Letter of guarantee is a deed through which the bank or credit institute irrevocably guarantees that immediately upon written announcement of the beneficiary claiming any amount indicted in the said document during its validity period (prior or on the date of maturity) without any condition and/or realization of the condition that has been stipulated at time of issuance, to pay the claimed amount to the beneficiary. Issuance of letter of guarantee is one of the bank services that is provided by banking system. On the whole, letter of guarantee is issued at the written request of the applicant for various purposes and it cannot be transferred to another party.
- Lack of bounced check and no matured debt in banking system;
- Submission of the aforesaid documents only for primary review of the request;
Types of letters of guarantee:
- Letter of guarantee for participation in bid/auction;
- Letter of guarantee for good performance of obligations arising from contract; good performance of project;
- Letter of guarantee for down payment
- Letter of guarantee for refund of deduction of amount of obligation;
- Customs letter of guarantee;
- Foreign currency letter of guarantee;
- Miscellaneous letters of guarantee;
- Letter of guarantee as undertaking for payment
- Letter of guarantee for participation in bid/auction:
Usually, governmental institutions and organizations and some other natural and legal entities carry out the purchase of major necessities and sale of surplus items as well as accomplishment of construction projects and the similar cases to choose the best contractor, seller or buyer in terms of the best conditions offered by releasing an official notice in one of the widely circulated dailies or local newspapers through bid or auction. Hence, in order to prevent withdrawal of winner of bid or auction from signing the corresponding contract, the bidder or auction organizer request the participants in a bid or auction to present a certain percentage of price of transaction in cash or through bank letter of guarantee together with their offers. This type of letters of guarantee, as the case may require, is called the letter of guarantee for participation in a bid or auction. Upon convention of the bid or auction and review of offers and indicating the winner, letters of guarantee obtained from other participants will be returned to the said party. However, the letter of guarantee of the winner will be kept with the employer until signing final contract (for fulfillment of obligation).
- Good performance guarantee for fulfillment of obligations arising from contract (good performance)
This letter of guarantee will guarantee precise execution of contents of contract by the seller or the contractor before the buyer or the employer. It usually amounts to 10% of primary price of contract. After the winner of bid or auction is introduced, a new contract is concluded by and between the employer and the winner. Since it is likely that the contractor fails to fulfill the entire obligations, for assurance about good performance of work process, the employer claims for the aforesaid letter of guarantee from the contract. This type of letter of guarantee is usually cancelled after approval of proceedings of temporary delivery and in case of no debt of the contractor with the employer. Cancellation letter of the said guarantee is submitted with retired copy of the letter of guarantee and extensions thereof to the issuing bank.
- Letter of Guarantee for Down Payment
Usually after signing the main contract between the employer and the contractor (winner of bid), a certain amount is paid by the employer to the contractor as down payment to finance the executive costs of the project (at the request of the said party or directly). In these cases, in order to guarantee payable amounts to the contractor, the employer clams for a bank letter of guarantee from the contractor. The amount of down payment (letter of guarantee) is usually given as 20% of price of contract. It is decided that the said amount would be paid by the employer to the contractor. Paid amounts to the contractor by the employer will be deducted from statements of payment of different stages provided that the said amount has been depreciated prior to last temporary statement of payment. Obviously, the amount of guarantee equals to amount deducted as indicated by the employer per each stage will be deducted and depreciated before date of temporary delivery at most.
- Letter of guarantee for refund of deductions of amount of obligation
Usually, according to the main contract concluded between the employer and the contractor, the latter shall pay certain amounts to the former in proportion of work progress and according to statement of payment submitted. At each stage of payment the employer deducts and deposits a certain percentage (between 5 and 10%) to guarantee good performance. Hence, in case of final delivery and lack of any defects, the said amount shall be refunded to the contractor accordingly. After accomplishment of the project and the project has temporarily been delivered to the employer, the employer requests the contractor to submit a letter of guarantee for refund of deduction of amount of obligation so that accumulated amounts through deductions deposited at each stage of payment shall be paid by the employer to the contractor. According to general conditions of contract, the employer may cancel half of the amount of letter of guarantee immediately after signing the proceedings for temporary delivery. Obviously, the remaining half of the amount of obligation will be in effect until approval of proceedings of final delivery. Cancellation of the same shall be made after passage of guarantee periods of project and signing of proceedings of final delivery of project as well as submission of account clearance certificates of the contractor from social security branches, district municipalities, finance department and the ones.
