Sovereign Guarantee is a promise by the Government to discharge the liability of a third person in case of his default.
Sovereign Guarantees are contingent liabilities of the Central and State Governments that come into play on the occurrence of an event covered by the guarantee.
The guarantee cover of the Government of India (GoI) is limited only to the payment of principal and normal interest in case of default. GoI is not be liable to pay any penal interest/any other charges. Further, in view of the quasi-sovereign nature of the borrowings, it is stipulated that the interest payable should compare with yield on G-securities of comparable maturity with a small spread. The guarantee once given would not be transferable to any other agency. In case of default, the lending agency has to invoke the Guarantee within a time limit of 45 to 90 days of the default. In case the guarantee is not invoked within that stipulated period, the guarantee would cease to exist for that portion of the tranche/loan/liability for which guarantee has not been invoked.
Article 292 of the Constitution of India extends the executive power of the Union to the giving of guarantees on the security of the Consolidated Fund of India, within such limits, if any, as may be fixed by Parliament. Similar powers are given to States under Article 293.
The Fiscal Responsibility and Budget Management Act, 2003 and the Rules made thereunder prescribe a limit of 0.5% of GDP for guarantees to be given in any financial year beginning with the financial year 2004-05. If this limit is exceeded owing to unforeseen circumstances, the Finance Minister is required to make a statement in both Houses of Parliament explaining the deviation including whether the deviation is substantial and relates to the actual or the potential budgetary outcomes and the remedial measures that the Central Government proposes to take in the matter.
The sovereign guarantee is normally extended for the purpose of achieving the following objectives:-
- To improve viability of projects or activities with significant social and economic benefits, undertaken by government or non-government entities under Public Private Partnerships;
- To enable public sector companies to raise resources at lower interest charges or on more favourable terms;
- To fulfill the requirement in cases where sovereign guarantee is a precondition for concessional loans from bilateral/multilateral agencies to sub-sovereign borrowers.
Class of guarantees given by the Union Government
The different guarantees given by the Union Government are as follows:
- Guarantees given to RBIs, other banks and Financial Institutions (like IFCI, LIC, UTI etc) for repayment of principal and payment of interest, cash credit facility, financing seasonal agricultural operations, and for providing working capital in respect of companies, corporations, cooperative societies and cooperative banks
- Guarantees given for repayment of share capital, payment of minimum annual dividend and repayment of bonds / loans, debentures issued / raised by statutory corporations and financial institutions
- Guarantees given in pursuance of agreements entered into by the Government of India with International Financial Institutions, Foreign lending agencies, Foreign Governments, Contractors, Consultants, etc., towards repayment of principal, payment of interest / commitment charges on loans, etc., by them and payment against agreement for supplies of material and equipment on credit basis to companies, Corporations/ Port Trusts, etc.
- Counter-Guarantees to Banks in consideration of the Banks having issued Letters of Authority to Foreign Suppliers for Supplies / Services made / rendered by them on credit basis, in favour of the Companies / Corporations.
- Guarantees given to Railways / State Electricity Boards for due and punctual payment of dues / freight charges by Companies / Corporations. (Nil for past few years)
- Performance guarantees given for fulfilment of contracts / projects awarded to Indian companies in foreign countries. (Nil for past few years)
- Performance guarantees given for fulfilment of contracts / projects awarded to Foreign companies in foreign countries(Nil for past few years)
Chapter 11 of the General Financial Rules, 2005 details the current administrative guidelines for grant, review, accounting and monitoring of sovereign guarantees.
Indian Government Accounting Standards (IGAS) which became effective on 1 April 2010 has notified on 20th December the IGAS 1 “Guarantees given by the Governments: Disclosure Requirements” to ensure uniform and complete disclosure of government guarantees across the Union and State Governments. IGASs are issued by Government Accounting Standards Advisory Board (GASAB) constituted by Comptroller and Auditor General of India (CAG)
A Government Guarantee Policy was notified in September 2010.