Corporate Restructuring in India: Types, Legal Framework and Common Pitfalls

India's business landscape has changed dramatically over the past few years. The rise of startup culture has intensified competition, and factors like economic slowdowns and evolving consumer preferences are pushing companies to take a hard look at how they are structured and how they operate.

As businesses become more willing to take risks, corporate restructuring has become a go-to strategy. Companies typically opt for it when they want to cut operational costs, keep pace with new technologies, respond to shifting market dynamics, or enter new markets.

This article explains the different types and modes of restructuring, the regulatory framework that governs it, and the legal mistakes companies should steer clear of. Engaging an experienced corporate law firm in India at an early stage can make a significant difference in how smoothly the process unfolds.

What is Corporate Restructuring?

Corporate restructuring is the process through which a company reorganises its financial or operational structure to improve efficiency and strengthen its market position.

There are two broad approaches: internal and external restructuring. Internal restructuring takes place when a company modifies its financial structure from within, without shutting down or transferring its business. This can be achieved by altering or reducing share capital, varying shareholders' rights, or entering into a scheme of compromise and arrangement under the Companies Act, 2013.

External restructuring, on the other hand, involves transferring, consolidating, or reorganising a company's business, assets, or liabilities through legally recognised routes. Companies usually take this path when they are in serious financial difficulty and cannot recover through internal measures alone. Common methods include mergers and acquisitions, demergers, disinvestment, slump sales, asset sales, reverse mergers and joint ventures.

Legal Framework Governing Corporate Restructuring in India

The key laws and regulations that govern corporate restructuring are outlined below:

Companies Act, 2013

The Companies Act, 2013 (the "Act") is the primary legislation governing corporate restructuring in India. It permits companies to alter their share capital for internal restructuring without disrupting day-to-day operations, provided they follow the prescribed procedures, including obtaining approvals from shareholders and the board of directors.

The Act also provides scheme-based restructuring routes that help companies reach compromises or arrangements with their creditors. These mechanisms are particularly valuable for financially stressed businesses looking to restructure debt or convert debt into equity.

For external restructuring, such as mergers, amalgamations and demergers, the Act lays down a structured, court-supervised process that helps companies separate or realign their businesses. That said, these transactions often go through multiple layers of scrutiny, including oversight by the National Company Law Tribunal ("NCLT") and approvals from creditors and shareholders. To make restructuring simpler for smaller companies, the Act also permits fast-track mergers for entities that meet the prescribed criteria.

Securities and Exchange Board of India ("SEBI")

Listed companies planning a restructuring must comply with additional SEBI regulations designed to ensure fairness and protect public shareholders. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 govern schemes of arrangement and require prior stock exchange approval, valuation reports and detailed disclosures to safeguard everyone involved in the transaction.

In addition, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 regulate acquisitions and changes in control arising from restructuring, and trigger obligations such as an open offer once a specified shareholding threshold is crossed. Taken together, SEBI's framework ensures that restructuring of listed entities is carried out in full legal compliance while protecting minority shareholders.

Foreign Exchange Management Act, 1999 ("FEMA")

Cross-border restructuring involving foreign investment, overseas mergers or asset transfers falls under FEMA, with compliance monitored by the Reserve Bank of India ("RBI"). FEMA regulates capital flows, sectoral caps and reporting requirements for such transactions. Getting FEMA approvals and considerations right is essential when structuring both inbound and outbound deals.

Insolvency and Bankruptcy Code, 2016 (IBC)

When a company faces severe financial distress, restructuring may take place through the Corporate Insolvency Resolution Process under the IBC. The Code provides a time-bound, creditor-driven framework for resolving insolvency through approved resolution plans, with the primary aim of keeping the company running as a going concern and maximising value for stakeholders. Resolution plans are subject to judicial scrutiny by the NCLT to confirm they meet legal and procedural requirements. Where revival is not possible, the Code also allows for an orderly exit through liquidation.

