Corporate reconstruction generally refers to the process of reorganizing the financial structure of a company. It involves significant changes in the ownership, management, and operation of a company to improve its financial performance, strategic positioning, and competitiveness in the market.
Internal reconstruction is a process by which a company reorganizes its capital structure without any change in its legal status. It involves changing the rights and obligations of various stakeholders, such as shareholders, creditors, and debenture holders, to improve the company’s financial position and operational efficiency.
The main objective of internal reconstruction is to enable the company to continue its operations by correcting the deficiencies in its financial structure, such as accumulated losses, high debt levels, or poor liquidity. Internal reconstruction can also help the company to improve its profitability, reduce costs, and enhance shareholder value.
Techniques used in internal reconstruction are:
- Reduction of capital: The Company may reduce its capital by cancelling or extinguishing some or all of its share capital, either by reducing the face value of the shares or by extinguishing them completely. This can help to eliminate accumulated losses, improve liquidity, and provide a stronger financial base for the company.
- Revaluation of assets and liabilities: The Company may revalue its assets and liabilities to reflect their current market value or fair value. This can help to correct any undervaluation or overvaluation of assets and liabilities and provide a more realistic picture of the company’s financial position.
- Conversion of debt into equity: The Company may convert its debt into equity by issuing shares to its creditors or debenture holders in exchange for their debt holdings. This can help to reduce the debt burden of the company and improve its debt-equity ratio.
- Consolidation of shares: The Company may consolidate its shares by exchanging a fixed number of old shares for a new share of higher face value. This can help to reduce the number of shares in circulation and improve the market value of the shares.
- Writing off losses: The Company may write off its accumulated losses by using its reserves or by creating a new reserve for this purpose. This can help to eliminate the negative balance in the profit and loss account and provide a cleaner financial statement.
External reconstruction is a process in which a company merges with or acquires another company to improve its financial position and operational efficiency. Unlike internal reconstruction, external reconstruction involves a change in the legal status of the company, as it may involve the creation of a new company or the acquisition of an existing one.
The main objective of external reconstruction is to create a larger and more efficient entity that can take advantage of economies of scale, reduce costs, and enhance shareholder value. External reconstruction can also help the company to diversify its operations, expand its market share, and improve its access to capital and other resources.
Techniques used in external reconstruction are:
- Merger: A merger is a process in which two or more companies combine to form a new company. In a merger, the assets, liabilities, and operations of the merging companies are combined to create a larger and more efficient entity.
- Acquisition: An acquisition is a process in which one company acquires another company by purchasing its shares or assets. In an acquisition, the acquiring company gains control over the operations, assets, and liabilities of the acquired company.
- Amalgamation: An amalgamation is a process in which two or more companies merge to form a new company, but the original companies cease to exist. In an amalgamation, the assets, liabilities, and operations of the merging companies are combined to create a new entity.
- Takeover: A takeover is a process in which one company acquires another company by purchasing a controlling stake in its shares. In a takeover, the acquiring company gains control over the operations and management of the acquired company.
Here’s a table summarizing the main differences between internal reconstruction and external reconstruction:
|Feature||Internal Reconstruction||External Reconstruction|
|Definition||A process in which a company reorganizes its capital structure, without changing its legal status.||A process in which a company merges with or acquires another company, resulting in a change in its legal status.|
|Objective||To improve the financial position of the company, by reducing or eliminating accumulated losses, revaluing assets or reducing debt.||To create a larger and more efficient entity, by taking advantage of economies of scale, reducing costs, and enhancing shareholder value.|
|Techniques||Capital Reduction, Revaluation of Assets, Writing off Accumulated Losses, Issue of New Shares or Debentures, Conversion of Debt into Equity.||Merger, Acquisition, Amalgamation, Takeover.|
|Change in Legal Status||No change in legal status.||Change in legal status, may involve the creation of a new company or the acquisition of an existing one.|
|Approval Required||Approval of Shareholders, Board of Directors, and Regulatory Authorities (if applicable).||Approval of Shareholders, Board of Directors, and Regulatory Authorities (if applicable).|
|Impact on Shareholders||Existing shareholders retain their shareholding, but the value of their shares may be diluted or enhanced depending on the nature of the reconstruction.||Existing shareholders may receive shares in the new company, cash or a combination of both, depending on the terms of the reconstruction.|
|Impact on Creditors||Creditors are generally unaffected, as the company’s debts are not cancelled or reduced.||Creditors may be affected, as the company’s debts may be cancelled or reduced, depending on the terms of the reconstruction.|
|Compliance Requirements||Compliance with legal and regulatory requirements, such as Companies Act, Income Tax Act, and SEBI Regulations.||Compliance with legal and regulatory requirements, such as Companies Act, Income Tax Act, SEBI Regulations, and Antitrust Laws.|