Consortium banking

Consortium banking

1. CONSORTIUM BANKING Gita Bhatia – 8 Amruta D eshmukh – 14 Jacky Kajrolkar – 40 Parin Sanghvi - 97 Hitasha Sharma – 100 Amit Rawool - 161

2. INTRODUCTION In Consortium financing, several banks (or financial institutions) finance a single borrower. In this case there is a common documentation, joint supervision and follow-up exercises between all banks/financial institutions. So the participating banks form a new consortium bank. The whole loan amount is divided among those banks forming consortium, so the risk also gets divided. The bank which takes the higher risk (by giving the highest amount of loan) will act as a leader and thus it acts as an intermediary between the consortium and the borrower

3. CONSORTIUM -A RISKY BUSINESS Consortium banking are not right for every project as they bring their own unique risk and considerable management challenge The risk is associated with their supply and normally defined in writing in the contracts that parties enter into… Contracts contains obligations and need to be performed with corresponding liabilities they are the written contract how risk is associated with the delivery of a given project are to be divided between the parties One particular type of contractual arrangement that has been specifically designed to achieve a more even spread of risk sharing is the consortium or joint venture approach A joint venture is a short term or long term arrangement between two or more parties for the purpose of taking common project or enterprise there are 2 types of joint venture Corporate joint venture Contractual joint venture

4. CORPORATE JOINT VENTURE & CONTRACTUAL JOINT VENTURE As a name suggest it is a creation of corporation an independent legal entity and liable in law for all obligations of its interest which are separate and distinct from its shareholders IT is most common between large companies who pool their expertise in a particular field to develop markets or undertake large scale development projects on permanent and semi permanent basis The contractual Joint-venture by contrast has no permanent structure is governed by contract enter into by the parties and is form mainly for the purpose of delivering short term one of the project the most common use of such venture is engineering is a consortium

5. Documents required for consortium banking (Term Loan) CONSTITUTIONAL DOCUMENTS : Memorandum and articles of association and certificate of incorporation and commencement of business or trust deed/bye laws/partnership deed of the Borrower and the other security provider or relevant parties in connection with the Facility. A certified true copy of a resolution of the board of directors/members/trustees of the Borrower: (a) approving the terms and execution of, and the transactions contemplated by, the Facility Agreement and the other Transaction Documents; (b) authorizing, the affixation of the common seal on the Facility Agreement and the Transaction Documents, and/or directors or members or trustees or other authorised executives to execute the Facility Agreement and the other Transaction Documents; and (c) authorizing a person or persons, on its behalf, to sign and/or dispatch all documents and notices to be signed and/or dispatched by it under or in connection with the Facility Agreement and the other Transaction Documents

6. A specimen signature of each such person authorised by the resolutions referred to in Sub-clauses (a)(ii)(b) and (a)(ii)(c) herein above. 6 A certified true copy of a resolution of the shareholders of the Borrower if required under the Companies Act, 1956, authorising , inter alia, the borrowing contemplated under, and the execution of, the Facility Agreement and the other Transaction Documents. v) A certificate of the statutory auditors of the Borrower confirming that: (a) the borrowing or the availing of Facility under the Facility Agreement would not cause any borrowing limit binding on the Borrower to be exceeded, and (b) the assets to be mortgaged/charged/pledged as security for the Facility, are the absolute property of the

7. A certificate of the legal advisers of the Borrower certifying that the Borrower and its Directors/Members/Trustees have the necessary powers under the constitutional documents of the Borrower to borrow or avail the Facility and enter into the Facility Agreement and that the borrowing or availing of the Facility under the Facility Agreement would not cause any borrowing limit binding on the Borrower to be exceeded. Documentary evidence that the Borrower has complied with all of its obligations to file all of its statutory returns, forms and other documents with the relevant Registrar of Companies/ other such statutory authorities as may be prescribed under the various laws applicable to the Borrower. A copy of the Borrower’s most recent audited accounts and auditor's report and unaudited accounts.

