Types of Corporate Restructuring

Ind AS 103, which deals with Business Combinations, does not directly apply to demergers in the same way it applies to mergers or acquisitions. While demergers involve the division of a company, they are not considered a business combination under the standard’s definition unless the resulting entities are under common control.

A demerger involves transferring a part or all of a company’s undertaking to another entity. It can be structured as a transfer of assets and liabilities to an existing company or a newly formed one.

Ind AS 103 defines a business combination as the acquisition of control of one or more businesses.

Applicability of Ind AS 103 : Ind AS 103 applies to transactions where one entity (the acquirer) obtains control of another entity (the acquiree).

Demergers and Common Control: When a demerger results in entities under common control, Ind AS 103 is not directly applicable. In such cases, the accounting is often done using the “pooling of interests” method, where assets and liabilities are carried at their existing book values.

Demergers and Unrelated Entities: If a demerger involves transferring a business to an unrelated entity, it may be viewed as an acquisition from the perspective of the receiving entity. In such cases, Ind AS 103 might be relevant for the receiving entity, requiring fair valuation of the acquired assets and liabilities.

In conclusion: While Ind AS 103 is a crucial standard for business combinations, its direct applicability to demergers depends on the specific structure and whether the resulting entities are under common control. If the demerger involves an unrelated entity and the acquisition of control, then Ind AS 103 may be relevant for that specific transaction.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2A(ii) (Syllabus 2022).

(i)Tax Aspects on Slump Sale

As per section 2(42C) of Income-tax Act, 1961, slump sale is defined as transfer of one or more undertakings (on a going concern basis or during winding-up) as a result of sale for a lump-sum consideration without values being assigned to individual assets and liabilities.

As per section 50B (1) of the Income Tax Act, 1961:-

•any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains from the transfer of long-term capital asset and shall be deemed to be the income of the previous year in which the transfer took place:

•Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assesee for not more than thirty-six months immediately preceding the date of transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

However, even in case of long-term capital asset, no indexation benefit is available for slump sale transaction, which increases the tax liability.

Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking.

(ii)Tax Aspects on Demerger

Demerger is a corporate partition of a company into two or more undertakings, thereby retaining one undertaking with it and transfer- ring the other undertaking to the Resulting Company.

Section 2(19AA) of the Income-tax Act, 1961 defines demerger and provides tax benefits, subject to fulfilment of certain conditions namely:

(i)The demerger satisfies all the conditions laid down in section 2 (19AA); and

(ii)The resulting company is an Indian company.

As per section 47 of the Income-tax Act, 1961, following transfers will not be regarded as a transfer for the purpose of capital gains and hence not subject to income tax: where there is a transfer of any capital asset in a demerger by Demerged Company to Resulting, Company provided the Resulting Company is an Indian company

•Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if— (a) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and (b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated : Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of demergers referred to in this clause;

•any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in the Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if— (a) the shareholders, holding not less than three-fourths in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and (b) such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated: Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1 of 1956) shall not apply in case of demergers referred to in this clause;

•any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking;

Additional income tax benefits available in a scheme of demerger include:

•Expenditure for obtaining licence to operate telecommunication services [Section 35ABB]

•Expenditure for obtaining Spectrum to operate telecommunication services [Section 35ABA]

•Amortisation of certain preliminary expenses [Section 35D]

•Treatment of expenditure on prospecting, etc. of certain minerals [Section 35E(7A)]

•Treatment of bad debts [Section 36(1)(vii)]

•Amortisation of expenditure in case of amalgamation or demerger [Section 35DD]

•Carry forward and set off of business losses and unabsorbed depreciation of the demerged company [Section 72A (4)&(5)]

•Deduction available under section 80-1A(12) or 80-1B(12)

•Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(b) (Syllabus 2017).

The resulting company shall be eligible for tax concessions only if the following two conditions are satisfied:

(i)The demerger satisfies all the conditions laid down in section 2 (19AA); and

(ii)The resulting company is an Indian company.

The following concessions are available to the resulting company pursuant to a scheme of demerger:

(i)Expenditure for obtaining licence to operate telecommunication services [Section 35ABB]

The provisions of the section 35ABB of the Income Tax Act, 1961 relating to deduction of expenditure, incurred for obtaining licence to operate communication services shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the latter had not transferred the licence and the amalgamated company or the resulting company is an Indian company.

(ii)Expenditure for obtaining Spectrum to operate telecommunication services [Section 35ABA]

The provisions of the section 35ABA of the Income Tax Act, 1961 relating to deduction of expenditure, incurred for obtaining spectrum to operate communication services shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the spectrum and the amalgamated company or the resulting company is an Indian company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 3(a) (Syllabus 2017).

In the case of demerger, the existing shareholders of the demerged company will hold after demerger:

(a)shares in resulting company; and

(b)shares in demerged company.

And in case the shareholder transfers any of the above shares subsequent to the demerger, the cost of such shares shall be calculated as under: –

Cost of acquisition of shares in the resulting company [Section 49(2C)]

The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger.

Cost of acquisition of shares in the demerged company [Section 49(2D)]

The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C).

For the above purpose, net worth shall mean the aggregate of the paid-up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger.

Period of holding of shares of the resulting company [Section 2(42A)(g)]

In the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2A(iii) (Syllabus 2022).

Divestiture means selling or disposal of assets of the company or any of its business undertakings/ divisions, usually for cash (or for a combination of cash and debt) and not against equity shares to achieve a desired objective, such as greater liquidity or reduced debt burden. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

Reasons for Divestitures

•Huge divisional losses

•Continuous negative cash flows from a particular division

•Difficulty in integrating the business within the company

•Unable to meet the competition

•Better alternatives of investment

•Lack of technological upgradations due to non-affordability

•Lack of integration between the divisions

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(b) (Syllabus 2017).

A scheme of compromise or arrangement, that leads to either amalgamation, merger or demerger needs to be fair and reasonable and made in good faith, is fit for sanction by the Tribunal.

It was held in the case of Sussex Brick Co Ltd that although it might be possible to find faults in a scheme that would not be sufficient ground to reject it. In order to merit rejection, a scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence.

It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies with the basic requirements to the extent of 100 per cent. It is consistent view of the Courts that no scheme can be said to be fool proof and it is possible to find faults in a particular scheme but that by itself is not enough to warrant a dismissal petition for sanction of the scheme.

In the case of Re Kami Cement & Industrial Co Ltd, it was held that if the Court is satisfied of the scheme is fair and reasonable and in the interest of the general body of shareholders, there could be no scope for any provision favouring dissentients. For such a provision is not a sine qua non to sanctioning a fair and reasonable scheme, unless any special case is made out which warrants the exercise of court’s discretion in favour of the dissentients.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(d) (Syllabus 2017).

Takeovers that occur without consent of acquired company/ target company are commonly called hostile takeovers. Here earlier attempt by ZYZ Ltd. to give open offer for Controlling stake and onboarding two directors in ABC Ltd. can be termed as hostile. But subsequent agreement and steps taken for demerger of Product O business and then taking 51% stake in TRM Ltd. give narrative of agreed/ friendly acquisition.

Taking of controlling stake in ABC Ltd. only for product O business seems hostile takeover and unnecessarily being saddled with burden of managing of L, M and N product segments of ABC Ltd. when company XYZ Ltd. is really interested in taking product O business of ABC Ltd. Moreover, complexity of compliances/approvals/cross border issues will also increase. Demerger into TRM Ltd. seems more focused approach.

Pursuant to Section 230 of the Companies Act, 2013, a company may propose for compromise or arrangement with its creditors or its members which may include reduction of share capital of the company and NCLT will permit the same under section 230 and 232 of companies Act, 2013, separate compliance under section 66 is not required.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(b) (Syllabus 2022).

In a spin off, the shares of the new entity are distributed to the shareholders of the parent company on a pro-rata basis. There are two approaches in which Spin offs may be conducted.

In the first approach, the company distributes all the shares of the new entity to its existing shareholders on a pro-rata basis. This leads to the creation of two different companies holding the same proportions of equity as compared to the single company existing previously.

The second approach is the floatation of a new entity with its equity being held by the parent company. The parent company later sells the assets of the spun off company to another company.

In both the approaches, the parent company also retains ownership in the spin-off entity.

A spinoff may occur for various reasons, such reasons may include:

i.A company may conduct a spinoff so it can focus its resources and better manage the division that has more long-term potential.

ii.Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary as spinoffs. For Example, a company might spin off one of its mature business units that are experiencing little or no growth so it can focus on a product or service with higher growth prospects.

iii.a portion of the business is headed in a different direction and has different strategic priorities from the parent company, the company may adopt spin off so it can unlock value as an independent operation.

The downside of spin off is that their share price can be more volatile and can tend to underperform in weak markets and outperform in strong markets. Spinoffs can also experience high selling activity and the share price may dip in the short term because of this selling activity, even if the spin offs long term prospects are positive.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(e) (Syllabus 2017).

A slump sale means a sale that has a lump sum price as consideration without attributing values to the individual assets and liabilities disposed. Normally, sale of capital assets results in capital receipt and any profit derived is liable for capital gains in certain case.

The Supreme Court in the case of CIT vs. West Cast Chemicals and Industries Ltd. held that a slump sale price paid is an appreciation of capital but not arising out of trading. In the case of CIT vs. Mungeeram Bangar & others it was held that mere fact that in the schedule price of land was stated does not lead to conclusion that part of the slump price is attributable to the land sold.

Gujarat High Court also recognized the sale of undertaking as a whole as a going concern creates liability of Capital Gain Tax { Sarabhai M. Chemicals Pvt. Ltd. (126 ITRI)}.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(c) (Syllabus 2017).

Equity carve-outs are referred to a percentage of shares of the subsidiary company being issued to the public. This method leads to a separation of the assets of the parent company and the subsidiary entity. Equity carve-outs result in publicly trading the shares of the subsidiary entity. In other words, a company takes out one of the businesses and creates a separate company to handle that part of the business.

