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CS Professional · Corporate Restructuring, Valuation and Insolvency · Types of Corporate Restructuring

Nair Auto Ltd, a stressed company, converts Rs 60 crore of its debt owed to lenders into equity shares as part of a restructuring. What is the principal effect on the company's financial position?

Debt falls and equity rises by Rs 60 crore with no cash movement, improving the debt-equity ratio and interest burden. Lenders become shareholders and the existing shareholders are diluted. Equity does not fall and cash does not rise because only a liability is exchanged for shares.

  1. ADebt falls and equity rises, improving the debt-equity ratio, while lenders become shareholdersCorrect
  2. BBoth debt and equity fall by Rs 60 crore
  3. CDebt remains unchanged but cash rises
  4. DEquity falls because shares are issued at a discount to book value

Explanation

A debt-to-equity conversion extinguishes the liability and issues shares for the same amount, so liabilities fall and equity rises by Rs 60 crore with no cash movement. The debt-equity ratio improves and lenders gain ownership. Both falling or cash rising does not occur.

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