Shareholder activism and Regulator Activisim

What is 'Shareholder Activism'
Shareholder activism is a way in which shareholders can influence a corporation's behaviour by exercising their rights as owners. Although shareholders don't run a company, there are ways for them to influence the board of directors and management.

It can take from of proxy battles, publicity campaigns, shareholder resolutions, litigation, and dialogue and negotiations with management, dialogue with management being the modest to formal proposals that are voted on by shareholders at a company's annual meetings being the extreme.
·       The goals of activist shareholders can be financial (increase of shareholder value through changes in corporate policy, financing structure, cost cutting, etc.) Investors may believe that a company's management is doing a bad job and who attempt to gain control of the company and replace management for the good of the shareholders.

·         The goals can be non-financial aslo. It can also relate to social change. Some of the issues most often addressed by shareholder activists are related to the environment, investments in politically sensitive parts of the world and workers' rights (sweatshops). 

 Maruti Suzuki Feb 2014. India

Top fund houses in India acting as Custodians of retail investors' funds have jointly questioned the decision taken by a Maruti Suzuki. The plan of the company is to have Japanese parent Suzuki take over the plant at Vitthalapur, produce cars and sell them to Maruti

The situation in India is quite the opposite of what happens overseas, where institutional investors are very active. For instance, when Walmart Mexico was named in a bribery case, the institutions demanded that the chief executive officer of Walmart US step down as he was responsible for the company's global business and hadn't been proactive in checking incidents related to bribery or fraud.

Usually, as a study by proxy voting advisory firm InGovern shows, institutional investors tend not to raise awkward questions at board meetings. The InGovern study on the voting patterns of mutual funds in 2013 says that out of a total of 28,290 resolutions disclosed, mutual funds voted against just 1.5 per cent of them. They favoured 47 per cent of the resolutions and abstained from voting in 51.5 per cent. While no such data is available for LIC's participation in resolutions, experts say it rarely stands up as a naysayer. "These companies do not voice their opinion in corporate decisions. They typically skip the routine resolutions. They only raise their voice when controversial decisions are being taken," says Shriram Subramaniam of InGovern.


There have a few occasions when India's minority investors have raised their voices aggressively. In 2008, they protested against the inflated valuations when Satyam Computer Services announced its plan to acquire Maytas Properties and Maytas Infra. The deal didn't go through. In the same year, minority shareholders of Sterlite Industries India were adamant that a restructuring proposal floated by parent Vedanta was against their interests. Earlier this year, some minority shareholders complained that Siemens AG, the German engineering company, had paid a low price for acquiring additional shares of its Indian subsidiary.

However, experts also admit that in many cases, the minority shareholders can do little except to dump the shares of the company. Indeed, this is what is happening to Maruti too. "We redeemed some of our holding in Maruti a couple of weeks after the announcement, in late-January and early February," says a fund manager. "However, we are still holding on to some shares till more clarity emerges." Mutual fund brokers say that fund managers are ready to sell Maruti shares as there is no confidence that the company will review the decision on the back of shareholders' feedback.

From January 8, 2014, when it quoted at Rs 1,839.15, the Maruti stock dipped to Rs 1,563.2 on January 28. It closed at Rs 1,581.75 on March 3. Between January 8 and March 3, the stock lost almost 14 per cent; investors have lost as much as Rs 5,000 crore in market capitalisation.


Limited choices

But dumping stock isn't an efficient strategy either, says J N Gupta, founder and managing director of another proxy advisory firm, Stakeholders Empowerment Services. This can be effective only in a system that has high standards of corporate governance. In the Indian market, governance is an issue that crops up regularly.

When investors dump the stock because of perceived governance issues, it can actually hurt investors. There is a decrease in the number of companies that are seen as investment-worthy. As a consequence, all investors chase the same limited number of companies, causing volatility and increase in share prices. The increased demand and higher prices drive up price-to-earnings (PE) ratio of the stock, increasing risk and reducing returns on investment. This makes the markets unattractive for investors.

On the other hand, if the investors engage with the companies, governance standards will improve and the pool of companies worthy of investment becomes enlarged. This will lead to a reduction in risk, increase returns, reduce volatility and improve the confidence of investors. "Participation by investors in company meetings and engaging with promoters and management is, for these reasons, a must," says Gupta. Anil Harish of legal firm DM Harish & Company advises shareholders to either "take part in the voting on the resolutions proposed by a company or raise questions and apprise the promoters of their concerns in annual general meetings".

The general acquiescence of mutual funds in boardrooms is telling - as the InGovern figures show, they abstained from voting on 13,037 resolutions in 2013. This may have been the reason why the Securities and Exchange Board of India, or Sebi, is said to be exploring the possibility of creating a platform for non-controlling shareholders. (Non-controlling shareholders are individual or institutional stakeholders who are neither promoters nor have board representation.) This will help to protect the interests of minority shareholders and improve corporate governance.

Till such a time as such platforms and measures are adopted, minority shareholders may have little leverage against corporate decisions, to the disadvantage of retail investors. The fact that mutual fund investors in Maruti are disposing of their stocks seems to indicate that the protest of the sort they carried out may not yield much dividend, at least at this point of time.

CHANGE IN THE OFFING

The minority shareholders could play a more meaningful role in companies once the Companies Bill, 2012 is renacted to replace the half-century-old Companies Act, 1956. The Bill incorporates some sweeping changes related to minority shareholders.

Board representation: The new Bill mandates representation in the board for minority investors. Currently, any appointment of a director to represent the small investors is at the discretion of the company. It also says that at least one-third of the total number of directors in listed companies should be independent directors. (An independent director is a person who is not related to the promoters or other members of the company). Having independent directors may not be a proven method of deterring malpractices, yet could ensure greater accountability. The new Bill also warrants that in case of a company with more than 5,000 members, a shareholders' meeting should have the personal attendance of at least 30 members, failing which such a meeting should be adjourned.

Class-action suit: The Bill has a provision for class-action suit to allow shareholders to seek damages from the company and its directors for any fraudulent act. Shareholders will also be able to seek damages from auditors and audit firms in case of mis-statement of facts.

Exit option: The new Bill says that if a company has funds remaining unused after being raised in an initial public offer and wants to change the objectives for which the funds were raised, it has to provide an exit opportunity to shareholders who do not support such a step. It also decrees that such an exit should be offered at a price specified by Sebi to help shareholders move out at a reasonable price. This is of special significance for stocks that plunge below offer price soon after listing.

