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Consortium Lending

Consortium Documentation

Consortium Documentation

Documentation for Creation of Security

Documentation under consortium arrangement generally takes care of conferring charge in favour of the participating banks and financial institutions to cover their share of advances out of total advances to a borrower The legal rights so conferred is Pari-Passu in nature.

"Pari-Passu" means "in proportion to". Once the arrangement for lending is through a consortium, the limits are shared and released in the agreed proportion.

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In the same proportion as the advance, the securities are shared, and in the event of enforcement of the security, the sales realisations will be shared in proportion to the outstandings (within the sanctioned limits) with each bank to the aggregate outstanding.

In the absence of a common joint document, embodying all the terms and conditions of lending, and the creation of necessary charge and allocation of security etc., each bank, by a mere letter authorises other bank to release their share and agree to cede pari passu charge in their favour as the individual documents executed in favour of each of these banks will not specify the extent of security cover for their respective share of advances.

The independent document witnesses the creation of the security of all the current assets in their favour and the pari passu letter dilutes the same to the extent required. While registering the documents with Registrar of Joint Stock Companies, this letter ceding pari-passu charge has to be sent along with the other documents.

While, we as a participating bank receive a letter ceding pari paasu charge in our favour from the other banks, we have also to issue similar letters in favour of other participating banks.

Letter of consent from all the other banks indicating therein that they have no objection to the Company borrowing from our bank against execution of independent documents in our favour for the sanctioned sums and creating a security upto the requisite extent to subject to the same being brought under consortium at a later stage when joint documents are to be executed, should be obtained.

Inter-Se Agreement: When a pari passu charge is conferred in favour of the participating banks, the rights, duties etc., of each of the banks are conveyed by the participating banks by means of Inter-se agreement. This is an agreement among the participating banks where by the sharing of limits, security, ancillary business etc., are set out.

This can be so drafted as to make the borrower also a party. Each participating bank keeps a copy of this executed agreement and this deed need not be sent for registration. It need not be stamped.

The agreement, interalia indicates the name of the leader bank, their rights, duties and also contains an authority in their favour given by the other participating banks to act as the agent on their behalf, to obtain, hold and maintain the security. The format of this agreement is given in the Annexure I & IV.

Like any other advance, consortium advances are also broadly divided into

(a) Working Capital advances and

(b) Term Loans.

Documentation for Working Capital Advances

Working Capital Finance under Consortium arrangements can be

i) Pledge: (a) the banks participating can take the goods under pledge in independent godowns, acceptable to them. The security therefore remain independent and identifiable. Banks can take independent pledge document favouring their banks and take separate insurance cover.

Joint Pledge: In cases where it is convenient for a particular bank in the consortium to take the goods of the borrower under pledge, on behalf of all the banks, then it is the responsibility of that bank to take adequate care of the goods, inspect them periodically and effect deliveries against pro rata payments by the borrower.

The bank taking the pledge of the goods can either distribute the proportionate debits to the other member banks so that the borrower can avail of the proportionate amounts from those banks or make available the entire permissible loan amount to the borrower and distribute the share of each member banks. The adjustment to be made for the repayments of the loan against prorata deliveries should also be similarly accounted for by the member banks.

ii) Cash Credit facility (Hypothecation): This is the most common form of lending in the consortium arrangement. Limits are sanctioned to be availed by means of Cash Credit accounts from each participating Bank. Where the operation are confined only through one Bank due to operational convenience, it is the responsibility of the Leader Bank to recover and remit to each Bank monthly/quarterly interest charges and other service charges.

(a) Documentation Procedure for the Cash Credit facility under Consortium Arrangement

During 1974-75, State Bank of India took the initiative and in consultation with the Chiefs of the Legal Departments of all the Nationalised Banks, a common joint hypothecation deed and interse pari passu agreement were finalised. Both the formats are furnished in the Annexure 1(a) & (b).

These two joint documents can be used in the case of consortium Cash Credit facility arrangement If any amendment is required to suit a particular case, suitable alterations, additions and deletions can be mad in these drafts with the approval of the Legal Department. For example, the drafts formulated by State Bank of India are applicable to one of the Working Capital limits, namely, Cash Credit limit.

If it is decided I the consortium Banks to secure current assets and book debts for all the working capital limits, including Bills and non-borrowing limits, like L/C and L/G, suitable amendments can be made in the format of Jo Deed of Hypthecation and Inter-se Pari passu agreements.

Though, the joint documentation is used for the borrowing limits like, cash credit and work capital and term loan the non borrowing limits, such as Letter of Guarantee/Letter of Credit/Co-acceptar Drawee Bills can also be brought under the consortium arrangement if the relative security were to be hypothecated jointly to the member bank provided these limits are extended to facilitate the acquisition of current assets.

In such cases, the pattern of sharing of security will be determined on the basis of the cash credit limit and the non-borrowing limit granted by each Bank out of the total fund based and non fund based cash limits. It is also necessary that while sanctioning such non-borrowing limits, charge on current assets by of hypothecation is to be stipulated.

For the computation of the drawing power under the cash credit accounts the branches are to be guided by our Misc. Circular No. 181 (file 7c) dated 8-9-81.and in order not to inconvenience the borrower, each bank may take the hypothecation documents as per their standard formats. Generally, each Bank may take the following individual documents in such eventuality:

1. Demand Promissory Note

2. Letter of Hypothecation.

3. Board Resolution.

4. Letter agreeing to cede pari passu charge from the other banks. The charges should be filed with the Registrar of Companies within the prescribed time on the basis of the individual documents taken by each participating Bank. After the execution of the joint deed of hypothecation and inter-se pari passu agreement, the individual charges are to be satisfied and a fresh regist- ration of charge to be filed on the basis of the joint documents. However, it should be ensured that there is no other intermediate charge taking precedence in this process.

