APPENDIX 9

APPENDIX 9

(See Chapter XI, Article 288)

Bank Guarantee Scheme

The important provision of the ‘Bank Guarantee Scheme’ and the procedure obtaining thereunder are given below:

I. Provisions

(a) Scheduled banks (including the State Bank of India) approved by the Reserve Bank of India in this behalf are permitted to issue guarantees or tender fixed deposit receipts, etc., up to certain specified limits without being required to deposit cash or lodge Government securities as over.

NOTE:—

Individual Deposit Receipts or Guarantees of Scheduled banks up to a limit of Rs. 25,000 (Rupees twenty-five thousand only) furnished as Earnest Money Deposit of Contractors may be accepted without insisting on confirmatory advices from the Reserve Bank of India being received subject to the condition that before the contract is finally awarded to successful tenders, necessary confirmatory advices should be received by the Departments concerned.

(b) Guarantee bonds executed or fixed deposit receipts, tendered in excess of the limit fixed for an approved Bank will not be accepted by Government Departments unless the Bank lodges either with the Reserve Bank of India or the Department concerned requisite cash or

Government Securities as cover for such excess.

(c) Guarantee bonds executed or fixed deposit receipts, etc. tendered by scheduled banks which have not been approved by the Reserve Bank of India for the purpose can be accepted provided:

(i) the bond in question is countersigned by any of the approved banks (including the State Bank of India) whereby the latter undertakes full responsibility to indemnify the Government Department in case of default; or

(ii) the bank concerned lodges either with the Reserve Bank of India or the Government Department concerned requisite securities as cover, the securities being valued on the basis of the market value there of allowing for a margin of 5 per cent.

(d) In the case of Government securities lodged by Scheduled Banks with the Reserve Bank of India as cover against the guarantees executed or fixed deposit receipts tendered in favour of Government Departments, the Reserve Bank may, at its discretion, grant advances against such securities up to 50 per cent of the market value thereof to sound banks in an emergency.

II. Procedure

(a) When an approved Scheduled Bank of any of its offices executed a guarantee or tenders a fixed deposit receipt, it or the office concerned has to intimate to the principal office or the Reserve Bank (i.e., the office at which it maintains its principal account under the Scheduled Bank’s Regulations) direct the name of the party on whose behalf the guarantee is being given or fixed deposit receipt is being rendered and the name of the Government Department to which the instrument is being tendered, endorsing a copy of its letter to the Government Department concerned. The bank’s office will also advise its principal office accordingly. In the case of guarantees, etc., issued by unapproved banks, the necessary particulars thereof have to be intimated to the office of the Reserve Bank with which the bank concerned has deposited cash or lodged Government Securities as cover. A scheduled bank is permitted to deposit securities for the purpose at any office of the Reserve Bank at which place of guaranteeing or tendering branch is situated.

(b) Immediately on receipt of the above intimation, the concerned office of the Reserve Bank will advise the Government Department concerned to accept the instrument in question if the amount of the guarantee or the fixed deposit receipt is within the limit fixed for the bank, having regard to the amount of outstanding guarantees, etc., or in case the amount of guarantee, etc., is in excess of the prescribed limit, if the bank concerned has lodged sufficient cover. In the case of unapproved banks, similar advice would be sent if the amount of cash and/or Government securities held on behalf of the bank concerned is sufficient to cover the amount of the instrument in question, the Government securities being valued, as already stated, on the basis of market price allowing for a margin of 5 per cent. A copy of such acceptance advice will be endorsed to the principal or local office of the bank as the case may be.

The above procedure will be followed only when Government securities and/or cash are deposited with the Reserve Bank of India. In case they are lodged with the Government Department concerned, no intimation to the Reserve Bank about the particulars of the instrument is necessary and the question issue of an acceptance advice by the bank will not also arise.

(c) In connection with the Government securities to be deposited as cover for guarantees executed in favour of and deposit receipts, cash certificates, etc., tendered to any Government Department, the Reserve Bank will obtain from the scheduled banks concerned a letter of authority as per specimen forms attached (marked ‘B’ and ‘C’).

(d ) Specimen form of guarantee bond prescribed by the State/Government to be used by banks* is also attached (marked ‘D’ and ‘E’).

