Corporate restructuring, not unlike medical surgery, involves transformative treatment based on professional diagnosis. It is a corporate management term that refers to the act of partially dismantling and then reorganising a company for the purpose of making it more efficient and therefore more profitable. Traditionally, corporate restructuring has referred to amalgamations, mergers, demergers or acquisitions. With second generation economic reforms, however, corporate restructuring has come to assume many more forms. But our legal regulatory framework has failed to evolve in tandem with these changes.

The most oft-used tools of corporate restructuring are amalgamation, merger, demerger, spin-off, slum sale, acquisition, buy-back of shares, joint venture, strategic alliances and franchises etc. The role of legislation should be that of a facilitator. The role of judiciary has to be minimalist, acting as the guardian of law and facilitating the interplay of commercial forces in a healthy and fair environment. The need of the hour is efficiency and speed, aimed at solving problems in order to maximise growth.

The structure of a corporate entity can now be modified internally, by altering its capital or business or by taking steps aimed at rationalisation within the existing organisation. It can also be modified externally, by way of intervention by a third party whereby the corporate entity itself undergoes a change. Sections 391 and 394 of the Companies Act have proved a major legislative blessing for corporate restructuring. The Bombay High Court observed, in a case pertaining to the PMB Auto Industries Ltd, that Section 391 is a “complete code” or a “single window clearance system” as it grants the court wide powers to frame a scheme for reviving a company.

Yet, any attempt at corporate restructuring continues to involve compliance with an array of enactments such as the Companies Act, 1956; Income- Tax Act, 1961; Securities and Exchange Board of India Act, 1992; Listing Agreement Takeover Regulations, 1997; Competition Act, 2002; stamp duty laws of various states; Sick Industrial Companies (Special Provisions) Act, 1985; and Securitisation and Reconstruction of Financial Assets Enforcement of Security Interest Act, 2002.

It is time to streamline the regulatory framework so that it is able to meet contemporary requirements. In order to do so, a number of steps need to be taken. To begin with, there is a dire necessity to reduce the multiple legislations applicable so as to cut down the lengthy court procedures. Second, the National Company Law Tribunal as provided under the Companies (Second Amendment) Act, 2002 needs to be constituted to expedite corporate amalgamations, mergers, demergers etc. There are various corporate terms such as merger, amalgamation, demerger, reconstruction etc which are not expressly defined in the Companies Act. As a result, various definitions incorporating different dimensions have been propounded by various authorities and jurists. It is, therefore, important to explicitly define these corporate terms.

Third, valuation of shares of merging companies remains a grey area because companies are free to follow any method of valuation. In the absence of a single formula, valuation is often arrived at to suit the interests of the promoters. Statutory guidelines are needed to bring in transparency and uniformity to protect the interest of small investors.

Fourth, companies often resort to buy back shares and reduce capital under Section 391-394 rather than Section 77A and Section 100 of Companies Act. Section 77A and Section 100, being  specific enactments, should prevail over Section 391 for buy-back of shares.

Fifth, transfer of immovable property in the process of merger, amalgamation, demerger etc attracts stamp duty on the prevalent market value of the fixed assets transferred to the resultant company. The transfer of any immoveable property in the process of amalgamation, demerger etc should not attract the provisions of Stamp Act.

Sixth, the provisions under the Income Tax Act for demerger are quite restrictive. The requirement of transfer of all properties and liabilities of the demerged company to the resulting company is very intricate to comply with due to various legal and contractual restrictions like tenancy rights, technical knowhow, patent etc. Furthermore, liabilities of a company may also be disputed or are not settled. Therefore, the assets and liabilities of the demerged company, which are mutually agreed upon for transfer should alone be transferred.

Corporate India has been reshaping and repositioning itself to meet the challenges and seize the opportunities thrown open by globalisation. India Inc can do so much more effectively if laws governing corporate restructuring help in making Indian companies more competitive and do not act as a stumbling block in the path of Indian entrepreneurs.