a change of a particular
economic area structure, change of production schedules and innovative
activities. Restructuring involves divestiture of underperforming business,
spin-offs, acquisitions, stock repurchases and debt swaps, in combination with
structural changes in day-to-day business management. According to Rappaport
(1986), one time major transactions are considered as Phase I restructuring and
day to day management to improve business value are considered as Phase II
restructuring.
Rappaport
(1986) argues that it is required for companies to move from Phase I
restructuring to Phase II. The reason being the shareholder value approach is
employed not only in Phase I i.e. acquisitions, mergers, spin offs,
repurchases, but also during the planning and performance monitoring of all
business strategies on an on-going basis. Firms which are
prepared and capable to understand the requirement and importance of continuous
changes i.e. the firms which approach actively to a process of restructuring can
be successful in the present world.
“Financial restructuring of the company includes
changes in the structure of financial resources, whereby the final financial
structure of a particular company is the ratio betweenequity and debt, which
maximizes the unit price of a company’s equity, while presentingthe lowest cost
of company’s financing”(Dubrovski, 2011).
Financial
restructuring in capital structure is done to achieve balanced operative
results. The financial reorganization is necessary to bring a balance in debts
and equity funds, short term and long term financing. With the help of
rebalancing the companies can reduce financial burden, loss of capital, improve
earnings per share, market value and develop better management practices.
The
primary objective of financial restructuring is to take steps that prevent the
company from bankruptcy which will also ensure the short-term survival of the
business. This is the prerequisite for a sustainable restructuring process.
Financial restructuring is the rearrangement of firm’s assets and liabilities.
Financial restructuring is likely to focus on effectively managing assets and
reducing liabilities. Financial restructuring involves the infusion of debt to
either finance leveraged buyouts or to buy back stocks from equity investors,
or to pay dividends. Fox & Marcus (1992) argue that changes in capital
structure can be achieved by recapitalization, conversion of debt into equity
and stock purchase.
According
to Bowman, Singh, Useem & Badhury (1999), restructuring practices can be
identified by changes in the firm’s capital structure. These changes include
debt for equity swaps, leverage buyouts, or some form of recapitalization.
1.2Indian
Economy: Growth and Momentum
Indian economy growth is featured by agricultural
and service sector. Agricultural growth has been subject to large variation
over the decades while service sector growth record is continuing and
consistent. Indian economy growth has gained momentum in early 1990’s due to
various reforms measure taken by Government of India for various sectors of
economy. In the later half of 1990s , there was some loss of growth
momentum which coincided with the onset
of the East Asian financial crisis, setbacks to the fiscal correction process,
quality of fiscal adjustment, decline of agriculture growth, and some
slackening in the pace of structural reforms.
From 2003-04 onwards, various strengthening measures
has been taken by authorities to support sectorial development. Restructuring
measures by domestic industry, overall reduction in domestic interest rates,
improved corporate profitability, supportive investment climate along with
strong global demand and commitment rules-based fiscal policy have led to the
real GDP growth averaging close to 9 per cent per annum over the 4-year period
ended 2006-07.
1.2.1
Performance of Private Sector in Indian Economy
Policy measures and government reform
measures supported Private corporate sector in Global Market. Private sector
tremendously shows improvement in productivity and efficiency due to
application of technology. At macro level, the economic reforms of India have
helped greatly in making the policy environment favorable for entrepreneurial
activity. The corporate tax rate was steadily reduced from 45 per cent in
1992-93 to 30 per cent by 2005-06 and was kept stable thereafter. Monetary
policy has contributed to the sustained moderation in inflation leading to
reduction in nominal interest rates. At micro level, Financial restructuring of
firms has also led to the reduction in overall debt equity ratios in the
corporate sector. The substantial reduction in debt servicing costs has thereby
added to the corporate sector’s competitiveness and profitability.The following
table will provide a glimpse of corporate financial performance since 1990.