The State Government and other institutions which adopt the scheme have to forward to the Reserve Bank for information and record, copies of the guarantee bond forms which have been actually prescribed by them. It may be particularly noted that the period of expiry of the bond has to be indicated by the department taking the guarantee and in fixing it care should be taken to make due allowance for the period necessary for submission of claim if any. The date of expiry of the bond will thus extend beyond the date of termination of the contract so that there would be enough time to review the position and submit claims, if any, or to extend the period of the guarantee, if necessary.

(e) When the guarantee, expires is cancelled, or, in the case of a fixed deposit receipt, etc., the stipulated period for the lodgment of the receipt is over, the bank and the Government Department concerned will advise immediately.

(i) the principal office of the Reserve Bank in the case of guarantee executed or fixed deposit receipts tendered by approved banks within limits, and

(ii) the particular office of the Reserve Bank with which the amount of cash is deposited or securities are lodged as cover by unapproved banks or by approved banks which have executed guarantees, etc., in excess of their prescribed limits.

(f) On receipt of the relative advice of the Government Department concerned, regarding the expiry of the cancellation of the instrument in question, the Reserve Bank would restore the limit and/or release the securities, if any, held.

(g) The form of the letter of deposit to be obtained by Government Departments from banks while accepting their fixed deposit receipts, cash certificates, etc., in lieu of the cash deposit required is also attached (marked ‘F’). It may be added that the acceptance of fixed deposit receipts by the Government of India under the scheme, inter alia, is subject to the provisions of Rule 277 of the General Financial Rules, Vol. I (vide paragraph 3 of the Government of India Office Memorandum, dated the 17th May 1955, referred to above). In terms of the said rules, fixed deposit receipts which are in the name of a contractor can also be tendered as security deposit. In this connection the Government of India have stated that where a fixed deposit receipt standing in the name of the contractor is tendered under the guarantee scheme, the certificate as required under the above rule that the deposit can be withdrawn only on demand or with the sanction of the pledgee (Government Officer concerned) should be given on the deposit receipt.

If, however, any bank does not agree to record such a certificate as required under the rule for technical or other reasons, such deposit receipts cannot be accepted as security by the Government of India and the party concerned is advised to take out the deposit receipt in the name of the officer concerned.

NOTE:—

(1) Reference made to Government Departments in the above note are deemed to be references to the State Government as well as other institutions which have adopted the scheme.

(2) The specimen forms of letters, etc., attached to this note are on the lines of the forms approved by the Government of India.

Copy of the Office Memorandum No. F7 (27)—F.I./54, dated the 26th February 1955 issued by the Government of India, Ministry of Finance, Department of Economic Affairs, New Delhi, to various Government Departments

Subject.—Guarantee offered by Banks to Railways and other Government Departments regarding the payment of freight, implementation of Government contracts, etc.

With reference to the Ministry of Finance, Department of Economic Affairs, Memo No. F7 (27)-F. 1/54, dated the 28th December 1954, on the subject noted above, the undersigned is directed to state that on reconsideration the Government of India have decided that proposal to set up State Bank of India need not hold up the examination of working of the bank guarantee schemes as outlined in the Ministry’s Office Memorandum No. F7 (107) F. 1/50, dated the 1st June 1953.

The said scheme has accordingly been reviewed in the light of the recommendation of the Committee on Finance for Private Sector (with Shroff Committee), and it has been decided that scheduled banks approved by the Reserve Bank of India in this behalf shall be eligible to issue guarantees or tender fixed deposits with etc., up to certain specified limits without being

required to lodge Government securities as cover. A scheduled bank offering such guarantee and desiring to know whether it is eligible for this concession, may be asked to refer to the principal office of the Reserve Bank of India (i.e., the office with which it maintains its principal account under the Scheduled Bank’s Regulations) whether it is so eligible and if so to what extent. The banks to whom this concession is extended will be required to advise the particulars of such guarantees, etc., to the principal office of the Reserve Bank. No Government Department should accept any such bank guarantee or fixed deposit receipts, etc., without obtaining in writing the concurrence of the principal office of the Reserve Bank of India, the expiry of the guarantee or its cancellation should also be unfailingly advised to the same office.

