Security Trusteeship is a contractual arrangement amongst Borrower, Lenders (who are NBFCs, Banks & Financial Institutions), and the Security Trustee. This arrangement is established by executing a document called Security Trustee Agreement (STA).
Pursuant to the execution of STA, the Borrower is required to create all securities in favour of the Security Trustee including a mortgage of immovable properties. Security Trustee holds a charge on the 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 are created by the Borrower in favour of a single entity called “Security Trustee” for the benefit of lenders. In other words, lenders are represented through Security Trustee as their sole representative. This being contractual arrangement is absolutely legal, valid, binding and enforceable.
In view of the advantages of Security Trusteeship arrangements, all NBFCs, Banks & Financial Institutions prefer Security Trusteeship Arrangements in financing small, medium and large corporates for their all types of projects including Infrastructure Projects like Power, Telecom, Roads, Airports, Ports, etc. and also other small and medium projects.
Key Benefits to Lenders and Borrowers are:-
- Since Security Trustee has no financial relations with other corporate entities(like many banks and financial institutions have), it has no conflict of interest in discharging the 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 the pledge of shares prescribed under various regulations can be addressed by engaging a Security Trustee.
- Lenders can down-sell or divest their stake to incoming lenders with minimal documentation.
- Enforcement of the security when required by the lenders and disbursement of the sale proceeds without prejudice.
- Saves Banks & FIs of their hassles for the creation of security and enforcement of the same, which helps them to concentrate on their core activities.
Security Trustee is the entity that acts in place of Lenders for holding the security and enforcing the same for and on behalf of the lenders for the benefit of the Lenders.