- Customs Letters of Guarantee
This type of letter of guarantee is one of the letters of guarantee for undertaking payment that is issued for guarantee payment of customs charges and interests, temporary release of goods, transit of goods, and passavant of goods.
- Foreign currency letters of guarantee
Foreign exchange letters of guarantee are among the letters of guarantee addressing contracting or undertaking of payment, that are issued by banks of a country in the favor of executive organizations or banks of other countries. Acceptance and issuance of this type of letter of guarantee is made through coordination of Foreign Exchange Operation General Department.
- Miscellaneous Letters of Guarantee
Miscellaneous letters of guarantee are issued in consideration of various purposes and goals depending on specific type and condition (including the letters of guarantee requested to be submitted to general conscription department, Ministry of Science, Research and Technology, Ministry of Health and Medical Education and Justice Administration).
- Letter of Guarantee undertaking for payment
It refers to the letter of guarantee that is issued for acceptance of payment of debt of the party seeking for guarantee on definite maturity date according to the contents of basic relation.
The minimum amount of cash deposit in the letters of guarantees for undertaking of payment is given as 20%.
Types of pledges accepted for issuance of letter of guarantee:
- Cash sum
- Credit letters of guarantee (IRR and foreign currency) issued by Export Guarantee Fund of Iran;
- Guarantee of banks or accredited domestic noncredit institutions;
- Interest-free savings in IRR;
- Ordinary short-term investment deposits and other accounts which are short-term in nature;
- Partnership bonds of Bank Maskan released according to authorization of the Central Bank of Islamic Republic of Iran;
- Special time investment deposits in IRR (long-term and short-term);
- Current foreign currency interest-free loan and foreign currency savings;
- Ordinary foreign currency short-term investment deposits;
- Foreign currency time investment deposits;
- Immovable property;
- Promissory notes signed by two obligors accepted by the bank;
**Note: For issuance of customs letters of guarantee, at least 20% and for other types of letters of guarantee, at least 10% of cash sum is necessarily paid as pledge. Value of other pledges will be calculated and deducted upon deduction of cash percentage of guarantee obtained.
Note: In such cases as types of bank deposits are introduced as pledge, blocking of accounts balance as much as the value of pledge, depositing the original copy of deposit at the fund of branches, registration of mortgage and blocking the account in accounts opening form, drawing up affidavit of pledges and fulfillment of other regulations and criteria are mandatory.
Corresponding documents needed for issuance of letter of guarantee:
- Natural entities
Original copy and photocopy of the birth certificate and National ID card of the applicant, beneficiaries of unit, submission of pledges accepted by the bank, original copy and photocopy of license of activity, tax declaration, application form, completed and signed, original copy and photocopy of the valid contract signed by the applicant and the beneficiary (for the letter of guarantee for participation in bid/auction, notice or invitation), records of activity of the applicant (the party seeking for guarantee) and the beneficiary concerning the subject of contract of letter of guarantee;
- Legal Entities
- Original copy and photocopy of the Articles of Association (for non-stock companies, it is mandatory to submit the memorandum of association);
- Original copy and photocopy of the registration notice of establishment of the company (at least one year has passed since date of registration of the company);
- Original copy and photocopy of the notice of changes of the company;
- Submission of economic code and National Identifier of the company;
- Original copy and photocopy of the birth certificates and National ID cards of members of Board of Directors, managing director, authorized signatories and beneficiaries of the unit;
- Tax declaration and audited financial statements by the auditors members of the Association of Official Certified Accountants in the recent three years (concerning the last financial statements, ownership proportion of the company should equal to 25%. In other words, at least 25% of the company’s assets should be provided through shareholders’ equity).
