Bank Guarantee _revised Fort

BANK GUARANTEE

Presented on 27Presented on 27thth June 2015June 2015

GUARANTEE

TRUSTASSURANCESECURITYCREDIT WORTHINESSRISK MITIGATION HEDGING

Why Do We Need a Bank Guarantee?

In the international and Local trade and financial transaction a Bank Guarantee is required as security

BankBuyer

SellerPlease provide security for my performance of contract to buyer !

Please provide security for my payments to seller !my payment to seller !

Banker’s Guarantee

NEED OF THE GUARANTEE

As a part of business, banks issue guarantees on behalf of their customers for various purposes. The guarantees executed by banks comprises both performance guarantees and financial guarantees. The guarantees are structured according to the terms of agreement, viz., security, maturity and purpose.

BANK GUARANTEE FACILITATES

TRADE - EXCHANGE OF GOOD S & SERVICES CROSS BORDER PAYMENTS STATUTORY COMPLIANCE LEGAL COMPLIANCE PERFORMANCE FINANCE INVESTMENTS

MEANING OF BANK GUARANTEEA bank guarantee is a written promise issued by a bank at the request of its customer, undertaking to make payment to the beneficiary within the limits of a stated sum of money in the event of default by the principal.

The Indian Contract Act 1872 Section 126 defines “A contract to perform the promise or discharge the liability of a third party in case of default.”

SCOPE OF BANK GUARANTEE

An Agreement Enforceable By Law is a Contract -The Indian Contract Act 1872

Bank Guarantee is Tripartite Agreement. All Rupee/ INR Guarantees covered under The Indian

Contract Act 1872. All FCY Guarantees governed as per Notification No.

FEMA.8/2000-RB dated 3rd May 2000 ICC Publication: URDG – Uniform Rules for Demand

Guarantees 758 ICC

Types of Bank Guarantee

Performance Guarantee Bid Bond Guarantee Financial Guarantee Advance Payment Guarantee Foreign Bank Guarantee Deferred Payment Guarantee

A Bank Guarantee should be: Irrevocable, Unconditional, DivisibleIrrevocable: The Guarantee cannot be modified or cancelled without the permission of the beneficiaryUnconditional: The bank pays irrespective of the underlying transaction only upon the first demand or some documents of the beneficiaryWithin the validity of the bank guarantee: After the expiry the guarantor has no more obligationTo call upon the guarantor to pay, the beneficiary has to present (through bank channel): documents indicated in the letter/contract of bank guarantee.There is only one exception: evident fraud;

NATURE OF THE GUARANTEE

PARTIES TO BANK GUARANTEE

Applicant -- the party that requests a bank to issue a bank

guarantee. Beneficiary

-- the party in whose favor a bank guarantee is opened and who has the right to claim for compensation in accordance with the terms and conditions of the guarantee. Guarantor / Surety / bank

-- the bank that issues a letter of guarantee at the request of its customer.

Advising or transmitting bank -- a bank in the beneficiary’s place that notifies or transmits the guarantee to the beneficiary.

CLASSIFICATION

FINANCIAL GUARANTEES –

Consideration and obligation under Guaranteeis financial in Nature.

PERFORMANCE GUARANTEES –

Consideration and obligation under Guaranteeis Performance in Nature.

FINANCIAL GUARANTEES

Advance Payment Guarantee Financial Obligation Guarantee All Statutory Guarantees Treat as Financial as

obligation is Payment. Customs, Excise , Tax Liability, Disputed Tax

Liability, Licenses Guarantees, Deferred Payment Guarantees, Down Payment Guarantee, Shipping Guarantee, Credit Period Guarantees.

PERFORMANCE GUARANTEES

Bid Bond Earnest Money Deposits Security Deposit for Performance of Contract Guarantee for Retention Money Guarantee for Defect Liability Guarantee for Liquid Damages Guarantee for Warrantee period

TYPES OF BANK GUARANTEE BOND

UNCONDITIONAL GUARANTEE BOND

A bank guarantee in which the beneficiary does not have to provide any evidence that the terms of the underlying contract between the contractor and the beneficiary have not been met; the issuing bank has to pay at the first request of the beneficiary.

CONDITIONAL GUARANTEE BOND

A bank guarantee in which the beneficiary does not have to provide any evidence that the terms of the underlying contract between the contractor and the beneficiary have not been met; the issuing bank has to pay at the first request of the beneficiary.

