To enhance the attractiveness of the surety bond business, the government is considering making relevant changes in the Insolvency and Bankruptcy Code (IBC) to recognize insurers as financial creditors in case of default in infrastructure projects.
A surety bond, issued by a general insurance company, is a three-party contract in which the surety guarantees the performance or obligations of the principal to the obligee.
The surety is a company that provides a financial guarantee to the obligee, usually a government entity, ensuring that the principal, or business owner, will fulfill their obligations.
Sources reveal that the Ministry of Corporate Affairs is addressing concerns raised by insurers regarding their right to recovery on par with banks, as raised by the Department of Financial Services under the finance ministry.
The department is currently examining the issue and intends to make relevant changes in the IBC to grant financial creditor status to insurers during the resolution process.
General insurance companies are seeking changes in the Indian Contract Act and Insolvency and Bankruptcy Code (IBC) to provide equal recourse to them in the case of defaults, similar to what is available for bank guarantees.
Surety bond insurance acts as a risk transfer tool for the principal, protecting them from potential losses if the contractor fails to fulfill their contractual obligations.
Unlike bank guarantees, surety bond insurance does not require contractors to provide significant collateral, freeing up funds that can be utilized for business growth.
The introduction of surety bonds as a financial instrument will undoubtedly enhance liquidity and capacity, thereby strengthening the infrastructure sector.
In the Union Budget 2022-23, Finance Minister Nirmala Sitharaman announced that the use of surety bonds as a substitute for bank guarantees will be accepted in government procurement.
According to the guidelines of the Insurance Regulatory and Development Authority of India (IRDAI), insurers can underwrite surety insurance policies for up to 10% of the total gross written premium, with a maximum limit of Rs 500 crore per financial year.