Issuance of Guarantees

1. Issuance of Bank Guarantees

1.1 Bank Guarantees 

  1. Bank guarantee is a type of instrument issued by banks to ensure the bank’s commitment to settle the liabilities of a debtor or a bank’s client in the event such person fails to settle their debts.
  2. Banks issue different forms of guarantees such as Bank Guarantees, Bonds and Standby Letter of Credit in relation to capital and current transactions.
  3. Banks shall obtain proper legally acceptable documentary evidence to establish the legality and bona-fide of the underlying transaction and the ability of the guarantor to pay possible claims arising from the bank guarantees.

        i.       Bank guarantees permitted in respect of current transactions

Banks are generally permitted to issue and renew bank guarantees in respect of current transactions.

      ii.       Bank guarantees permitted in respect of capital transactions

The following is a summary of permitted bank guarantees pertaining to capital transactions.

 

 

Guarantor

Guarantee

Purpose

1

A company incorporated in Sri Lanka (i.e. investor) or parent/fully owned subsidiary in case the investee does not have the capacity.

A company incorporated outside Sri Lanka (i.e., investee)

To raise facilities from a financial institution

Conditions:

  • Maximum value- USD 1 Mn and shall be proportionate to the stake
  • Outward remittance on claims shall be made out of the funds in the Business Foreign Currency Account or Personal Foreign Currency Account of the investor is the investments have been made through such accounts.

2

A company incorporated in Sri Lanka (i.e. investor) or parent/fully owned subsidiary in case the investee does not have the capacity.

A branch or project office established outside Sri Lanka

 

To raise facilities from a financial institution.

Condition:

Maximum value USD 500,000

3

A company incorporated in Sri Lanka (i.e., agent)

A company incorporated outside Sri Lanka (i.e., principal)

For the purposes of agency agreement

Condition: Up to the amount stipulated in the agency agreement.

4

A person resident outside Sri Lanka (i.e. investor) against the funds lying to the credit of an Inward Investment Account

Relevant counter party

For purchasing the shares of listed companies

 

 

    iii.       Other types of permitted Bank Guarantees

The following is a summary of other types of permitted bank guarantees.

 

Guarantor

Guarantee

Purpose

1

Another Authorized Dealer

 

A Business Foreign Currency Account holder

To obtain accommodations under the Direction No. 09 of 2021

Condition: Valid claims shall be made utilizing funds held in the Business Foreign Currency Account of the borrower.

2

A property developer (i.e. seller of the property)

An Inward Investment Account holder (i.e., purchaser of the property)

For the purpose of purchasing an apartment.

Conditions:

  • Value  up to the 50% of the payments made through the same Inward Investment Account
  • Valid claims shall be made utilizing funds held in the Business Foreign Currency Account of the property developer.

3

Resident

Non-resident

Guarantee on advanced payments.

Conditions:

  • The guarantee value shall be less than or equal to the value of the advance payment received by the resident.
  • Valid only after the receipt of the advance payment to an account in Sri Lanka of resident.

4

Resident

Non-resident

Performance bond for contract

Condition: subject to proof of award of the contract and conditions stipulated therein

5

Resident

Non-resident

Bid bond on tender/quotations

Condition: subject to the conditions stipulated in the tender or quotation

 

 iv.   Payments on claims arising from bank guarantees

  1. Banks are permitted to make outward remittances with respect to the claims arise in relation to permitted bank guarantees.
  2. The maximum amount of a valid claim under a guarantee shall be limited to the proportion of the outstanding value of the liability of the underlying transaction and shall be proportionated or lower to the percentage of shareholding of the investor in the investee of the outstanding obligation at the time of the claim.

   v.   Recovery of the Value of the Claim

  1. The investor shall make appropriate legal agreement with the investee to recover the value of the claim to be made in the event of a default prior to issuing the said guarantees.
  2. Recoveries of value of claims shall be brought into the same through which the investment was made (Outward Investment Account or Business Foreign Currency Accounts or Personal Foreign Currency Accounts).

 vi.   Special Permission for Bank Guarantees

  1. A resident may seek a special permission for issuing bank guarantees which deviate from purposes and procedures specified in the relevant Foreign Exchange Regulations and Directions.
  2. The permission will be granted with the approval of the Governing Board upon obtaining necessary Directions from the Minister of Finance, on a case-by-case basis, considering exceptional circumstances.

Application for a special permission - A written request addressed to Director-Department of Foreign Exchange shall be submitted along with all relevant information and documents.

References: Regulations No. 4 of 2021 - Miscellaneous Capital Transactions, published in the Government Gazette (Extraordinary) Notifications No. 2213/37 dated 03.02.2021.

 

1.2 Issuance of Corporate Guarantees

        i.      Permission for issuance of corporate guarantees

Companies incorporated in Sri Lanka are permitted to issue corporate guarantees on behalf of non-resident investees subject to the following.

  1. Purpose: to enable the investee to obtain loans from financial institutions or to facilitate a contract.
  2. Maximum value: up to USD 1 Mn. based on the percentage of the shareholding  in the investee.
  3. The Board of Directors of the company  ensure that the company has financial strength to meet any contingent liability arising out of the corporate guarantee.

      ii.      Payments on claims arising from bank guarantees

  1. Banks are permitted to make outward remittances with respect to the claims arise in relation to permitted bank guarantees.
  2. The maximum amount of a valid claim under a guarantee shall be limited to the proportion of the outstanding value of the liability of the underlying transaction and shall be proportionated or lower to the percentage of shareholding of the investor in the investee of the outstanding obligation at the time of the claim.

    iii.      Recovery of the Value of the Claim

  1. The investor shall make appropriate legal agreement with the investee to recover the value of the claim to be made in the event of a default prior to issuing the said guarantees.
  2. Recoveries of value of claims shall be brought into the same through which the investment was made (Outward Investment Account or Business Foreign Currency Accounts or Personal Foreign Currency Accounts).  

iv.       Special Permission for Corporate Guarantees 

  1. A resident may seek a special permission for issuing corporate guarantees which deviate from purposes and procedures specified in the relevant Foreign Exchange Regulations and Directions.
  2. The permission will be granted with the approval of the Governing Board upon obtaining necessary Directions from the Minister of Finance, on a case-by-case basis, considering exceptional circumstances.

Application for a special permission - A written request addressed to Director-Department of Foreign Exchange shall be submitted along with all relevant information and documents.

References: Regulations No. 1 of 2021 published in the Government Gazette (Extraordinary) Notifications No. 2213/37 dated 03.02.2021.