Assignment of bank guarantee for bank finance

Nitin Agrawal (Chartered Accountant) (317 Points)

23 August 2019  

This is a question related to finance on which clarity is needed.

- Suppose there is large size contractor (X Ltd) who has got a work order for construction of govt building and also for execution of electrical commissioning in said building. 

- Said contractor company (X Ltd) need to buy various electrical items from open market for execution of the project. Lets assume said company has made tie up with one supplier (Y Ltd)  for supply of all electrical items. Y Ltd will also provide the after sales services for 2 years to main contractor X Ltd

- Due to large size order and shortage of working capital Y Ltd needs working capital assistance. However to get that assistance from its bank, Y ltd does not have sufficient security. Also in such huge project Y Ltd wants to involve X ltd financially either by way of advance or by way of financial security.

- X Ltd is having bank guarantee limits with various banks in sizable amount. 

- X Ltd agrees to give a bank guarantee in favor of banker of Y Ltd against which Y Ltd can avail working capital from its banker. Said bank guarantee will have assignment clause in favor of banker of Y ltd and also would be invocation at the open of banker of Y ltd at the incident of default by Y Ltd in repayment of debt of working capital.

- Question is 1) Whether RBI permits assignment of Bank Guarantee's in such way for raising funds? 2) Whether said kind of practice is prevailing in market with any bank? 3) Whether said BGs would be enforceable by lender at the time of default?


Kindly suggest.