Concept of Consortium Financing in India and its comparison with Loan Syndication. Reference Case: State Bank of India & ors vs. Mallya and ors (2018) EWHC 1084 (comm.)

Concept of Consortium Financing in India and its comparison with Loan Syndication. Reference Case: State Bank of India & ors vs. Mallya and ors (2018) EWHC 1084 (comm.)

WHAT IS CONSORTIUM?

A group of Independent Companies participating in a Joint Venture for mutual benefit. Companies in a Consortium co-operate with one another, often sharing technology as needed. A Consortium allows the Companies to conduct operations that they would not be able to do individually. It is important to note, however, that a Consortium is not a merger and the Companies remain independent. A group of Organizations that participate in a Joint Venture. Airbus Industries, a European Airplane manufacturer, is a Consortium of four Public and Private Corporations in Britain, France, Spain and Germany. A group of Organizations, sharing the same goals, which combine their resources and risks. Consortium Banking was popular in the late 1970s, when a number of major Banks would combine to form a Merchant-Banking or Finance-Company offshoot. Many of Australia’s Merchant Banks were formed as consortia with European, Asian and US Banks teaming with Australian Banks. Consortium is a coalition of Organizations, such as Banks and Corporations, set up to fund ventures requiring large capital resources. A Consortium is an association of two or more Individuals, Companies, Organizations or Governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Consortium is a Latin word, meaning ‘partnership, association or society’ and derives from consors ‘’ Partner”, itself from con- ‘together’ and sors ‘fate’, meaning owner of means or comrade.[1]

Like a loan syndication, consortium financing occurs for transactions that might not take place with a single lender. Several banks agree to jointly supervise a single borrower with a common appraisal, documentation, and follow-up and own equal shares in the transaction. Unlike in a loan syndication, there is not one lead bank that manages the financing project; all of the banks play an equal role in managing the project.[2]

Consortiums are not built to handle international transactions such as a syndication loan; instead, a consortium may arise because the size of the project at hand is simply too large or too risky for any single lender to assume. While loan syndications typically work across borders and may handle financing in different currencies, consortiums typically occur within the boundaries of a given nation.

Sometimes the participating banks form a new consortium bank that functions by leveraging assets from each institution and disbands after the project is complete. By allowing all of the members to pool their assets, consortiums allow smaller banks to tackle larger projects.[3]

Consortium of Bank

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 countries. A Consortium Bank is created to finance a specific project; once the project is complete, the Consortium Bank dissolves itself. While they are not as common as they once were, they are useful when a project involves multiple currencies.

Definition of Consortium Bank

A consortium bank is a subsidiary bank, which numerous other banks create. These banks might create a consortium bank to fund a specific project (such as providing affordable homeownership for low- and moderate-income home buyers) or to execute a specific deal (such as selling loans in the loan syndication market).

The consortium leverages individual banks' assets to achieve their objectives. All member banks have equal ownership shares, and no one member has a controlling interest. After the consortium bank meets its objective, it typically dissolves.[4]

Example of a Consortium Bank

In 2018 in Grand Rapids, Michigan the non-profit Start Garden developed a project to provide $1,000 mini-grants as part of their 100 Days/$100,000 Initiative to foster entrepreneurship among neighborhood businesses. The project is funded in partnership with a consortium bank, which formed for the purpose of this project. Over several years the aim is for the consortium to invest millions of dollars in the local ecosystem in order to help alleviate poverty.

Break Down of Consortium Bank

Debt transactions, which require more than a single lender, will often rely on a consortium bank. Several banks agree to jointly supervise a single borrower. A legal contract generally governs the consortium bank and delegates responsibilities among its members. This can include a common appraisal, documentation, and follow-up; as well as a decision to portion out equal ownership shares in the transaction.

Consortium banks originated in the early 1960s for the purpose of enabling smaller banks to participate in international banking activities. They are most common in Europe. Consortium banks are not as active as they have historically been. However, strong examples still exist in the U.S. and overseas. Member banks may be headquartered in different countries.[5]

RBI’s Role in Consortium Finance:-

Large Lending’s are formed always under Consortiums as per the guidelines issued by DBOD of RBI. That DBOD of RBI as such issues circulars and guidelines from time to time including documentation one of such is enclosed at Annexure I hereunder which please be read as part of this opinion as our opinion Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool formed under statutory directives and documents are obtained as per the IBA formats strictly devised as per directions of RBI. That in terms of the guidelines which has statutory force the Consortium of Banks has a force of community of interest.

Now the question springs up for my opinion whether a deed of hypothecation or Mortgage created by a borrower in consortium lending shall be treated as one instrument or separate instruments for the purpose of section 5,6 of Bombay Stamp Act. Whether it is a multifarious instrument covering Several distinct matters? We will have to refer the provisions of Bombay Stamp Act

Where several distinct matters and transactions are embodied in a single Instrument, the Instrument is called the multifarious instrument.[6]

RBI Guidelines on Consortium Advances

The concept of consortium advance has since gone many changes and most of the large borrowers are now being financed by banks in consortium. Reserve Bank of India had also issued revised comprehensive guidelines in June 1987 on this subject.

