CREDIT SYNDICATION
INTRODUCTION
Credit syndication services are services
rendered by the merchant bankers in the form of organizing and procuring the
financial facilities form financial institutions, banks, or other lending
agencies. Financing arranged on behalf of the client for meeting both fixed
capital as well as working capital requirements is known as loan syndication
service'
CREDIT SYNDICATION SERVICES
Merchant bankers
provide various services towards syndication of loans. The services may be
either loan sought for long term fixed capital or of working capital funds.
Objectives arranging
medium and long term funds for long term fixed capital and working capital
fund needs.
Scope The scope of
syndicated loan services as provided by merchant bankers include identifying
the sources of finance, approaching these sources, applying for the credit, and
sanction and disbursal of loans to the clients. While carrying out the
activities connected with credit
syndication, the merchant
banker ensure due
compliance with the
formalities of the financial institution, banks and
regulatory authority. They are:
1.
General Information: The
purpose of furnishing general information is to enable the financing
company to obtain a general idea about the applicant company and its proposed
project.
2.
Promoter Information: Information
about promoters is furnished by the merchant banker with the objective
of helping the lending agency to gain an understanding of the promoter, his
activities economic background, credibility and integrity.
3.
Company Information: The
merchant banker has to furnish the following information as regard the
company for loan syndication arrangements to be made:
• Brief history of the concern
• Schemes already executed in the case
of existing company
• Expansion/diversification plans in the
case of an existing company
• Nature, size and status of the project
to assess the funds requirement in the case of a new company
• Changes in names, business,
management, etc. and mergers, reorganizations, etc. that have taken place in
the past.
4.
Project profile Information: Full
information relating to the project for which financial assistance is
sought is furnished by the merchant banker. The type of information may pertain
to plant capacity, nature of production process to be employed, and nature of
technical arrangements available for the project.
5.
Project cost Information: Details
of the estimated cost of the project should be provided to the lending
institution. This includes information as regards rupee cost/rupee equivalent
of foreign exchange cost/total cost for land or site
development/buildings/plant and machinery, imported/indigenous, technical
know-how, etc. to be furnished. Besides, details of expenses likely to be
incurred on foreign technicians/training of Indian technicians abroad,
miscellaneous fixed assets, preliminary pre-operative expenses, provision for
contingencies, margin money for working capital etc. should be stated in the
loan application.
Project financing Information: Details
regarding the mode of financing used for the project should be stated.
This includes information on the extent of debt and equity capital funding
source. Besides, details of rupee loans, foreign currency loans, debentures,
internal cash accruals, and promoter‘s contribution. The security offered for
the loan/bank guarantee, etc. should also be specified. Data should also be
provided on the extent of loan arrangements already applied for and the limit
of financial arrangements thereto.
7.
Project marketing Information: As
part of the credit syndication exercise, it is incumbent on the part of
the merchant banker to furnish adequate information about the marketing
arrangements made for the products of the borrowing unit.
8.
Cash flow information : The
merchant banker has to furnish details as to profitability and expected
stream of cash flows and cost of the proposed project for this purpose, it is
essential that working results of operations, cash flow statements and
projected balance sheet are given in prescribed form along with the basis of
the calculations.
9.
Other Information: The
merchant banker has to indicate as to how the purpose of the economic
and national importance of the proposed project will be realized. Besides,
following are the other details to be furnished by the merchant banker to the
lending agency.
1. CIF/FOB
international price of inputs to be imported/exported.
2.
Economic benefits in general and the
region in particular available to the nation from the project.
3.
Economic benefits in general and the
region in particular available to the nation from the project.
4. Expected
contribution to the growth, if any of ancillary industries in the region.
5.
Government consent by way issue of
letter of intent, industrial license, foreign exchange permission, approval of
technical financial collaboration etc.
a. Making Application
The merchant banker
files the duly filled-in application in a manner as desired by the term-lending
institution. While presenting the application, it is incumbent on the part of
the merchant banker to ensure that all the required formalities have been
complied with. For instance, it is important that necessary sanction is
obtained from the Government for the proposed project. Loans are syndicated by
development financial institutions though the lead institution especially in
the case of consortium financing or joint consortium approach to lending is
followed. The lead institution adopts single window scheme while appraising,
sanctioning and disbursing loans. A part of credit syndication services, the
merchant banker arranges for appraisal of the project by sufficiently
interacting with the officials of the development financial institutions. The
merchant banker holds formal discussions with the appraisal team of financial institutions. He
helps the promoters/chief executive of the company by providing information to
the appraisal team. He takes part in the site inspection with the appraisal
team and provides information to them about the technical aspect of the project
implementation. He also assists the appraisal team on matters connected with
the choice of technique to be adopted for appraisal of the project. Merchant
banker provides advice in the preparation of project/feasibility report and the
market survey report, and the financial projections relating to the project.
