This article has been written by Mr. Rahul Kumar, a 3rd year 5th semester student of Faculty of Law, Banaras Hindu University.

ABSTRACT

Reorganising a company’s ownership, operations, or structure to improve efficiency and competitiveness in the market is known as corporate restructuring. Corporate restructuring in India is regulated by a complicated regulatory structure that seeks to combine safeguarding the interests of many stakeholders with promoting company expansion. This essay examines the legal ramifications of corporate restructuring in India, emphasising significant statutes and authorities that play a role in the procedure.

INTRODUCTION

Under corporate law, a firm can improve its efficiency, economies of scale, and financial performance by pursuing mergers, acquisitions, and downsizing. These business strategies are typically employed to improve the company’s business model in order to accelerate management and technical growth. Acquisitions are when one company buys the operations of another, which could include a subsidiary, its holding company, and an associate company. Mergers are when two or more companies come to an agreement to continue operating as a single entity. However, downsizing describes an employer’s decision to reduce or terminate an ineffective workforce, usually in an effort to weather difficult economic circumstances.

Evolution of corporate restructuring 

Prior to the Economic Reforms Policy of 1991, the economy was regulated, meaning that every facet of business was subject to government interference through laws, regulations, and other frameworks. Prices were set prior to the centralization of the economy and the application of supply and demand. Following the raid of DCM Ltd. and Escorts Ltd., financial institutions have played a more significant part in establishing the entire new trend of corporate restructuring.

Following the reforms of the Industrial Policy of 1991, the economy was decentralised to attract more foreign investment, and globalisation led to an open competition regime for Indian markets. For example, changes were made to the MRTP Act in all sections that were restrictive and discouraged expansion in the industrial sector. Indian and multinational corporations (MNCs) can restructure and reconstruct their companies to meet market synergies and compete in the market to assure profitability and liquidity, thanks to changes in the environment, technology, and capital markets.

It is important to recognise that a global restructuring tsunami is currently reshaping the corporate sector, affecting both large and small organisations and combining old economy conglomerates with new economy businesses. The service and infrastructure industries are heavily involved in the same. One might classify takeovers, mergers, amalgamations, acquisitions, consolidation, and mergers as essential components of the new economic paradigm. Considering how quickly events are changing, it is safe to say that corporate restructuring activities are anticipated to happen more frequently than in the past, putting India quickly on the global stage.

Merger and Acquisition (M&A) Regulations:

In the corporate sector, the idea of corporate restructuring presents a number of opportunities. Numerous entities are able to undergo internal or external rebuilding as a result of unfavourable commercial and economic conditions, rapid technological innovation, and increased rivalry. Enhancing economies of scale, reviving failing industrial units, cutting prices, and gaining access to cutting-edge research and technology are the primary goals. In order to adjust to a changing environment, the concept underwent further evolution and is now undergoing adjustments. The growth and early success of firms is ensured by changes in different regulatory frameworks. The primary regulatory framework, including the SCRA and the Finance Act of 1997, SEBI Takeover Regulations, and others, have been changed in order to drastically modify the Indian takeover market.

Additionally, as a result of growing digitisation and the post-COVID era, a lot of organisations are restructuring to acquire cutting-edge technology for innovations and to effectively compete in the market by upskilling their current and prospectively efficient personnel. It might also entail firing permanent staff members who are ineffective. A rise in digitalization intensifies the emphasis on obtaining and implementing cloud computing, AI mechanisms, data-driven information utilities, and cybersecurity.

Legal Requirements of Corporate Restructuring

The development and growth of the corporation are significantly influenced by mergers, acquisitions, and downsizing; these activities are governed by a number of laws. These schemes are governed by a number of statutes, regulations, rules, orders, and notifications, and they are implemented by a number of sectoral regulators, including the Central Government, RBI, SEBI, CCI, RoC, and others.

Corporate Restructuring under The Companies Act, 2013

Under Sections 230–240 of the Companies Act, 2013, enabling provisions pertaining to compromise, agreements, and amalgamations are provided. Acquisitions, mergers, and downsizing are all components of a business plan or compromise that a firm makes to maintain growth or take advantage of current economic synergy. A process that must be followed when a compromise or arrangement is made in connection with a merger or amalgamation plan is outlined in Section 232 of the Act.

Section 233 of the entities Act, 2013 permits specific entities, including small businesses, their holding companies, and subsidiary companies, to choose to merge or amalgamate quickly. The Central Government may approve these enterprises’ use of expedited procedures at its discretion and may also place restrictions on them. The corporation had to adhere to Sections 230–232 for any arrangement plans with members or creditors.  

Corporate  Restructuring under the Competition Act, 2002

The Competition Act of 2002 provides information on the economic aspects of mergers and combinations. This Act calls for the creation of a commission to oversee the market and safeguard the economy from actions that might materially harm competition. The Competition Act refers to a merger and acquisition as a combination. Section 6 of the Act provides clarification on the regulation of combinations. This act required that, within 30 days after receiving board of directors approval, a notification of the proposed combination be submitted to the commission. The Competition Commission of India is authorised by Section 29 to look into the accuracy of information disclosed to it under Section 6 and whether a proposed merger would negatively impact competition. CCI may give parties a show-cause notice explaining why an investigation won’t be conducted against them if it has reasonable suspicions that a particular transaction may affect the competition. Within seven days of receiving the response, CCI is entitled to request the DG’s report.