Protection for whistleblowers: Under the new Bill, an independent director of a company or any employee who brings a company's malpractices to light will be protected from unfair treatment by the management. The new legislation requires all listed companies to establish in addition a mechanism through which employees can report to the chairperson of the audit committee their apprehensions about the conduct of the business, its accounting methods or any other aspects of business. The companies have to provide details of such a system on their website.

Insider trading: The new Bill prohibits insiders of a company from trading directly or indirectly in shares both in the cash and futures market. Any person who violates the clause will face a cash fine or imprisonment or both.
In a letter to the stock exchanges on Thursday, Maruti clarified that it will have to share the net surplus generated by the sale of vehicles from Suzuki's Gujarat plant to fund future capex needs. The fund houses and other investors believe that clarification issued by Maruti Suzuki,the de facto play on the Indian automobile industry, is more of platitudes and that in the long run Maruti has much to lose than to gain by transferring the Gujarat plant to Suzuki.

Fund house officials, who did not want to be named, said that they will now approach Sebi to address their concerns. Seven mutual funds including ICICI Asset Management Company, Reliance Asset Management Company UTI, HDFC and SBI Asset Management companies had recently written to the Maruti Suzuki's management, saying that the proposed move was not fair and not in the interest of local shareholders. They said that it will lead to erosion in the company's value.

Reflecting the concerns of investors, the Maruti stock lost 4.5% to close at Rs 1,586, a share on the BSE on Friday, the lowest close in one month. The market cap of India's biggest car maker has lost Rs 7,700 crore since January. The stock is likely to be under pressure as analysts continue to debate on the mark-up percentage that the manufacturing entity will keep to maintain a robust operational performance.

While an earlier notification said that Maruti was expected to bear only the cost of production and depreciation expenses of the Gujarat plant, the new clause which provides for deploying funds generated through the Gujarat plant to fund Suzuki's capital expenditure has added another layer of invisible costs. The company's clarification on Thursday has caused more dismay and confusion among investors than its original intention to explain and simplify the new structure, fund managers and analysts said. The most disruptive element from a Maruti shareholder's perspective would be the percentage of margins to be ploughed back to the Gujarat plant to fund incremental capital expenditure requirement for the car maker.



Among the three sources of financing, the capital expenditure of the Gujarat plant includes the mark-up levied on Maruti Suzuki. It is negative on two counts. Firstly, investors did not reckon any mark-up to be included in the transfer pricing earlier. Secondly, it only factored the cost of production and depreciation to be charged to Maruti Suzuki. The inclusion of mark-up now implies that vehicles made at Gujarat plant will have lower margin then the existing facility in Haryana. Thus, higher the amount beyond 33% of net surplus, it would lower margins for Maruti. The company's statement did not elaborate on the how the markup would be calculated.

A CLSA note by analysts Abhijeet Naik & Nitij Mangal after the clarification was issued to the stock exchanges said that if incremental capital expenditure requirement in Gujarat over FY20-24 is split 50-50 between Suzuki an Maruti, it would imply that the Gujarat plant would need to charge 4% of revenue as mark-up on vehicles on Maruti over and above the depreciation charges. In this scenario, the margins accruing from vehicles produced in the Gujarat plant would be on an average 6% lower than the Haryana plant. Even the clarification on the transfer of assets in Gujarat at fair value to Maruti after 15 years, if the contract is not renewed, will add to investor concerns, given that it would be construed as an indirect route to increase the holding in the company. This instance could be quite similar to what eventually happened in Suzuki Powertrain in June 2012, which resulted in the Japanese parent's shareholding going up by 2%.

The statement has also been silent on two critical issues. One, what would happen in case demand is lower than production. What would be critical in such a scenario is clarity on which of its subsidiaries will bear the burden of reducing production. Secondly, determining the precedence of capacity utilisation and the vehicle models to be manufactured from which plant will be another moot point to ponder over.

The basic question still remains unanswered: What merits the setting up of a new plant under the aegis of Suzuki considering that Maruti has strong cash surplus. Is there a real advantage, when it appears that most officials of the new entity are expected to be drawn from Maruti, especially when even the vendor sourcing would be done by the Indian entity.

Jefferies analyst Govindarajan Chellappa and Rajasa, in a note written on Friday, said that "investors worried about Maruti's independence today. This is hardly reassuring. We wonder why this structure is needed in the first place. If Suzuki has excess cash on its balance sheet which it wants to utilise to help Maruti, there are other cleaner ways to extend a loan or give one-year credit on royalty".




Stock Analysts turn as Activists

Cautious investors have new friends — analysts from brokerages. Mainstream brokerage analysts, once happy writing about the rosy picture of the India growth story, are venturing into some not-so-clean areas of corporate India.
While companies at the receiving end have either ignored or rubbished them, such reports have gained momentum.
In a space of a few days, at least five companies from diverse sectors have faced the wrath of brokerage analysts, who questioned their accounting practices, utilisation of cash and other governance-related issues. In a few cases, they even downgraded the company in question to a “sell”.

ANALYSTS ON THE FRONT FOOT
  • Espirito Santo questions accounting policies of Biocon, Educomp
  • Macquarie raises concerns on 
  • Kotak, Barclays and Motilal Oswal analysts question Infosys over utilisation of cash reserves
  • Veritas slams RCom on accounting policies
Companies rubbished reports in all cases
Shriram Subramanian, founder of Ingovern Research Services, an advisory firm that deals with corporate governance issues, said, “In good times, all brokerages come with buy recommendations. But when times are bad, you need to dig deeper and find value. That’s what they are doing.”
Towards the end of May, Portugese broker Espirito Santo slammed Biocon and Educomp Solutions. In Biocon’s case, the accounting treatment of a couple of deals was questioned, while Educomp was accused of certain conflicts of interest in the appointment of auditors.
Even Sensex firms such as mortgage lender HDFC and IT major Infosys have not been spared. Earlier this month, Macquarie Securities downgraded HDFC on charges of dodgy accounting practices — charges the company trashed. Infosys’ Rs 20,000-crore cash drew concerns from analysts at Kotak, Motilal and Barclays.
While scams and scandals over the past few years, beginning with the Satyam Computer scandal, have sensitised investors to such issues, over the past year the income stream of brokerages has seen a shift from the traditional corporate to investors, say analysts.
“In tough market conditions, only the good and clean companies can survive. With public issues drying up, equity research has become the bread and butter of brokerages. What is keeping brokerages afloat are the investors, who are also buying their research,” said one.
Saurabh Mukherjea of Ambit claims to be among the earliest to spot this broader drift towards corporate governance a while ago. Rightly so, because Mukherjea had started the India practice of the UK-based Noble as its research head. As early as 2009, Noble had published a report on creative accounting practices and promoter tricks such as “pump and dump” and “blab and grab” soon after the Satyam and Pyramid Saimira scandals.
Noble was later bought by Execution and became Execution Noble. In 2010, Execution Noble was acquired by Espirito Santo. While Mukherjea moved to Ambit Capital, some of his team members stayed back.
Espirito Santo says it has “benchmarked reporting standards in India versus developed markets and found several areas where reporting and corporate governance can be improved.”
Both Espirito and Ambit have been rating companies on corporate governance and accounting practices for a while. The Canada-based Veritas, which has come up with occasional, sensational reports, has been routinely criticised for allegedly one-sided views.
Though most companies routinely rubbish or ignore them, some experts say they contribute to the diversity of opinion in the markets, which even regulators prefer. Recently, the regulator itself set up a forensic accounting cell to monitor accounting practices.
Some brokers like Nirmal Bang have gone beyond financials and research reports by arranging for investors to talk to the union leaders of Maruti and Arvind facing labour trouble. Rahul Arora, CEO, institutional equities, Nirmal Bang, said, “We have reached a stage where people want to know every side to each story.”
Varatharajan S of ICICI Securities, SVP and head of research, said, “Companies have always been rated (by the market) on their disclosure level. This wasn’t as talked about as now, possibly because in the past it was largely with relatively small companies.”

