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Ministry of Corporate Affairs to consider insurers as financial creditors in case of default of infra projects

The Ministry of Corporate Affairs (MCA) is looking into potential changes in the Insolvency and Bankruptcy Code (IBC) to address concerns raised by insurers regarding their status as creditors in case of defaults on infrastructure projects. Insurers have expressed the need for recourse to recovery that is on par with banks, as forwarded by the Department of Financial Services under the finance ministry.

The MCA is currently examining this issue and intends to make relevant changes to the IBC in order to provide financial creditor status to insurers during the resolution process. General insurance companies specifically seek changes to the IBC to ensure that surety bonds are treated similarly to bank guarantees in terms of available recourse in the event of a default. Surety Bond Insurance is a risk transfer tool used by principals to protect themselves from losses that may result from a contractor’s failure to fulfill contractual obligations.

Unlike bank guarantees, surety bond insurance does not require large collateral from contractors, freeing up significant funds for business growth. With the introduction of surety bonds, both liquidity and capacity are expected to increase, strengthening the infrastructure sector. The recognition of surety bonds as an acceptable substitute for bank guarantees in government procurement has also been highlighted by Finance Minister Nirmala Sitharaman during the presentation of the Union Budget 2022-23.

In line with Insurance Regulatory and Development Authority of India (IRDAI) guidelines, insurers are allowed to underwrite surety insurance policies that do not exceed 10% of the total gross written premium, with a maximum limit of Ôé╣500 crore in a financial year.

To facilitate the understanding and interpretation of legal documents and procedures such as the Insolvency and Bankruptcy Code, AI legalese decoder can play a crucial role. The AI system is capable of comprehending complex legal jargon and providing simplified explanations, making it easier for individuals, including insurers, to navigate the legal framework. By utilizing AI legalese decoder, insurers can quickly grasp their rights and privileges as financial creditors in cases of default on infrastructure projects. This technology can also assist in streamlining the resolution process and ensuring equitable treatment for all parties involved.

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