Industry awaits final guidelines on surety insurance activities


Representation image | Photo credit: BCCL

Highlights

  • Each contract obliges the contractor to post various guarantees throughout the life cycle of the project.
  • Khaldelwal said the basic construction of the bond is the zero loss assumption

Bombay: The industry is eagerly awaiting final guidelines on surety solutions after the release of draft guidelines by the Insurance Regulatory and Development Authority (IRDA) in September. Promoters already engaged in offering surety solutions will be given priority in accordance with the draft guidelines.

Vikash Khandelwal, CEO of Eqaro Guarantees, said each contract requires the contractor to put in place various bonds throughout the project lifecycle, which can add up to around 15-20% of the total project cost. . Most collateral requirements for the infrastructure sector are fulfilled by banks in the form of bank guarantees covering all bank lines, consume collateral and margin money, thus sucking cash from an entrepreneur who is already reeling from a liquidity crisis. Since sureties depend on their underwriting expertise to assess the risks associated with the project, they generally do not need cash collateral to issue surety collateral.

Therefore, surety bonds do not cut bank lines or consume productive collateral that can be used by the contractor much more effectively to execute the project or to participate in new project opportunities, Khandelwal added.

It should be noted that in the United States and other developed countries of the world, bond guarantees are required by law on infrastructure projects and have played an enabling role in protecting the interests of project owners. and lenders against the consequences of entrepreneur default.

Speaking in more detail on surety solutions, Khaldelwal said: “The basic construction of surety underwriting is the zero loss assumption – this means that the underwriter approaches a given proposal with the belief that the The underlying obligation will be fulfilled from today’s perspective. As such, it is imperative that the surety be assured of a full recourse against the principal in the event of default and subsequent call to the guarantee.

Currently, the Insolvency and Bankruptcy Code (IBC) grants the surety certain rights under the law. It includes the right of a guarantor to initiate corporate insolvency proceedings against the debtor. The IBC also distinguishes between a financial creditor and an operational creditor and the rights they have under the IBC. Additionally, since the surety substitutes for the original creditor under the Indian Contract Act, it is important to determine the exact nature of the debt in order to understand the rights of a surety under the IBC.

Insolvency law grants different rights depending on whether a creditor is an operational or financial creditor, which include how the creditor can request the opening of insolvency proceedings, inclusion in the creditors committee and the right to vote on a resolution as well. Operational creditors are neither included in the creditors committee nor can they vote on a resolution during the insolvency process and are ranked lower in the hierarchy below financial creditors for the distribution cascade.

Khandelwal added that if the concept of surety insurance is to flourish in India and achieve the desired goal of building surety capacity in our country, thereby providing much needed relief to the contracting community, care must be taken to clarify the rights and remedies available to surety companies. Surety companies need to know how and where they stack up against other regulations in India.


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