N Sundaresha Subramanian & Malini Bhupta June 21, 2012 Business Standard


US SEC- Securities Exchange Commission issues Comment Letters. What about such activism by ROC / SEBI in India.

Examples of some SEC Comments Related to Goodwill
Company A
Question 1:  Please tell us when you are evaluating your individual reporting units for impairment how you validate the reasonableness of the fair values determined.  For example, tell us whether you reconcile the fair values determined in your analyses to your total market capitalization.  In this regard, we note that paragraph 23 of SFAS 142 indicates that the fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date, and that that quoted market prices in active markets are the best evidence and should be used if available.  In circumstances where an entity has multiple reporting units, and all reporting units have goodwill that are tested for impairment, a tool that could be used to validate the reasonableness of the fair values determined for the individual reporting units is a reconciliation of the total fair values of the reporting units, to the market capitalization of the company, adjusted for any control premium as deemed appropriate.  If you do not perform such an analysis, please indicate whether this is due to the fact that such an analysis cannot be easily performed (for example, because not all of your reporting units contain goodwill or there were not triggers of impairment at each of your reporting units at each of the times you tested goodwill for impairment), or whether you don’t believe such an analysis is meaningful.  Additionally, if such an analysis is not performed, please tell us whether you perform any other procedures to evaluate the reasonableness of the fair value of the reporting units.  If such an analysis is performed, please tell us the results of your procedures, including a discussion of any control premium assumed in the analysis, and how the reasonableness of that premium was evaluated;
Question 2:  Please provide us examples of the market comparables and multiples used in preparing the analyses of the fair value of your reporting units.  In your response, please include XX reporting unit and the actual multiples and market comparables used in your analysis of that reporting unit.  Please explain how those multiples and market comparables are similar to your XX reporting unit (and the other examples provided), in regards to nature, scope and size of operations, as contemplated in paragraph 25 of SFAS 142; and
Question 3:  We note that you use a single valuation approach to determine the fair value of all of your reporting units except for XX reporting unit.  In light of the guidance in paragraph 19 of SFAS 157, which indicates that multiple valuation techniques could be appropriate in determining the fair value of reporting units, and the fact that it is often difficult to identify market comparables for single reporting units, please tell us how you concluded that it was appropriate to only consider one valuation approach for these reporting units.

Company B
Question:  We note your disclosure regarding your policy for testing goodwill for impairment and the related changes to your methodologies during the first and second quarters of 2008.  Please respond to the following regarding those methodologies:
·         Tell us and provide enhanced disclosure in future filings describing why you moved exclusively to a discounted cash flow methodology from the earnings multiple methodologies use in prior periods.  Specifically, tell us how you concluded that this approach is more reflective of a market participant’s view, and tell us whether you would always expect to use this methodology in the future given your belief it is more reflective of a market participant’s view, or whether you only believe it is more reflective of a market participant’s view given the current economic conditions.
·         Please clarify how your discount rates “reflect current market capitalization plus a control premium.”  Specifically, consider providing an example illustrating how the discount rates were determined, and how they reflect a control premium.  Please also tell us the control premium assumed.
·         Please tell us why the discounted cash flow methodology used at December 31, 2007 to determine the fair value of your reporting units did not use a discount rate that factored in control premiums.  Please explain why you believe the use of a discount rate that factors in a control premium is more appropriate in determining the fair value of the reporting unit. 
·         Please clarify why you added a third method, based on market multiples of peer companies adjusted to include a control premium, in the first quarter of 2008 in addition to the approach based on market multiples of peer companies not adjusted for control premiums.  Specifically, explain why this approach is appropriate, or more consistent with fair value, than the approach used in prior periods that did not factor in a control premium.
·         We note your previous disclosure on page 96 of your Business Segment footnote that states that provisions for credit losses are allocated to each core business segment in an amount equal to net charge-offs and any difference between the consolidated provision and the provision allocated to the segments is reflected in the Parent segment.  Please confirm that when estimating the fair value of your reporting units, whether based on a market multiple or discounted cash flow approach, that you factor in all of the provision related to the loans contained in that segment, as opposed to solely being based on an amount equal to net charge-offs.  If not, please tell us why you believe your methodology is appropriate, and tell us whether you believe that the use of an incurred loss model would result in a different conclusion about any goodwill impairment charge.
·         Tell us whether you performed your goodwill impairment tests as of March 31, 2008 and June 30, 2008 using the methodology used as of December 31, 2007.  If so, please tell us the results of those tests.
·         Please tell us whether each of the changes in methodologies and approaches was discussed with your Audit Committee in advance of the change.