Labour and Employment Laws

Many businesses tend to overlook their obligations towards employees during restructuring. However, labour and employment laws take centre stage whenever a restructuring involves the transfer of employees or changes to their service conditions. Companies must ensure continuity of employment benefits, statutory contributions and compliance with transfer, retrenchment or termination requirements under the new labour codes and social security legislations.

Due Diligence and Risk Assessment

Thorough due diligence helps identify potential problems before they escalate. This typically covers:

• Financial due diligence – verifying the counterparty's assets, liabilities, debts and overall financial health.

   

• Legal due diligence – conducted by a corporate law firm in India to review contracts, licenses, statutory filings, litigation and intellectual property of the investee company.

   

• Operational due diligence – assessing internal processes, employee obligations and stakeholder approvals under the Act.

   

• Creditor and stakeholder checks – identifying hidden risks, potential disputes and the consents required.

   

• Regulatory compliance review – confirming compliance with all applicable laws, approvals and sector-specific rules, including FDI caps, competition thresholds and IBC/Companies Act timelines.

   

Legal Pitfalls in Corporate Restructuring

Despite the range of statutory mechanisms available, restructuring efforts often fail because of poor legal planning and procedural lapses. One of the most frequent problems is inadequate due diligence, particularly around business approvals and licenses, financial debts and liabilities, and employee obligations, which regularly leads to post-transaction disputes and regulatory intervention.

Companies also expose themselves to unnecessary risk when they proceed without proper guidance from legal experts. Failing to secure the necessary approvals or communicate openly with creditors and stakeholders can undermine and derail the entire restructuring effort, especially where the scheme is supervised by regulatory authorities.

Another recurring issue is inadequate valuation of assets and shares, which invites objections from shareholders, regulators and creditors, and delays the approval process.

Finally, non-compliance with labour laws or sector-specific regulatory requirements, along with overlooked tax implications, is among the most common reasons a proposed restructuring ends up creating unintended liabilities and eroding the very benefits it was meant to deliver.

Judicial Approach

Indian courts and tribunals have significantly shaped the restructuring landscape through their interpretation of the law. Under the IBC, the Supreme Court has repeatedly upheld the commercial wisdom of creditors, limiting judicial interference in approved resolution plans except where there is a clear breach of law or a procedural irregularity.

JSW Steel and Bhushan Power & Steel Ltd (“BPSL”) acquisition: After BPSL entered insolvency in 2017 under the weight of heavy debt, JSW Steel emerged as the successful resolution applicant in 2019, with its plan approved by the Committee of Creditors and the NCLT. In May 2025, the Supreme Court set aside the resolution plan and ordered liquidation, citing procedural lapses and violations of the IBC. In September 2025, however, the Hon’ble Court reversed its decision and reinstated JSW Steel’s plan, reaffirming the primacy of the creditors’ commercial wisdom. The case reflects both the intense legal scrutiny that IBC-based restructuring attracts and its power to genuinely revive distressed businesses.

Courts have also come down firmly on the misuse of restructuring as a vehicle for tax avoidance or regulatory arbitrage. Transactions that lack genuine commercial substance, or that exist mainly to secure tax benefits, face heightened scrutiny.

In schemes of arrangement, the NCLT's review extends to whether the scheme is commercially reasonable, legally compliant, and not oppressive or prejudicial to any class of stakeholders. The tribunal examines valuation reports and the overall fairness of the scheme closely, ensuring that minority shareholders and creditors are adequately protected.

Conclusion

Corporate restructuring turns chaos into clarity, offering struggling businesses a genuine lifeline, whether through internal measures like capital reduction or external transformation such as mergers and demergers. Acting at the right time unlocks value, reduces debt and improves business efficiency. At the same time, companies must avoid missteps like skipping due diligence or ignoring regulatory timelines, as these can quickly wipe out the anticipated gains.

In the Indian economy, restructuring offers a path to strategic revival, balancing growth with compliance for long-term success. Working with a trusted corporate law firm in India ensures the process stays legally sound at every stage.

Original Source: https://www.ahlawatassociates.com/blog/corporate-restructuring-in-india-legal-guide