1.
Technical Appraisal: Technical
appraisal involves the assessment of technical and engineering soundness
of the project. While carrying out the technical appraisal of a project,
aspects such as competence of the experts preparing design of facilities and
specifications; purchase arrangements of equipments; supervision of construction
and installation; ability of consultants and their costs for services, are
looked into. Attention is also paid to the aspects concerning the scale of
operation, cost of production and prospective demand. Similarly, attention is
paid to understand the appropriateness of the methods and processes to be used
for the project. Consideration is also given to the level of availability of
latest technology, degree of obsolescence in technological process, etc.
2.
Ecological Appraisal: Regarding
the ecological aspects of the project, the merchant banker ensures that
the borrowing company has taken all possible steps for preventing air, water
and soil pollution arising out of the industrial project proposed to be
undertaken. A certificate from the State Pollution Control Board has to be
produced to the effect that the company has installed equipment adequate and
appropriate to the requirement of meeting the environment protection.
Ecological appraisal is mandatory with respect to highly polluting industries
such as zinc, lead, copper, aluminum, steel, paper, pesticides/insecticides,
refineries, fertilizers, paints, dyes, leathering tanning, rayon,
sodium/potassium cyanide, basic drugs, foundry, batteries, acids/alkalis,
plastics, rubber, cement, asbestos, fermentation, electro placing,etc.
3. Financial Appraisal: Financial
appraisal involves analyzing the financial viability of the project
under consideration. Analysis of the need for fixed capital and working capital
is also carried out. Consideration is also given to the cost of the project as
relating to acquisition of capital assets, interest cost on loans obtained for
promotional, organizational, training and other purposes.
4.
Promoters contribution: Promoter's contribution for
establishment and running of a project is vital. The important sources of
promoters‗ contribution in the case of newly established companies include own equity, managed equity
from special funds such as Risk Capital/venture
Capital Funds or
Seed Capital from
IDBI through SFCs, etc.
and foreign equity,
deposits contributed by
promoters, etc. In
the case of
existing companies the
sources of promoter
contribution include internal
accruals, right issues,
divestment of shares,
additional equity, unsecured
loans, etc. The extent of promoter‘s contribution and debt-equity norms must be
scrutinized by the merchant banker.
5.
Economic Appraisals: The project involves making an analysis
of the expected contribution of the project to the particular sector, besides
its contribution to the development of the national economy. Particular
attention is paid to the project‗s usefulness in terms of best possible
utilization of scarce resources. It is essential to consider the priority
nature of the project. Accordingly, a project will be considered desirable if
it has a tremendous impact on the balance of payment and the capacity to
generate exchange surplus through new exports, import substitution and
resultant savings in foreign exchange.
6.
Commercial Appraisal:
It involves the determination of commercial viability of the project in
terms of arrangements for buying, transporting and marketing the product.
7.
Managerial Appraisals:
It is concerned with the evaluation of effectiveness and efficiency of the
managerial personnel who are vested with the responsibility of organizing the
available resources of the project. The merchant banker checks the managerial
competency both at construction and operation stages to ensure the success of
the project.
8.
Arrangement of Loan Sanction –It
is the function of a merchant banker to obtain the letter of
intent/sanction from the lending institution/bank. The lending agency informs
the merchant banker about the sanction of loan by the sanctioning authority.
The sanction letter invariably contains terms and conditions pertaining to the
sanction of loan. Some these terms include amount of loan, rate of interest
applicable, commitment charge levied by the lender in order to motivate the
borrowing unit to make efficient use of the loan, security for the loan,
conversion option in the case of default and rehabilitation assistance,
repayment terms of loan, and other terms and conditions.
Compliance for Loan
Disbursement: It is essential duty of the merchant
banker to ensure compliance of terms and conditions to have the loan
facility disbursed by the bank or the financial institution. Compliance is
required in respect of the following. 9.3 Compliance with the provisions of
Memorandum and the Articles 9.4 Compliance with the provisions of Acts 9.5 Compliance
with the provisions of loan agreement.
9.
10. Compliance with memorandum and
the articles The merchant banker ensures due compliance
with the provisions of Memorandum and Articles of Association of the borrowing
unit. This is to check the extent of powers commanded by the Board of Directors
of the company to make borrowings from the lending agency. The borrowing powers
of the Board are enshrined in the memorandum by means of its ‘objects c agency
to ensure that the acts of directors are not ultra-vires so as to safeguard its
interest.
b. Statutory Compliance
In addition, compliance
is also called for with regard to the provisions constrained in various
enactments concerning the management and regulation of joint stock companies in
India. Some of these enactments include Companies Act, 1956, Industries
(Development and Regulation) Act, 1951, Foreign Exchange Regulation Act, 1973,
Securities Contracts (Regulation) Act, 1956. The Foreign Trade (Development and
Regulation) Act, 1992, Income-Tax Act, 1961.