Company C
Initial comment letter:  In connection with the current economic environment, we note the decline in your retail store operating results and the negative growth in identical store retail sales during the first quarter of fiscal 2009.  Further, we also note your shares of common stock are trading price much lower than a year ago.  Along with lower consumer confidence and an unfavorable retail climate, these are key indicators warranting a close review for impairment of the $X billion in goodwill and other indefinite-lived intangible assets associated with your retail segment.  Please advise us of the results of your review and analysis performed in accordance with paragraphs 26 through 28 of SFAS 142.
SEC follow-up question:  We note the supplemental information you provided and your response to our prior comment regarding an impairment review of goodwill under SFAS 142.  Even though we understand the quoted price of your common stock should not be the sole measurement basis of your fair value, we believe market capitalization can be used as an overall evaluation in the review process.  In this regard, using your closing share price of $24 as of August 31, 2008 your market capitalization value was approximately $5.1 billion, compared to recorded goodwill of $7 billion, yielding a material negative variance of $1.9 billion, or 27%.  Further, using your closing stock price of $28 as of February 29, 2008, your market capitalization value was approximately $5.8 billion, compared to recorded goodwill of $7 billion, yielding a large negative variance of $1.2 billion, or 17%.  We believe the existence of such material negative variances raises serious questions about whether any impairment of goodwill has occurred.  In light of the further deterioration of an unfavorable business climate, the continuing decline in consumer spending and negative same store sales performance, please provide us with a copy of the recent sensitivity analysis you prepared supporting your conclusion as of August 31, 2008 that there was no indication of impairment of goodwill since the last annual test.  Please also provide us with a comprehensive discussion of the basis for each of the major assumptions relating to revenue growth, operating ratios, and annual gross margin and EBIT percent used for each reporting unit by forecast year.  We may have further comments upon our review of your responses. 

Company D
Initial Comment Letter – Question 1:  We note that there was a significant decline in your market capitalization during the first six months of 2008.  It appears that this is a triggering event that would require you to reassess your goodwill for impairment.  Please tell us what consideration you gave to reassessing the recoverability of your goodwill as of March 31, 2008 and June 30, 2008.  If you did not perform impairment tests as of March 31, 2008 and June 30, 2008, please explain why.  To the extent that impairment tests were performed, tell us how you determined that no impairment existed.
Initial Comment Letter – Question 2:  Please tell us what consideration you have given to providing MD&A disclosure that addresses how the significant decline in your market capitalization has impacted the timing of your goodwill impairment testing.  Also tell us how you considered providing an update to your Critical Accounting policy as of June 30, 2008.  In this regard, it would appear that your method of impairment testing may change now that you operate under a single reporting unit.
SEC follow up – Question 1: Your response to prior comment number 1 indicates that when assessing whether an impairment analyses is necessary, you compare the book value of net assets to your average market capitalization over a period of nine to twelve months.  Please explain to us, in greater detail, why you believe that the use of an average market capitalization is appropriate under paragraph of 28 of FAS 142.  In this regard, we note that paragraph 28 looks to events or changes in circumstances, such as price declines, that by their occurrence should be considered.
SEC follow up – Question 2: Your response indicates that you did not believe that the declines in market price were a triggering event and it remains unclear to us how you came to this conclusion.  In this regard, we note that you experienced consistent declines in market price in each of the last four quarters.  We also note that your price declines were more severe than those of the comparable companies identified in your response. Please describe, in further detail, why you believe that the declines in market price were not a triggering event as described in paragraph 28(a) of SFAS 142.

Company E
Question: We note the recent drop in your stock price and market capitalization since the quarter ended October 3, 2008.  It appears as though this event may represent an occurrence of a triggering event that may require you to test your goodwill for impairment before your annual test pursuant to paragraph 28 of SFAS 142.  Tell us whether the Company has performed (or intends to perform) an interim analysis of goodwill pursuant to this guidance and if so, please tell us how your evaluation of goodwill impairment complies with paragraphs 10 through 22 of SFAS 142.  Explain how you determine the fair value of your reporting units and hoe your estimate of fair value complies with paragraphs 23 through 25 of SFAS 142.  Compare the fair value for your reporting units to the Company’s market capitalization, and if materially different, please provide us with the underlying reasons.  Alternatively, if you do not believe the decrease in your market capitalization represents a triggering event, then please explain how you concluded as such.

Company f
Question: We note that the market value of your common stock outstanding as of June 28, 2006 is significantly less than the book value of your stockholders’ equity.  Although we recognize that the fair value of a reporting unit can exceed its market capitalization, in light of your conclusion that goodwill was not impaired despite your market capitalization, recurring operating losses, and negative cash flows from operations, please provide us with more information about the results of your latest goodwill impairment test.  In your response, please quantify each reporting unit’s carrying value and calculated fair value as of your latest impairment test and provide a sensitivity analysis that shows how this fair value would fluctuate based on hypothetical changes in your assumptions and judgments.  If the first step of the test identified a potential impairment, thus requiring you to perform the second step of the test, please provide us the details of your determination of the implied fair value of goodwill.  Consistent with our comment above, this type of information should be disclosed in future filings as part of your discussion of Critical Accounting Estimates.

Company G
Question 1: We note that your net book value exceeded your market capitalization at December 31, 2007.  Please tell us how you considered this factor in your goodwill impairment analysis.
Question 2: We note the material balance of goodwill at December 31, 2007 and the significant increase during 2007.  Please provide us supplementally, and disclose in future filings, the following information:
·         Define and describe the reporting units at which you test goodwill for impairment and address any changes in those units or goodwill allocations during the period presented.
·         We note that the “primary valuation method” for determining the fair market value of your reporting units is a discounted cash flow analysis.
·         Please disclose any other methodologies you use, including a description of and the assumed benefits of a valuation prepared under each method, and why management selected each applicable method as being meaningful for preparing your goodwill impairment analysis.
·         If applicable, please disclose how you weight each of these methods, including how you determined the weights for each method.  To the extent that the weight assigned to each method is a subjective estimate, please include a sensitivity analysis to address the impact on fair value if you weighted the methods differently.
·         For each methodology, provide a description of the material assumptions used and the sensitivity of those assumptions in determining fair value.  For example, for a discounted cash flow analysis such assumptions may include the discount rated used, revenue growth rates, operating profit margin percentages and the terminal rate.
·         To the extent that the carrying value of an of your reporting units is not materially different from its estimated fair value or if a reasonably possible impairment charge would be material to your consolidated financial statements, please specifically address those reporting units, including the amount of goodwill allocated to the reporting unit, the carrying value of the reporting unit and the fair value of the reporting unit.