Reserve Bank of India further constituted a Committee in January, 1993. under the Chairmanship of Shri J.V. Setty, Chairman and Managing Director, Canara Bank, to review the extant guidelines on lending under consortium arrangement and suggest measures for improving the efficiency of banking system in delivery of credit. Based upon the report submitted by the above Committee, Reserve Bank announced important changes in die existing guidelines. Guidelines m applicable to consortium advance are as under.

M/S Lakshmi Energy & Food Ltd vs Reserve Bank Of India & Ors HC(2019)[7]

The overall exposure to a single borrower should not exceed 25% of the net worth of the banking institution. For this purpose non fund based facilities shall be counted @ 50% of limits sanctioned and added to total fund based facilities to arrive at total exposure to the borrower. Exposure limit to group has also now been stipulated. The overall exposure to a group should not exceed 50%  (60% in case of infrastructure projects consisting of power, telecommunication, roads and ports) of the net worth of the banking institution.[8]

1. The borrowers who are already havi9ng multiple banking arrangement and enjoy fund based credit limits of Rs. 50.00 crores or more must necessarily be brought under consortium arrangements. The bank who is having the largest share in the credit facilities would automatically become the leader of consortium and would ensure that consortium arrangements are finalised immediately.

(b) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of less than Rs.50 crores should also be brought under formal consortium arrangements at the time of further enhancements which would take the aggregate limits to Rs.50 crores or more. The enhancements in such cases would be considered jointly by the financing banks concerned and the bank which takes up the largest share of fund based limits shall be the leader of the consortium.

(c) These provisions would also be applicable to new units which approach more than one bank for sanctioning of working capital limits of Rs.50 crores or more.

The net effect of these provision amounts to that no borrower will be allowed to have multiple banking arrangement if the total fund based credit limit sanctioned to him amounts to Rs.50 crores or more. A formal consortium will have to he constituted in such cases and the bank having largest share in fund based credit limits will automatically assume the status of the leader of the consortium.

Reserve Bank has since withdrawn its instructions for obligatory formation of consortium. It will thus not be obligatory on the part of banks to form a consortium even if the credit limit per borrower exceeds Rs.50 crore. The need based finance required by the borrowers may, therefore, be extended by the banks either entirely on their own, subject to observance of exposure limits, or in association with other banks. As an alternative to sole/multiple banking/consortium arrangement, banks may adopt loan syndication route, irrespective of the quantum of credit involved. There is no ceiling on number of banks in a consortium, whether it is obligatory (fund?based credit limits of Rs.50 crates and above from more than one bank) or voluntary (fund based credit limits below Rs.50 crores from more than one bank) in nature. However, the share of a bank as member of consortium should he a minimum of 5 per cent of the fund based credit limits or Rs.1 crore whichever is more. This provision would itself restrict the number of banks in a consortium. To illustrate this point let us consider these two examples:

1. In a consortium for total fund based credit limits of Rs.3 crores, the minimum share should be Rs1.00 crore.
2. In a consortium for total fund based credit limits of Rs.50 crates, the minimum share should be Rs.2,50 crores.

The banks who have sanctioned term loans to a unit or who have also participated in term loans sanctioned in consortium with term lending financial institution should also provide working capital facilities to such a unit. 'These banks may, however, associate other banks, if so warranted, to provide working capital finance. The borrower who is being financed under a formal consortium arrangement should not avail any additional credit facility by way of bills limits/ guarantees/acceptances, letters of credit etc. from any other bank outside the consortium. It has been stipulated by Reserve Bank of India that any bank outside the consortium should not extend any such facility or may not even open a current account without the knowledge and concurrence of the consortium members. This stipulation is applicable to even those borrower who are enjoying total fund based credit limits of above Rs.50 crores from a single bank or under syndication without a consortium arrangement.[9]

Loan Syndication and Consortium

Before going into the details and for better understanding, a rough idea about the concepts of Loan Syndication and Consortium is necessary. “A setup in which group of individuals or entities decides to pool resources towards fulfilling a debt or financing a single borrower wherein the setup is governed by a legal contract that delegates responsibilities among its members, is known as Consortium” whereas a Loan Syndication is somewhat a similar process, the term is generally reserved for loans that involve international transactions, different currencies and a necessary banking cooperation to guarantee payments and reduce exposure, this setup is headed by a managing bank that is approached by the borrower to arrange credit.[10]