1.India's largest engineering and Construction Company Larsen and Tourbo (L&T) adopted "asset-lights strategy" by separating business units into independent subsidiaries by selling a stake in business. The Company, which is considered a corporate proxy for the broader economy, divested its assets as a way to generate capital for investing in fresh projects.

2.In 2017, the Government of India divested 10 per cent stake in Coal India Limited through the Offer-For-Sale (OFS) route at Rs.358 per share and brought its holding to 79.65 per cent.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 3(c) (Syllabus 2017).

Where a foreign company holds any shares in an Indian company and transfers the same in case of a demerger, to another resulting foreign company, such transaction will not be regarded as transfer for the purpose of capital gain under the Income Tax Act, 1961 if the following conditions are satisfied:

(a)The shareholders holding not less than three-fourth in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company, and

(b)Such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 3(e) (Syllabus 2017).

The facts of the case are similar to a case decided by Supreme Court in CIT vs. Veerabhadra Rao (T), K. Koteswara Rao & Co (1985) 155 ITR 152 (SC) . In this case the Supreme Court observed that if a business, along with its assets and liabilities, is transferred by one owner to another, there was no reason as to why the debts so transferred should not be entitled to the same treatment in the hands of the successors. In this case, it was decided that where due to demerger, the debts of the demerged company have been taken over by the resulting company and later if such debt or part thereof turns out to be bad, such bad debt will be allowed as a deduction to the resulting company. Hence MN Ltd can claim the bad debts as deduction in its books, subject to the following conditions-

i.The amount of such bad debt or part thereof should be written off as irrecoverable in the accounts of MN Ltd for the previous year.

ii.The amount of deduction relating to any such debt or part thereof shall be restricted to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(i) (Old syllabus).

Divestiture means selling or disposal of assets of the company or any of its business undertakings/ divisions, usually for cash (or for a combination of cash and debt) and not against equity shares to achieve a desired objective, such as greater liquidity or reduced debt burden. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

For example : XYZ Ltd. is the parent of a food company, a car company, and a clothing company. If XYZ Ltd. wishes to go out of the car business, it may divest the business by selling it to another company, exchanging it for another asset, or closing down the car company.

Reasons for Divestitures

1.Huge divisional losses

2.Continuous negative cash flows from a particular division

3.Difficulty in integrating the business within the company

4.Unable to meet the competition

5.Better alternatives of investment

6.Lack of technological upgradations due to non-affordability

7.Lack of integration between the divisions

8.Legal pressures

E.g. Nestle is selling its US chocolate business, which includes brands such as BabyRuth, Butterfinger, and Crunch to Ferrero for US$2.8 billion. The deal is part of Nestle’s strategy to sell underperforming brands and refocus on healthier products and fast-growing markets.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 1(b) (Syllabus 2017).

Splits involve dividing the company into two or more parts with an aim to maximize profitability by removing stagnant units from the mainstream business. Splits can be of two types, Split-ups and Split-offs.

Split-ups : It is a process of reorganizing a corporate structure whereby all the capital stock and assets are exchanged for those of two or more newly established companies resulting in the liquidation of the parent corporation.

Split-offs : It is a process of reorganizing a corporate structure whereby the capital stock of a division or subsidiary of corporation or of a newly affiliated company is transferred to the stakeholders of the parent corporation in exchange for part of the stock of the latter. Some of the shareholders in the parent company are given shares in a division of the parent company which is split off in exchange for their shares in the parent company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(e) (Syllabus 2017).

A slump sale means a sale has a lump sum price as consideration without attributing values to individual assets and liabilities disposed. Normally, sale of a capital asset results in capital receipt and any profit derived is liable for capital gains in certain cases. This is also true in the case of sale of an undertaking.

Supreme Court in the case of CIT v. West Coast Chemicals and Industries Ltd. – 46 ITR 135 held that a slump price paid is an appreciation of capital but not a profit arising out of trading. Further in CIT v. Mugneeram Bangur and Co. , - 57 ITR 299 it was held that the mere fact that in the schedule the price of land was stated does not lead to the conclusion that part of the slump price is attributable to the land. Gujrat High Court also recognised that sale of undertaking as a going concern creates liability of Capital Gains tax.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 1(b) (Old syllabus).

Any scheme which is fair, reasonable and made in good faith will be sanctioned if it could reasonably be supported by sensible people to be for the benefit to each class of the members or creditors concerned. In Sussex Brick Co. Ltd. , Re, (1960) 1 All ER 772: (1960) 30 Com Cases 536 (CH D) it was held, inter alia, that although it might be possible to find faults in a scheme that would not be sufficient ground to reject it.

It was further held that in order to merit rejection, a scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies with the basic requirements to the extent of 100 per cent. It is the consistent view of the Courts that no scheme can be said to be fool-proof and it is the possible to find fault in a particular scheme but that by itself is not enough to warrant a dismissal.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2A(i) (Old syllabus).

‘Demerger’ is a form of corporate restructuring in which the entity's business operations are segregated into one or more components. In simple words, it means division or separation of different undertakings of a business functioning under a common corporate umbrella, it is in fact a corporate partition of a company in two undertakings. A demerger is often done to help each of the segments operate more smoothly, as they can focus on a more specific task after demerger.

Demerger under section 2(19AA) of the Income-tax Act, 1961 means the transfer, pursuant to a scheme of arrangement under section 230 to 232 of the Companies Act, 2013, by a demerged company of its one or more undertakings to the resulting company.

‘Slump sale’ is transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities. If a company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined lump sum consideration called slum price, then it results in a slump sale.

Section 2(42C) of the Income-tax Act, 1961, recognizes ‘slump sale’ as a transfer of an ‘undertaking’ i.e. a part or a unit or a division of a company, which constitutes a business activity when taken as a whole. Sale includes transfer of an asset from one person to another for some consideration, where consideration can be in kind or in cash.

The conceptual difference lies in the valuation methodology and the end purpose to be achieved for the specific action taken.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(c) (Old syllabus).

Broadly speaking, management is prompted to resort to corporate restructuring either for financial or other reasons. Financial reasons could be to reduce risk; increase operating efficiency; improve access to financial market; or to avail tax benefits. Other reasons could be to expand marketing and management capabilities; explore new products for development; avail synergistic benefits; or revive a sick company. Insolvency and Bankruptcy Code, 2016 has created one more window to submit resolution plan in a Corporate Insolvency Resolution Process.

Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business i.e., monopolies, goodwill, exclusivity through licensing, etc. to enhance the competitiveness advantages. Thus, restructuring helps in bringing an edge over competitors.

Prominent mergers/ demergers or acquisitions that took place recently are Flipkart acquiring Myntra, Asian Paints acquiring Ess Ess Bathroom products, RIL acquiring Network 18, Merck acquiring Sigma, Sun Pharma absorbing Ranbaxy; Tata Power acquiring PT Arutimin Indonesia, Reliance Industries demerger, Whitbread plc. demerged Costa Coffee and Sintex demerger.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 1(c) (Syllabus 2017).

The year 2008 witnessed the Global Economic Crisis, thereby, bringing the economic growth across the globe to a grinding halt. A survey and study by New Zealand Trade & Enterprise revealed acquisitions and strategic alliances as a key factor to overcome economic recession to strengthen, re-focus and position the company for increased growth and profitability. The mentioned research study has also identified that Companies made acquisitions to access new markets, products, technologies, customers and talent at an accelerated pace. There were the examples of organizations that have adopted, survived and prospered during recessionary periods. All the companies studied, achieved dramatic increase in growth and profitability during the period of economic downturn or in the following recovery period.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2(a) (Old syllabus).

Any sale of an undertaking as a going concern for a lump sum consideration is a slump sale in which values are not assigned to individual assets and liabilities that are sold. Normally, any sale of a capital asset is considered as capital receipts and subjected to capital gain tax and stock in trade is subjected to tax as revenue profit or loss.

Supreme Court held in CIT v. West Coast Chemicals and Industries Ltd. 46 ITR 135 and CIT v. Mugneeram Bangur & Co 57 ITR 299, where a slump price is paid, and no portion is attributable to the stock-in-trade, since it may not be possible to say that there is a profit other than what is resulted as the appreciation of capital.

Gujarat and Bombay High Courts have also held that there will be a capital gain only when a sale of business as a whole occurs. Undertaking of a business is a capital asset as its disposal at slump price is capital receipt which can attract capital gain tax alone.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 3(a) (Old syllabus).

Based on Section 68 of the Companies Act, 2013, the maximum quantum of buy-back is 15,000 shares (25% of total shares of 60,000) amounting to a maximum cost of ₹ 37,50,000 (25% of aggregate of paid-up capital + free reserves). The debt-equity ratio after buy back remains well within the 2:1 limit.

1.Calculation of Maximum Quantum: -

•Total Shares: 60,000 Equity Shares

•Maximum Shares (25% rule): 60000 * 25% = 15000;

•Offer Price: ₹ 250

•Maximum Amount (Shares): 15000 * 250 = ₹ 37.50 Lakh

2.Financial Capability (25% of aggregate of Paid-up Capital + Free Reserves)

•Equity Share Capital: ₹ 60,00,000 (60000 * ₹ 100)

•Add: General Reserve: ₹ 36,00,000

•Add: P&L (Cr): ₹ 40,00,000

•Add: Security Premium: ₹ 4,00,000

•Total Net Worth: ₹ 1,40,00,000

•Max Buy-back Value Allowed: 25% of 1,40,00,000 = ₹ 35 Lakh;

3.Conclusion

The maximum amount allowed by the 25% net worth criteria ( ₹ 35,00,000) is lower than the amount required for 25% of the shares ( ₹ 37,50,000). Therefore, the number of shares must be limited based on the financial capacity: -

•Maximum Number of Shares: 35 Lakh / Rs. 250 = 14000 shares;

•Maximum Amount of Buy-back: ₹ 35,00,000

Before buy-back:

Secured Loan = ₹ 40,00,000 and Unsecured Loan =₹ 20,00,000

Debt = 40,00,000 + 20,00,000 = ₹ 60,00,000 Net Worth = ₹ 1,40,00,000

Debt-Equity Ratio:

60,00,000/1,40,00,000 = 0.43:1

After buy-back:

Net Worth = 1,40,00,000 − 35,00,000 = ₹ 1,05,00,000

Debt Equit Ratio (after Buy Back) = 60,00,000/1,05,00,000 = 0.57:1

Both are well within the statutory limit of 2:1.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 2A(ii) (Syllabus 2022).