The commission may recommend modifications even after soliciting public suggestions and objections if it determines that the proposed combination will materially harm competition. Such a combination will only be approved if the parties agree to the modifications or if the CCI accepts the parties’ proposed amendments.

Any failure to provide such notice or declaration will result in a penalty being imposed under Section 43A of the Act against such person, association of persons, enterprise, or association of enterprises.

Corporate Restructuring through the lenses of Insolvency and Bankruptcy Code, 2016

A firm is said to be insolvent if its assets are insufficient to cover its liabilities. In order to settle debts and liabilities and improve the company’s situation, creditors or corporate debtors must adhere to the framework and processes outlined in the IBC. The Corporate Insolvency Resolution Process (CIRP), which can be started by a financial creditor, an operational creditor, or the corporate debtor itself, is covered in Chapter II of the Code. In the event that CIRP fails, debtors will go through a liquidation process, during which the liquidator will realise and distribute their assets. 

This Code offers methods for reconstruction as well as debt recovery, unlike the Sick Industrial Companies Act of 1985 (since abolished). The company’s operations can be revived by mergers, acquisitions, or downsizing, but an application must be submitted to NCLT first.  

Corporate Restructuring under Income Tax Act, 1961

As per the Income Tax Act, 1961, merger and acquisition are referred to as “amalgamation,” and merging companies are termed “amalgamating companies.” Tax benefits and exemptions differ from the structure of amalgamation. Amalgamation must be confirmed with certain conditions in order for it to be considered tax neutral along with fulfilling requirements under the Companies Act, 2013

A merger will be considered an amalgamation for the purpose of the Income Tax Act, 1961, when:

1. All the properties and liabilities of an amalgamating company becomes property and liability of an amalgamated company.
2. Shareholders holding at least 3/4th in value of shares in amalgamating company became the shareholders of amalgamated company.

Section 47 of the Act exempts amalgamating companies from capital gains tax on the transfer of capital assets to the amalgamated company. Similarly, when one foreign company amalgamates with another foreign company that has shares of an Indian company, the gain is not taxable if it is not taxable under the provisions of the foreign company. The only requirement is that 25% of the amalgamating company’s shareholders remain shareholders in the amalgamated company.

Any costs incurred by the merging firm for scientific research that are transferred to an Indian amalgamated company are eligible to be carried forward and deducted. If the combined company sells such an asset, any proceeds over the cost will be taxed as capital gains, and the asset’s cost would be regarded as business income. For instance, if a 10 lakh item is sold for 15 lakh, the 5 lakh that is above the cost price will be subject to capital gains tax.

Effect of cross-border transactions on India 

It is possible to carry out corporate restructuring outside of India, and it might involve international businesses. Due to globalisation, there are now more opportunities for Indian and international businesses to oversee or guide the management of other businesses. This enables each company rebuild or revitalise itself and opens up the market to two jurisdictions. There are two kinds of cross-border transactions: acquisitions or mergers between Indian and international businesses, or the opposite. A number of additional statutes as well as Section 234 of the Companies Act of 2013 have governed it.

Growing cross-border trade makes India more visible in international markets, which boosts the country’s economy’s growth, diversification, and technical improvement, among other factors. Small businesses are now able to compete with larger, international corporations because to this. The expansion and liquidity of the economy as a whole are improved by these transactions and different regulatory clearances.

CONCLUSION

Corporate restructuring techniques include downsizing, acquisitions, and mergers. These kinds play a significant role in the expansion and development of Indian marketplaces and need a number of regulatory clearances in order to operate effectively. While downsizing is typically an internal restructuring technique that entails removing ineffective individuals or workers from the organisation, mergers and acquisitions require external restructuring.  These actions are taken by a firm based on a number of variables, including its goals and objectives, management, life cycle, development stage, and corporate profile. That varies depending on the business. In order to optimise the benefits of corporate restructuring, it is imperative that companies adhere to legal frameworks and obtain timely approvals in compliance with industry-specific regulations. Businesses should constantly get professional assistance to ensure that they are adhering to all regulations in order to avoid facing severe fines for breaking the law.  

REFRENCES

• This article was originally written by Achint Kaurt published on scconline.com. The link for the same is herein https://www.scconline.com/blog/post/2022/09/17/key-ma-trends-digital-transformation/
• This article was originally written by R. Kumar published on taxguru.in. The link for the same herein https://taxguru.in/corporate-law/corporate-restructuring-india.html#:~:text=In%20earlier%20years%2C%20India%20was,policies%20and%20rigid%20regulatory%20framework
• This article was originally written by N. Venkiteshwaran published on journals.sagepub.com. The link for the same is herein https://journals.sagepub.com/doi/pdf/10.1177/0256090919970301
• This article is written by Kanchan Yadav and Dr. Sanjay Guha and published on papers.ssrn.com. The link for the same is herein https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3310189
• This article was originally written by Annapoorna published on cleartax.in. The link for the same is herein https://cleartax.in/s/corporate-restructuring