Loan Syndication

Syndicate as term in general sense has originated in the U.S. Loan Syndication refers to a lending process wherein a borrower approaches a bank for a loan amount that is comparatively heavy and also involves international transactions and different currencies. Here, as and when a bank is approached by a client for availing a loan, the said bank fixes up the interests and other borrowing terms and conditions of the loan with the client and itself approaches other banks for selling of this loan. The other banks, if agree, “Purchase” a part of the loan on the same or different terms and conditions. In a Loan Syndication process, the client deals with one Bank only. The bank approached by the borrower to arrange credit is referred to as Managing Bank that is responsible for negotiating conditions and arranging the loan amount. Here it is important to note that the Managing Bank need not be the “Majority lender” or “Lead bank” but only plays the role of manager in arranging the loan amount in association with other banks. Depending on the terms and conditions of the agreement any bank can play the role of Managing Bank. The lead bank acts as recruiting bank of other sufficient banks in the process of producing of loan, negotiating the terms, negotiating details of the agreement and preparing documentation. The bank that is awarded/ given the mandate by prospective borrower and is responsible for placing and managing the loan process, its terms and conditions and finalizing the same is known  as Lead Manager, Lead Bank, Syndicate Bank. They are entitled to arrangement fees and undergo a reputation risk during this process. The banks that participate in process of lending a portion of total loan amount entitled to receive interest and participation fees are Participating Banks.[11]

The manager/lead bank is responsible for repayment and disbursement of the loan amount and also for providing the borrower’s financial statements to the banks involved in the syndicate lending process. The manager/ lead bank is paid a fee by the borrower for these services. The Managing bank may hire one or more other banks as co-managers to assist in the process, who share in the fee in return for helping with the manager’s duties. A borrower takes resort of Loan Syndication for Working Capital credit, Export Finance, Capital goods financing, Mergers and Acquisitions, Project Finance, Standby facility, Trade finance, guarantees etc.[12]

While in Consortium, there arise cases where a borrower approaches a bank for huge loans; this high amount means high risk to a single lender. In such cases banks resort to a lending mechanism known as Consortium to reduce the risk involved in the Loan Process. A consortium is successful where it is not possible for a single bank to finance the loan amount to the borrower; it has nothing to do with international transactions unlike Loan Syndication, simply the loan amount is too large or risky for a single lender to provide. Consortium financing occurs for transactions that might not take place with a single lender. Here when a borrower approaches a bank for loan, several banks club together to supervise the said loan amount.[13]

To conclude, every syndicate is a consortium, but not every consortium is a syndicate. When it comes to loans, the big difference (in my opinion) is when the lender cannot repay. With a consortium the lender can repay one bank and fail on another. With a syndicate there is only one loan, the lender will have to fail on the whole loan which may create legal complexities and make the borrower face other legal consequences. They may look alike and both the terms are used as synonyms to each other yet there exist technical differences when it comes to operations, procedures, relationships, legal complexities etc.

Reference Case: State Bank of India & ors vs. Mallya and ors

(2018) EWHC 1084 (comm.)

Kingfisher Airlines, established in 2005, was a major business venture launched by Mallya. It eventually became insolvent and had to be closed down. As of October 2013, it had not paid salaries to its employees for 15 months, had lost its license to operate as an airline, and owed more than US$1 billion in bank loans. By November 2015, the amount owed to the banks had grown to at least $1.35 billion, and there were other debts owed for taxes and to numerous small creditors. As part of the Kingfisher collapse, Mallya is accused of being a "willful defaulter" under Indian law, including accusations of money laundering, misappropriation, etc.[14]

In March 2016, a consortium of banks approached the Supreme Court of India to stop Mallya from going abroad due to the pending money his companies owed them. As per media reports, he had already left India. On 13 March 2016 a court in Hyderabad issued a non-bailable warrant for Mallya's arrest, but it appears he is remaining at his country estate near London, England, while his lawyer contests the warrant with a higher court. On 18 April 2016, a special court in Mumbai also issued an undated non-bailable arrest warrant against the businessman. This was issued in response to a plea by the Enforcement Directorate on 15 April before the special court hearing cases under the Prevention of Money Laundering Act, 2002. There were allegations on him that he transferred ?4,000 crore (US$580 million) to tax havens.[15]

In June 2016, the Enforcement Directorate (ED) reported it had "provisionally attached" ?1,411 crore (US$200 million) rupees worth of Mallya's Indian assets and properties against unpaid loans totaling ?807 crore (US$120 million). On 3 September, it issued a second attachment order for a further ?6,630 crore (US$960 million) worth of Mallya's assets, including a farmhouse, shares in United Breweries and multiple flats in Bangalore valued at ?565 crore (US$82 million). By December 2016, the ED has attached a total of Rs 9661 crore worth of assets of Mallya and Kingfisher in India. This is one of the largest attachment of assets made by the ED in a Prevention of Money Laundering Act case till now.

The ED also decided to send letters rogatory (LR) to the US, the UK and Europe requesting them to assist it in attachment of Mallya's over ten foreign assets.