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What are Surety Bonds?

Surety Bonds:

 

In the Budget 2022-23, the government has allowed the use of surety insurance bonds as a substitute for bank guarantees in case of government procurement and also for gold imports.

  • Insurance Regulatory and Development Authority of India (IRDAI) has also released final guidelines to ensure orderly development of surety insurance business in India.
  • The IRDAI (Surety Insurance Contracts) Guidelines, 2022 will come into effect from 1st April , 2022.
  • A surety bond is a legally binding contract entered into by three parties—the principal, the obligee, and the surety.
  • The obligee, usually a government entity, requires the principal, typically a business owner or contractor, to obtain a surety bond as a guarantee against future work performance.
  • Surety bonds are mainly aimed at infrastructure development, mainly to reduce indirect cost for suppliers and work-contractors thereby diversifying their options and acting as a substitute for bank guarantee.
  • Surety bond is provided by the insurance company on behalf of the contractor to the entity which is awarding the project.
  • Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal.
  • They guarantee the performance of a variety of obligations, from construction or service contracts to licensing and commercial undertakings.

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