Company H
Question:  Please provide us a comprehensive discussion (timing, description of reporting units, etc.) of your most recent goodwill impairment tests and consider the guidance in paragraphs 16-35 of SFAS 142 as your formulate your response.  In your response, please: 
·         Provide detailed information on how you determined the fair value of each of your reporting units including a summary schedule of your SFAS 142, step 1 test results and an analysis of the results;
·         Tell us how you considered the relationship between your quoted common stock price and your reported book value and net tangible asset value as of year-end and latest interim period and whether or not there is an “implied” impairment of assets;
·         Tell us how you considered whether you were required to test for goodwill impairment in 2008 due to current market conditions, the decrease in your stock price, published media reports detailing the financial condition of major customers, third party borrower default guarantors and any other applicable factor(s) in paragraph 28 of SFAS 142;
·         Tell us whether you have had any discussions with third parties regarding offers to purchase any particular group of assets and how any discussions may have influenced your decision as to retest goodwill or recognize an impairment at any particular balance sheet date;
·         Tell us what other information would have been required for you to conclude that an impairment loss was probable and reasonable estimable at year-end and the latest interim period if you conclude that an impairment does not currently exist;
·         Discuss what involvement your independent auditors have had regarding comments we have raised on this issue, including any consultation at the national office level.
Company I
Question:  In the interest of providing readers with a better insight into your judgments in accounting for goodwill, please consider disclosing the following in future filings:
·         The reporting unit level at which you test goodwill for impairment and your basis for that determination;
·         Each of the valuation methodologies used to value goodwill (if multiple approaches are used), including sufficient information to enable a reader to understand how each of the methods used differ, the assumed benefits of a valuation prepared under each method, and why you selected these methods as being the most meaningful in preparing the goodwill impairment analyses;
·         How you weight each of the methods used including the basis for that weighting (if multiple approaches are used);
·         A qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based upon reasonable likely changes; and
·         How the assumptions and methodologies used for valuing goodwill in the current period have changed since the prior periods, highlighting the impact of any changes.

Company J
Question:  We note that you have recognized significant impairment charges during the year ended September 30, 2008 and the three month period ended December 31, 2008 related to your XXXXX business.  In the interest of providing readers with a better insight into management’s judgments in accounting for impairments of long-lived assets including plant and equipment, goodwill and intangible assets, please consider disclosing the following in future filings, beginning with your next interim filing:
·         Please clarify how you determine which property, plant and equipment held for use should be tested for impairment as well as at what point in time they should be tested for impairment.  Please state the types of events and circumstances that you believe indicate impairment;
·         The reporting unit level at which you test goodwill for impairment and your basis for that determination;
·         Sufficient information to enable a reader to understand how you apply the present value of future cash flows in estimating the fair value of your reporting units and why management selected this method as being the most meaningful in preparing your goodwill impairment analysis;
·         How you determine the appropriate discount rates and attrition rates to apply in your intangible asset impairment analysis;
·         A qualitative and quantitative description of the material assumptions used in determining impairments for all long-lived assets and a sensitivity analysis of those assumptions based upon reasonably likely changes; and
·         If applicable, how the assumptions and methodologies used for valuing property, plant and equipment, goodwill and intangible assets in the current year have changed since the prior year, highlighting the impact of any changes.

Bank Guarantee

BANK GUARANTEE(BG) can be many types - Advance BG,Payment BG, Performance BG , Bid security BG






ADVANCE BANK GUARANTEE

Bank guarantee No. ………………………

Date : ………………….. 


To
Employer

Dear Sirs,

In consideration of Employer  having its registered office at ……… (herein after called ‘the Company’ which expressions shall unless repugnant to the context or meaning thereof include its successors, administrators, executors and permitted assigns) has awarded to M/s Applicant, a company incorporated under the Companies Act, 1956, and having its registered office at …… (hereinafter referred to as ‘the Contractor’ which expressions shall unless repugnant to the context or meaning thereof include its successors administrators, executors and permitted assigns) a contract, by issuance of a Purchase Order No. …. (‘PO’) by the Company on terms and conditions stated therein and the same having been unequivocally accepted by the Contractor at a gross value of Rs. 9,00,00,075/- (Rupees Nine Crores and Seventy Five Only) (‘Contract Value’).

As per clause “a” in Payment terms of the PO, the Company has agreed to make an advance payment of 10 % of Contract Value to the Contractor amounting to Rs.90,00,008/- ( Rupees Ninety Lakhs and Eight Only) (hereinafter called the ‘said advance’ which expressions shall include any and all further amounts advanced by the Company to the Contractor with reference to the PO) against bank guarantee to be furnished by the Contractor having a validity of not less than six months for due performance of the terms of the PO.


NOW THEREFORE THESE PRESENTS WITNESSTH that in consideration of the promises aforesaid and at the request of the Contractor, we, State Bank of Hyderabad, constituted under the State Bank of India subsidiary Act 1959, having its central office at Gunfoundry, Abids Hyderabad-500 177 and amongst other places a branch at TFCPC,2nd floor, Surya towers, SP road, Secunderbad-500 003 (hereinafter called the ‘Bank’) so as to bind ourselves and our successors and assigns DO HEREBY issue this bank guarantee (‘Bank Guarantee’) and hereby irrevocably agree and undertake:

(a)    to pay the Company anywhere in India forthwith on first demand with or without any reason in writing from the Company, without protest or demur or reservation or contest or recourse or proof of satisfaction and without reference to the Contractor any and all said advance demanded from us by the Company with reference to this guarantee upto an aggregate limit of Rs.90,00,008/- ( Rupees Ninety Lakhs and Eight Only)

(b)   not to require any proof in addition to the written demand from the Company or its authorized representative, made in any format, raised at the above mentioned address of the Bank, in order to make the said payment to the Company or its authorized representative.

(c)    Any such demand made by the Company on the Bank shall be conclusive and binding notwithstanding any differences between the Company and the Contractor or any dispute pending before any Court, Tribunal, Arbitrator or any other Authority. The Bank undertakes not to revoke this Bank Guarantee during its currency without previous consent of the Company in writing and further agrees that the Bank Guarantee herein contained shall be enforceable till expiry of its validity.