- Application form, completed and signed;
- Original copy and photocopy of the valid contract signed by the applicant and the beneficiary (with respect to letter of guarantee for participation in bid/auction, notice and invitation);
- Minutes of board of directors of the company for agreement to issuance of letter of guarantee;
- Records of activity of applicant (the party seeking for guarantee) and beneficiary in subject of contract of letter of guarantee;
Details of turnover of operation of approval and conclusion of contract for letter of guarantee and issuance of the said guarantee;
- Referral of the customer and submission of the application for issuance of letter of guarantee;
- Completion of application form of issuance of letter of guarantee by the applicant and registration of application with book of letters received from branch;
- Obtaining the required documents such as basic contract and sealing the documents bearing the phrase “copy conforms to original”, by the corresponding person in charge indicating the seal of the respective responsible person;
- Review of mutual relationship and obligations between the obligor and obligee (according to basic contract), and review of authenticity of basic contract, eligibility and ability of obligee for fulfillment of concerned obligations and actual existence of beneficiary;
- Completion of the credit questionnaire, examination of financial ability and personality of the applicant for letter of guarantee, obtaining the necessary inquiries such as bank loan facilities, bounced checks, the system of the corresponding individuals and conducting the necessary examination (discarding type of pledges);
- Collection of commission fee of inquiry from the Iranian Rating of consulting company’s system and review of reply to inquiry obtained;
- Control of replies to inquiries, credit questionnaire, report on credit information, appraisal report (in case of issuance of letter of guarantee with immovable pledge), insurance of immovable property, contents of mortgage contract or allocating and the entire corresponding documents by branch responsible persons;
- Obtaining form of undertaking from legal entities and cancellation of stamp fee for IRR 10000 on the said document;
- Collection of on-account commission fee of appraisal for immovable pledges and submission of file for evaluation and collection of differential amount of commission of appraisal;
- Review and specification of type of pledge that should be submitted by the applicant;
- Conduction of the corresponding operation for provision of pledges;
- Calculation and collection of commission fee for issuance of letter of guarantee;
- Financing the corresponding amount to the least cash deposit as much as indicated by the applicant;
- Drawing up and conclusion of contract for issuance of letter of guarantee in triple copies;
- Affixing and cancellation of stamp fee for IRR 10000 on the contract for issuance of letter of guarantee;
- Indicating the number of contract for letter of guarantee;
- Registration at SEPAM System and obtaining an unique number from the said system; \
- Specifying the number of letter of guarantee issued on the basis of systemic number of letter of guarantee, code of issuing branch, code of type of letter of guarantee and the letter “Z” on left side as detailed as follows:
Definite systemically issued number/headlines of letter of guarantee/branch code/from 1 to 7/Z;
- Issuance of the corresponding accounting documents and control of documents by branch responsible authorities;
- Drawing up and issuance of letter of guarantee in consideration of type of guarantee requested in triple copies signed by the person in charge of issuance and issuing unit person in charge;
- Affixing and cancellation of stamp fee for IRR 1000 on the first copy of the letter of guarantee and sealing the entire copies, bearing the embossed seal further to the ordinary seal of branch;
- Sealing all copies of letter of guarantee, bearing the seal of “Nontransferable”, and second and third copies bearing the seal of “non-claimable”;
- Affixing and cancellation of tax stamp on the application for letter of guarantee at the cost of applicant (after issuance of letter of guarantee and according to Article 47 of Direct Tax Law);
- Perforation of amount on copies of letter of guarantee;
- Separating the copies of letter of guarantee as follows:
- First Copy (original copy): This copy shall be submitted to the applicant to be handed over to the beneficiary against receipt (on the third copy).
- Second copy : Applicant only;
- Third copy: Filing of the letter of guarantee;
- Assurance about completion and submission of x/28 forms of the Central Bank of Islamic Republic of Iran;
Major points in issuance of letter of guarantee:
- The letter of guarantee should contain the following items:
- Particulars and address of the party seeking for letter of guarantee and the beneficiary;
- Name of bank and particulars of the branch issuing the letter of guarantee;
- Number, date and subject of basic contract according to which the letter of guarantee is issued;
- Unique number obtained from SEPAM System;
- Amount of letter of guarantee in number and letter;
- Date of issuance;
- Termination date of letter of guarantee;
- Termination of validity (if any);
- Tax stamp