What is the Loan Documentation?

Term lending by the Financial Institutions is a high-risk business and is therefore important for them to satisfy themselves that no legal lacuna or formality is omitted as might expose the Financial Institutions to the danger of losing the money lent. The relationship between the Lender and the Borrower is a legal relationship that results in mutual rights, duties, and liabilities, and commercial prudence demands that these should be well expressed and be foolproof as far as possible. Loan documentation is one of the most important aspects of banking and banks are very cautious in the documentation for project financing.

The procedure for the execution of documents has been standardized in most cases. Sometimes delay takes place in providing certain documents required in connection with the execution of the loan documents. The Company Secretary of the Borrower should there therefore in consultation with the Legal Department of the financial institution and the Company’s advocate arrange to have:

(a) Inspection and investigation of the Title Deeds of the Borrower in respect of its properties by the Lenders and/or by the advocates chosen by the Borrower from the panel maintained by the Lenders to establish a clear and marketable title in favor of the Borrower to its properties.

(b) Approval of the shareholders of the company for mortgaging/charging the company’s properties in favor of the Financial Institutions as required under Section 180(1)(a) of the Companies Act, 2013;

(c) Shareholders’ Authority to the Board of directors of the company to borrow in excess of the limits of its paid-up capital and free reserves as required under Section 180(1)(a) of Companies Act, 2013;

(d) Resolution of the Board of directors of the Company accepting the terms and conditions of the Sanction Letter or Letter of Intent issued by the Financial institution sanctioning the term loan and execution of Loan Agreement and Deed of Hypothecation.

(e) Normally the Lending Institution obtains several undertakings from the borrower on stamp papers. These are:

  1. Undertakings from the Promoters Group regarding non-disposal of their shares in the Company without prior approval of the Lender;
  2. Undertaking by the Promoters to meet the over-run in the cost of the project without having recourse to the Institutions and agreeing not to withdraw the unsecured loans and deposits brought in by the Promoters/their Group for financing the project;
  3. Undertaking to complete the pending formalities given in the Sanction Letter within a stipulated period and also to create the Mortgage (if not completed) within a stipulated period.

(f) The Institution in the case of bridge loan gets a Demand Promissory Note signed by the authorized Director, along with Board’s is a resolution for authorizing the director.

(g) The Institution also obtains a ‘No-lien’ letter from the Company’s Bank to which the sanctioned loan amount is to be credited. Format of this ‘No-lien’ letter is provided by the Lending institution.

(h) Permission of the Income-tax authorities under Section 281 of the Income Tax Act.

(i) Letter of Confirmation under Section 9A of IDBI Act that none of its Directors are interested in the project being financed.

(j) Permission/exemption under Urban Land Ceiling Act, wherever required.

As such before signing the Loan Documents with the Financial Institutions, the Company secretary should, besides keeping the aforementioned documents/paper, constantly liaise with the lenders to ascertain if any further compliance is required to enable disbursement of the loan amount as soon as the documentation gets completed.

The importance of the Loan Agreement and its main terms and conditions are discussed hereunder.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top