Capital Restructuring
Chapter 2 cont....
2.3.2 Capital Restructuring
Capital is generally the assets, often monetary, that are available to generate more assets. Thus the liquidity of capital should be high. Restructuring them means reallocating them to improve their availability (liquidity).
The process requires selling assets to buy different ones in order to improve your capital (monetary) position so that you can improve your asset position thus enabling you to earn more with them. It is generally undertaken by companies that are generally doing poorer than expected and wish to stabilize future performance of their assets.
Capital / Financial Restructuring touches upon the following
aspects:
1. Leverage of the company: This is essentially
the Debt: Equity Ratio. Here, companies have the option of undertaking
Debt Restructuring - especially if it is a Debt - laden company
(high debt leveraged company).
> Debt Restructuring: It is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.
2. Investment Pattern: This relates to ability of corporations to identify the various investments opportunities that would lead to higher returns.
3. FDI Participation: This aspect relates to the change in structure of the shareholding due to the increasing FDI inflows.
4. Divestitures: As stated earlier in the types of Divestiture in Portfolio and Asset Management, this aspect relates to divesting divisions and / or businesses to improve the financial standing of the organization.
Motives of Capital Restructuring
1. To enhance liquidity.
2. To lower the cost of capital.
3. To reduce risk.
4. To avoid loss of Control.
5. To improve Shareholder Value.
Benefits of Capital Restructuring
- Greater Financial Muscle
- Access to Better / Greater Technologies
- Focus on Core Competencies
Issues in Capital Restructuring
> Loss of Management Control
