The 2022-23 budget introduced the use of surety insurance bonds as a substitute for bank guarantees by the Government of India in case of government procurement and for gold imports. The insurance regulator of the country, insurance Regulatory & Development Authority of India (IRDAI) has also released guidelines to ensure development of surety insurance business in India. The IRDAI (surety insurance contracts) Guidelines, 2022 will come into effect from 1st April 2022.
A Surety bond is a legally binding contract entered into by 3 parties-
The principal
The oblige
The surety
The principal is typically a business owner or contractor, the oblige usually a government entity. Surety bond are mainly aimed at infrastructure development. The surety bonds is provided by the insurance company on the behalf of contractor to the entity which is awarding the project. Surety bond protect the beneficiary from unforeseen damages or losses in the commercial undertaking.
Surety bonds is a new concept in India, it is risky & insurance companies are yet to achieve expertise in surety bonds in risk assessment. The move to frame rules for surety contracts will help address the large liquidity & funding requirement of the infrastructure sector. It will create a level playing field among the large, mid & small contractor.
Contract bond may include Bid Bonds, Performance Bonds, advance bonds & Retention money. Bid Bond provide financial protection to an oblige. If a bidder awarded a contract but fail to sign the contract. Performance bonds provide assurance that the oblige will be protected if the principal & contractor fails to perform the bonded contract. Advance payment bond is a promise be the surety provider to pay the outstanding balance of the advanced payment in case the contractor fails to complete the contract. Retention money is a part of amount payable to the contractor which is retained & payable at the end after successful completion of the contract. The limit of guarantee should not exceed 30% of the contract value.
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