Surety Bond:
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A surety bond is a legally binding contract entered into by three parties – the principal, the obligee, and the surety.
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The obligee, usually a government entity, requires the principal, typically a business owner or contractor, to obtain a surety bond as a guarantee against future work performance.
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Surety bonds are mainly aimed at infrastructure development, mainly to reduce indirect cost for suppliers and work-contractors thereby diversifying their options and acting as a substitute for bank guarantee.
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Surety bond is provided by the insurance company on behalf of the contractor to the entity which is awarding the project.
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Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal. They guarantee the performance of a variety of obligations, from construction or service contracts to licensing and commercial undertakings.
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Why in news? In the Budget 2022-23, the government has allowed the use of surety insurance bonds as a substitute for bank guarantees in case of government procurement and also for gold imports.