AND the Bank hereby further agree and undertakes as follows:

i)                    The Company shall have the fullest liberty without reference to the Bank under this Bank Guarantee at any time and/or from time to time to vary the said Bank Guarantee and/or any of the terms and conditions thereof or of the said advance and/or to extend time for performance of the said Bank Guarantee and/or payment of the said advance in whole or part or to postpone for any time and/or from time to time any said obligations of the Contractor and/or the rights, remedies or powers exercisable by the Company against the Contractor either to enforce or forbear from enforcing any of the terms and conditions of /or governing the said Bank Guarantee and/or the said advance, if any, or any of them available to the Company and the Bank shall not be released from its liability under these presents and the liability of the Bank shall remain in full force and effect notwithstanding any exercise by the Company of the liberty with reference to any or all the matters aforesaid or by reason of time being given to the Contractor or any other forbearance, or omission on the part of the Company or any indulgence by the Company to the Contractor of any other act, matter or thing whatsoever which under any law could (but for this provision) have the effect of releasing the Bank from its liability hereunder or any part thereof.

ii)                   It shall not be necessary for the Company to proceed against the Contractor before proceeding against the Bank and the Bank Guarantee herein contained shall be enforceable  against the Bank as Principal debtor notwithstanding the existence of any security for any indebtedness of the Contractor to the Company and notwithstanding that any such security shall at the time when claim is made against the bank or proceedings taken against the Bank hereunder, be outstanding or  unrealised.

iii)                 As between the Bank and the Company for the purpose of this Bank Guarantee, the amount claimed or demanded by the Company from the Bank with reference to this Bank Guarantee shall be final and binding upon the Bank as to the amount payable by the Bank to the Company hereunder.

iv)                 The liability of the Bank to the Company under this Bank Guarantee shall remain in full force and effect notwithstanding the existence of any difference or dispute between the Contractor and the Company, the Contractor and the Bank and/or the Bank and the Company or otherwise howsoever touching or  effecting these presents or the liability of the Contractor to the Company, and notwithstanding the existence of any instructions or purported instruction by the Contractor or any other person to the Bank not to pay or for any cause withhold or defer payment to the Company under these presents, with the intent that notwithstanding the existence of such difference, dispute or instruction, the Bank shall be and remain liable to make payment to the Company in terms hereof.

v)                  The Bank Shall not be released of its obligations under these presents by any exercise by the Company of its liberty with reference to the matters aforesaid or any of them or by reason of any other act or forbearance or other acts of omission or commission on the part of the Company or any other indulgence shown by the Company or by any other matter or thing whatsoever which under the law would but for this provision, have the effect of relieving the Bank.

vi)                 The Bank shall not require the Company to justify the invocation of this Bank Guarantee, nor shall the Bank have any recourse against the Company or its authorized representative in respect of any payment made hereunder.

vii)               This Bank Guarantee shall be a primary obligation of the Bank and accordingly, the Company or its authorized representative shall not be obliged before enforcing this Bank Guarantee to take any action in any court or arbitral proceedings against the Contractor, to make any claim against or any demand on the Contractor or to give any notice to the Contractor to enforce any security or its authorized representative or to exercise, levy or enforce any distress, diligence or other process against the Contractor.


viii)              This Bank Guarantee shall not be affected in any manner by reason of merger, amalgamation, restructuring, liquidation, winding up, dissolution, insolvency or any other change in the constitution of the Bank or that of the Contractor or Company or any irregularity in the exercise of borrowing powers by or on behalf of the Contractor.

ix)                 This Bank Guarantee shall not be affected by the liquidation, winding up or insolvency etc., or the Contractor seeking protection of any law.

x)                  This Bank Guarantee shall not be revoked by the Bank until its expiry, except with the prior consent of the Company.

xi)                 The Bank hereby declare that Shri……………………. who is the ………………… (designation) of the Bank is authorised to sign this Bank Guarantee on behalf of the Bank and to bind the Bank thereby.
                                                                                                          
xii)               This Bank Guarantee shall be interpreted in accordance with the laws of India and the courts at Kolkata shall have exclusive jurisdiction. The Bank represents that this Bank Guarantee has been established in such form and with such content that it is fully enforceable in accordance with its terms as against the Bank in the manner provided herein.

xiii)              The Bank hereby agrees and acknowledges that the Company shall have a right to invoke this Bank Guarantee either in part or in full, as it may deem fit.

Notwithstanding anything contained hereinabove, our liability under this Bank Guarantee is limited to Rs.90,00,008/- ( Rupees Ninety Lakhs and Eight Only) and it shall remain in force upto the midnight of 31-Dec-14 with a claim period of one (1) month i.e. 31-Jan-15 and shall be extended from time to time for such periods as may be desired by the Company in writing.

Notwithstanding anything contained hereinabove:

(a)    Our liabiity under the Bank Guarantee shall not exceed  Rs.90,00,008/- ( Rupees Ninety Lakhs and Eight Only)

(b)   This Bank Guarantee shall be valid upto 31-Dec-14

(c)    We are liable to pay the Bank Guaranteed amount or any part thereof under this Bank Guarantee only and only if you serve upon us a written claim or demand on or before 31-Dec-14.

Dated this 30th  day of October 2014


Yours faithfully,
Witness:
Signature ………………………
1)
Name ….………………………
2)
Designation …….……………..


Bank seal / stamp …………….



BANK GUARANTEE FOR MOBILIZATION ADVANCE



1.    In consideration of ……………(hereinafter called "the Employer" which expression shall unless repugnant to the subject or context include its successors and assigns) having agreed under the terms and conditions of the Work Oder Ref. No…………..  ISSUED BY THE Customer which have been unequivocally accepted by……. M/s applicant…… company incorporated under the Companies Act 1956 and having its registered office at………(hereinafter called “the said Contractor” which expression shall unless the context requires otherwise include its administrators, successors and assigns)  in connection with the work of " Execution, Erection, testing & commissioning of power plant including associated ancillary electrical works for the ------- (hereinafter called "the Contract") to make at the request of the Contractor a 30% advance of Rs.8,85,180/- (Eight Lakhs Eight Five Thousand One Hundred and Eighty Only ) for utilizing it for the purpose of the Contract on his furnishing a guarantee acceptable to the Employer, we State Bank of Hyderabad having its branch office at ----------,(hereinafter referred to as "the said Bank") do hereby guarantee the due recovery by the Employer of this said advance with interest thereon as provided according to the terms and conditions of the Contract. If the said Contractor fails to utilize the said advance for the purpose of the Contract and / or the said advance together with Interest thereon as aforesaid is not fully recovered by the Employer, 

2.    we, The Said bank  hereby unconditionally and irrevocably undertake to pay to ………. on demand and without demur to the extent of the said sum of Rs.8,85,180/- (Eight Lakhs Eight Five Thousand One Hundred and Eighty Only ), any claim made by the Employer on us for the loss or damage caused to or suffered by the Employer by reason of the Employer not being able to recover in full the said sum of Rs.8,85,180/- (Eight Lakhs Eight Five Thousand One Hundred and Eighty Only ) with interest as aforesaid.

2. We,  The Said bank further agree that the Employer shall be the sole judge of and as to whether the said Contractor has not utilized the said advance or any part thereof for the purpose of the Contract and the extent of loss or damage caused to or suffered by the Employer on account of the said advance together with interest not being recovered in full and the decision of the Employer that the said Contractor has not utilized the said advance or any part thereof for the purpose of the Contract and as to the amount or amounts of loss or damage caused to or suffered by the Employer shall be final and binding on us.

