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CS Professional · Strategic Management and Corporate Finance · Role of Intermediaries in Fund Raising

Aarav Textiles Ltd has issued Rs 200 crore of secured NCDs. The trust deed requires asset cover of at least 1.25 times of the outstanding principal. The trustee verifies that the value of the charged assets is Rs 235 crore. What is the position, and the shortfall or surplus against the required cover?

The cover is not met, with a shortfall of Rs 15 crore. Required cover is 1.25 times Rs 200 crore, which is Rs 250 crore, while charged assets are only Rs 235 crore. The trustee must therefore take steps to have the deficiency made good.

  1. ACover is met with a surplus of Rs 35 crore
  2. BCover is not met; shortfall of Rs 15 croreCorrect
  3. CCover is met with a surplus of Rs 15 crore
  4. DCover is not met; shortfall of Rs 25 crore

Explanation

Required security = 1.25 x 200 = Rs 250 crore. Available is Rs 235 crore, so there is a shortfall of 250 - 235 = Rs 15 crore. Rs 35 crore surplus wrongly compares assets with principal alone (235 - 200) and ignores the 1.25 multiple.

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