Highway contracts: Retrospective booster to put surety bonds in fast lane

In a bid to expand the surety bonds insurance ecosystem in national highway development, the Centre will allow contractors engaged by the Ministry of Road Transport and Highways of India (MoRTH) to convert their existing bank guarantees into surety bond insurance products with a retrospective effect, Union minister Nitin Gadkari said on Wednesday.

“I conveyed to the road transport and highways secretary to communicate with the finance secretary and allow a provision for all bank guarantees with the National Highways Authority of India (NHAI), NHIDCL, and MoRTH to be retrospectively converted if the contractor wants… I am happy to announce that our secretary spoke to the finance secretary, who has given his approval to it,” the highways minister said during a workshop on the implementation of e-bank guarantees and surety bonds, organised by the NHAI.

The event was organised to bring synergy into the efforts of various stakeholders towards deepening the surety bond insurance market in India, which has been seeing roadblocks despite an announcement by Finance Minister Nirmala Sitharaman in her FY23 Budget speech that surety bonds could be a substitute for bank guarantees.

Among the concerns presented by insurers was lack of legal clarity on surety bonds insurance products, including non-application of the bankruptcy code. NHAI officials at the workshop said that these matters have been duly heard and will be taken up with the Insurance Regulatory and Development Authority of India (Irdai) soon.

In 2020, Irdai formed a nine-member committee to study the legal framework and suitability of the Indian insurance industry or any other sector to offer such bonds. Earlier, the regulatory framework did not allow the underwriting of bonds related to performance securities and bid securities as they did not come under the ambit of conventional insurance products.

Performance securities and bid securities are essential facets of the infrastructure tendering process as these are considered tokens of the seriousness of the players. The industry has been raising concerns that the present bank guarantee framework sucks out too much liquidity and contractors’ working capital needs are often compromised.

“To reduce indirect cost for suppliers and work-contractors, the use of surety bonds as a substitute for bank guarantee will be made acceptable in government procurements. Businesses, such as gold imports, may also find this useful. Irdai has given the framework for issue of surety bonds by insurance companies,” Sitharaman said in 2022.

The Centre is also trying to push banks towards adopting the e-bank guarantee framework, in a bid to eliminate cases of fraud guarantees. The MoRTH itself found 27 fake guarantees in the past. “The NHAI has started accepting bid security and performance security in the form of e-BG. However, at present, only 13 banks in 19 states & Union Territories provide the facility of issuing e-BG. Despite this, so far, around 202 e-BGs pertaining to NHAI contracts have been issued by various banks in different states through the NeSL platform,” the highway authority said.

The NHAI is also in touch with insurance companies to analyse the use of insurance surety bonds as an additional mode of submitting bid security and /or performance security Deposit. Insurance surety Bonds, when issued, would be cost-effective and provide adequate security for NHAI projects, the NHAI’s statement said.

TAKING THE HIGHWAY

• Concerns presented by insurers include lack of legal clarity on surety bonds insurance products
• NHAI officials present at a workshop said that these matters have been duly heard
• In 2020, Irdai had formed a nine-member committee to study the legal framework and suitability of the Indian insurance industry
• Performance securities and bid securities are essential facets of the infrastructure tendering process