Divestiture means selling or disposal of assets of the company or any of its business undertakings/ divisions, usually for cash (or for a combination of cash and debt). Divestiture will allow the company to shed non-core assets, unlocking capital that can be redeployed in more profitable and emerging business opportunities. Equity carve-outs are referred to a percentage of shares of the subsidiary company being issued to the public. This method leads to a separation of the assets of the parent company and the subsidiary entity. In equity carve out the key benefit is that the parent company can sell a minority stake (e.g., via an IPO) while still maintaining control over the rest.

As a strategic advisor an equity carve-out is suggested over a complete divestiture because it unlocks the subsidiary’s value by establishing a market price, generates capital without giving up full control and at the same time allows a clearer focus on core operations for both entities. The carve out option satisfies the management who does not wish to lose control over their nurtured units and stakeholders who wish to unlock values to utilise those resources on core areas.

Further, the following reasoning was being given to gain approval for debt restructuring, buyback and acquisition :

Capital/Debt restructuring will help improve return ratios and align the capital structure with the company’s growth strategy. A share buyback can be used to return excess cash to shareholders, signal management’s confidence in the company’s future, and improve EPS and ROE. All mergers and acquisitions have one common goal to create synergy that makes the value of the combined companies greater than the sum of the two parts.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 1(a) (Syllabus 2022).

Regulation 11 of Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 deals with the Extinguishment of certificate and other closure compliances. It states that:

(i)The company shall extinguish and physically destroy the securities certificates so bought back in the presence of a registrar to an issue or the Merchant Banker and the secretarial auditor within fifteen days of the date of acceptance of the shares or other specified securities.

It may be noted that the company shall ensure that all the securities bought-back are extinguished within seven working days of expiry of buy-back period.

Explanation : The aforesaid period of fifteen working days shall in no case extend beyond seven working days of expiry of buy-back period.

(ii)The shares or other specified securities offered for buy-back if already dematerialised shall be extinguished and destroyed in the manner specified under the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, and the bye-laws, the circulars and guidelines framed thereunder.

(iii)The company shall, furnish a certificate to the Board certifying compliance as specified in sub-regulation (i) above, and duly certified and verified by:

a)the registrar and whenever there is no registrar, by the merchant banker;

b)two directors of the company, one of whom shall be a managing director, where there is one; and

c)the secretarial auditor of the company,

Explanation: This certificate shall be furnished to the Board within seven working days of the extinguishment and destruction of the certificates.

(iv)The company shall furnish the particulars of the securities certificates extinguished and destroyed under sub-regulation (i), to the stock exchanges where the shares of the company are listed within seven days of extinguishment and destruction of the certificates.

(v)Where a company buys back its shares or other specified securities under these regulations, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed in sub-section (9) of section 68 of the Companies Act.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 1(b) (Syllabus 2022).

(i)Filing Declaration of Solvency with SEBI/ROC (Rule 17(3) of the Companies (Share Capital and Debentures) Rules, 2014)

When a company proposes to buy-back its own shares or other specified securities under this section in pursuance of a special resolution or board resolution as the case may be, it shall, before making such buy- back, file with the Registrar along with the letter of offer and the Securities and Exchange Board (in case of listed companies), a declaration of solvency in Form No. SH-9 signed by at least two directors of the company, one of whom shall be the managing director, if any, in such form as may be prescribed and verified by an affidavit as specified in said form.

(ii)Dispatch of letter of Offer (Rule 17(4) of the Companies (Share Capital and Debentures) Rules, 2014)

The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 1(b) (Syllabus 2017).

Regulation 19 of the SEBI (Buy-Back of Securities) regulations, 2018 deals with Buy–back of physical shares or other specified securities

A company may buy-back its shares or other specified securities in physical form through open market method as provided hereunder:

(a)a separate window shall be created by the stock exchange, which shall remain open during the buyback period, for buy-back of shares or other specified securities in physical form.

(b)the company shall buy-back shares or other specified securities from eligible shareholders holding physical shares through the separate windows specified in clause (a), only after verification of the identity proof and address proof by the broker.

(c)the price at which the shares or other specified securities are bought back shall be the volume weighted average price of the shares or other specified securities bought-back, other than in the physical form, during the calendar week in which such shares or other specified securities were received by the broker:

Provided that the price of shares or other specified securities tendered during the first calendar week of the buyback shall be the volume weighted average market price of the shares or other specified securities of the company during the preceding calendar week.

Explanation: In case no shares or other specified securities were bought back in the normal market during calendar week, the preceding week when the company has last bought back the shares or other specified securities may be considered.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2A(iii) (Syllabus 2017).

The amount of buyback of shares will be the least of the following two amounts:

Paid up capital before buyback ₹ 12,00,000

Free reserves ₹ 18, 00,000

Total paid up capital & free reserves ₹ 30, 00,000

(1)25% of free reserves & paid-up capital ₹ 7,50,000

(2)Amount of equity available after satisfying minimum post buyback debt/equity ratio is ₹ 18,00,000

Post buyback debt/equity ratio is calculated as follows:

Debt/equity ratio=debt (after buyback) / equity (after buyback)

2= (25, 00,000+11, 00,000)/ equity

Equity=36, 00,000 /2 =Rs.18, 00,000

Amount of equity available for buyback = equity before buyback-equity required after buyback. =Rs. (36,00,000-18,00,000) =Rs.18,00,000 Amount of buyback permissible is Rs.7,50,000

(i.e. lower of the two amounts Rs.7, 50,000 & Rs.18, 00,000)

Number of shares to be bought @ Rs.50= 750000 =15,000

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(a) (Syllabus 2017).

According to Section 68(1) of the Companies Act, 2013, a company whether public or private, may purchase its own shares or other specified securities (hereinafter referred to as “buy-back”) out of:

(i)its free reserves; or

(ii)the securities premium account; or

(iii)the proceeds of any shares or other specified securities.

The buy-back shall be authorised by its articles.

Quantum of Buy-back

(a)Board of directors can approve buy-back upto 10% of the total paid-up equity capital and free reserves of the company and such buyback has to be authorized by the board by means of a resolution passed at the meeting. Free reserve includes share premium also.

(b)Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company. In respect of any financial year, the shareholders can approve by special resolution up to 25% of total equity capital in that year. Debt equity ratio post buy back should not exceed 2:1.

Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

In case the number of shares or other specified securities offered by the shareholders or security holders is more than the total number of shares or securities to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.

In the present case, since the paid-up equity capital, share premium and free reserves is Rs. 41,800 crores as per the latest audited financial statement, the Board can authorise through a resolution passed at its meeting the buyback of shares totaling Rs. 4180 crore, which is less than the Rs. 4204.51 crore which company wants to buyback. Shareholders in their meeting can by special resolution approve buyback up to 25% of Paid up capital and free reserves. So, 25% of 41800 crore i.e. Rs. 10450 crore can be bought back.

After the completion of the buyback scheme for Rs. 4204.51 crore, the company’s paid up capital and free reserve would drop to Rs 37,595.49 crore (Rs. 41800 crores minus Rs. 4204.51 crore) and total secured and unsecured debts is Rs. 1867 crore. Thus, the debt equity ratio is after by back scheme has been fully completed would be 0.0496, which is less than the stipulated 2:1. Hence, PQR Limited can proceed with the proposed buy back scheme by passing a special resolution passed at the shareholders meeting.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(a) (Syllabus 2022).

The following are the provisions for Escrow Account for open market buy back through stock exchange:

a)The company shall, within two working days of the public announcement, as and by way of security for performance of its obligations under the regulations, deposit in an escrow account such sum as specified as below

b)The escrow amount shall be payable in the following manner:

i.if the consideration payable does not exceed Rupees100 crores;25 per cent of the consideration payable;

ii.if the consideration payable exceeds Rupees100 crores; 25 per cent upto Rupees100 crores and 10 percent thereafter.

c)The escrow account referred to in this regulation shall, subject to appropriate margin as specified by the Board, consist of,

i.cash including bank deposits deposited with any scheduled commercial bank, or

ii.bank guarantee issued in favour of the merchant banker by any scheduled commercial bank, or

iii.deposit of frequently traded and freely transferable equity shares or other freely transferable securities, or

(iiia)government securities, or

(iiib)units of mutual funds invested in gilt funds and overnight schemes, or

iv.a combination of above

Explanation : The cash component of the escrow account may be maintained in an interest-bearing account, provided that the merchant banker ensures that the funds are available at the time of making payment to shareholders.

d)Where the escrow account consists of deposit with a scheduled commercial bank, the company shall, while opening the account, empower the merchant banker to instruct the bank to make payment the amount lying to the credit of the escrow account, as provided in the regulations.

e)Where the escrow account consists of a bank guarantee, such bank guarantee shall be in favour of the merchant banker and shall be valid until thirty working days after the expiry of buy-back period or until the completion of all obligations under these regulations, whichever is later.

Explanation : The bank guarantee shall not be returned by the merchant banker until the completion of all obligations under these regulations.

f)The company shall, in case the escrow account consists of securities, empower the merchant banker to realise the value of such escrow account by sale or otherwise and if there is any deficit on realisation of the value of the securities, the merchant banker shall be liable to make good any such deficit.

g)In case the escrow account consists of approved securities, these shall not be returned by the merchant banker till completion of all obligations under the regulations.

h)Where part of the escrow account is in a form other than cash, the company shall deposit with a scheduled commercial bank, in cash, a sum of not less than two and half per cent of the total amount earmarked for buyback as specified in the resolution of the Board of Directors or the special resolution, as the case may be, as security for the fulfilment of its obligations under the regulations.

