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.