Documentation Procedure for granting Term Loan facility under Consortium Arrangement

(A) In the case of Term Loans, the usual securities obtained are:-

1. First charge on moveable machineries by way of hypothecation.

2. First charge on land, building and assets embedded to earth (example, plant and machinery).

To secure the movable machineries, the consortium Banks can execute a joint hypothecation deed. The charge on the fixed assets of the company can be created by way of mortgage. The consortium Banks can adopt any of the following procedures for creating the mortgage in favour of all the Institutions.

1. Joint Equitable Mortgage.

2. Joint Registered Mortgage.

3. Joint Equitable Mortgage in favour of certain Institutions and registered mortgage in favour of any one or some of the Institutions.

In the case of creation of joint equitable mortgage, the Leader Bank accepts the title deeds on behalf of themselves as well as on behalf of the other participating institutions as their agent. Generally, in such cases, where a joint equitable mortgage is created in favour of all the institutions, an undertaking letter is taken from the borrower to the effect that a registered mortgage would be created in future as and when it is desired by the financial institutions. In addition to that, a Power of Attorney also will be taken by the borrowing company appointing the participating banks as Attorney to create such registered mortgage.

The following specimen of joint documents relating to the term loans are given in Annexure II (a to g)

1. Common Loan Agreement containing the terms and conditions of the loan (share of each Banks rate of interest, repayment schedule etc.)

2. Joint Deed of hypothecation securing the movable machineries.

3. Undertaking letter to create a registered mortgage in future.

4. Power of Attorney authorising the participating Banks as Attorney to create a registered mortgage on behalf of the borrower.

5. Memorandum of Entry (title deed narration) to be entered in the Register of the Lead Bank.

B) INTERIM DOCUMENTATION PROCEDURE FOR RELEASING THE TERM LOAN UNDER CONSORTIUM ARRANGEMENT

As stated earlier, it may not be possible for releasing the term loans by all Banks simultaneously on execution of joint documents and creation of joint mortgage. Similar to the interim documentation procedure applicable to cash credit advance as mentioned above in the case of release of term loans also the participating links can obtain individual documents as prescribed in their banks pending finalisation of joint documents and creation of joint mortgage. In the case of limited company borrowers, care should be taken for creation charge on the strength of the joint documents.

ALTERNATIVE DOCUMENTATION PROCEDURE IN CASE OF TERM LOANS

There is no uniform documentation procedure in the case of consortium term loans. In most of the cases, the aforesaid joint documents like Common Loan Agreement, Joint Deed of hypothecation etc. are executed. Sometimes, the participating Bank can agree to adopt the following simple procedure :-

Each participating Bank can release their term loan against execution of individual hypothecation deed as per their standard format.

A joint equitable mortgage will be created in favour of the participating Bank by deposit of title deeds with the Lead Bank. (Among the participating Banks, one Bank can have registered mortgage and others can have a joint equitable mortgage).

The participating Banks can enter into an agreement stating that their individual hypothecation charge and the mortgage created in their favour shall rank pari passu.

specimen of the Pari passu agreement is appended in Annexure IV.

The case of limited company borrowers, the charges filed on the basis of the individual hypothecation are modified on the basis of the pari passu agreement.

Documentation Procedure for establishing letters of credit and issuing letters of guarantee under consortium arrangement

In cases, where due to the operational convenience of the borrower the leader bank opens LCs or issues LG's with an understanding to share the commission with the participating banks on pro-rata basis, in order to protect the interest of the leader bank, the borrower as well as the participating banks shall be required to execute a Letter of Indemnity in favour of the leader bank.

A specimen of such a letter of indemnity is given in Annexure III (a) Alternatively, if it is not convenient to execute such common indemnity, the Lead Bank can take individual indemnity from each participating Bank. A specimen of the individual indemnity taken by the Leader Bank is given in Annexure III (b) In either case, each participating Bank should take counter guarantee/ indemnity from the borrower in respect of their commitment in order to safe-guard their interest.

Part Releases/Adhoc Release/Bridge Loans/LC Commitments against Term Loans

The Joint Documentation procedure in regard to term loans under a consortium arrangement is time consuming. The gap between sanction and the regular release after creation of security and execution of the documents is very wide, and the project for which the term loan is sanctioned will suffer if the loan amount is to be released only after completing all the formalties. There may, therefore be a need for adhoc releases or part releases or bridge loan to enable the borrower to complete the project as scheduled. In all such cases banks and financial institutions can take their own security documents and get them registered with the Registrar of Companies after obtaining the following:

i) No objection letters from the other participating banks/financial institutions;

ii) Letter agreeing to cede pari passu charge in their favour from others;

iii) Suitable Board Resolutions;

iv) Undertaking letter from the borrowers agreeing to execute the regular documents and creation of security within a stipulated period.

It also happens that the bridge loans may be released by a bank which is not participating in the regular term loan, but which may have agreed to extend necessary working capital finance at a later stage. In such cases they obtain

(a) their own documents with the supporting Board resolutions from the borrowers;

(b) no objection letters from the consortium banks;

(c) letters ceding pari passu charge;

(d) a letter from the concerned financial institutions (against whose term loan commitment, bridge loans are extended) stating that, they have no objection to banks extending the bridge finance and that they shall release the term loan proceeds through that bank when it is ready for disbursal for adjustment of bridge finance.