I)On payment of consideration to all the securities holders who have accepted the offer and after completion of all formalities of buy-back, the amount, guarantee and securities in the escrow, if any, shall be released to the company.

j)The Board in the interest of the securities holders may in case of nonfulfillment of obligations under the regulations by the company forfeit the escrow account either in full or in part

The amount forfeited under clause (j)may be distributed pro rata amongst the securities holders who accepted the offer and balance, if any, shall be utilised for investor protection.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(c) (Syllabus 2017).

Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buyback has to be authorized by the board by means of a resolution passed at the meeting.

Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company. In respect of any financial year, the shareholders can approve by special resolution up to 25% of total equity capital in that year.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back should not be more than twice the paid-up capital and its free reserves i.e., the ratio shall not exceed 2:1.

In the present case, since the paid-up equity capital and free reserves is Rs. 41, 578 crores as per the latest audited financial statement, the Board can authorise through a resolution passed at a meeting the buyback of shares totalling Rs. 3911.15 crore, which is less than the prescribed 10% limit (i.e., Rs. 4157.80 crore).

After the completion of the buyback scheme for Rs. 3,911.15 crore, the comp any’s paid up capital and free reserve would drop to Rs. 37,666.85 crore (Rs. 41578 crores minus Rs. 3911.15 crore) and total secured and unsecured debts is Rs. 2550 crore. Thus, the debt equity ratio is after by back scheme has been fully completed would be 0.068, which is less than the stipulated 2:1.

Hence, PQR Limited can proceed with the proposed buy back scheme by passing a resolution passed at the meeting of its Board of Director.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 1(d) (Syllabus 2017).

As per Regulation 25 of SEBI (Buy-Back of Securities) Regulations, 2018, the obligations of Merchant Banker include ensuing the following:

a.the company is able to implement the offer

b.the provision relating to escrow account has been complied with

c.firm arrangements for monies for payment to fulfil the obligations under the offer are in place

d.the public announcement of buy-back is made and the letter of offer has been filed in terms of the Regulations.

e.the merchant banker should furnish to SEBI, a due diligence certificate which should accompany the draft letter of offer

f.the merchant banker should ensure that the contents of the public announcement of offer as well as the letter of offer are true. fair and adequate and quoting the source wherever necessary

g.the merchant banker should ensure compliance of Section 68, 69 and 70 of the Companies Act. and any other applicable laws or rules in this regard has been made

h.upon fulfilment of all obligations by the company under the Regulations, the merchant banker should inform the bank with whom the escrow or special amount has been deposited to release the balance amount to the company and send a final report to SEBI in the specified form, within 15 days from the date of expiry of the buy-back period.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 1(b) (Syllabus 2017).

The provisions of section 68 of the Companies Act, 2013 provide that Board of Directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buy back has to be authorized by the board by means of a resolution passed at the meeting.

Thus, Board of Directors is authorized to approve buy back up to Rs. 2 crore. Hence the decision of the Board to purchase shares for a value up to 15% of the paid up share capital is valid.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2(b) (Old syllabus).

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 has been amended on 8th June 2018 wherein a proviso to Regulation 40(1) mandates that except in case of transmission or transposition of securities, requests for effecting transfer of securities shall not be processed unless the securities are held in the dematerialized form with a depository.

Hence the person holding shares in physical form is required to have the physical shares dematerialized so that he can tender the shares in dematerialized form and participate in the buyback.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(a) (Old syllabus).

ATC Ltd. can go ahead with the further issue of shares. As per section 68(8) of the Companies Act, 2013:

When a company completes a buy-back of its shares or other specified securities it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of Preference shares or debentures into equity shares.

Since the company is making a further issue of shares by way of bonus shares it is exempt from the provisions of section 68(8) and hence authorized to issue bonus shares.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(b) (Old syllabus).

(i)Maximum Quantum of Buy-Back with Board Approval:

Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buy back has to be authorized by the board by means of a resolution passed at the meeting.

(6, 00,000 + 2, 50,000 + 3, 00,000) x 10% = 1, 15,000 i/e/ 11500 shares can be bought back with board approval

(ii)Maximum Quantum of Buy-Back with shareholder’s Approval:

Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company. In respect of any financial year, the shareholders can approve by special resolution upto 25% of total equity capital in that year.

(6, 00,000 + 3, 00,000 + 2, 50,000) x 25% = 2,87,500, i.e., 28,750 shares can be bought back with shareholder approval

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2(c) (Old syllabus).

A company is required to balance between its debt and equity in its capital structure and the funding of the resulting deficit. Neither of the two is a good option. A company is said to be over- capitalized, if its earnings are not sufficient to justify a fair return on the amount of share capital and debentures that have been issued.

A company is said to be under-capitalized if the owned capital of the business is much less than the total borrowed capital. In this case the business is dependent more upon borrowed capital.

Hence we can see that both these options are not good. An ideal situation would be fair capitalization or optimum capitalization.

An over-capitalized company can restructure by taking following steps:

(i)Buy-back of own shares.

(ii)Paying back surplus share capital to shareholders.

(iii)Repaying loans to financial institutions, banks, etc.

(iv)Repaying fixed deposits to public, etc.

(v)Redeeming its debentures, bonds, preference shares etc.

An under-capitalized company may restructure its capital by taking one or more of the following corrective steps:

(i)Injecting more capital through public issue, rights issue.

(ii)Resorting to additional borrowings.

(iii)Issuing debentures, bonds, preference shares etc.

(iv)Inviting and accepting fixed deposits from directors, their relatives etc.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2(b) (Old syllabus).

Buy-back of securities is one kind of Internal restructuring that may bring economy in the cost of service towards shareholders, to enhance the future Earnings Per Share (EPS), prevent unwelcome takeover bids and enhance the consolidation of stake in the company.

It is an alternative mode of reduction in capital without requiring approval of the National Company Law Tribunal.

Corporate giants like Infosys Ltd, Wipro, TCS etc., also resorted to buy-back of securities.

The Buyback aims at improving the return on equity through distribution of cash thereby leading to long term increase in members' value. Some of the most important advantages of buyback of shares are as follows:

•Companies possessing large free reserves base and are willing to use funds to purchase or acquire shares and other securities under the buyback scheme, can use their funds in a wise and effective manner.

•Buy back of shares and securities helps the promoters to formulate an effective defensive strategy against hostile takeover bids.

•Buyback of shares and securities results in lower capital base, enhances postbuyback earning per share and appreciates considerably the price-earnings ratio.

The Buyback is undertaken after taking into account the strategic and operational cash requirements of the Company in the medium term and for returning surplus funds.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2(b) (Syllabus 2017).

Any default in payment of term loan, public deposits, and debentures becomes a hurdle in buy-back of securities. However, in the instant case, the default is remedied prior to 3 years of the proposal as stated in proviso to section 70(1)(c) of the Companies Act, 2013. Buy-back is also prohibited if done through any subsidiary or further subsidiaries down the line, through any sole or group investment companies and/or if there are failures in compliance of section 92 (annual return), sections 123 or 127 (distribution of dividends) or section 129 (financial statements) of the Companies Act, 2013.

In the given case the Company has default of payment of certain installments of the Bank was made good by July, 2013, and three (3) years has been passed before the passing of resolution by Board, So Company can go ahead for the Buy-back proposal.

Further, it is necessary to ensure debt to equity ratio is at least 1:2 post buy-back and shares ascribed for buy-back are fully paid-up. Process of buy-back need to be completed within 12 months of authorization. Shares bought back need to be destroyed within seven days of the last date of completion of buy-back.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2(b) (Old syllabus).

Quantum of Buy-back (Section 68 of the Companies Act, 2013)

(a)Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buy-back has to be authorized by the board by means of a resolution passed at the meeting.

(b)Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company. In respect of any financial year, the shareholders can approve by special resolution up to 25% of total equity capital in that year.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back should not be more than twice the paid-up capital and its free reserves i.e. the ratio shall not exceed 2:1.

In the instant case, since the paid-up equity capital and free reserves is Rs.20,789 crore as per the latest audited financials, the Board can authorize through a resolution passed at its meeting the buy-back of shares totaling Rs.1,955.57 crore, which is less than the prescribed 10% limit.

After the buy-back scheme for Rs.1955.57 crore has been fully completed, the company's reserves would drop to Rs.18401.72 crore and its paid-up equity capital would drop by Rs.10.29 crore to Rs.431.71 crore. Hence, its paid up capital and free reserves after buy-back would drop to Rs.18833.43 crore. Thus, the debt-equity ratio after buy-back scheme has been fully completed would be 0.068, which is less than the stipulated 2:1.

Hence, XYZ Ltd. can proceed with the proposed buy-back scheme by passing a resolution passed at the Board meeting.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2(c) (Syllabus 2017).

Regulation 4(vi) of SEBI (Buy-back of Securities) Regulations, 2018 does not permit buy-back through negotiated deals (of and on stock exchange), private arrangement and spot transactions.

According to Regulation 4(iv) of the SEBI (Buy-back of Securities) Regulation, 2018, a company may buy-back its own shares or other specified securities by any one of the following methods:

(a)from the existing shareholders or other specified securities holders on a proportionate basis through the tender offer;

(b)from the open market through:

(i)book-building process

(ii)stock exchange

(c)from odd-lot holders.

No offer of buy-back for 15% or more of paid-up capital and free reserves, shall be made from the open market.

Alternate Answer [based upon SEBI (Buy-back of Securities) Regulations, 1998]

Regulation 4(2) of erstwhile SEBI (Buy-back of Securities) Regulations, 1998 does not permit buy-back through negotiated deals (of and on stock exchange), private arrangement and spot transactions.

According to Regulation 4(1) of the SEBI (Buy-back of Securities) Regulation, 1998, a company may buy-back its own shares or other specified securities by any one of the following methods:

(a)from the existing shareholders or other specified securities holders on a proportionate basis through the tender offer;

(b)from the open market through:

(i)book-building process

(ii)stock exchange

(c)from odd-lot holders.

No offer of buy-back for 15% or more of paid-up capital and free reserves, shall be made from the open market.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 3(a) (Old syllabus).

Corporate Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business i.e., monopolies, goodwill, exclusivity through licensing, etc. to enhance the competitiveness advantages. Thus, corporate restructuring helps in bringing an edge over competitors, in highly competitive world, cost cutting and value addition are very important to get highlighted.

