Special Studies In FinancePresentation made by

Sameer Omles Shashank mohite Sandeep jaiswar

Vivek Gupta

TopicsMortgagePledgeHypotheticationLienCharge(1st and 2nd Charge)Fixed & floating chargePari passuPlRMargin money

MortgageMortgage is used for creating charge

against immovable property which includes

land, buildings or anything that is attached to the earth

or permanently fastened to anything attached to the earth.

Example of mortgage• The best example when mortgage is

created is when someone takes a Housing Loan / Home Loan. 

• In this case house is mortgaged in favor of the bank / financer but remains in possession of the borrower, which he uses for himself or even may give on rent. 

PledgePledge is used when the lender (pledgee) takes actual

possession of assets (i.e. certificates, goods ).  Such securities or goods  are movable securities.  In this case the pledgee retains the possession of the

goods until the pledgor (i.e. borrower) repays the entire debt amount.  

In case there is default by the borrower, the pledgee has a right to sell the goods in his possession and adjust its proceeds towards the amount due.

What is Pledge?

Some examples of pledge are Gold /Jewellery Loans

Hypothecation Hypothecation is used for creating charge against

the security of movable assets, but here the possession of the security remains with the borrower itself.  

Thus, in case of default by the borrower, the lender (i.e. to whom the goods / security has been hypothecated) will have to first take possession of the security and then sell the same.  

Lets see the example on Slide

What If a borrower defaults?(Example)In this case Car / Vehicle remains with the borrower but the

same is hypothecated to the bank / financer

In case the borrower, defaults

Banks take possession of the vehicle after giving notice and then sell the same and credit the proceeds to the loan account

Other examples of hypothecation Other examples of these hypothecation are loans against

stock and debtors.  Sometimes, borrowers cheat the banker by partly selling

goods hypothecated to bank and not keeping the desired amount of stock of goods.  

In such cases, if bank feels that borrower is trying to cheat, then it can convert hypothecation to pledge i.e. it takes over possession of the goods and keeps the same under lock and key of the bank.

LienA lien is a lender's claim against a collateral asset that may be

legally sold should the borrower fail to repay a loan.How it works/Example:When someone takes out a sizeable loan, such as a home

mortgage or an auto loan, the lender often requires an asset that can be held as collateral against the loan.

Thus, the collateral has a lien placed upon it. In the event of non-payment on the part of the borrower, the lending institution can exercise the lien and sell the collateral asset to offset the unpaid loan. Once the loan is repaid in full, the collateral asset is returned to the borrower and the lien dissolved.

Example of lienSuppose someone takes out a $10,000 loan for a new car. As part of the loan's terms, the bank gets to hold the title to

the car as a lien against the car until the loan is fully repaid. Should the borrower, at any point, default or refuse to repay

the balance of the loan, The bank can use the title to the car to sell it in order to

recover the money that was lent.

Pari-passu Pari-passu is a Latin term that means "at an equal rate or

pace." Pari passu is equal rights over the assets by two lending

institutions. The term is often used in venture capital.

Why it Matters:Pari-passu essentially means to treat all parties the same.

Obviously, common shares and preferred shares are not equal; however, the shares within each class are usually pari-passu.

How it works/Example:Let's assume Company XYZ is looking for $10 million of capital. It

contacts three venture capital firms, all of which are interested. VC Fund A agrees to invest $5 million; VC Fund B invests $2 million; and VC Fund C invests $3 million.

To negotiate the deal (and to protect themselves), the venture capital funds give Company XYZ terms sheets to sign. The term sheets state the equity that VC Fund A gets in Company XYZ will be pari-passu to all other series of equity, meaning that it will have the same rights and privileges as the equity that Company XYZ will issue to VC Fund B or C.

For most companies, common shares are pari-passu, meaning that they all rank equally and no one set of common shares has a higher claim to a dividend or assets than any other common shares.

Prime Lending RateDefault risk is the main determiner of the interest rate a

bank will charge a borrower. Because a bank's best customers have little chance of

defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan. 

PLR, Low To bank's best customers

PLR, High To those customerswho has a higher likelihood of defaulting

Prime Lending RateThe interest rate that commercial banks charge their most

credit-worthy customers known as PLR. Generally a bank's best customers consist of large

corporations. The prime rate is also important for retail customers, as the

prime rate directly affects the lending rates which are available for mortgage, small business and personal loans.

Margin moneyMargin means the own contribution of the owners for

purchase of machinery as no bank finance 100% of total cost of machinery.

For Instance – For Machinery it is 25% and for land it is 40%which is negotiatable.

The margin for land is more because land as an asset can not be easily liquidated.

If Bank financed 100% and borrower not contributing anything then there are chances that borrower may misuse the funds. To avoid that around 30% needs to be financed by borrower and remaining amount is given by bank.

Fixed and floating chargesFixed and floating charges are used to secure borrowing

by a company. Such borrowing is often done under the terms of a debenture issued by the company.

A fixed charge is a charge or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such as copyrights, patents, Trade marks, etc.

In case of a fixed charge, the lender can recover his dues from a certain predecided assets only in case default by the borrower.

Fixed and floating chargesA lender who has a floating charge can recovers his dues

from a gamut of assets. Lien or mortgage on an asset that changes in quantity and/or

value from time to time (such as an inventory), to secure the repayment of a loan.

The lender who lends on fixed charged therefore has to bear higher risk than the one lending on a floating charge.

Generally the lender who has a fixed charge will price is loan higher, considering the fact he is to bear a greater risk.

ChargeLoans are granted to borrower against securities. Sometimes

a borrower might use the same assets for raising finance from two or more lenders.

In this case the lender who has first lend to the borrower against the assets will have a right on the assets, before the second lender, in case of default. This known as the First charge.

Only after the dues of the first lender are cleared, by selling off the assets, the second lender can claim his dues. This known as Second charge. Generally the lender who has second charge will price his loan higher, considering the fact has to bear a greater risk.

Thank you