(i)
The companies Act, 1956 contains
specific provisions that stipulate the powers of borrowings vested with
the Board of Directors of the company. For instance, section 292 and 293 of the
Act outline the exercise of powers to borrow from banks and financial
institutions. Similarly, sections 17 and 31 of the said Act give an account of
restrictive covenants pertaining to powers of directors to borrow to be
contained in the Memorandum of Association and Articles of Association of a
company. The provisions mainly outline the procedures such as passing of
resolutions etc. to be followed for raising loans from term lending agencies.
(ii)
Compliance is also required under
the provisions of the Industries (Development and Regulation) Act, 1951. The
Act contains provisions of control and regulation for the setting up of
new industries and also expansion of existing industries. The provisions mainly
relate to registration and revocation of registration of industrial
undertaking, licensing of new industrial undertakings, license and revocation
of license for producing or manufacturing new articles, licensing industrial
undertakings in special cases, etc. Besides, provisions also outline the powers
of the Central Government to specify the requirements which shall be complied
with by small scale industrial undertakings, power of the Central Government to
exempt any industrial undertaking in special cases, etc.
Compliance is called for as regards
provisions contained in the Foreign Exchange Management Act (FEMA). The
provisions are applicable in the case of non-resident Indians being associated
in any manner with the organization or management or operations of the client
company or where foreign capital in any manner with the organization or
management or operations of the client company or where foreign capital in any
manner (i.e. By way of foreign
(iv)
Provisions of the Securities
Contracts (Regulation) Act, 1956 (SCRA) are also required to
be complied with by the borrowing unit before seeking financial assistance from
the term lending agency. Compliance is related to stipulations of enlistment of
securities of the company in recognized stock exchanges (although listing is
not mandatory under the said Act). Under Section 21 of the Act, Central
Government is empowered to compel any public limited company to enlist its
securities with a recognized stock exchange.
(v)
Compliance with the provisions of
the FIDRA (Foreign Trade Development and Regulation Act), 1992 are
required compliance by the borrowing unit. This becomes necessary where
the client company envisages to procure raw material, machinery, plant and
equipments from overseas through imports under the import license granted by
the Central Government under Import and Export (Control) Act, 1947.
(vi)
An important enactment in India
that requires closer compliance by the borrowing units is the Income-Tax Act,
1961. The Act contains provisions that require furnishing
of a tax clearance certificate from assessing officer under section 230A
of Income Tax Act before creation of security by way of English mortgage in
favor of lenders.
c. Documentation and Creation of
Security
An important function
of a merchant banker is to create an adequate documentation of security by
working closely with the ‘lead financial i loan. The type of documents to be
prepared and executed by the merchant banker will be as per the requirements of
the lead financial institution. Depending on the loan type, the merchant banker
executes bridge loan document or interim loan document. The merchant banker
provides the following details with regard to the security for the loan:
1.
First mortgage and charge of
all immovable properties both present and future of the borrower company
in the form as may be indicated by lenders which are equitable mortgage by
deposit of title deeds.
2. First
charge by way of hypothecation:
(i) All movables such
as stocks of raw material, semi-finished and finished goods, consumable stores
and such offer movables as may be agreed to by the lead institution for
securing the borrowings for working capital requirements in the ordinary course
of the business, and
(ii) On specific items
of machinery as permitted by the lender purchased and/or to be purchased by the
client company under the deferred payment facilities granted the client
company.
3. Security
for bridge loan
4. Security
for interim loan
5. Substantive
security: Where the loan amount is being secured in terms of
the loan agreement by first charge on the company‗s immovable and movable
assets, present and future.
6. Personal guarantee:
Where the loan amount is being secured in terms of the loan agreement by first
charge on the company‗s immovable and movable assets, present and future
7. Personal guarantee:
Where the borrowing is being secured by irrevocable and unconditional personal
guarantee from its promoters/directors in favor of the lending institutions.
d. Pre –Disbursement Compliance
This function is aimed
at merchant bankers assisting the borrowing unit in the withdrawal of the loan
amount from the financial institution. This done with additional compliance of
formalities of provision of information and documentation. Some of the
pre-disbursement conditions that require compliance by the merchant banker are
documentation. Some of the pre-disbursement conditions that require compliance
by the merchant banker are as follows:
1. Completion
of creation of security as stipulated in loan agreement
2.
Completion of borrowing arrangements
with other institutions and banks for raising funds as per the financing plan
3.
Non-existence of event of default in
payment of principal sum of the loan interest, arrears of interest, and in
performance of other terms and conditions of the loan
4. Compliance
of special conditions of sanction of loan
5. Review
of progress as satisfactory
6.
Subscription of share capital by
promoters as stipulated in the loan agreement and as stipulated in proposal of
financing the project cost.
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