Corporate restructuring is when a company makes significant changes to its structure, ownership, or operations to improve its efficiency, profitability or to address challenges it faces. In India, these changes are influenced by laws, taxes, and economic conditions. This article explains the reasons for corporate restructuring or why companies in India undertake restructuring, focusing on Indian laws, in a clear and detailed way, as of 2025.
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Legal Reasons for Corporate Restructuring
Companies often restructure because of legal requirements. These can include dealing with financial problems, following government rules, or adapting to new legal systems. Below are the main legal reasons why companies restructure:
Financial Difficulties and Insolvency
When a company cannot pay its debts, it may need to restructure in order to survive. The Insolvency and Bankruptcy Code, 2016 (IBC) helps companies in such situations. If a company owes more than INR 10,000,000 (1 crore rupees) and is unable to repay, it can start a process called the Corporate Insolvency Resolution Process (CIRP). This is done through a court called the National Company Law Tribunal (NCLT). The goal is to reorganize the company’s debts to keep it running. For smaller businesses like micro, small, and medium enterprises, or MSMEs, there is a faster option called pre-packaged insolvency where the management of a company stays in control, and the process is quicker, as long as certain people connected to the company are not banned from participating under the Insolvency and Bankruptcy Code, 2016.
Scheme of Arrangement
Under Section 230 of Companies Act, 2013, companies can create a plan to restructure their debts, merge with another company, or split into smaller parts. This plan needs approval from most of the company’s creditors or shareholders and specifically, a majority in number who hold at least three-fourths of the value of the shares or debt. However, this process has limitations. It doesn’t allow the company to force all groups of creditors to agree (no cross-class cramdown), and there’s no legal protection (moratorium) to stop creditors from taking action during the process, which makes it less secure.
Cross-Border and Group Issues
India doesn’t have specific laws for handling insolvency across a group of related companies, but the NCLT can combine cases for companies with similar businesses to make the process easier. For companies operating in multiple countries, restructuring is more complex. India is working on adopting international insolvency rules, but currently, foreign court decisions are only recognized under certain conditions in the Indian Civil Procedure Code, especially if the countries have mutual agreements.
Regulatory Compliance
Changes in government policies can force companies to restructure. For example, new rules about foreign investments or industrial licenses may require a company to change its structure to comply. Updates to regulations, like Securities and Exchange Board of India (SEBI) on takeovers, also push companies to adjust their operations to meet new legal standards.
Informal Work-outs
Sometimes, companies negotiate directly with their lenders to restructure debts without going to court. These negotiations, called informal work-outs, are guided by rules from the Reserve Bank of India (RBI). These agreements are typically used when a company owes money to only a few lenders, like banks or certain non-banking financial companies (NBFCs). However, these arrangements don’t offer legal protection (like a moratorium), so they are less secure than formal processes under the IBC.
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Tax-Related Reasons for Corporate Restructuring
Taxes play a big role in why companies restructure. By planning carefully, companies can save on taxes or take advantage of tax benefits. Below are the main tax-related reasons for restructuring in India:
Tax-Neutral Mergers and Amalgamations
When two companies merge, it can be done in a way that avoids taxes, as allowed under Section 47(vi) of the Income Tax Act, 1961. If the new company formed after the merger is based in India, no capital gains tax is charged on transferring assets.
The cost of acquiring these assets is calculated under Section 49(1), and the time the assets were held by the original company counts for tax purposes (Section 2(42A)). Shareholders also avoid capital gains tax if they receive shares in the new company as payment (Section 47(vii)), and no taxes are applied as if dividends were paid. This tax-free setup makes mergers attractive for companies looking to combine operations efficiently.
Tax-Neutral Demergers
Splitting a company into separate businesses is called a demerger which can also be tax-free under Section 47(vib) of the Income Tax Act, 1961, if the new company is Indian. No capital gains tax is charged on transferring assets, and the cost and holding period of assets are calculated similarly to mergers (Sections 49(1), 2(42A)). Shareholders don’t pay capital gains tax on shares they receive in the new company (Section 47(vid)), and no taxes are treated as dividends. This allows companies to separate business units without tax burdens, making it a popular restructuring strategy.
Capital Reduction
A company may reduce its capital by canceling the shares or paying off the shareholders. If the company has accumulated profits, this payment can be treated as a dividend under Section 2(22)(d) and shareholders must pay tax on it (starting April 1, 2020). Reducing capital is considered a transfer, so it can trigger capital gains tax. However, canceling shares can sometimes create a capital loss, which can be useful for tax planning. This makes capital reduction a strategic option for restructuring a company’s finances.
Buyback of Shares
When a company buys back its own shares, it pays a 20% tax on the money distributed, as per Section 115QA (effective June 1, 2016). This tax is paid by the company, not the shareholders, who are exempt from taxes under Section 10(34A). No capital gains tax is charged on shareholders under Section 46A. This setup makes buybacks a tax-efficient way for companies to return extra cash to shareholders while optimizing their capital structure.
Issuance of New Shares and Angel Tax
If a company issues new shares at a price higher than their fair market value, it may have to pay “angel tax” under Section 56(2)(viib). This tax applies to the extra amount received, treated as income, and now includes non-residents (effective April 1, 2024). Startups and venture capital investments are sometimes exempt. Additionally, if more than 51% of a company’s shares change hands, it may lose the ability to carry forward tax losses under Section 79, which can influence restructuring decisions.
Tax Rate Changes
When the government lowers corporate tax rates, like it did in 2019, companies may restructure to take advantage of the savings. For example, they might move operations or change their structure to pay less tax, making their business more competitive.
Summary
Corporate restructuring in India happens for a mix of reasons, including legal requirements, tax savings and economic challenges. The Insolvency and Bankruptcy Code, 2016, and the Companies Act, 2013, provide strong legal tools for restructuring, while the Income Tax Act, 1961, offers tax benefits for mergers, demergers and share buybacks. Companies must carefully plan their restructuring to balance their business goals with legal and tax rules, ensuring they can grow sustainably.
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Reasons for Corporate Restructuring: FAQs
Q1. Why do companies in India restructure?
Companies restructure to fix financial issues, follow laws (IBC, Companies Act), save taxes (mergers, buybacks), meet regulatory changes, or handle economic challenges like competition.
Q2. What are common reasons for restructuring?
Financial struggles, legal compliance, tax savings, regulatory updates, and economic pressures like competition or new technology needs.
Q3. What’s a key reason for restructuring?
Financial distress, using the IBC to reorganize debts via the NCLT to keep the business running.
Q4. What’s the purpose of restructuring?
To boost efficiency, profits, or sustainability by changing a company’s structure, ownership, or operations to solve problems or seize opportunities.
Q5. Why is restructuring needed?
To survive financial issues, comply with legal/tax rules, reduce taxes, adapt to market changes, or improve competitiveness and efficiency.