STRUCTURE OF BANK GURANTEE TEXT

INTRODUCTION / PREAMBLE PART RECITLE PART / CONSIDERATION PART CONRACT CONDITIONS / TRADE CONDITIONS GUARANTEE CONDITIONS INVOCATION CONDITIONS NOTWITHSTANDING / SRC CONDITIONS

ONEROUS CLAUSES SURETY WAIVER CLAUSE ADVANCE PAYMENT CLAUSE CONTINUAION CLAUSE / IN CONNECTION AUTO RENEWAL / AUTO INVOCATION CLAUSE LAND REVENUE CLAUSE/ ATTACHMENT CLAUSE ARBTRATION CLAUSE SUBROGATION CLAUSE ASSIGNMENT CLAUSE INTEREST CLAUSE (INCASE OF DELAY IN INVOCK) FAX CLAUSE (INVOCATION BY FAX) POST CLAUSE (INVOCATION BY POST PARCEL)

GUARANTEES PROHIBETED FOR

CHIT FUND BUSINESS LOTTERY BUSINESS CHEQUE PAYMENT TERMS LOAN REPAYMENT LUCKY DRAW SCHEME CHEQUE PURCHASE FACILITY BILL PURCHASE FACILITY DEFFERED PAYMENT SCHEME

GUARANTEE FLOW CHART

Applicant

Guarantor

Beneficiary

TransmittingBank

Application

issue

Notify

Claims For payment FCY Guarantees

Underlying Contract

In case of INR / Local Case Beneficiary Claim Directly From Guarantor Bank

CHECKLIST OF GUARANTEE ISSUANCE

The guarantee request should be checked with reference to the following points.

The request should specify the currency, amount, expiry date, claim period, and beneficiary’s name and address.

The various clauses in the text of the guarantee should not be contradictory.

The guarantee should not be open ended. The text of the guarantee should end with standard limitation

clause. (SRC). Where the text of the guarantee has been provided by the

customer and contradictory/onerous clauses are noticed, the customer has to be contacted for suitable clarification.

DOCUMENTS FOR ISSUANCE OF GUARANTEE

Customer request letter

(Signature verification & document authentication ) Vetted guarantee text. Guarantee text to be printed on Stamp Paper in the

name of Applicant or Bank. Amount of stamping to be as per the state stamp

act.

Statewise Stamping Rates

DIFFERENT SLABS OF STAMP DUTY

MAHARASHTRA – 0.1 % OF THE GUARANTEE VALUE UP TO 10 LACS ABOVE 10 LACS 0.2%.RAJASTHAN / INDORE/JAIPUR – FLAT 0.25 % MIN RS.100.00.DELHI- MIN RS. 107.00 MAX NO CELING.KOLKATA-MIN RS.105.00 MAX NO CELING.BANGALORE - MIN RS.200.00 MAX NO CELING.GUJARAT - MIN RS. 100.00 MAX NO CELING.DIV DAMAN N.H. - MIN RS. 100.00 MAX NO CELING.GOA- FLAT RS. 1000.00.

AMENDMENT

BG TEXT AMENDMENT (Subject to No Onerous Clauses)

In case of Onerous Claus internal Approval required as per grid

BG TENOR EXTENTION BG AMOUNT ENHANCEMENT BG TENOR REDUCTION (Beneficiary Consent mandatory) BG AMOUNT REDUCTION (Beneficiary Consent mandatory)

CANCELLATION

Guarantee cancellation letter from beneficiary.(Discharge Letter)

Branch staff to receive Original Guarantees (Complete set) for cancellation and stamp with date

and time.

Guarantee desk will cancel the guarantee in the system as per internal Process.

INVOCATION

Must contain:The max amount payable under the guarantee.The last date up to which the guarantee can be invoked.If guarantee is invoked, bank must pay.Where guarantees are invoked, payment should be made to the beneficiaries without delay and demur. An appropriate procedure for ensuring such immediate honouring of guarantees should be laid down so that there is no delay on the pretext that legal advice or approval of higher authorities is being obtained.

BANK GUARANTEE ADVISING

HDFC Bank receives Bank Guarantee through different channels i.e. Swift / SFMS from the issuing Bank.

We as Advising Bank, our role is as underIntimation to BeneficiaryProcessing in System as per internal process noteRecovery of our charges from Beneficiary / Issuing Bank as case may beAdvise the Guarantee by notifying our ref no’s: details on the guarantee

Signatories to Bank Guarantee'sTwo Authorised Bank signatories (POA – power of attorney holder) will sign the Guarantee clauses on Stamp paper.

