Financial restructuring involves a significant Change in the financial structure of the firm and/or the pattern of ownership, and control. Financial restructuring is done in a variety of ways. The more common ones are:
1. Going Public
2. Debt-equity swap
3. Leveraged buyout
Most of the partnership firms and private limited companies and to some extent even sole proprietorship concerns that have attained some size and stature seem to debate whether they should go public and if so when and on what terms.
Whether to go Public: For many firms the decision relating to going public is an agonizing one. What are the pros and cons that are relevant to such a decision? The potential advantages that seem to include many companies to go public are:
Access to Capital: A private limited company many find it very difficult to grow beyond a certain point for want of capital. Hence, the principal motivation for going public is to have access to larger capital.
Respectability: Heading a public limited company is deemed to be more entrepreneurs believe that they have arrived in some sense if their company goes public.
Ability to Attract Talent: Competent and ambitious executives would like to work for organizations that offer greater prospects for growth, other things being equal public limited companies have greater growth potential compared to private limited companies. Hence, they can attract superior talent.
Foreign alliances: Foreign companies may be more comfortable in working with public limited companies. Hence a firm, interested in seeking an alliance with a foreign partner would be better off if it is organized as a public limited company. A pubic limited company of course is not an unmixed blessing. There may be several disadvantages in gong public:
Dilution: When private limited company goes public, the existing shareholders will have to accept some dilution of their ownership stake. They no longer remain the absolute owners of the company.
Loss of flexibility: The affairs of a public limited company are subject to fairly comprehensive regulations. Hence, when a private limited company is transformed into a public limited company there is some loss of flexibility.
Disclosures: Law requires a public limited company to disclose more information to investors and others. Hence, it cannot maintain a strict veil of secrecy over its expansion plans and product market strategies as its private counterpart can do.
Accountability: Understandably, the degree of accountability of a public limited company is higher. It has to explain a lot to its shareholders.
When and on what terms: On the whole many private limited companies may find that the pros off going public outweigh the cons of going public. Once they are convinced in principle, that they should go public, the next question is when and on what terms?
Generally, a private limited company has to wait till it has a certain track record of profitability. There is a SEBI guideline which says that a company should have been profitable for at least three years out of the preceding 5 years. As far as the actual timing of the public issue is concerned, it is matter of judgment. Companies would naturally like to go public when the stock market is buoyant. However, given the lead time required for a public issue and the unpredictability of the stock market, successful timing seems to depend as much on luck as on skill.
When a firm finds if difficult to service its existing debt it may explore the possibility of converting debt into equity. Such a conversion is referred to as debt-equity swap. For example, when Indian Drugs and pharmaceuticals Limited was not in a position meet the interest burden let alone the principal repayment obligation, on its outstanding debt, it sought to swap its debt to equity.
Remember that financially troubled firms seek to avoid debt and embrace equity. Why? Equity is soft debt hard. Equity is forgiving debt insistent. Equity is a pillow, debt is a sword. Equity and debt are the yin and yang of corporate finance.