Objectives may include the following:

•To enhance shareholders value

•Deploying surplus cash from one business to finance profitable growth in another

•Exploiting inter-dependence among present or prospective businesses

•Risk reduction

•Development of core-competencies

•To obtain tax advantages by merging a loss-making company with a profit-making company

•Revolution in information technology has made it necessary for companies to adopt new changes for improving corporate performances.

•To become globally competitive

•To increase the market share

•Convertibility of rupee has attracted medium-sized companies to operate in the global markets.

•Competitive business necessitated to have sharp focus on core business activities, to gain

•synergy benefits, to minimize the operating costs, to maximize efficiency in operation and to tap the managerial skill to the best advantage of the firm.

•By diversification of business activities, the minimization of business risk is possible and it enables the firm to achieve at least the minimum targeted rate of return

With the integration of sick unit into the successful unit, the adjustment of unabsorbed depreciation and write off of accumulated loss is possible and thereby the successful unit can have strategic tax planning

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(a) (Syllabus 2017).

Corporate Restructuring is the process of significantly changing a company’s business model, management team or financial structure to address challenges and increase shareholder value.

Need and Scope of Corporate Restructuring:

•To enhance shareholders value.

•Deploying surplus cash from one business to finance profitable growth in another.

•Exploiting inter-dependence among present or prospective businesses.

•Risk reduction.

•Development of core-competencies.

•To obtain tax advantages by merging a loss-making company with a profit-making company.

•Revolution in information technology has made it necessary for companies to adopt new changes for improving corporate performances.

•To become globally competitive.

•To increase the market share.

•Convertibility of rupee has attracted medium-sized companies to operate in the global markets.

•Competitive business necessitated to have sharp focus on core business activities, to gain synergy benefits, to minimize the operating costs, to maximize efficiency in operation and to tap the managerial skill to the best advantage of the firm.

•By diversification of business activities, the minimization of business risk is possible and it enables the firm to achieve at least the minimum targeted rate of return.

•With the integration of sick unit into the successful unit, the adjustment of unabsorbed depreciation and write off of accumulated loss is possible and thereby the successful unit can have strategic tax planning.

Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business i.e., monopolies, goodwill, exclusivity through licensing, etc. to enhance the competitiveness advantages. Thus, restructuring helps in bringing an edge over competitors. In highly competitive world, cost cutting and value addition are very important to get highlighted.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(a) (Syllabus 2017).

Mergers and takeovers involve payment of consideration for acquiring the properties/shares of the target company. The consideration depends on the target company valuation.

•Funding mergers and takeovers imply the modes of raising finance to service the corporate restructuring strategy

•Funds may be raised through internal sources such as Equity capital Preference Capital, accumulated reserves and profits.

•As per the Companies Act, 2013, an Indian company is permitted issue equity instruments with differential rights as to dividend and or voting Companies may issue non-voting shares

•Such issue gives companies an additional source of fund without dividend cost and without the obligation to repay, as these are other forms of the equity capital. Generally, promoters prefer such securities since there is no loss of control.

A company limited by shares may issue equity shares with differential rights subject to the following conditions:

1.There must be an authority in the Articles of Association of the company,

2.Obtain shareholders’ approval through ordinary resolution in general meeting. Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot.

3.The equity capital with differential rights shall not exceed 74% of the total voting power,

No default in filing annual accounts and annual returns for three years; immediately preceding the financial year in which it is decided to issue such shares;

4.No subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend

5.The company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund of the Central Government. Provided that a company may issue equity shares with differential rights upon expiry of five years from the end of the financial Year in which such default was made good.

6.The company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

7.A company shall not convert its existing equity share capital with normal voting rights into equity shares with differential voting rights and vice versa.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(c) (Syllabus 2017).

Corporate restructuring is the process of significantly changing a company's business model, management team or financial structure to address challenges and increase shareholder value. Corporate restructuring is an inorganic growth strategy.

Corporate Restructuring is concerned with arranging the business activities of the corporate as a whole so as to achieve certain predetermined objectives at corporate level. Such objectives include the following:

1.Orderly redirection of the firm's activities;

2.Deploying surplus cash from one business to finance profitable growth in another;

3.Exploiting inter-dependence among present or prospective businesses within the corporate portfolio;

4.Risk reduction; and

5.Development of core competencies.

The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and improving efficiency (profitability). When a company wants to grow or survive in a competitive environment, it needs to restructure itself and focus on its competitive advantage. The survival and growth of companies in this environment depends on their ability to pool all their resources and put them to optimum use. A larger company, resulting from merger of smaller ones, can achieve economies of scale. If the size is bigger, it enjoys a higher corporate status. The status allows it to leverage the same to its own advantage by being able to raise larger funds at lower costs. Reducing the cost of capital translates into profits. Availability of funds allows the enterprise to grow in all levels and thereby become more and more competitive.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 1(a) (Old syllabus).

The given statement is absolutely true. The restructuring process requires various aspects to be considered before, during and after the restructuring. Any or combination of one or more of the following strategies are adopted in an effective corporate restructuring. They are as under:

1.Merger

Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption or by formation of a new company.

2.Demerger

It is a form in which the entity's business operations are segregated into one or more components.

3.Reverse Merger

Reverse merger is the opportunity for the unlisted companies to become public listed company, without opting for Initial Public offer (IPO) or a sick company acquires a profitable company to avail tax benefits.

4.Disinvestment

Disinvestment means the action of an organization or government selling or liquidating an asset or subsidiary. It is also known as "divestiture".

5.Takeover/Acquisition

Takeover occurs when an acquirer takes over the control of the target company. It is also known as acquisition. Normally this type of acquisition is undertaken to achieve market supremacy.

6.Joint venture (JV)

The parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company. It may be Project based joint venture or Functional based joint venture.

7.Strategic Alliance

Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called strategic alliance.

8.Franchising

Franchising may be defined as an arrangement where one party (franchiser) grants another party (franchisee) the right to use trade name as well as certain business systems and process, to produce and market goods or services according to certain specifications.

9.Slump Sale

Slump sale means the transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(a) (Old syllabus).

A good restructuring scheme involves a lot of planning. Equally important is the implementation of the scheme. Some keys for a successful corporate restructuring scheme may be as follows:

1.Focus first on the longer-term strategic aspirations.

2.Take time to develop an accurate, verifiable picture of today's structures, processes, and people.

3.Select the right blueprint carefully by creating multiple options and testing them under present scenario.

4.Consider all three elements of organizational design: structure, processes and people.

5.Fill well-defined roles in an orderly, transparent way.

6.Identify and actively change the necessary mind-sets. Do not assume that people will automatically fall in line.

7.Use metrics to measure short- and long-term results.

8.Make sure business leaders communicate, and create a powerful redesign narrative to inspire and mobilize the company.

9.Monitor and mitigate transitional risks, such as interruptions to business continuity, loss of talent, and customer-care lapses.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 1(c) (Old syllabus).

Corporate Restructuring aims at different things at different times for different companies with prominent objective is to eliminate the disadvantages and combine the advantages. Corporate Restructuring need to optimise in:

(i)Focus core strengths, operational synergy and efficient allocation of managerial capabilities and infrastructure.

(ii)Consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.

(iii)Rehabilitation of a sick unit by synergising losses with profits of a healthy units.

(iv)Acquiring constant supply of raw materials and access to scientific research and technological developments.

(v)Capital restructuring with mix of loan to reduce the cost of servicing and improving return on capital employed.

(vi)Improve performance at par with competitors by adopting through radical changes adopting information technology.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2(a) (Old syllabus).

Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It is aimed at to get an edge over its competitors. Corporate Restructuring may be broadly of two types - Financial and Others.

The Financial objectives aims at reducing risks, increasing operating efficiency, improving access to financial markets or obtaining tax benefits, to eliminate competition and so on.

For a manufacturing unit the operating efficiency is of utmost importance but for lenders like Banks, Financial Institutions and NBFCs, the disbursement risk is the greatest as a wrong judgment shall create a Non-performing asset. Risk has many forms and any one can be a cause for concern for the lenders.

For newly set-up companies desiring to expand, modernize and grow, the access to financial markets is essential and for this the generation of ideas is important which in future should be able to generate and sustain revenue. Tax savings is the target for all corporate entities.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 1(b) (Syllabus 2017).

In every corporate restructuring exercise, the aim is to eliminate disadvantages and to combine advantages. The various needs for undertaking a Corporate Restructuring exercise are as follows:

(i)to focus on core strengths, operational synergy and efficient allocation of managerial capabilities and infrastructure.

(ii)consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.

(iii)revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.

(iv)acquiring constant supply of raw materials and access to scientific research and technological developments.

(v)capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed.

(vi)improve corporate performance to bring it at par with competitors by adopting the radical changes brought out by information technology.

One of the modes is to amalgamate the units in order to get the advantage of a bigger and useful organization. On the other hand, to get rid of demerits of manageability, demerger is resorted to. Thus, mergers, demergers, reverse mergers, takeovers, joint ventures, strategic alliances, franchising, slump sale are the different strategies that forms part of corporate restructuring. Further, various aspects are to be examined such as valuation, funding, legal, procedural, taxation, stamp duty, accounting, competition as well as human and cultural synergies while under taking corporate restructuring.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(a) (Old syllabus).

Scope of Corporate Restructuring

The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and improving efficiency (profitability). When a company wants to grow or survive in a competitive environment, it needs to restructure itself and focus on its competitive advantage. A larger company, resulting from merger of smaller ones, can achieve economies of scale. If the size is bigger, it enjoys a higher corporate status. The status allows it to leverage the same to its own advantage by enabling it to raise larger funds at lower costs. The reduction in the cost of capital translates into profits.

Portfolio and Asset Restructuring

This type of restructuring can be performed in the following ways:

— Merging of two or more companies.