•Internal Control Systems

Bank guarantees issued for Rs.50,000/- and above should be signed by two officials jointly. A lower cut-off point, depending upon the size and category of branches, may be prescribed by banks, where considered necessary. Such a system will reduce the scope for malpractices/ losses arising from the wrong perception/ judgement or lack of honesty/ integrity on the part of a single signatory. Banks should evolve suitable systems and procedures, keeping in view the spirit of these instructions and allow deviation from the two signatures discipline only in exceptional circumstances. The responsibility for ensuring the adequacy and effectiveness of the systems and procedures for preventing perpetration of frauds and malpractices by their officials would, in such cases, rest on the top managements of the banks. In case, exceptions are made for affixing of only one signature on the instruments, banks should devise a system for subjecting such instruments to special scrutiny by the auditors or inspectors at the time of internal inspection of branches.

BASIC BG Validations

Tenure mentioned in the application must match with the text submitted.

Clauses in the text require approval of functional head and credit must be on record.

Funds must be available in customers a/c for to debiting the charges /commission.

Beneficiary details on the request letter must co-relate with Guarantee text.

Payable location of the guarantee must be clarified. Stamp Duty to check or must obtained before

issuance.

GUARANTEE /SBLC

WHY SBLC I/O BANK GUARANTEES

Federal Reserve Regulations prevent nationally chartered banks in the United States from issuing Guarantees. That is the reason why US banks generally issue Standby Letters of Credit in lieu of Guarantees.

SBLC

As the name implies, the Credit is “Standing By”. It is a ‘guarantee’ of the Issuing Bank to pay the buyer (of goods or services), if there is a default (e.g., undelivered service, failure Of warranty, non-payment). Like a “guaranty”, the issuing party does not expect to have it called (drawn upon). Governed by different rules -ISP 98.

[Foreign banks can issue “Bank Guarantees”, U.S. banks, by law, cannot; U.S banks must issue a Standby L/C.]

GUARANTEE /SBLC cont’d…

Often Standby Letters of Credit are used instead of Guarantees. Standby Letters of Credit work in much the same way as Guarantees, offering financial assurance to the Importer if the Exporter defaults on agreed upon contractual obligations. However, there are at least two important ways in which Standby Letters of Credit differ from Guarantees :

Standby Letters of Credit are governed by the International Chamber of Commerce’s UCP 600/ ISP 98 while Guarantees are subject to the laws of the country of the Issuing Bank.

Banks in several countries, including the United States, are not empowered to issue Guarantees, and therefore use Standby Letters of Credit instead of Guarantees.

Synopsis of RBI MASTER CIRCULAR

GUIDELINES RELATING TO THE CONDUCT OF GUARANTEE BUSINESS

As regards the purpose of the guarantee, as a general rule, the banks should confine themselves to the provision of financial guarantees and exercise due caution with regard to performance guarantee business.

As regards maturity, as a rule, banks should guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. No bank guarantee should normally have a maturity of more than 10 years.

Now Banks are allowed to issue Guarantees tenure more than 10 years subject to due diligence and internal policy.


cont’d….PRECAUTIONS FOR ALERTING FRAUDS

While issuing guarantees on behalf of customers, the following safeguards should be observed by the banks:

At the time of issuing financial guarantees, banks should be satisfied that the customer would be in a position to reimburse the bank in case the bank is required to make payment under the guarantee.

In the case of performance guarantee, banks should exercise due caution and have sufficient experience with the customer to satisfy themselves that the customer has the necessary experience, capacity and means to perform the obligations under the contract and is not likely to commit any default.

Banks should normally refrain from issuing guarantees on behalf of customers who do not enjoy credit facilities with them.


cont’d…. Restrictions on guarantees of inter-company deposits/loans Banks should not execute guarantees covering inter-company

deposits/loans thereby guaranteeing refund of deposits/loans accepted by NBFC/firms from other NBFC/firms.

2.4.1 Restriction on guarantees for placement of funds with NBFCs These instructions would cover all types of deposits/ loans irrespective

of their source, including deposits/loans received by NBFCs from trusts and other institutions. Guarantees should not be issued for the purpose of indirectly enabling the placement of deposits with NBFCs.

