What changed
The Government e-Marketplace (GeM) has informed sellers that it now accepts an Insurance Surety Bond as an alternative to a Bank Guarantee (BG) for the Earnest Money Deposit (EMD) when bidding. Sellers can apply for the bond during bid participation, under the EMD / ePBG section of the bid.
This is not a GeM experiment. A surety bond is recognised at par with a bank guarantee under the General Financial Rules (GFR), 2017. The Department of Expenditure added insurance surety bonds to the list of accepted bid security and performance security instruments through Office Memorandum No. F.1/1/2022-PPD, dated 2 February 2022, amending GFR Rules 170 and 171. As GeM's note says, it requires no special approval.
GeM's stated reason is simple: to help sellers who do not have access to bank guarantees, or who have exhausted their banking limits, and to let them take part in more bids.
Why this matters for MSMEs
A bank guarantee looks like paperwork, but it uses real money. Banks issue it against your credit limits, and often ask for a cash margin or a fixed deposit as security. Every live bid with a BG keeps part of that limit locked until the bid validity ends.
For a growing supplier, that creates a hard ceiling. When the BG limit is used up, the business stops bidding, even when it has the capacity to deliver. The same limit is also what the business needs for raw material, wages and stock.
Example. A supplier is running 5 bids at the same time, each asking for ₹4 lakh EMD. With bank guarantees, ₹20 lakh of bank limit is tied up until those bids close. With surety bonds, that ₹20 lakh of limit stays free for orders and working capital. (Illustrative numbers.)
What is an insurance surety bond?
A surety bond is a promise involving three parties:
- You, the seller (the "principal"), who must honour the bid conditions.
- The government buyer (the "obligee"), who is protected if you don't.
- The insurer (the "surety"), an IRDAI-regulated general insurance company that issues the bond.
Insurers in India issue these bonds under the IRDAI (Surety Insurance Contracts) Guidelines, 2022. In 2023, IRDAI relaxed the rules (lowering the solvency requirement for this business and removing the 30% per-contract exposure limit) to encourage more insurers to offer the product.
One point many sellers miss: a surety bond is not a free pass. If the buyer invokes the bond, for example because you withdraw after bidding or fail to sign the contract, the insurer pays the buyer and then recovers the amount from you. The risk of forfeiting EMD is exactly the same as before. Only the way you secure it has changed.
Bank guarantee or surety bond: the key differences
- Who issues it: a BG comes from your bank; a surety bond comes from an IRDAI-regulated insurer.
- Effect on bank limits: a BG uses your bank's non-fund-based limit; a surety bond does not use your bank limit.
- What you pay: a BG usually costs a commission plus margin money; a surety bond costs a premium set by the insurer after it assesses your business.
- Legal standing for government bids: both are accepted under GFR 2017.
- On GeM: both can now be submitted within the bid's EMD / ePBG section.
Who should look at this first
- Sellers whose BG limits are fully used, and who are skipping bids because of it.
- Firms that are not exempt from EMD. Micro and Small Enterprises and recognised startups are generally exempt from EMD on GeM, but traders, medium and large enterprises usually are not. Always check the bid document.
- Suppliers who bid often, where several live bids tie up guarantees at the same time.
- Winning bidders who must give performance security (ePBG) after an order, since GeM's new option sits in the same EMD / ePBG section.
Six things to check before you apply
- Check the bid document. Confirm the EMD amount and bid validity, and that the bid does not restrict the form of security.
- Start early, not on the closing day. The insurer will assess your business (typically financial statements and past contract record) before issuing the bond.
- Compare insurer terms. Ask for the premium, any counter-guarantee or collateral it needs, and the turnaround time, in writing.
- Match every detail exactly. The bond amount, beneficiary (buyer) name, bid number and validity must match the bid, or the bid can be rejected.
- Make sure validity covers the full period. The bond must stay valid for the full bid validity, including any extension the buyer may ask for.
- Understand invocation. Read how the buyer can claim the bond, and remember the insurer will recover any claim from you.
The bottom line
For sellers held back by bank limits, this is one of the most practical changes on GeM in recent years. It lets you bid on more tenders without locking up the bank limits your business runs on. But it rewards preparation: clean financials, a ready document file, and a clear view of which bids are worth the EMD in the first place.
Procuris helps businesses plan and run their tender pipeline end to end: bid selection, documentation, EMD and performance security, and support through execution. If you want help deciding when a surety bond makes sense for your bids, let's connect.
Sources
- Department of Expenditure, OM No. F.1/1/2022-PPD dated 2 February 2022, amending GFR 2017 Rules 170 and 171: https://www.gconnect.in/orders-in-brief/conduct-rules/amendment-general-financial-rules-gfr-2017-insurance-surety-bonds.html
- Government includes Insurance Surety Bonds as security instrument for government procurement, StudyCafe, 5 February 2022: https://studycafe.in/government-includes-insurance-surety-bonds-as-security-instrument-for-govt-procurements-115985.html
- IRDAI relaxes norms for surety bonds, Outlook Business, May 2023: https://www.outlookbusiness.com/news/irdai-relaxes-norms-for-surety-bonds-to-expand-market-for-such-products-news-286912
The example uses illustrative numbers. This article is general information, not financial or legal advice. Always follow the terms of the specific bid document.