— Purchasing assets of another company

— Acquisition of equity shares of another firm resulting in change of ownership

— Financial re-engineering

— Buying-back of shares

— Issuing different types of shares like non-voting or differential voting rights or preference shares

— Issuing different types of debts to meet the need for fixed and working capital

— Infusing foreign debts and equity

Internal streaming and reorganizing the business process:

— Reducing the head count

— Closing uneconomical units

Inducting programme to reduce costs:

— Disposing off obsolete and un-workable/idle assets

— Reorganizing the business process and techniques

Different modes of Corporate Restructuring are as under:

1.Merger

2.Demerger

3.Reverse Merger

4.Disinvestment

5.Takeovers

6.Joint Venture

7.Strategic alliance

8.Franchising

9.Slump Sale

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 1(a) (Old syllabus).

Organic growth strategy in corporate restructuring relates to business or financial restructuring within the organization that results in enhanced customer base, higher sales, increased revenue, without resulting in change of corporate entity. In contrast, if there is involvement of other entities in the form of mergers, takeovers, divestment, etc. it is referred to as inorganic growth strategy in corporate restructuring. Obviously, the business model changes so also management positions, financial structure with sole object of enhancing the value to shareholders. Mergers, demergers, reverse mergers, disinvestments, takeovers, joint ventures, franchising, strategic alliances, slump sale are some options that are adopted as a measure to achieve inorganic growth strategy in Corporate Restructuring.

Orderly redirection of activities, redeployment of surplus cash in other enterprises, exploiting inter-dependence among present or future businesses within corporate portfolio, risk reduction and development of core competencies are some of the objectives within overall objective of increasing the value to the shareholders on resorting to restructuring. Corporates can achieve the economies of scale through vertical, horizontal integration of enterprises for maximization of profits.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(a) (Old syllabus).

Securities with Differential Rights:

Section 48 of the Companies Act, 2013 deals with the variation of shareholders’ rights. This section deals with the procedure involved, when a company intends to vary rights attached with any class of shareholders. The features are as follows:

1.Approval of class of shareholders - The rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that class —

(a)if provision with respect to such variation is contained in the memorandum or articles of the company; or

(b)in the absence of any such provision in the memorandum or articles, if such variation is not prohibited by the terms of issue of the shares of that class.

2.Impact on rights of other class - The section provides that if variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation.

3.Cancellation of variation - Variation may be cancelled if, holders of not less than ten per cent of the issued shares of a class did not consent to such variation or vote in favour of the special resolution for the variation. They may apply to the Tribunal to cancel the variation, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal. It is provided that an application under this section shall be made within twenty-one days after the date on which the consent was given or the resolution was passed, as the case may be, and may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose. The decision of the Tribunal on any such application shall be binding on the shareholders. The company shall, within thirty days of the date of the order of the Tribunal, file a copy thereof with the Registrar.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2A(iii) (Syllabus 2022).

Establishment of NCLT and NCLAT have created plenty of opportunities for Practicing Company Secretaries. Company Secretaries are authorized to appear before the NCLT/NCLAT. Following are the areas of activities for Company Secretary in Practice:

1.Merger/Amalgamation/Compromise - A whole new area of practice opened up for Company Secretary in Practice with respect to advising and assisting corporate sector on merger, amalgamation, demerger, reverse merger, compromise and arrangements. The role of CS starts from the conceptual to implementation level. Company Secretaries in Practice will be able to render services in preparing schemes, appearing before NCLT/NCLAT for approval of schemes and post-merger formalities.

2.Revival of Companies - Where a Registrar of Companies (ROC) have struck off the name of a company u/s 248, a practicing company secretary may assist in revival of such company.

3.Winding up - National Company Law Tribunal has also been empowered to pass an order for winding up of a company. Therefore, Practicing Company Secretaries may represent the winding-up case before the Tribunal. Now Practicing Company Secretaries have been permitted to act as Liquidator in case of winding-up by the Tribunal.

4.Reduction of Capital-As per Section 66 of the Companies Act, 2013, subject to confirmation by the Tribunal, a company limited by shares or a company limited by guarantee and having a share capital can reduce its share capital. Practicing Company Secretaries will be able to represent cases of reduction of capital before the Tribunal.

5.Oppression and mismanagement- Sections 241 and 244 of the Companies Act, 2013 deals with the cases of Oppression and Mismanagement. Section 241 deals with making an application to Tribunal for relief in cases of Oppression, etc. and section 244 describes the Right to apply under section 241.

6.Insolvency and Bankruptcy cases- Insolvency practice is a new field of activity for professionals while improving the quality of intervention at all levels during rehabilitation/winding-up liquidation proceedings. Law has recognized the Insolvency Practitioners as Administrators, Liquidators, Turn around Specialists Valuers, etc. Greater responsibility and authority have been given to Insolvency Practitioners under the supervision of the Tribunal to maximize resource use and application of skills.

7.Company Secretary in Practice as Member of NCLT- A Practicing Company Secretary can be appointed as a Technical Member of NCLT, provided he has 15 years working experience as secretary in whole-time practice.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(e) (Syllabus 2017).

National Company Law Tribunal has the powers to entertain and adjudicate up on matters pertaining to the following sections of the Companies Act, 2013:

— Section 7(7) : Incorporation

— Section 55(3) : Issue and redemption of preference shares

— Section 58 and 59, remedy for refusal to transfer or transmission of securities.

— Section 61 (1) : Approval for consolidation and division of shares which results in changes in the voting percentage of shareholders of the limited company

— Section 62(4) to (6) : further issue of share capital

— Sections 71(9) to (11) : Debentures issues

— Section. 75 : Damages for fraud

— Sections 97, 98, & 99 : To call meetings of members

— Sections 119(4) : Inspection of minutes' books

— Sections 130, 131 : Reopening of accounts, revision of financial statements

— Sections 140 (4) & (5) : Removal of auditors

— Sections 169(4) : Removal of directors

— Sections 213, 216(2), 214, 221, 222, 224(5) : Investigations into company's affairs

— Section 230, 231 : Compromise or Arrangement

— Section 231, 232 : Merger or Amalgamation

— Sections 241, 242 except (1) (b), (2) (c) and (g) : Relief in cases of oppressions, etc. and powers of Tribunal.

— Sections 243, 244, 245 : Oppression and mismanagement and Class Action suits

— Section 252 : Revival of strike -off companies

— Sections 399 (2) : Production of documents

— Sections 419, 425 : Powers of NCLT

— Section 441 : Compounding.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(d) (Syllabus 2017).

According to Section 2(92) of the Companies Act, 2013, unlimited company means a company not having any limit on the liability on the members.

The member's liability is unlimited. The unlimited company can reduce the share capital of the Company in a manner specified in the Articles of Association of the Company without confirmation of NCLT.

The following are cases which amount to reduction of share capital but where no confirmation of the Tribunal is necessary:

(a)Surrender of shares.

(b)Forfeiture of shares.

(c)Diminution of capital.

(d)Redemption of redeemable preference shares.

(e)Buy-back of its own shares.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 2A(ii) (Syllabus 2017).

With establishment of National Company Law Tribunal (NCLT) and National Company Law Tribunal (NCLAT) opportunities for Company Secretaries has increased. Under section 432 of the Companies Act, 2013, Company Secretaries have been authorized to appear before the Tribunal/ Appellate Tribunal. Before setting - up of the Tribunal, the matters dealt by the Tribunal what dealt by the High Court and so the appearances were taken by only advocates.

Areas of increased scope are as under:

1.Merger/ Amalgamation/Compromise

2.Revival of Companies

3.Winding up

4.Reduction of Capital

5.Oppression and Mismanagement

6.Insolvency and Bankruptcy cases.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 3(b) (Syllabus 2017).

The petitioner-company was referred to the Corporate Debt Restructuring (‘CDR’) forum for re-scheduling and restructuring its debt. As per restructuring package, as approved by CDR forum, for every 10 equity shares the company would cancel 4 equity shares and in lieu of such cancellation, 4 non-cumulative preference shares would be allotted and the existing equity shareholders would continue to hold remaining 6 shares without any alteration of rights. When the petitioner-company moved to the High Court for confirmation of its restructuring package, the objector opposed the scheme on the ground that it would suffer financial loss. Taking an overall view and considering the proposed scheme of reduction of share capital in larger perspective, the High Court found no reason not to confirm the proposed action of the company to reduce its share capital.

The High Court observed that the proposal is likely to improve the financial resources of the company, and to increase the share of profit available for expansion and growth of the company. Moreover, the proposal does not involve diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital.[ Essar Steel Ltd. Re (2005) 59S CL 457: (2006) 130 Com cases 123(Guj) ].

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(b) (Old syllabus).

In case the proposed reduction of capital involves diminution of liability in respect of unpaid capital or payment of any paid-up capital to any shareholder or in any other case, the Tribunal permits the creditors to object to such proposal.

The Tribunal while granting sanction of the proposed reduction will take into consideration interest of creditors and minority shareholders. In the process, notices will be given to the Government, Registrar of Companies, Securities and Exchange Board of India (in case of listed companies) and the creditors within three months of the application.

There is no limitation on the power of the Court to confirm the reduction except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured [ British and American Trustee and Finance Corpn. v. Couper, (1894) AC 399, 403 : (1991-4) All ER Rep 667 ].

(Attempt all parts of either Q. No. 2 or 2A)

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(d) (Syllabus 2017).

Section 66 of the Companies Act, 2013 provides that subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner. Hence we can see that section 66 of the Companies Act, 2013 is applicable to a company limited by shares or a company limited by guarantee and having share capital.

An unlimited company can reduce the share capital in the manner specified in the Articles and Memorandum of the company, as Section 66 of the Companies Act, 2013 is not applicable.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(a) (Old syllabus).

Mr. Suman shall not be successful.

Resolution for reduction of capital is approved with requisite majority. Tribunal passed order of approval with proper reasoning. It was held in the matter of Chander Bhan Gandhi v. Reckit Benckiser (India) Ltd. [2012] 107 CLA 511 (Del) that in the absence of any fault in the reasoning of the Single Judge approving the reduction of capital, valuation of shares, the appeal by a sole shareholder is rejected. Merely determination of value of shares by some other method having a different conclusion is not a ground for appeal. [ Wartsila India Ltd v. Janak Mathuradas and other [2010] 99 CLA 463 (Bom) ]

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3(e) (Old syllabus).

