In this blog post, Mohammed Azharuddin, legal counsel at Borderless Access Panels Pvt. Ltd and a student of Diploma in Entrepreneurship Administration and Business Laws by NUJS provides an overview on the regulations for syndicated loans with foreign banks. 

Introduction

To understand the regulations governing the borrowing and lending of syndicated loans, one must first understand the concept of what constitutes “syndicated loans” and how are these loans made effective practically in the commercial transactions. Simply put syndicated loans are such loans which are offered by a group of lenders by pooling in the funds to be offered to a single borrower. The borrower in question here could be a corporation or a governmental entity.

Syndicated loans are preferred by high-risk takers to invest and utilize in projects involving huge operational costs; the projects could be ranging from construction of a dam to building highways or to business involving substantial expenditures such as starting an Airline business.

Procedure and Features of Loan Syndication

As stated earlier, syndicated loans involve huge sums of money agreed to be repaid on a long term basis. The banks prefer this way of operation as the risks are diversified so that an individual lender does not bear the burden if forecasted results are not met.

To understand the intricacies of any transaction in a syndicated loan the parties involved in the process are to be well defined. In a typical scenario, there are close to five parties involved in any transaction. The parties to be taken into consideration here are as follows:

• The Lender: These are banking institutions along with the co-lender who lend out money for the required purposes.
• The Borrower: The entity which requires the funds to be received and the initiator of the whole process.
• Lead Merchant Banker: The Lead Merchant Banker is a co-lender but takes up the responsibility of heading the syndicate and also to entice other banking institutions to lend funds into the arrangement.
• Agent: The Agent acts as a link between the borrower and the lender and is also in-charge of keeping the compliances in check. It must be noted here that the Agent acts as an agent of the bankers and not the borrowers. An agent is sometimes also assigned with the duty of a security trustee wherein it would be required to take necessary actions in the event of default.

Stages in Syndication

There are essentially three important stages in loan syndication namely:

• The Pre-mandate stage
• Disbursement stage
• Post-closure stage

The Pre-Mandate Stage:

The borrower initiates the pre-mandate stage; this is carried out by the borrower by liaising with the single bank or through various banks. The borrower here is required to mandate the lead bank and the underwriting bank; after this process is completed the underwriting bank shall then identify the needs of the borrower and structure an appropriate loan methodology.

After the identification of need of the borrower is clarified a mandate letter is issued which consists of the proposal to acquire the loan and the details of the appraisal process.

Disbursement stage:

The next level of the syndication process is the disbursement stage wherein the lead banker takes the proposal from the borrower and approaches the other co-lender to lend funds to the borrowers. During the phase of approaching the prospective participating banks, the lead banker is required to prepare the term sheet and other legal documentation such as term sheet, duties and obligations of the lenders, titles of arrangers, commitment amounts required and an underwriting agreement with the bank to underwrite or use the best efforts to arrange the underwriting process. The lead banker in this stage also decides the way through which the loan are to be granted and the stages in which they are realized.

Post-closure stage:

This is the final stage of the syndication process and is known as the monitoring and follow up phase, under this juncture, the assigned agent handles the day to day activities and running of the loan facility.

Regulations with Foreign Banks

Foreign banks have their registered offices outside India they operate through their branches and subsidiaries and are allowed on a reciprocal basis. The foreign banks actively participate in trade finances and corporate banking activities and help the Indian entities in raising syndicated loans as well as external commercial borrowings. The foreign banks while raising syndicated loans will have to comply with the regulations laid down by the Reserve Bank of India, IRDA & SEBI, and compliances on priority sector lending.

International Banking transactions on syndication of loan attract numerous challenges and compliance hence the following aspects will have to be taken into consideration while drafting the loan agreements.

• Choice of law: the choice of law clause needs to be clearly defined and mentioned in the agreement; this could pose a challenge to numerous parties who are involved in the transaction.
• Clarity of terms: the agreement demands a lot of clarity regarding financial projections, borrower’s status, and incorporation details.
• Clearances: The agreement shall also mention the clearances to be obtained from the government and regulatory authorities in their respective jurisdiction before the loans are allocated.
• Commitment fees: The loan agreement should clearly specify the commitment fees, front-end fees and interest payable (floating or fixed) indication of interest rate
• Jurisdiction: The Loan Agreement shall also specify the place of jurisdiction in which the agreement shall be enforceable*

The pointers as mentioned above are some of the important aspects to be taken into consideration while dealing with syndicated loan transactions along with the regulations to be followed by foreign banks.