2.4.2 Restrictions on Inter-Institutional Guarantees 2.4.2.1 Banks should not execute guarantees covering inter-company

deposits/ loans. Guarantees should not, also, be issued for the purpose of indirectly enabling the placement of deposits with non-banking institutions. This stipulation will apply to all types of deposits/loans irrespective of their source, e.g. deposits/ loans received by non-banking companies from trusts and other institutions.

Part I: Issuance of FCY Guarantees on behalf f of our Customer through

Correspondent Bank (Outward Guarantees) THE PROCESS FOR ISSUANCE OF FOREIGN BANK GUARANTEE

TO BE FOLLOWED IS AS UNDER: The Applicant approaches Trade desk-Branch for issuance of Foreign

Bank Guarantee. The text of the guarantee is to be vetted and verified for compliance of FEMA guidelines.

Then sends a mail to the Correspondent bank seeking a confirmation from them for issuance and the pricing. The draft of the guarantee text is either sent at this juncture, at the request of the Applicant.

Once the pricing is accepted by the applicant, we check for availability of Customer limits for issuance of Guarantee. In case the limits are insufficient or unavailable, we follow up with RM’s and LSS and ensure that necessary limits are available. Upon receipt of Limits, the guarantee is booked in FCC and swift is sent to correspondent bank.

Part I : Issuance of FCY Guarantees on behalf of our customer through

Correspondent Bank (Outward Guarantees) The counter guarantee is as per our standard format or as per their

format which varies from Bank to Bank( In that case approval from business and credit is required )

Once the swift message is received, the Correspondent bank vets the guarantee clauses, and if required, they ask for necessary modifications in the clauses . Such amendments / modifications, if any, would be conveyed by Branch to Applicant for their confirmation and forward their acceptance to trade desk Upon receipt of such confirmation, Trade Desk to send out swift message to the correspondent bank confirming the changes.

Trade desk to follow up with correspondent bank for copy of the guarantee issued.

Corr Bank charges are paid to them by debit customer account and credit the Nostro Account , Swift Message 202 is sent to the Bank whose account has been credited so that the funds can be remitted to the corr bank .

Part II : Issuance of Guarantees against Counter Guarantee received from Correspondent

Bank

We issue guarantees to beneficiaries in India on behalf of our Correspondents, based on their Counter Guarantee to us. These guarantees can be for various purposes such as Performance/advance payment/Bid bond etc . These guarantees are issued in various currencies depending on the Country of the beneficiary.

We have a tie up with various Correspondent Banks globally for transacting various foreign exchange transactions required by our clients. These Banks also use the services of our bank to issue guarantees in India, favouring Indian beneficiaries, on behalf of their clients. The Correspondent Banks will issue their Counter Guarantee to us and on basis of their counter guarantee we issue guarantee to various beneficiaries in India.

Part II : Issuance of Guarantees against Counter Guarantee received from Correspondent Bank

The process for issuance of Inward foreign bank guarantee to be followed is as under:

We receive Counter Guarantee and guarantee text from correspondent Banks. Upon receipt of the same Trade Desk verifies the text of these guarantees as well as counter guarantees and check about acceptability of the clauses and counter guarantee.

In case any clause which is not acceptable to us, swift message is sent to the Correspondent bank asking for an amendment in the Guarantee text and/or Counter guarantee text.

After receipt of the desired amendment, Trade Desk initiates mails to credit Approvers seeking approval for setting limits for issuance of guarantee on behalf of the correspondent bank basis their counter guarantee.

Part II : Issuance of Guarantees against Counter Guarantee received from Correspondent Bank

Once such approval is received from credit approvers, the same is forwarded to the LSS for setting limits for these banks.

Once limits set Trade desk books the guarantee in the FCC and prepare guarantee text and takes print out of the guarantee on stamp paper and sends the guarantee to the beneficiary as per disposal instructions of the correspondent bank.

Trade desk calculates the commission on the issuance and recovers the same by debiting equivalent in INR/FCY receivables account also sends swift message to the correspondent bank claiming charges for the issuance. Correspondent banks credit the charges to our Nostro accounts post sights the funds and credits the same to receivables account.

Part II : Issuance of Guarantees against counter Guarantee received from Correspondent Bank

Grid for approving BG

TF, provided a Bank has a minimum rating of A/A2 or under approved bank lines, counter guarantee expires after 30 days and maximum tenor is 3 years, and the quantum of BG is not more than Rs.15 crores. (In TF, approval of the Unit Head would be required).

Or else 3 credit approvers as per process.