Cases which amount to reduction of share capital but where no approval/confirmation by the Tribunal is necessary:

(a)Surrender of shares – ‘Surrender of shares’ means the surrender of shares already issued, to the company, by the registered holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute or for any other reason, it will have the same effect as a transfer in favour of the company and amount to a reduction of capital. But if, under any arrangement, such shares, instead of being surrendered to the company, are transferred to a nominee of the company then there will be no reduction of capital [ Collector of Moradabad v. Equity Insurance Co. Ltd., (1948) 18 Com Cases 309: AIR 1948 Oudh 197 ]. Surrender may be accepted by the company under the same circumstances where forfeiture is justified. It has the effect of releasing the shareholder whose surrender is accepted for further liability on shares.

The Companies Act, 2013 contains no provision for surrender of shares. Thus, surrender of shares is valid only when Articles of Association provide for the same and:

(i)where forfeiture of such shares is justified; or

(ii)when shares are surrendered in exchange for new shares of same nominal value. Both forfeiture and surrender lead to termination of membership. However, in the case of forfeiture, it is at the initiative of company and in the case of surrender it is at the initiative of member or shareholder.

(b)Forfeiture of shares - A company may if authorised by its articles, forfeit shares for non-payment of calls and the same will not require confirmation/approval of the Tribunal.

(c)Diminution of capital - Where the company cancels shares which have not been taken or agreed to be taken by any person.

(d)Redemption of redeemable preference shares.

(e)Buy-back of its own shares.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2A(iii) (Syllabus 2017).

Securities premium can be utilized for reducing share capital. Utilization of securities premium and general reserve for reduction of share capital is permissible if:

(i)There is no diminution of liabilities, or

(ii)There is no repayment of paid-up capital, or

(iii)There is no reduction of issued, subscribed or paid-up share capital.

Vide Alembic Ltd. Re (2008) 144 Comp cases 105; (2009) 89 SCL 19 (Guj.)

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 3(d) (Old syllabus).

After passing the special resolution for the reduction of capital, XYZ Ltd. has to apply to the National Company Law Tribunal (NCLT) for the confirmation of resolution under section 66 of the Companies Act, 2013. Where the proposed reduction of share capital involves either (i) diminution of liability in respect of unpaid share capital, or

(ii)the payment to any shareholder of any paid-up share capital, or (iii) in any other

case, if the Tribunal so directs, the following provisions shall have effect:

The creditors having a debt or claim admissible in winding-up are entitled to object. To enable them to do so, the Tribunal will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the rights of the creditors.

The Tribunal shall give notice of every application made to it to the Central Government, Registrar of Companies and to the Securities and Exchange Board of India, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by Central Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice.

If no representation has been received from them within the said period, it shall be presumed that they have no objection to the reduction.

Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 of the Companies Act, 2013 or any other provision of the Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.

There is no limitation on the power of the Tribunal to confirm the reduction except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured [ British and American Trustee and Finance Corporation v. Couper (1894) ].

When exercising its discretion, the Tribunal must ensure that the reduction is fair and equitable.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 1(a) (Syllabus 2017).

As per section 66(5) of the Companies Act, 2013, MGF Ltd. shall deliver a certified copy of the order of the Tribunal and of a Minute approved by the Tribunal showing —

(a)the amount of share capital;

(b)the number of shares into which it is to be divided;

(c)the amount of each share; and

(d)the amount, if any, at the date of registration deemed to be paid-up on each share, to the Registrar of Companies (RoC) within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.

The reduction of share capital takes effect only on registration of the order and Minutes and not before. The RoC will then issue a certificate of registration which will be conclusive evidence that the requirements of the Companies Act, 2013 have been complied with and that the share capital is now as set out in the Minutes. The Memorandum has to be altered accordingly.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 6A(ii) (Syllabus 2017).

Amalgamation is a legal process by which two or more companies are joined together to form a new entity or one or more companies are to be absorbed or blended with another as a consequence the amalgamating company loses its existence and its shareholders become the shareholders of new company or amalgamated company. In other words, property, assets, liabilities of one or more companies are taken over by another or are absorbed by and transferred to an existing company or a new company.

Therefore, the essence of amalgamation is to make an arrangement thereby uniting the undertakings of two or more companies so that they become vested in, or under the control of one company which may or may not be the original of the two or more of such uniting companies.

The word “amalgamation” is not defined under the Companies Act 2013 whereas section 2(1B) of Income Tax Act,1961 defines Amalgamation as:

“amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that –

(i)all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;

(ii)all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;

(iii)shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation.

Otherwise, then as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company.

Reasons for Amalgamation:

(a)To acquire cash resources

(b)To eliminate competition

(c)Tax savings/advantages

(d)Economies of large-scale operations

(e)To Increase shareholders value

(f)To reduce the degree of risk by diversification

(g)Managerial effectiveness

(h)To achieve growth and financial gain

(i)Revival of weak or sick or insolvent/bankrupt company

(j)Survival

(k)Sustaining growth

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 1(a) (Syllabus 2017).

(i)Horizontal Merger

Horizontal Merger is a merger between companies selling similar products in the same market and in direct competition and share the same product lines and markets. It decreases competition in the market. The main objectives of horizontal merger are to benefit from economies of scale, reduce competition, achieving monopoly status and control of the market.

Facebook’s acquisition of Instagram for a reported $1 billion. Both Facebook and Instagram operated in the same industry and were in similar production stages in regard to their photo-sharing services. Facebook, looking to strengthen its position in the social media and social sharing space, saw the acquisition of Instagram as an opportunity to grow its market share, increase its product line, reduce competition and access potential new markets.

(ii)Congeneric Merger

Congeneric merger is a merger between two or more businesses which are related to each other in terms of customer groups, functions or technology. Combination of a computer system manufacturer with a UPS manufacturer is a Congeneric Merger.

(iii)Conglomerate Merger

Conglomerate merger is a merger between two companies that have no common business areas. It refers to the combination of two firms operating in industries unrelated to each other. The business of the target company is entirely different from the acquiring company.

Berkshire Hathway acquired Lubrizol: Berkshire Hathaway and its subsidiaries engage in diverse business activities including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services. Berkshire’s common stock is listed on the New York Stock Exchange. The Lubrizol Corporation is an innovative specialty chemical company that produces and supplies technologies to customers in the global transportation, industrial and consumer markets. These technologies include lubricant additives for engine oils, other transportation-related fluids and industrial lubricants, as well as fuel additives for gasoline and diesel fuel.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(a) (Syllabus 2022).

Approval of National Company Law Tribunal (NCLT) is a pre requisite for schemes of Mergers. However, a Merger cannot be said to be completely successful only upon approval of the scheme of arrangement by NCLT. The factors which are required to measure the success of any merger are briefly discussed below:

a)The earning performance of the merged company can be measured by return on total assets and return on net worth. It has been found that the probability of success or failure in economic benefits was very high among concentric mergers. Simple vertical and horizontal mergers were found successful whereas the performance of concentric mergers was in between these two extremes i.e. failure and success.

b)Whether the merged company yields larger net profit than before, or a higher return on total funds employed or the merged company is able to sustain the increase in earnings.

c)The capitalisation of the merged company determines its success or failure. Similarly, dividend rate and pay-outs also determines its success or failure.

d)Whether merged company is creating a larger business organisation which survives and provides a basis for growth.

e)Comparison of the performance of the merged company with the performance of similar sized company in the same business in respect of (i) sales, (ii) assets,

(iii)net profit, (iv) earnings per share and (v) market price of share. In general,

growth in profit, dividend pay outs, company’s history, and increase in size provides base for future growth and are also the factors which help in determining the success or failure of a merged company.

f)Fair market value is one of the valuation criteria for measuring the success of post-merger company. Fair market value is understood as the value in the hands between a willing buyer and willing seller, each having reasonable knowledge of all pertinent facts and neither being under pressure or compulsion to buy or sell. Such valuation is generally made in pre-merger cases.

g)In valuing the whole enterprise, one must seek financial data of comparable companies in order to determine ratios that can be used to give an indication of the company position. The data is analyzed to estimate reasonable future earnings for the subject company. The following information must be made available and analyzed for post-merger valuation:

i.All year-end balance sheets and income statements, preferably audited, for a period of five years and the remaining period up to the valuation date.

ii.All accounting control information relating to the inventory, sales, cost, and profit contribution by product line or other segment; property cost and depreciation records: executives and managerial compensation; and corporate structure.

iii.All records of patents, trademarks, contracts, or other agreements.

iv.A history of the company, including all subsidiaries.

Analysis of these items provides data upon which forecasts of earnings, cash flow, etc. can be made.

h)Gains to shareholders have so far been measured in terms of increase or decrease in share prices of the merged company. However, share prices are influenced by many factors other than the performance results of a company. Hence, this cannot be taken in isolation as a single factor to measure the success or failure of a merged company.

i)In some mergers there is not only increase in the size of the merged or amalgamated company in regard to capital base and market segments but also in its sources and resources which enable it to optimize its end earnings.

j)In addition to the above factors, a more specific consideration is required to be given to factors like improved debtors realisation, reduction in non-performing assets, improvement due to economies of large scale production and application of superior management in sources and resources available relating to finance, labour and materials.

Accordingly, the statement is does not appear to be correct.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 2(b) (Syllabus 2017).

Strategy adopted in this case is reverse merger in order to achieve the objectives of lower taxes, economies of scale, broadening market network, protecting trademarks, license agreements and avoiding hassles of complying with listing requirements of a stock exchange. Reverse Merger is a simplified process as it minimizes the risk due to less dependent on Market.

Similar Strategies were adopted in the mergers of Vodafone India and Idea Cellular, Kingfisher and Air Deccan, ICICI and ICICI Bank, Godrej Soaps and Gujarat Godrej Innovative Chemicals.

In the given case, if Mango Communications Ltd adopts normal merger to absorb Tango Ltd, it may lose telecom licenses. Hence, reverse merger is suggested because Mango Communications Ltd becomes a listed company and there is no need to acquire fresh licenses.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 1(a) (Syllabus 2017).

