SURETY BOND
A Surety Bond is a kind of financial guarantee. It is issued by a Surety (usually an insurance
company) on behalf of your company (the Principal) to reassure the Obligee (the government or
project owner) that you will fulfil the terms of the contract or tender. If you fail, the Surety will
compensate the obligee up to the bond amount.
Real-life Roles:
Role Who is it in a Tender Scenario
Principal Your company (the bidder/contractor) applying for the tender.
Obligee The government department or private entity issuing the tender.
Surety The insurance company giving the bond on your behalf.
Example: You are a contractor bidding for a government road project. The government asks for a
financial guarantee. Instead of blocking your funds in a Bank Guarantee, you can get a Surety Bond
from a surety provider (like an insurer). If you fail to complete the project, the surety pays the
government. Instead of blocking your funds in a Bank Guarantee (BG), you now have the option to
get a Surety Bond – it performs the same function but is less costly and less cash-intensive.
SURETY BOND vs BANK GUARANTEE – KEY DIFFERENCES
Feature Surety Bond Bank Guarantee
Nature Insurance product Financial instrument
Parties 3 (Principal, Obligee, Surety) 2 (Applicant, Beneficiary)
Risk Held By Surety (Insurer) Bank
Collateral Usually less or none Often requires 100% collateral (FD, property, etc.)
Financial Burden Off-balance sheet On-balance sheet
Claim Payment After investigating default On first demand (usually)
Cost Lower in many cases Higher due to blocked funds
Surety Bonds are new in India, started after IRDAI (Insurance Regulator) allowed them in 2022.
Currently, insurance companies issue them.
List of Surety Bond Providers in India:
1. New India Assurance
2. Bajaj Allianz General Insurance
3. ICICI Lombard
4. HDFC ERGO
5. SBI General Insurance
6. Tata AIG
7. IFFCO Tokio
8. Reliance General Insurance
9. Oriental Insurance
10. National Insurance Co.
CHARGES / PREMIUM FOR SURETY BONDS
The cost is called premium and is usually a percentage of the bond amount. It depends on risk, size,
and term.
General Range:
1% to 3% annually of the bond amount.
For large, well-rated companies, it may go as low as 0.75%.
No need to give 100% collateral (unlike bank guarantee).
When your company applies for a Surety Bond, the insurer charges a premium based on:
Size of the tender or bond
Your company’s credit rating
Type of work (construction, supply, services)
Duration of the bond
Project risk
Typical Premium Structure:
Project/Bond Size Premium Rate (Annual) Notes
₹10 Lakh – ₹50 Lakh 1.5% – 2.5% May be lower for good credit
₹50 Lakh – ₹5 Cr 1% – 2% Better rates for reputed companies
₹5 Cr+ 0.75% – 1.5% Negotiable; based on balance sheet strength
Companies in India Known to Use Surety Bonds (or Likely Early Adopters)
1. Larsen & Toubro (L&T)
Sector: Infrastructure, construction, EPC
Use: Known to explore innovative financing tools like surety bonds, especially for large
government infra projects.
2. Afcons Infrastructure
Sector: Railways, roads, metros
Use: Likely candidate, often bids in large government tenders, early interest in surety model
reported.
3. JMC Projects (Kalpataru Group)
Sector: Highways, buildings, water projects
Use: Engaged in multiple government EPC contracts where surety bonds are accepted as
performance security.
4. Capacit'e Infraprojects
Sector: Urban infra, housing projects (govt/PSU)
Use: Participates in public sector tenders, has shown interest in surety models for
bid/performance guarantees.
5. PSP Projects
Sector: Government buildings, institutions, hospitals
Use: Medium-sized EPC contractor likely using surety bond for faster financial closures.
PROFIT & LOSS – BENEFITS AND DRAWBACKS
Advantages (Profits):
No need to block capital (unlike FD for BG).
Frees up working capital.
Off-balance sheet – better for accounting ratios.
Lower cost for financially strong companies.
Better for startups/MSMEs with limited funds.
Disadvantages (Risks):
Still new – not accepted everywhere yet.
Surety provider does detailed evaluation – may reject risky applicants.
Takes time initially – needs financial documents, credit reports.
Limited awareness among tender authorities – needs follow-up.
Summary:
Benefit Impact on Your Business
No Collateral Needed Frees up your cash for real work
Off-Balance Sheet Keeps books clean, improves loan eligibility
Cheaper in Many Cases Lower cost than fixed deposit or BG
MSME Friendly Especially good for companies with low cash
Government Approved Valid substitute for BG in public procurement