3. We, the said Bank, further agree that the Guarantee herein contained shall remain in force and effect during the period that would be taken for the performance of the said Contract and till the said advance with interest has been fully recovered and its claims satisfied or discharged and till the Employer certifies that the said advance with interest has been fully recovered from the said Contractor, and accordingly shall have no claim under this Guarantee after  ( 0 ) days from the date of satisfactory completion of the said Contract (as per the mutually agreed Work Schedule) i.e. upto and inclusive of  Rs.8,85,180/- (Eight Lakhs Eight Five Thousand One Hundred and Eighty Only )   unless a notice of the claim under this Guarantee has been served on the Bank before the expiry of the said period i.e. 15-Feb-15   in which case the same shall be enforceable against the Bank notwithstanding the fact, that the same is enforced after the expiry of the said period.


4. The Employer shall have the fullest liberty without affecting in any way the liability of the Bank under this Guarantee or Indemnity, from time to time, to vary any of the terms and conditions of the said Contract or the advance or to extend time of performance by the said Contractor or to postpone for any time and from time to time any of the powers exercisable by it against the said Contractor and either to enforce or forbear from enforcing any of the terms and conditions governing the said Contract or the advance available to the Employer and the said Bank shall not be released from its liability under these presents by any exercise by the Employer of the liberty with reference to the matters aforesaid or by reasons of time being given to the said Contractor or any other forbearance, act or omission on the part of the Employer or any indulgence by the Employer to the said Contractor on any other matter or thing whatsoever which under the law relating to sureties would, but for this provision, have the effect of so releasing the Bank from its such liability.

5. It shall not be necessary for the Employer to proceed against the Contractor before proceeding against the Bank and the Guarantee herein contained shall be enforceable against the Bank notwithstanding any security, which the Employer may have obtained or obtain from the Contractor shall at the time when proceedings are taken against the Bank hereunder, be outstanding or unrealized.

6. We, the said Bank, lastly undertake not to revoke this Guarantee during its currency except with the previous consent of the Employer in writing and agree that any change in the Constitution of the said Contractor or the said Bank shall not discharge our liability hereunder.

If any further extension of this Guarantee is required the same shall be extended to such required periods on receiving instructions from the Contractor on whose behalf this Guarantee is issued.

Notwithstanding anything contained herein before our liability under this Guarantee is restricted to Rs.8,85,180/- (Eight Lakhs Eight Five Thousand One Hundred and Eighty Only ) together with interest . Our undertaking shall commence from the date of execution and shall remain in force upto        .

Dated this                 





PERFORMANCE CUM DEFECT LIABILITY BANK GUARANTEE

               

GUARANTOR: BANK STATE BANK OF HYDERABAD

GUARANTEE NUMBER  : ……………………………………………….

PRINCIPAL: ……NAME OF APPLICANT…………..

BENEFICIARY: ... (hereinafter referred to as “Purchaser”)

Agreement to which this Guarantee relates:

Agreement for Design, Engineering, Erection including associated civil works, Installation, testing and commissioning of ….for the …..Project at ……gainst Purchase order no: ……… (hereinafter referred to as the “Contract”).

Aggregate Maximum Amount of this Guarantee: Rupees 1,01,124/-  ( One Lakh One Thousand One Hundred and Twenty Four Only) equivalent to 5 % of the Contract value] of the aggregate of the Contract Price of Rupees 20,22,480/- (Twenty Lakhs Twenty Two Thousand Four Hundred and Eighty only)

Expiry Date: 20th Day of May, 2016.


This PERFORMANCE CUM DEFECT LIABILITY BANK GUARANTEE (the “Guarantee”) is provided on this             day of March, 2014 at Hyderabad, by the Guarantor in favour of the Purchaser for an amount of Rupees 1,01,124/-  ( One Lakh One Thousand One Hundred and Twenty Four Only).

In consideration of the Contract awarded by the Purchaser in favour of the Contractor for the [Purpose of the Contract], on the terms and conditions set out in the Contract, dated 05-Aug-2013 valued at Rupees 20,22,480/- and the same having been unequivocally accepted by the Contractor, the Contractor hereby agreed to provide a performance cum defect liability bank guarantee for the faithful performance of the entire Contract, [including the warranty obligations /liabilities under the Contract equivalent to 5% of the said value of the Contract, to the Purchaser amounting to Rupees 1,01,124/-  ( One Lakh One Thousand One Hundred and Twenty Four Only) as the contract security in the form of a bank guarantee.

We, State Bank of Hyderabad, constituted under the State Bank of India subsidiary Act 1959, having its central office at ……. and amongst other places a branch at ……..,being the Guarantor under this Guarantee, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby irrevocably and unconditionally guarantee and undertake to you, the abovementioned Purchaser, or such other persons for the time being entitled to the benefit hereof, upon your written request, any sum or sums up to the Aggregate Maximum Amount of this Guarantee as amended from time to time, upon any failure by the Contractor to fulfill any of the conditions of the Contract required to be performed during the performance of the Contract , as determined by you in your absolute judgment.

We, as Guarantor, undertake to effect payment forthwith upon receipt of your written demand, without proof, conditions, grounds or reasons for such demand for the sum specified therein, notwithstanding any contestations, claims, demands or objections made by the Contractor or any other third party. We recognize that under this Guarantee we have no right to set-off or counterclaim the amounts claimed under this Guarantee.

Any payment made hereunder shall be made free and clear of, and without deduction for or on account of any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever and whomsoever imposed. We, further, unconditionally acknowledge that any such demand by the Purchaser of the amounts payable by us to the Purchaser shall be final, binding and conclusive evidence in respect of the amounts payable by the Contractor to the Purchaser.

We agree that our obligations under this Guarantee are irrevocable, absolute and unconditional and shall remain in full force and effect till the Final Expiry Date without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation:
(i)                   any time or other indulgence granted by the Purchaser to the Contractor under the Contracts,
(ii)                 any amendment, modification, supplementation or other variation of the Contract,
(iii)                any invalidity, irregularity or unenforceability of all or part of the Contract or any obligation of the Contractor under or pursuant thereto,
(iv)               any partial or complete performance of the Contract,
(v)                 any lack of or limitation on the status or power of the Contractor,
(vi)               any winding-up, dissolution, receivership or bankruptcy of the Guarantor, the Contractor and any amalgamation, merger, reconstruction, reorganization or any change in the constitution of the Guarantor and/or the Contractor, or
(vii)              any other act, omission, event or circumstance which would or may but for this provision operate to prejudice, affect or discharge this Guarantee or our obligations hereunder.

