Legal Question in Banking Law in India

23.03.2015

Dear Sir / Madam,

Yes. Both these are commercial banking terms related to secured loans granted by the Bank to its borrowers.

"Pari-passu" is a Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations are equally managed without any display of preference. An example of pari-passu occurs during bankruptcy proceedings when a verdict is reached, all creditors can be regarded equally, and will be repaid at the same time and at the same fractional amount as all other creditors. Treating all parties the same means they are pari-passu.

An asset or a class or group of business assets owned by the borrower are said to be covered by a first pari passu charge wherein the assets are clear of any earlier or previous lien or mortgage by any Bank, and the charge or mortgage of such assets of the borrower by the Bank are said to be a first pari-passu charge.

In the case of a second pari-passu charge, there is already an existing first pari-passu charge created by a Bank on the asset(s) of the borrower by a Bank. The second Bank in a consortium (Consortium means two or more Banks granting funding facilities to the borrower) granting additional facilities to the borrower, over and above his / her existing first pari-passu charge of an existing Bank, may choose to create a second pari-passu charge on the asset(s) owned by the borrower secured by the first Bank. A second pari-passu charge is usually created in instances wherein the fair valuation of the asset(s) already charged, pledged and secured by the first Bank are far higher than the quantum of facilities availed from the Bank by the borrower, leaving a drawing power or margin for a second pari-passu charge to be created by the other Bank in the consortium on such asset(s) for the additional facilities that the second Bank grants to.the borrower.

Regards,