In financial terms, a "pari passu charge" refers to an equal ranking of security or claim on specific assets held by a lender. It ensures that multiple lenders have an equal right to the same set of assets in case of default by the borrower. Let's explain the concept with a numerical example:
Let's consider a company ABC Pvt. Ltd., which has taken loans from three different lenders:
1. Foreign Term Lenders (FTL) for financing machinery
2. State Bank of India (SBI) for financing solar assets
3. Bandhan Bank for financing solar assets
The terms of the loans stipulate the following security arrangements:
1. First Pari Passu Charge on Fixed Assets (Except Machinery financed by FTL and Solar Assets financed by SBI & Bandhan Bank):
- This means that all lenders, except Foreign Term Lenders, SBI, and Bandhan Bank, will have an equal claim on all the fixed assets of ABC Pvt. Ltd. in case of default. The first pari passu charge ensures that these lenders have an equal right over the specified fixed assets.
2. Second Pari Passu Charge on Current Assets:
- This means that all lenders, including Foreign Term Lenders, SBI, and Bandhan Bank, will have an equal claim on all the current assets of ABC Pvt. Ltd. in case of default. The second pari passu charge gives these lenders an equal right over the current assets.
Let's assume the following values for ABC Pvt. Ltd.:
- Total Fixed Assets: $1,000,000
- Machinery Financed by Foreign Term Lenders: $200,000
- Solar Assets Financed by SBI: $300,000
- Solar Assets Financed by Bandhan Bank: $150,000
- Total Current Assets: $500,000
Now, let's see how the first and second pari passu charges work in the event of default:
1. First Pari Passu Charge on Fixed Assets (Except Machinery financed by FTL and Solar Assets financed by SBI & Bandhan Bank):
- Total Fixed Assets available for first pari passu charge: $1,000,000 - $200,000 (machinery) - $300,000 (SBI solar assets) - $150,000 (Bandhan Bank solar assets) = $350,000
- In the case of default, all lenders, except Foreign Term Lenders, SBI, and Bandhan Bank, will share an equal claim of $350,000 on these fixed assets.
2. Second Pari Passu Charge on Current Assets:
- Total Current Assets available for second pari passu charge: $500,000
- In the case of default, all lenders, including Foreign Term Lenders, SBI, and Bandhan Bank, will share an equal claim of $500,000 on these current assets.
In summary, the pari passu charges ensure that different lenders have equal priority over specific sets of assets. In this example, the first pari passu charge covers fixed assets (except machinery and solar assets financed by specific lenders), and the second pari passu charge covers current assets. Each set of lenders will have an equal right to the respective assets in case of default by the borrower.
When a lender holds an "exclusive charge" on specific assets, it means that they have a priority claim over those assets, and other lenders do not have any rights or claims on those particular assets. Let's explain the concept with a numerical example:
Consider a company XYZ Ltd., which has obtained loans from two different sets of lenders:
1. Foreign Lenders (FL) for financing Plant & Machinery.
2. Solar Project Lenders (SPL) for financing Solar Projects.
The terms of the loans state the following security arrangements:
1. Exclusive Charge on Plant & Machinery financed by Foreign Lenders:
- This means that the Foreign Lenders have a priority claim over the Plant & Machinery financed by them. Other lenders, including Solar Project Lenders, do not have any claim on these assets.
2. Exclusive Charge on Solar Projects financed by Solar Project Lenders:
- This means that the Solar Project Lenders have a priority claim over the Solar Projects they financed. Other lenders, including Foreign Lenders, do not have any claim on these assets.
Let's assume the following values for XYZ Ltd.:
- Value of Plant & Machinery financed by Foreign Lenders (FL): $500,000
- Value of Solar Projects financed by Solar Project Lenders (SPL): $300,000
Now, let's see how the exclusive charges work:
1. Exclusive Charge on Plant & Machinery financed by Foreign Lenders:
- The Foreign Lenders have an exclusive claim on the Plant & Machinery, and their charge is $500,000. Other lenders, including Solar Project Lenders, do not have any claim on these assets.
2. Exclusive Charge on Solar Projects financed by Solar Project Lenders:
- The Solar Project Lenders have an exclusive claim on the Solar Projects, and their charge is $300,000. Other lenders, including Foreign Lenders, do not have any claim on these assets.
In case of default or any other event leading to asset liquidation, the assets subject to an exclusive charge will be used to satisfy the claims of the lender holding that exclusive charge before other lenders can make any claims.
To summarize, an exclusive charge provides a lender with priority rights over specific assets, and other lenders are excluded from making claims on those assets. In the example given, the Foreign Lenders have an exclusive charge on Plant & Machinery, and the Solar Project Lenders have an exclusive charge on Solar Projects. This arrangement gives each set of lenders priority over the assets they financed, safeguarding their interests in case of default or financial distress.
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