2. In respect of all guarantees issued or fixed deposit receipts, etc., tendered by banks not eligible for this concession or in excess of the limit fixed for the banks eligible for the concession, the procedure laid down in this Ministry’s Office Memorandum No. F7 (107)-FI/50, dated the 1st June 1953 will continue to obtain.

3. The revised scheme will be in force for a period of one year from the 1st March 1955, at the end of which the position will be reviewed.

Copy of Office Memorandum No.F7 (27)-FI/54, dated the 17th May 1955 issued by the Government of India, Ministry of Finance, Department of Economic Affairs, New Delhi, to

various Government Departments

Subject.—Guarantees offered by Banks to Railways and other Government Departments regarding the payment of freight, implementation of Government contracts, etc.

The undersigned is directed to refer to this Ministry’s O.M. No. F7 (27)— FI/54, dated the 25th February 1955, on the subject mentioned above and to state for the clarification of all concerned that with introduction of the revised scheme with effect from the 1st March 1955 for a period of one year the position will be as indicated below:

(a) The scheduled banks (including the Imperial Bank of India) approved by the Reserve Bank of India in this behalf shall be eligible to issue guarantees or tender fixed deposit receipts, cash certificates and such other instruments representing any special class of deposits up to certain specified limits without being required to lodge securities as cover.

(b) Guarantee bonds executed or fixed deposit receipts, etc., tendered in excess of the limit fixed for an approved bank (including the Imperial Bank of India) for the purpose will not be accepted unless the bank concerned lodges with the Reserve Bank of India requisite securities, viz., cash deposits or Government securities, in respect of the guarantees to be executed or fixed deposit receipts, etc., to be tendered by it in excess of the limit.

(c) Guarantee bonds executed or fixed deposit receipts, etc., tendered by scheduled banks which have not been approved by the Reserve Bank of India for the purpose may be accepted, provided—

(i) the bond in question is countersigned by any of the approved banks (including the Imperial Bank of India) whereby the latter undertakes full responsibility to indemnify the Government Department in the case of default;

(ii) the bank concerned lodges with the Reserve Bank of India requisite securities namely cash deposits or Government securities in respect of the guarantees to be executed or fixed deposit receipts, etc., to be tendered by it.

(d) If any scheduled bank desires to lodge cash or Government securities to cover its guarantee or fixed deposit receipt, etc., with the Government department concerned; it may be permitted to do so, the amount of securities being sufficient to cover the full amount of the

guarantee or the fixed deposit receipt, etc., with a margin of 5 per cent below the market price.

2. In all cases other than those where securities are lodged with the department concerned in terms of paragraph 1(d) above, no Government Department should accept any such bank guarantee or fixed deposit receipt, etc., without getting in writing the concurrence of the Reserve Bank of India.

3. The terms of issue of the fixed deposit receipts, etc., will in other respects continue to be governed by the provisions of Rule 277 of the General Financial Rules, Vol. I of the Central Government.

4. The advice regarding the cancellation or expiry of bank guarantees, etc., should be immediately sent to the office concerned of the Reserve Bank of India by the Government department concerned so that the scheme may work smoothly.

Letter of authority ‘B’

The Manager,

Reserve Bank of India,

..............................................................

Dear Sir,

With reference to the Government securities and/or cash that have/ has been deposited or may hereafter be deposited by us into the “Bank Security Deposit Account”/ “Bank Cash Deposit Account” with you in connection our guaranteeing to the ............................................................accepting our the........................................ ............................................. .......................................fixed deposit receipt ..........as security for or to be hereafter entered into by our constituents with the.................................and in consideration of premises, we hereby agree that as and when required or instructed by the ............................................................................................................. you may appropriate as much of the cash and/or sell, after giving us seven days notice, as much of the securities referred to above as you may consider necessary for paying over to the.........................................................sums which the........................................may claim to be payable to it byour constituents by reason or in respect of their failure in the proper performance of any of their contracts with the ........................................................... ..................................................and also to cover the costs, charges and expenses of and incidental to such sale.

This shall not in any manner prejudice or affect any right which you may have in regard to the said securities in connection with advance made by you to us against cover of the said securities.

Yours faithfully,

For and on behalf of.......................

Manager/Managing Director/Secretary.

NOTE:—To be used by Scheduled Banks in connection with the guarantees executed/fixed deposits receipt rendered to the

........................................................