Precautions to be taken while issuing FCY Guarantees as per Foreign Exchange

Management (Guarantees) Regulations, 2000GUARANTEES WHICH MAY BE GIVEN BY AN AUTHORISED DEALER :-

(1) An authorised dealer may give a guarantee in respect of any debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside India, in the following cases, namely:-where the debt, obligation or other liability is incurred by the person resident in India, -i) as an exporter, on account of exports from India;ii) as an importer, in respect of import on deferred payment terms in accordance with the approval granted by the Reserve Bank for import on such terms.(2) An authorised dealer may give a guarantee in respect of any debt, obligation or other liability incurred by a person resident outside India, in the following cases, namely :-i) where such debt, obligation or liability is owed to a person resident in India in connection with a bona fide trade transaction :Provided that the guarantee given under this clause is covered by a counter guarantee of a bank of international repute resident abroad; ( MT 760 Swift message is required ) ii) as a counter-guarantee to cover guarantee issued by his branch or correspondent outside India, on behalf of Indian exporter in cases where guarantees of only resident banks are acceptable to overseas buyers.

Precautions to be taken while issuing FCY Guarantees as per Foreign Exchange

Management (Guarantees) Regulations, 20003) An authorised dealer may, in the ordinary course of his business, give a guarantee in the following other cases, namely:i) on behalf of his customer or branch or correspondent outside India in respect of missing or defective documents, or authenticity of signatures;(ii) in favour of organizations outside India issuing travellers cheques stocked for sale in India by the authorised dealer or by his constituents who are authorised persons Amendment of Regulation 5 Management (Guarantees) Regulations, 2000 (Notification No. FEMA 8/2000-RB) dated May 3, 2000, in regulation 5, after clause (d), the following new clause shall be inserted and shall be deemed to have been inserted with effect from April 20, 2009, namely,- “(e) a bank which is an authorised dealer may, subject to the directions issued by the Reserve Bank in this behalf, permit a person resident in India to issue corporate guarantee in favour of an overseas lessor for financing imports through operating lease effected in conformity with the Foreign Trade Policy in force and under the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 framed by Government of India vide Notification No G.S.R. 381 (E) dated May 3, 2000 and the directions issued by Reserve Bank under Foreign Exchange Management Act, 1999 from time to time.

Precautions to be taken while issuing FCY Guarantees as per Master Circular

Bid bonds and performance bonds or guarantees for exports i. In terms of Notification No.FEMA.8/2000-RB dated May 3, 2000, Authorised Dealer

banks have the permission to give performance bond or guarantee in favour of overseas buyers on account of bona fide exports from India.

ii. Prior approval of RBI should be obtained by the Authorised Dealer banks for issue of performance bonds/ guarantees in respect of caution-listed exporters. Before issuing any such guarantees, they should satisfy themselves with the bona fides of the applicant and his capacity to perform the contract and also that the value of the bid/ guarantee as a percentage of the value of the contract/ tender is reasonable and according to the normal practice in international trade, and that the terms of the contract are in accordance with the Foreign Exchange Management regulations.

iii. Authorised Dealer banks, should also, subject to what has been stated above, issue counter-guarantees in favour of their branches/ correspondents abroad in cover of guarantees required to be issued by the latter on behalf of Indian exporters, in cases where guarantees of only resident banks are acceptable to overseas buyers in accordance with local laws/ regulations.

iv. If and when the bond/ guarantee is invoked, Authorised Dealer banks may make payments due there under to non-resident beneficiaries..


(I) ISSUE OF BANK GUARANTEE IN FAVOUR OF FOREIGN AIRLINES/IATA Indian agents of foreign airline companies who are members of International Air Transport Association (IATA), are required to furnish bank guarantees in favour of foreign airline companies/IATA, in connection with their ticketing business. As this is a standard requirement in this business, Authorised Dealer banks in their ordinary course of business can issue guarantees in favour of the foreign airline companies/IATA on behalf of Indian agents of foreign airline companies, who are members of International Air Transport Association (IATA), in connection with their ticketing business. (II) ISSUE OF BANK GUARANTEE ON BEHALF OF SERVICE IMPORTERS With a view to further liberalise the procedure (other than in respect of a Public Sector Company or a Department / Undertaking of the Government of India / State Governments) for import of services, it has been decided to increase the limit for issue of guarantee by AD Category-I Banks from USD 100,000 to USD 500,000. Accordingly, AD Category-I banks are now permitted to issue guarantee for amount not exceeding USD 500,000 or its equivalent in favour of a non-resident service provider, on behalf of a resident customer who is a service importer, provided: (a) the AD Category-I bank is satisfied about the bonafides of the transaction; (b) the AD Category-I bank ensures submission of documentary evidence for import of services in the normal course; and (c) the guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident.


