By: Vikash Khandelwal, CEO, Eqaro Guarantees
As an introduction to the concept, a surety bond is a risk transfer mechanism where the surety company assures the project owner that the contractor will perform a contract in accordance with the contract documents. Through a surety bond, the surety agrees to uphold, for the benefit of the obligee—the contractual obligations made by the principal. In the event of a default and the subsequent invocation of the guarantee, the surety will pay and then turn to the principal for reimbursement of the amount paid on the default plus any legal fees incurred. Surety bonds are a prevalent concept in many parts of the world and are also mandated by law on public works projects
The introduction of surety bonds in India has been a long-standing demand from the construction and the infrastructure industry. The issuance of the draft guidelines and invitation of suggestions from the stakeholders is a welcome giant step towards formalizing the availability of surety bonds for infrastructure projects. Surety Bonds help impart efficiency to the management of working capital and collaterals and the guidelines once approved will help address the woes of the construction & infrastructure companies with respect to bank guarantees.
The draft guidelines are well thought out and address most of the aspects of surety underwriting in India. The draft also lays down the guiding principle of the surety underwriting principle with respect to the accumulation of risks, retention on the surety’s balance sheet, aggregation risks, group-level exposures, etc. By barring the issuance of guarantees on behalf of the surety co’s promoters, their subsidiaries, groups, associates, and related parties, the regulator has ensured prudent practices and an arm’s length distance between entities belonging to the same group. The guidelines provide for preference being given to applicants whose promoters are already engaged in carrying out surety insurance business in any jurisdiction. This should encourage global entities to set up/invest in surety insurance companies in India thus bringing much-valued surety expertise into the country.
As a strong proponent of the concept of sureties in India, we would like to extend our heartiest congratulations to the members of the working group and to the authors of the draft guidelines for having drafted such a comprehensive document. It is never easy introducing a new concept in a country as large and diverse as ours especially without the availability of surety-related expertise within the country.
Having said the above, we do have a wish list that we would ideally like to see as part of the guidelines when they are eventually approved by the regulators
India has the potential of being one of the largest surety markets globally. Many global surety giants have often evinced interest in participating in Indian construction risks. We believe that clarity on the above will help increase participation from a larger number of players, create an appropriate mechanism for contract enforcement while at the same time fostering an enabling environment for the surety insurance industry.
Feature Image credits: Photo by Pixabay from Pexels
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