Rule 277 — GFR

Rule 277 Guidelines for grant of Government of India Guarantee: The following guidelines should be followed by the Ministries or Departments of the Government of India for recommending guarantee or counter guarantee: -

(i) A proposal for guarantee by Government must be justified in public interest such as in the case of borrowings by central public sector institutions for approved development purposes or borrowings by central public sector undertakings from Banks for working capital and other purposes.

(ii) The Administrative Ministry/ Department or the credit Divisions of Department of Economic Affairs shall examine the proposal in consultation with the Financial Adviser in the same manner as a proposal for loan. While examining the proposal the following considerations shall be kept in view: -

(a) Public interest which the guarantee is expected to serve.

(b) Credit worthiness of the borrower to ensure that no undue risk is involved.

(c) Terms of the borrowing shall take into account the yields as applicable on Government paper of similar maturity.

(d) The conditions prescribed in the guarantee order/agreement in order to ensure continued credit worthiness of the borrower.

(iii) Risk associated with assumption of a new contingent liability/guarantee proposal, including the probability of future payouts should be thoroughly assessed by the concerned Administrative Ministry/Department or Credit Divisions of Department of Economic Affairs recommending the proposal. Such assessment should ideally be entrusted to an independent unit and should be undertaken even when it has already been decided by a higher authority to provide guarantees. The assessment should reveal an accurate picture of the financial condition of the entity to be guaranteed; risks associated with implementation of the project/ scheme, etc. This information would be useful to estimate the funds needed to meet associated contingent liabilities if the need should arise, in current or future budgets.

(iv) After examination in the concerned Ministry or Department or Credit Division of DEA, all proposals for extending guarantees shall be referred to Budget Division, DEA for approval. No guarantees shall be given without the approval of Budget Division, DEA.

(v) With a view to enable the Ministry of Finance to examine cases of Government of India guarantees and extension thereto, all

Ministries or Departments should furnish to that Ministry, data of certain operational parameters of the Public Sector Undertaking or Entity, as given in GFR26. In case the accounts of the Central Public Sector Undertaking or Entity have been audited by the Comptroller & Auditor General of India, the effect of the comments of the Comptroller & Auditor General of India on the Central Public Sector Undertaking’s profitability should be brought out. Further, where BIFR targets have been assigned or Cabinet directions issued to the Company, the actuals vis-à-vis targets for the preceding three years should be indicated. The data should be furnished in the Form GFR 26 along with the proposal for guarantee.

(vi) Guarantees shall normally be restricted to the repayment of principal and normal interest component of the loan. Other risks shall not form part of the guarantee.

(vii) Government guarantees will be extended to only central public sector companies/ agencies.

(viii) Government guarantees shall not be provided to the private sector.

(ix) Government guarantees should normally not be extended for external commercial borrowings.

(x) Government guarantees may be given on all soft loan components of the bilateral/ multilateral aid. However, guarantee shall not be normally given for the commercial loan components of such aid.

(xi) Government of India guarantee will not be given in cases of grants. However, if the donor insists on ensuring performance, the same may be listed as a negotiating condition for getting the grant.

(xii) Appropriate conditions, may be made by Government while giving the guarantee e.g. period of guarantee, levy of fee to cover risk, representation for Government on the Board of Management, Mortgage or lien on the assets, submission to Government of periodical reports and accounts, right to get the accounts audited on behalf of Government etc. Even if fee, representation and mortgage are not considered necessary, the right to verify the continued credit–worthiness of the borrower should be ensured.

(xiii) Guarantees may not be proposed for pursuing low priority objectives or programmes. Proposal for grant of guarantee as an off-budget support should also be examined comprehensively by the proposing Ministry/Department against other alternative forms of support which may be more appropriate and cost- effective. For example, in the case of provision of credit guarantees to enterprises that continually incur losses as a result of government's pricing policy, budgetary subsidies or direct government loans may be a more effective and less costly option.

(xiv) Guarantees may not be proposed in respect of Central Public Sector Enterprises whose strong financial credentials and high credit rating would indicate inherent ability to directly raise the required resources without the support of government guarantee.