(iii) Issue of Bank Guarantee-Commodity hedging An Authorised Dealer Category I bank in India may give guarantee or

standby Letter of Credit in respect of an obligation incurred by a person resident in India and owed to a person resident outside India in connection with payment of margin money in respect of approved commodity hedging transaction of such person residing in India subject to terms and conditions as may be stipulated by the Reserve Bank from time to time. Banks are advised to refer to the Master Circular on “ Risk Management & Inter Bank Dealings” dated July 1, 2009 for the conditions and guidelines based on which a standby letter of credit /bank guarantee under the facility may be issued by Authorised Dealer Category I banks.

INTERNAL PROCESS Issue of Bank Guarantee-Commodity hedging Based on the parameters as given we need to frame a policy where an

official not below the rank of Vice President of the concerned business unit as also one approver from the credit risk unit be allowed to permit issuance of SBLC / BG for the said purpose subject to the under noted conditions:


The client making the request is well known to the bank and has a satisfactory track record established with us. It should be either a borrower client where due diligence has been done by the bank and his non-funded facility is earmarked for the said amount.

An undertaking will be taken from the applicant that the SBLC / BG is being issued for an amount not exceeding the margin payments made to the specific counterparty during the previous financial year.

Broker’s month end report duly confirmed / countersigned by corporate financial controller will be submitted regularly.

Credit approval for every such transaction as this exposure should be assigned risk weights for capital adequacy purposes.

Any deviation from the policy given above will have necessarily be referred to the Group Head of the concerned business unit who will ensure that the spirit of the RBI instructions is followed if it is considered necessary to give permission in the overall business interest of the bank.


GUARANTEES FOR EXPORT ADVANCE (i) It had come to the notice of Reserve Bank that exporters with low export

turnover are receiving large amounts as export advances, in low interest rate currencies, against domestic bank guarantees and are depositing such advances with banks in Indian Rupees for interest rate arbitrage. Further, the guarantees are being issued even before the receipt of the advances, with a proviso that the guarantees would be operational only upon receipt of the advances. The guarantees have been issued at par values, against the discounted values of the export advances. The exporters have also been allowed to freely book, cancel and rebook forward contracts without any crystallized exports and / or past performances, in contravention of the FEMA regulations. It has also been observed that the exporters keep a substantial part of their Indian Rupee – US Dollar leg of the currency exposure open, thereby exposing both the exporters and the domestic banks to foreign exchange risk. In such cases, generally no exports have taken place and the exporters have neither the track record nor the ability to execute large export orders. The transactions have basically been designed for taking advantage of the interest rate differential and currency movements and have implications for capital flow

Banks should also ensure that the export advances received by the exporters are in compliance with the regulations/ directions issued under the Foreign Exchange Management Act, 1999.


OVERSEAS INVESTMENT – GUARANTEE ON BEHALF OF WHOLLY OWNED SUBSIDIARIES (WOS)/JOINT VENTURES (JV) ABROAD

i. Presently, only promoter corporate are permitted to offer guarantees on behalf of their Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs), under the Automatic Route and issue of personal, collateral and third party guarantees requires prior approval of Reserve Bank and is considered by RBI, on a case by case basis.

ii. The scope of guarantees covered under the Automatic Route has been enlarged. Indian entities are now permitted to offer any forms of guarantee – corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India, provided:

a) All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 400 per cent of the net worth of the investing company (Indian party).


Overseas Investment – Guarantee on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad ( Continued )

b) No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront, and

c) As in the case of corporate guarantees, all guarantees are required to be reported to RBI in form ODI.

iii. Guarantees issued by banks in India in favour of WOS/ JVs outside India are outside this ceiling and would be subject to prudential norms issued by RBI from time to time

Invocation of guarantee In case of invocation of the guarantee, the authorised dealer bank should

send a detailed report to the Chief General Manager-in-Charge, Foreign Exchange Department, External Payments Division(EPD), Reserve Bank of India, Central Office, Mumbai – 400 001, explaining the circumstances leading to the invocation of the guarantee.

Your Questions……

COMPLIED BY YOGESH PATHAK_ FORT BRANCH

Thank-You

Documents

Bank Guarantee _revised Fort