Financial Restructuring: A Crucial Process for Businesses

Financial restructuring is crucial for companies to enhance their financial structure and efficiency by restructuring debt and equity capital, addressing liquidity issues, and fulfilling current obligations.

FREMONT, CA: Financial restructuring involves reorganizing the financial structure, primarily equity and debt capital. It can be done due to compulsion or as part of a company's financial strategy. Debt restructuring and equity restructuring are the two components of financial restructuring.

Debt restructuring involves reorganizing a company's entire debt capital, which can be done based on the company's circumstances. Companies can seek to restructure to change their debt by using market opportunities, reducing the cost of borrowing and increasing the working capital position, or creating an insolvent company that is solvent, free from losses, and viable in the future.

Components of debt restructuring include the restructuring of secured long-term borrowings, unsecured long-term borrowings, working capital borrowings, and other term borrowings. Restructuring secured long-term borrowings can be done for various reasons, such as reducing the cost of capital for healthy companies, improving liquidity and increasing cash flows for a sick company, and enabling rehabilitation for that ill company.

Equity restructuring involves reorganizing equity capital, including reshuffling shareholders' capital and reserves on the balance sheet. This complex legal process is highly regulated. 

Various methods of equity restructuring include repurchasing shares from shareholders for cash, changing equity capital into redeemable preference shares or loans, writing down share capital through appropriate accounting entries, reducing or waiving off dues that shareholders need to pay, consolidating share capital, or subdividing shares. Reasons behind equity restructuring include correction of overcapitalization, shoring up management stakes, providing a respectable exit mechanism for shareholders during depressed markets, reorganizing the capital for better efficiency, wiping out accumulated losses, writing off unrecognized expenditure, maintaining the debt-equity ratio, revaluing assets, and raising fresh finance.