RK Singh Okays Proposal for Acceptance of NBFC’s Letter of Undertaking against Bank Guarantees

With an aim to provide some financial relief to the ailing renewable energy industry, the Minister for New & Renewable Energy (MNRE) and Power RK Singh has approved a proposal for acceptance of Letter of Undertaking issued by three NBFC’s IREDA, PFC and REC in lieu of Bank Guarantees for Earnest Money Deposit (EMD) by state-owned SECI, NTPC and NHPC.

In case of tenders or biddings for developing Renewable Energy (RE) projects in the country, the solar project developers need to deposit certain amount of money as security with the state-owned implementing agencies like SECI, NTPC, NHPC.

Earlier, if the solar developer will not be able to deposit of the EMD mentioned in the tender document due to any reason like non availability of funds etc, his/her application was rejected.

Thus in order to provide some relief in such cases, the MNRE via a letter has now conveyed that “SECI, NTPC, NHPC or any other implementing agency on behalf of MNRE (henceforth implementing agencies) may accept Earnest Money Deposit (EMD), in the form of Bank Guarantee(s) or ‘Payment on Order instrument’”.

‘Payment on Order instrument’ means Letter of Undertaking from the 3 non-banking financial institutions (NBFCs) under MNRE and Ministry of Power (MoP) i.e. Indian Renewable Energy Development Agency Ltd (IREDA) or Power Finance Corporation Ltd (PFC) or REC Ltd (REC), to pay in case situation of default of RE power generator in terms of tender conditions and /or Power Purchase Agreement (PPA) arises.

Such Letters will have same effect as that of a Bank Guarantee issued by any public sector lender. Such ‘Payment on Order instrument’ would have terms and conditions similar to that of any Bank Guarantee given by any public sector bank and would promise to pay the procurer on demand within stipulated time.

Now, RE power generators can seek such Letters by offering due security to the above mentioned three non-banking financial institutions (IREDA, PFC & REC).

The communication further mentioned that, “the above decisions may be treated as amendments to the respective Standard Bidding Guidelines (SBG) (solar/ wind) and notified accordingly.”

The three non-banking financial institutions – IREDA or PFC or REC may issue such Letter(s) of Undertaking/ ‘Payment on Order instrument’ to pay as per their policy, on merits and after due diligence.

Commenting on the decision, RK Singh said that, “this decision of the Ministry of New & Renewable Energy will go a long way in ensuring Ease of Doing Business in RE sector as the developers will now have one more option in fulfilling the tender requirement.”