An organisation could venture into a new business taking any of the routes like funding a start-up, joint venture, strategic partnership. The reasons why mergers and acquisitions appears to be the most attractive route, despite all the compliances are as under:

1.It is a much quicker way to enter the market vs. starting from the scratch vide a start-up route.

2.Another advantage is synergy; one can grab a bigger market share, create a backward or forward integration and attract a much larger customer base, and simultaneously looking to reduce the cost of operations.

3.Overcoming the entry barriers and changing the league on the value chain itself by positioning itself as a larger conglomerate.

4.Ready availability of the necessary infrastructure.

5.Ready availability of a brand name.

6.Skipping the entire gestation period which is cumbersome and costly in terms of time and effort.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 4(b) (Old syllabus).

holders.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 3(b) (Syllabus 2017).

Technological restructuring occurs when a new technology is developed that changes the way an industry operates. This usually affects employees, and tends to lead to new training initiatives, along with some layoffs as the company improves efficiency. This also involves alliances with third parties that have technical knowledge or resources. Joint Venture, Strategic Alliances, Franchising is some of the forms of market and technological restructuring.

Indian technology major Tata Consultancy Services Limited has embarked upon the process of restructuring and focusing on three core areas Cloud, agile and automation.

Here are other key examples of technological restructuring in India:

•Banking & Financial Sector: More than a dozen Indian banks formed an institution using blockchain to process inland LCs in four hours, a process that previously took four to five days. Banks are also adopting AI, particularly agentic AI, to enhance service and handle massive, complex data.

•IT Sector Reorganization: Major IT firms (TCS, Infosys, HCL Tech) are restructuring internally to prioritize AI. For instance, TCS merged AI and cloud units, while Infosys transitioned to an "AI-first" company, reorganizing to focus on Internet of Things (IoT).

•Logistics & Retail (Flipkart-Walmart): Following Walmart's acquisition of Flipkart, the company underwent technological restructuring by integrating AI and advanced data analytics into its logistics and supply chain to enhance operational efficiency.

•Digital Public Infrastructure (UPI): The adoption of Unified Payments Interface (UPI) by the financial sector represents a massive technological overhaul, shifting the country from cash-heavy to digital-first, allowing 24/7 banking services.

•Government Digital Transformation: Central and State governments enterprises are implementing AI and technology for digital transformation across various sectors.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 2(d) (Syllabus 2022).

The problem in the question is a clear case requiring Internal Reconstruction of the organisation. The following methodology may be suggested by Mr. X as a practising company secretary to the management of A Ltd.

Internal Reconstruction

When a company incurs loss for number of years, the balance sheet does not reflect the true position of the business, as a higher net worth is depicted, than that of the real one. In such a company the assets are overvalued and it has many intangible assets and fictitious assets. Such a situation does not depict a true picture of financial statements. Such a situation requires reconstruction. Such a reconstruction may be carried out internally. In an internal reconstruction, the assets are revalued, liabilities are negotiated, and losses suffered are written off by reducing the paid-up value of shares and/or varying the rights attached to different classes of shares. Existing company is not liquidated.

Internal Reconstruction may be done by ways of:

(a)Cost Reduction through Closure of Units:

Assessment of Underperforming Units: The company evaluates its business units or operations to identify those that are underperforming or no longer aligned with its strategic objectives.

Closure or Rationalization: Underperforming units or operations may be closed down entirely or rationalized to reduce costs. This could involve shutting down unprofitable facilities, discontinuing unproductive product lines, or exiting unprofitable markets.

Impact Analysis: The company assesses the financial and operational impact of closure or rationalization, considering factors such as employee layoffs, asset write-offs, lease terminations, and potential restructuring costs.

Communication and Stakeholder Management: Transparent communication with employees, suppliers, customers, and other stakeholders is essential to manage the impact of closures effectively. The company may provide support to affected employees and establish a transition plan for suppliers and customers.

Optimization of Resources: By closing underperforming units, the company can reallocate resources, including capital, personnel, and management attention, to focus on core businesses or areas with higher growth potential.

( b)Redundancy Programs:

Identification of Redundancies: The company identifies areas of duplication, inefficiency, or overlap in its operations, such as redundant processes, roles, functions, or departments.

Voluntary or Involuntary Redundancy Programs: Redundancy programs may involve offering voluntary retirement packages, early retirement incentives, or severance packages to employees. In some cases, involuntary layoffs or job eliminations may be necessary to streamline operations.

Skills Assessment and Retention: The company assesses the skills and capabilities of its workforce to retain critical talent and ensure that the right people are in the right roles postrestructuring.

Legal and Regulatory Compliance: Redundancy programs must comply with applicable labor laws, regulations, and collective bargaining agreements. The company may need to consult with employee representatives or unions and provide adequate notice and compensation to affected employees.

Reorganization and Workforce Planning: Following redundancy programs, the company may reorganize its workforce and realign roles and responsibilities to optimize efficiency and productivity. Workforce planning ensures that the company has the necessary talent and skills to support its strategic objectives.

(c)Management or Organizational Restructuring involving Decentralization:

Evaluation of Organizational Structure: The company assesses its existing organizational structure to determine whether it is conducive to agility, innovation, and effective decision making.

Decentralization: Management restructuring may involve decentralizing decision making authority and empowering lower-level managers or teams to make more autonomous decisions. This could lead to faster responses to market changes, improved customer service, and increased accountability.

Clarification of Roles and Responsibilities: Clear delineation of roles, responsibilities, and accountability is essential in decentralized structures to avoid confusion and ensure alignment with organizational goals.

Communication and Training: Effective communication is critical to ensure that employees understand the rationale behind decentralization and their roles in the new structure. Training programs may be provided to equip managers and employees with the necessary skills to thrive in a decentralized environment.

Performance Monitoring and Feedback: The company establishes performance metrics and feedback mechanisms to evaluate the effectiveness of decentralization and make adjustments as needed. Regular monitoring helps identify bottlenecks, address challenges, and capitalize on opportunities for improvement.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(c) (Syllabus 2022).

In the given situation, the company is faced with financial crisis and is looking for options for Corporate Restructuring. Corporate financial restructuring is any substantial change in a company’s financial structure, or ownership or control, or business portfolio designed to increase the value of the firm i.e., debt and equity restructuring.

Internal reconstruction of a company is the simplest form of financial restructuring. Under this various liabilities are reduced after negotiating with various stakeholders such as banks, financial institutions, creditors, debenture holders and shareholders. It deals with the restructuring of capital base and raising finance for new projects.

One of the options available with the company is debt restructuring.

Debt Restructuring

It involves reduction of debt and an extension of payment terms or change in terms and conditions, which is less expensive. It is nothing but negotiating with bankers, creditors, vendors. It is the process of reorganizing the whole debt capital of the company. It involves the reshuffling of the balance sheet items as it contains the debt obligation of the company. Debt restructuring can be achieved in the following ways:

1)Restructuring of the secured long-term borrowing for improving liquidity and increasing the cash flows for a sick company and reducing the cost of capital for healthy companies. Restructuring of the unsecured long-term borrowings.

2)Restructuring of the long-term unsecured borrowings can be in form of public deposits and/or private loans (unsecured) and privately placed, unsecured bonds or debentures.

3)Restructuring of other short-term borrowings: the borrowings that are very short in nature arc generally not restructured these can indeed be renegotiated with new terms. These types of short- term borrowings include inter-corporate deposits clean bills & clean overdraft.

4)Best method for corporate debt restructuring is Debt-equity swap. In the case of a debt-equity swap, specified shareholders have right to exchange stock for a predetermined amount of debt (i.e. bonds) in the same company. In debt-equity swap debt /bonds are exchanged with shares/stock of the company.

Considering the above, debt restructuring is a viable option that the company may pursue.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 1(a) (Syllabus 2017).

Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operations significantly. To improve the operations of a corporate entity, market restructuring is indispensable. Market restructuring involves decisions with respect to the product market segments where company plans to operate on its corecompetencies. This type of restructuring usually affects employees, and tends to lead to new training initiatives along with some layoffs as the company improves efficiency. This type of restructuring also involves alliances with third parties that have technical knowledge and resources,

Indian technology major Tata Consultancy Services Ltd., has embarked upon the marketing capacity and on the process of restructuring and focusing on the three core areas like cloud, agile and automation. The restructuring plan focuses on the manufacturing capacity and on the product, technical, financial, employment, organization, processing and management restructuring activities. Disney is another example where market and technological restructuring has been restructured to, that has helped the company reach more long term technology goals.

Similarly, Tata Steel Ltd. acquired overseas Corus Group Plc. that drastically improved the production synergies for Tata Steel Ltd. Through the acquisition, Tata Steel Ltd. could combine its low-cost production with the high quality of Corus. It resulted utilization of wide retail and distribution network, technology transfer and enhanced R&D capabilities.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(a) (Syllabus 2017).

(i)In 'Internal Reconstruction', the assets are re-valued, liabilities are negotiated, and losses suffered are written-off by reducing the paid-up value of shares and/ or varying the rights attached to different classes of shares.

(ii)Internal Reconstruction (IR) is considered to be superior to External Reconstruction(ER) since the exercises undertaken in IR requires an in-depth analysis and remedies instead of giving up in ER in the form of merger or acquisition and losing identity.

(iii)In many a case, Internal Reconstruction does not require approvals from Courts or tribunals that may require conducting meetings of classes of shareholders and creditors, except in a case of reduction of paid up capital.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(b) (Syllabus 2017).

During the life of a Company, any one or more of the following circumstances prompt for Company’s restructuring:

(i)Injecting more working capital to meet the increased market demand.

(ii)Scenarios where a company is unable to fulfill its commitments.

(iii)If there is shortage in obtaining further credit from suppliers of raw materials, consumable stores, components, etc. and from other parties like those doing job work for the Company.

(iv)Failure to utilise optimum capacity for lack of liquid funds.

Financial restructuring involves rearrangement of its financial structure so as to make the Company’s finances more balanced. Every Company targets to strike a balance in ever changing business environment.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 3(c) (Old syllabus).