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Loan Syndication: Presented By: Reeti Gaur M-Com (E-Commerce) Roll No. 20
Loan Syndication: Presented By: Reeti Gaur M-Com (E-Commerce) Roll No. 20
Presented by:
Reeti Gaur
M-com (e-commerce)
Roll no. 20
Introductio
n
Once the client company has decided about the project
proposed to be undertaken, the next step is looking for the
sources wherefrom the funds could be procured to implement
the project.
DFIs have been the integral part of the capital market and
have played significant role in financing the investment
activity.
These institutions:
3. Provide credit and other facilities for development of
industries.
4. Provide term loans in Indian and foreign currencies.
Financial Institutions
All India Development IDBI
Banks IFCI
ICICI
SIDBI
All India IIBI
Financial Specialized Financial IVCF
Institutions ICICI Venture
Institution
TFCI
LIC
Investment Institutions UTI
GIC
State Financial
Corporation (SFCs)
State Level
Institution
Small Industries
Development Bank of India
(SIDBI)
Source: Reserve Bank of India, Annual Report, 2008-09, p. 451
General Considerations by
Merchant Banks:
Identify Financial Institution for
Identify Financial Institution for
borrowing
borrowing
Merchant Banks help the clients to approach the financial institutions for term
loans.
Identification of financial institution depends upon:
1. Nature of industry
2. Location of unit
3. Size of project cost
Project may be financed by one or more institutions depending on the size of loan.
Promoter’s Contribution
Promoter’s Contribution
Promoter’s Contribution,
Contribution cani.e. the
be in
stake
formofof:
promoters in the project to the project
cost
1. Subscription
is fixed at 22.5
topercent
share capital
of the project cost.
Concessional
2. Unsecurednormsloans are fixed in terms of:
3. The
1. Rightlocation
issues (equity
of the projects
shares or convertible debentures)
4. Risk
2. Cashof accruals
the project
in case of an existing company.
Thus
3. Promoter’s
the merchant
substantial
banker’sresources.
task includes checking promoter’s contribution.
General Considerations by
Merchant Banks:
Preliminary Meeting
Preliminary Meeting
After verification, a preliminary meeting should be fixed with the financial
institutions.
Loan Application:
1. Promoter’s Background, technical skills, relevant experience and financial
soundness.
2. Market research study
3. Aspects on technical, financial, and economic appraisal
4. Cash flow statement for seven to ten-year period
5. The land for project, plans for building and quotations for the machinery from two
manufacturers
6. Actual production process has to be depicted
7. Working capital requirements
Memorandum of association
Article of Association
General Considerations by
Merchant Banks:
Debt-Equity Ratio/ Debt Service Coverage
Debt-Equity Ratio/ Debt Service Coverage
Ratio
Ratio
Debt-equity ratio: Large and medium firms(2:1) Small firms(3:1)
Debt service coverage ratio: 1.6 to 2 times
Security
Security
Marginmargin represents the excess value of fixed assets over the term loan.
Margin
Security
The term loan is 75 percent of the value of fixed assets. The security margin is 25
percent.
Arranger/ Participant
Borrower s
Lead Bank
Documents
Placement Syndicate
Mandate Letter
Memorandum Document
Loan Syndication Process
Pre-mandate stage
1
Borrowe
Banks
r
2
Post-mandated stage
3 4 5
2. From the proposals it receives, the borrower chooses one or more arrangers
that are mandated to from a syndicate and negotiates a preliminary loan
agreement.
Post-mandated stage
3. Once the lead bank/ syndicator receives the mandate from the borrower, a
placement memorandum is prepared by the lead bank.
4. The loan is then marketed to other banks who may be interested in taking
up the shares.
Loan Syndication Process
5. On the basis of the data in the placement memorandum, banks make a
reasonable appraisal of the credit before deciding about their participation in
the loan.
6. Once the bank decides to become a member of the syndicate, it indicates the
amount and the price it is likely to charge on the loan.
7. Based on the information received from all participating banks, the lead bank
prepares a common document to be signed by all the members of the syndicate
and the borrowing company.
Post-signed stage
When the deal becomes active and the loan is operational, binding the
borrower and the syndicate members by the debt contract.
Benefit of Loan Syndication
News Report
Four Indian Banks, including State Bank of India and IDBI Bank, figure amongst
the top five banks in the Asia-Pacific region for arranging syndicated loans in 2010.
Amongst Asia-Pacific countries, Indian entities have been most active in raising
funds mostly from infrastructure projects in the power and airports segments.
Small amounts were raised for creating industrial capacities by corporates,”
SBI, the country’s largest lender, with a mandate for five deals raised $ 1.58 billion
followed by IDBI Bank ($ 1.41 billion in three deals), Axis bank ($ 980 million)
and ICICI Bank ($ 686 million).
•Union Bank of India, Bank of India, Allahabad Bank, Corporation Bank, UCO, United Bank of
India are among the banks entering this space. Traditional players will now have to chase
customers given the increase in competition.
•State-owned banks such as Union Bank of India, Bank of India, Allahabad Bank, Corporation
Bank, UCO, United Bank of India are gradually making inroads into this domain
•The prospect of earning an attractive fee income by leveraging their corporate relationships
is luring banks to set up loan syndication desks.
Bibliography
Machiraju, H.R. Merchant Banking(2001). New Delhi:
Internet sources:
Retrieved from:
http://www.thehindubusinessline.com/2010/08/20/stories/2010082052050600.htm