The Purchaser shall have the fullest liberty without affecting in any way the liability of the Guarantor under this Guarantee from time to time to extend the time for performance of the Contract by the Contractor.  The Purchaser shall have the fullest liberty without affecting the liability of the Guarantor under this Guarantee, to postpone from time to time the exercise of any powers  vested in it or of any right which they postpone from time to time they might have against the Contractor, and to exercise any powers vested in them or of any right which they might have against the Contractor, and to exercise the same at any time in any manner, and either to enforce or to forebear to enforce any covenants contained or implied in the Contract between the Purchaser and the Contractor or any other course of remedy or security available to the Purchaser. The Guarantor shall not be released of its obligations under these presents by any exercise by the Purchaser of its liberty with reference to matters aforesaid or any of them or by reason of any other act or forbearance to other acts of omission or commission on the part of the Purchaser or any other indulgence shown by the Purchaser or by any other matter or thing whatsoever which under the law would, but for this provision, have the effect of relieving the Guarantor.


We hereby waive notice of acceptance of this Guarantee and notice of any liability to which it may apply. Except with respect to the written demand for payment referred to above, we waive presentment, demand of payment, protest, notices of any kind and any right to require that resort be made to the Contract or any other security.

We, as Guarantor, undertake to pay to the Purchaser any money so demanded, within 7 (seven) days of receipt of request from the Purchaser, notwithstanding any dispute or disputes raised by the Contractor in any suit or proceeding pending before any Arbitration or Court or Tribunal relating thereto our liability under this Guarantee being absolute and unequivocal.

We, as Guarantor also agrees that the Purchaser at its opinion shall be entitled to enforce this Guarantee against us as a principle debtor, in the first instance without proceeding against the Contractor, and notwithstanding any security or other guarantees that the Purchaser may have in relation to the Contractor’s liabilities.

This Guarantee shall come into force on the date of issue. This Guarantee shall be a continuing security and accordingly: (i) it shall extend to cover any amount due at any time from the Contractor to Purchaser under the Contract; and (ii) it shall not be discharged by an intermediate discharge or repayment by or for the account of the Contractor or any settlement of accounts between the Contractor and the Purchaser.

We undertake not to revoke this Guarantee during its term except with the previous express consent of the Purchaser in writing and agree that any change in the constitution of the Guarantor or the Contractor shall not discharge the liability of the Bank hereunder.

The sums payable under this Guarantee shall be remitted by the Guarantor to the Purchaser’s designated bank account the details of which will be informed to the Guarantor by the Purchaser in writing. The Guarantor shall immediately notify the Purchaser on remittance of the amount/s. Remittance of sums payable hereunder into such designated account shall discharge the Guarantor of its liability hereunder to the extent of such remittance. The remaining obligations of the Guarantor shall continue until the exhaustion of the Aggregate Maximum Amount of this Guarantee.

Notwithstanding anything contained hereinabove:
1) Our liability under this Guarantee shall not exceed the Rupees 1,01,124/-  ( One Lakh One Thousand One Hundred and Twenty Four Only).
2) This Guarantee will be valid up to the Expiry Date 20th Day of May,2016.
3) We shall be liable to pay any amount under this bank guarantee or part thereof only if we receive a claim or demand in writing on or before the Final Expiry Date i.e. 20th  Day of May, 2016.

This Guarantee shall be governed by and construed in accordance with laws of India, and the courts at [Bangalore] shall have the jurisdiction to try any dispute arising hereunder. Notwithstanding this provision, the Guarantor shall have no right to withhold payment of the guarantee pending the resolution of any dispute, unless expressly directed to do so by a court of competent jurisdiction.

This Guarantee shall be extended upon written instructions from the Principal to the Guarantor.

In the event that any one or more of the provisions contained in this Guarantee are considered invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

Upon the Final Expiry Date, this Guarantee shall become null and void, whether returned to the Guarantor for cancellation or not and any claim or statement received after the Final Expiry Date where applicable, shall be ineffective and not accepted.


Notwithstanding anything contained herein above, our liability under this guarantee is restricted to Rupees 1,01,124/-  ( One Lakh One Thousand One Hundred and Twenty Four Only).

Our Guarantee shall remain in force until 20th Day of May,2016.
Unless a demand or claim under the guarantee is made on our bank in writing on or before 20th Day of May,2016.
All your rights under the said guarantee be forfeited and we shall be relieved and discharged from all liabilities thereunder.


[GUARANTOR BANK]

_________________________                                                                      By __________________________
Place and Date                                                                                                     Name:
Title:


CORPORATE GUARENTEE FORMAT












Bank Guarentee encashment legal position

 If beneficiary intends to encash Bank Guarentee courts dont interfere and grant injunction. Banks are duty bound to oblige

When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts will, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee.


The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order the bank giving the guarantee must honour the same and make payment ordinarily unless there is an allegation of fraud or the like. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee.

The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country.

The first exception which has been carved out by the Courts is that the fraud perpetrated must be of egregious nature meaning that the said fraud must be one of gross nature which shakes the conscience of the Court and the said fraud must be known to the parties including the party representing as well as the bank. Under the said circumstances, if the said fraud is established, the Court can interfere with the bank guarantee. In U.P. Cooperation Federation Ltd. (Supra) also it was held that the fraud pleaded must be of an egregious nature so as to vitiate the entire underlying transaction of the Bank Guarantee. It is fraud of the beneficiary and not the fraud of somebody else that would make the Court to grant the Order of injunction as asked for.

The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution

Various Cases for reference

Tarapore and Co., Madras –vs- V.O Tractors Export Moscow, AIR 1970 SC 891 

United Commercial Bank –vs- Bank of India, (1981) 2 SCC 766:AIR 1981 SC 1426 

U.P. Coop. Federation –vs- Singh Consultants & Engineers (P) Ltd., (1988) 1 SCC 174 

Hindustan Steel Works Construction Ltd. –vs- Tarapore & Co., AIR 1996 SC2268:(1996) 5 SCC 34

U.P.State Sugar Corporation –vs-. Sumac International Limited, AIR 1997 SC 1644:(1997)1 SCC 568 

Dwarikesh Sugar Industries Ltd. –vs- Prem Heavy Engineering Works (P) Ltd., (1997) 6 Supreme Court Cases 450

Federal Bank Limited –vs- V.M. Jog Engineering Limited, (2001) 1 SCC 663

National Highways Authority of India –vs- Ganga Enterprises, (2003) 7 Supreme Court Cases 410