Bank guarantee issued by foreign bank in favour of indian company
sushil bhatt
(Querist) 28 July 2014
This query is : Resolved
Dear experts
I (Indian Company based in Delhi) have given a contract for supply of some Machines to be installed in Nagpur to an Indian Company based in Kolkata (supplier). The contract is only between me and supplier and governed by Indian Laws.
The Company was supposed to give me a performance bank guarantee (PBG) of 10% of contract value against releasing final payment.
The Supplier has its parent company in Germany and some components are imported by Supplier from its parent company for execution of the contract. But there is no privity of contract between me and parent company.
Now the work is nearly completion, the supplier has submitted the PBG through its parent company's bankers in Germany. Means the PBG is arranged by parent company from Germany on behalf of supplier.
My query:
As per Indian law, the PBG submitted by Supplier through its parent company from a bank situated in Germany, is valid or not?
If not, then please suggest some RBI/ Banking law / FEMA provisions so that the same can be clarified to the supplier.
Prithvi Raj Sikka
(Expert) 28 July 2014
Mr. Sushil
The supplier is agent of the parent company and parent company is issuing PBG which is binding on both parties and it can be enforced as per Indian laws as you have stated that Indian laws will be applicable.
Prithvi Raj Sikka
lawjuris09@gmail.com
sushil bhatt
(Querist) 28 July 2014
Sir but how an Indian party will enforce a foreign bank guarantee in case of encashment. Since the PBG is issued on orders of parent company, the parent company may take an injuction in Germany in case of dispute.
Is there any restriction on issuing such bank guarantees by a foreign bank directly in favour of indian party without. Pls provide if any provisions in indian law is there.
DR.VEDULA GOPINATH
(Expert) 29 July 2014
dear sir
PLEASE SEND ME A COPY OF THE B.G.
FOR FURTHER COMMENTS
RGDS
DR V.GOPINATH vgnath@gmail.com
advocate high court
m 9866013121
T. Kalaiselvan, Advocate
(Expert) 30 July 2014
An extract of the master circular of RBI;
RBI/2013-14/66
DBOD. No.Dir.BC.12/13.03.00/2013-14 dated 01.07.2013 is given below for your information which may answer your query:
2.3 Guarantees governed by regulations issued under Foreign Exchange Management (Guarantees) Regulations
2.3.1 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.
sushil bhatt
(Querist) 30 July 2014
Thanx sir but this provision seems other way round and applicable for exporters viz. India to Foreign. In the present case I am an Indian entity based in India, my supplier is Indian entity based in India but the performance guarantee is issued by a German Bank on instructions of German based parent company of my supplier.
Hence in the present case can such performance guarantee be issued by a German Bank on instructions of German based parent company. Is there any restrictions under RBI/Banking law/ FEMA etc.
Thanx
sushil bhatt
(Querist) 30 July 2014
The Contract between me and my supplier governed by Indian Laws only being both the parties are Indian entities. There is no privity of contract with parent company in any manner.
c.p.s. ramachary
(Expert) 30 July 2014
According to settled law the Bank Guarantee(whether Indian or foreign origin)should be honoured when invoked without looking into under lying contract.
