Managing and mitigating risks in distress transactions

By Dorothy Thomas and Teza Jose, Shardul Amarchand Mangaldas & Co
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In the last two years, we have seen a significant rise in M&As, largely driven by big ticket consolidation across sectors as companies divested distressed assets in an effort to reduce debt. The Insolvency and Bankruptcy Code, in particular, has set up a time bound resolution mechanism for non-performing assets (NPAs), which helps prevent depreciation in the value of the assets.

Dorothy ThomasPartnerShardul Amarchand Mangaldas & Co
Dorothy Thomas
Partner
Shardul Amarchand Mangaldas & Co

In a distressed sale, where both parties are keen to minimize their exposure to risk, buyers prefer to acquire the targets’ assets and sellers often prefer to sell their shares. While, share sale is a simpler process and faster to execute, asset sale still remains an attractive proposition to buyers as it allows them to cherry pick assets and gives them a clean start.

As a trend most distressed deals are structured as asset sales rather and there are instances where companies are bought simultaneously with the cancellation of previous shareholders’ capital, when it has fully eroded.

There is no denying that distressed mergers and acquisitions are a great opportunity for making significant profits, however, unless planned and executed with caution, they also have the potential to cause significant losses. However, there are ways to manage and mitigate these risks.

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Dorothy Thomas is a partner at Shardul Amarchand Mangaldas & Co and Teza Jose, is an associate.

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