8. AUTHORISATIONS The Borrower shall submit the following: Certified copies of each authorisation necessary or desirable in connection with the entry into, performance, validity, enforceability and admissibility of the Facility Agreement and the other Transaction Documents (and the transactions contemplated thereby), including authorizations from its secured creditors stating that they have no objection to the Borrower creating the security interests on its assets in accordance with the Facility Agreement. Documentary evidence that each of the Transaction Documents has been duly executed by the parties to it and that each of the Transaction Documents is in full force and effect. Documentary evidence that all registration, notices and filings which are necessary or desirable in relation to the Transaction Documents and the Project have been completed. Documentary evidence that the Borrower has the necessary powers and authority to enter into the Project Documents and perform all obligations there under. The Borrower shall submit certified copies of each authorization necessary or desirable in connection with the entry, performance, validity, enforceability and admissibility of the Project Documents .

9. PROJECT DOCUMENTS : The Borrower shall submit certified true copies of each Project Document entered into, executed by or in favour of the Borrower. AUTHORISATIONS : Unless otherwise permitted by the Lenders, the Borrower shall create the security as stipulated in the Facility Agreement to secure the Facility.

10. Limited Liabilities Why do you think there should be limited liabilities in consortium banking?

11. Formation of consortium banking A Subsidiary Bank owned by several different Banks. Each Owner Bank has an equal share so that no Bank is the majority shareholder. The Owner Banks are often in different complete, the Consortium Bank dissolves itself. While they are not as common as countries. A Consortium Bank is created to finance a specific project; once the project is they once were, they are useful when a project involves multiple currencies. Large Lending’s are formed always under Consortiums as per the guidelines issued by  DBOD(Department of Banking Operations and Development) of RBI

12. Limited Liabilities (Vijay mallya’s case) Of Rs 7,000 crore lent to Kingfisher, banks can now recover just Rs 6 crore Documents, forensic reports and accounts of people from across the world studied by dna reveal that members of the 17-bank consortium of lenders led by SBI may never be able to recover the money loaned to Mallya's airline.

13. Many banks lended loan to kingfisher airline. 17 Banks caught in Kingfisher's loan trap(Corporation Bank, State Bank of Mysore Vijaya Bank, SBI, BOI, Punjab National Bank, Central Bank,  ). Year Brand value of Kingfisher Airlines Money owed to banks (estimated) 2009: Rs 4,111 crore : Rs 4,000 crore 2012: Rs 3,008 crore : Rs 7,000 crore 2014: Rs 6 crore : Rs 7,000 crore Thus Limiting liabilities in consortium banking plays a vital role. Banks needs to know the liabilities of a person/company has before giving them a loan. It thus helps banks to recover their with help of assets of person/company has whom loan is given / are about to give.

14. Advantages of consortium Ease of formation No forma procedures must be followed through most consortia are form in writing by the execution of a consortium agreement . in addition no capital is required to create the consortium. Flexibility Members of consortium can changed their contractual agreement at any time to suit change circumstances Ease of termination Ease of Termination Consortia can be set to expiry on a given date or on the occurrence of certain events without the formal requirements needed in the case of dissolution of a corporation Tax transparency The consortium is not directly subject to taxation the individual members are

15. Confidentiality Some of the members of the consortium may choose to be undisclosed parties in dealing with third parties. Costs: The cost of running a contractual joint venture is generally lower than running a joint venture company.

16. Disadvantages of consortium Liability It is difficult for a consortium member to restrict or limit its liability. Members may even become liable to third parties for the non-performance of other members of the consortium or the debts of such members incurred in undertaking the common project. External relationship and funding Third parties often find it difficult to enter into contract with a non-legal entity like a consortium. Because it is a non-legal entity funding is also normally only available to the individual members and not the consortium itself. Lack of permanent structure The lack of a permanent structure makes it difficult for a consortium to establish long-term business relationships with third parties. In addition, the lack of permanence means the consortium agreement is a crucial document and not easy to draft. It must be clear on the rights and obligations of the parties, which need to be focused firmly on the purpose of the consortium.

17. CONCLUSION Thus we can say that consortium banking is an important concept in finance the project which involves a huge risk . There should be clear understanding of obligations and risks associated with the project . There should be equal distribution of risks as per the amount of money invested among the members of the project which will help them to invest in project without any worries