‘C’

From

............................................................................

.....................................................................

.............................................................

To

The Manager,

Reserve Bank of India,

............................................

Dear Sir,

Guarantees offered and fixed deposit receipts tendered by Scheduled Banks to the....................................................................................................regarding implementation of contracts, etc.

With reference to the ‘Letter of Authority’, dated the..................................... already given by.........................Bank Ltd., in connection with the above scheme, we confirm that cash certificates and other similar instruments are covered by the term ‘fixed deposit receipt’ in the ‘Letter of Authority’ referred to above.

Yours faithfully,

‡Guarantee Bond prescribed by the Government of Kerala

FORM ‘D’

In consideration of the Governor of Kerala (Hereinafter called “the Government”) having agreed to exempt.............................................. [hereinafter called “the said contractor(s)/supplier(s)”] from the demand, under the terms and conditions of an Agreement dated........................................................... made between ................................................................and................................................ for ....................................................(hereinafter called “the said Agreement”) of security deposit any other cash deposit like earnest money deposit or any other forms of assurances for performance of contract for the due fulfilment by the said Contractor (s)/supplier(s) of the terms and conditions contained in the said Agreement, on production of a bank guarantee for

Rs................................(Rupees....................................only), we...........................................(indicate the name of the bank) (hereinafter referred to as “the bank”) at the request of.....................................Contractor(s)/supplier(s) do hereby undertake to pay to the Government an amount notexceeding Rs...........................(Rupees...............................................only) against any loss or damage caused to or suffered or could be caused to or suffered by the Government by reasons of any breach by the said contractor(s) of any of the terms or conditions contained in the said Agreement.

2. We...............................................(indicate the name of bank) do hereby undertake to pay the amounts due and payable under this guarantee without any demur merely on a demand from the Government stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach by the said contractor (s)/supplier (s) of any of the terms or conditions contained in the said Agreement or by reason of the contractor(s)/supplier(s), failure to perform the said Agreement. Any such demand made on the Bank shall be conclusive as regards the amount due and payable by the bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs......................(Rupees ......................................................................only).

3. We..................................................(indicate the name of the bank) undertake to pay to the Government any money so demanded not withstanding any dispute or disputes raised by the contractor (s)/supplier(s) in any suit or proceeding pending before any Court or Tribunal relating thereto our liability under this present guarantee being absolute and unequivocal.

The payment so made by us under this bond shall be a valid discharge of our liability for payment thereunder and the contractor(s)/ supplier(s) shall have no claim against us for making such payment.

4. We,................................................(indicate the name  of bank) further agree that the guarantee herein contained shall remain in full force and effect during the period that would be taken for the performance of the said Agreement and that it shall continue to be enforceable till all the dues of the Government under or by virtue of the said Agreement have been fully paid and its claims satisfied or discharged, or till......................Office/Department, Government of Kerala.................................certifies that the terms and conditions of the said Agreement have been fully and properly carried out by the said contractor(s)/supplier(s) and accordingly discharges this guarantee.

Unless a demand or claim under this guarantee is made on us on or before the..................................(specify the date) we shall be discharged from all liability under this guarantee thereafter.

5. We,................................................(indicate the name of bank) further agree with the Government that the Government shall have the fullest liberty without our consent and without affecting in any manner our obligations hereunder to vary any of the terms and conditions of the said Agreement or to extend time of performance by the said contractor(s) from time to time or to postpone for any time or from time to time any of the powers exercisable by the Government against the said Contractor(s)/Supplier(s) and to forbear or enforce any of the terms and conditions relating to the said agreement and we shall not be relieved from our liability by reason of any such variation, or extension being granted to the said Contractor(s)/Supplier(s) or for any forbearance, act or omission on the part of the Government or any indulgence by the Government to the said Contractor(s)/Supplier(s) or by any such matter or thing whatsoever which under the law relating to sureties would, but for this provision, have effect of so relieving us.

6. This guarantee will not be discharged due to the change in the constitution of the Bank or the Contractor(s)/Supplier(s).

7. We,......................................................(indicate the name of the bank) lastly undertake not to revoke this guarantee during its currency except with the previous consent of the Government in writing.

Dated the.......................day..........................

for..........................................................................

(indicate the name of bank)