Most of the Indian lenders viz NBFCs, Banks & Financial Institutions prefer to appoint a Security Trusteeship when they lend to corporates for projects ranging from their own Capex, to even Infrastructure Projects like Power, Telecom, Roads, Airports, Ports etc.
By executing a Security Trustee Agreement (STA), the Borrower, Lenders (who are NBFCs, Banks & Financial Institutions) and the Security Trustee, come into a contractual arrangement amongst themselves which is legal, valid, binding and enforceable. The Security Trustee holds charge on Borrower’s assets including interest in underlying security on behalf of the multiple lenders. Thus under the arrangement, Hypothecation/Mortgage and any other charge on other securities is created by the Borrower in favour of single entity called “Security Trustee” for the benefit of lenders. In other words lenders are represented through Security Trustee as their sole representative.
How do the Lenders and Borrowers gain ?
When the borrowers borrow vide a consortium of lenders, they need to co-ordinate with each of the lending member of the consortium which is a mammoth task. The security trustee plays the role of the co-ordinator since the security is drawn in its favour & helps the borrower to reduce his hassles of co-ordination with each of the lenders of the consortium.
Security Trustee plays a bipartisan role since it has no financial relations with either the borrower or the lender. It has no conflict of interest in discharging its role as security Trustee
Security Trustee coordinates with lenders, borrowers and all other agencies involved in the chain
Protection of lenders interest in respect of security held under the charge including verification of the title deeds related to mortgaged property and holding of such title deeds under the custody of STA at one place
The limitations on pledge of shares prescribed under various regulations, can be addressed by engaging a Security Trustee
Any potential downsell of Loans can be easily executed to incumbent (incoming) lenders with minimal documentation
Enforcement of the security when required by the lenders and disbursement of the sale proceeds without prejudice