Insurance Surety Bonds and Defence PSUs: HAL, BEL, BEML and Beyond

Rajeev Chari
Jul 22
9 min read

TL;DR

The September 2024 Department of Financial Services directive mandated ISB acceptance across central government, but defence acquisitions run under a separate framework called DAP 2020. The two frameworks give different answers on when an insurance surety bond can replace a bank guarantee.
Under DAP 2020, private contractors in competitive bidding must furnish bank guarantees for performance security. Insurance surety bonds are only permitted for iDEX and TDF startups and MSMEs, at a minimum rate of 3%, for procurement up to ₹250 crore cumulative.
Defence PSUs also run civil and administrative procurement contracts that fall under GFR 2022, not DAP 2020. For those contracts, the DFS September 2024 mandate applies and insurance surety bonds should be accepted at par with bank guarantees.
This article tells you how to identify which framework governs your specific contract, what to check in your tender document, and what the iDEX provision means in practice for startups bidding on defence orders.

Introduction

In September 2024, India's Department of Financial Services directed all government departments and PSUs to accept insurance surety bonds as equivalent to bank guarantees. For contractors working with infrastructure PSUs like NHAI, NTPC, and SECI, this directive translates cleanly. The standard bidding documents have been updated, the bond formats are published, and the instrument works.

For contractors working with defence PSUs, the answer is more complicated.

Defence procurement in India operates under a separate framework: the Defence Acquisition Procedure 2020 (DAP 2020), administered by the Ministry of Defence and governed by the Defence Acquisition Council. This framework has its own rules for bid security, performance security, and bank guarantees. Those rules do not automatically yield to the General Financial Rules framework or the DFS directive in the same way civil procurement does.

The result is a knowledge gap that leaves contractors confused. Most insurance surety bond guides cover NHAI, NTPC, and SECI in detail and mention defence PSUs as part of a broader PSU list without ever addressing DAP 2020. Contractors bidding on HAL, BEL, BEML, or shipbuilding DPSU tenders end up either assuming an insurance surety bond will be accepted when it will not, or assuming the opposite when it would actually work.

This article gives a direct answer. It covers which defence PSU contracts accept insurance surety bonds, which do not, why the distinction exists, and what the iDEX and TDF provision means for startups and MSMEs that have a genuine alternative route.

What Are Defence PSUs?

India has nine Defence Public Sector Undertakings (DPSUs) operating under the Ministry of Defence:

HAL (Hindustan Aeronautics Limited): aerospace, helicopters, aircraft maintenance
BEL (Bharat Electronics Limited): defence electronics, radar systems, communication equipment
BDL (Bharat Dynamics Limited): missiles and allied defence systems
BEML (Bharat Earth Movers Limited): defence vehicles, mining equipment, metro rail systems
MDL (Mazagon Dock Shipbuilders Limited): submarines and warships
GRSE (Garden Reach Shipbuilders and Engineers): frigates, corvettes, and fleet support vessels
GSL (Goa Shipyard Limited): offshore patrol vessels and survey ships
HSL (Hindustan Shipyard Limited): naval vessels and commercial ship repair
MIDHANI (Mishra Dhatu Nigam): advanced alloys and specialty materials for defence and aerospace

Combined, these entities run thousands of vendor and supplier contracts annually, spanning everything from complex weapons system components to canteen supplies and IT services. The framework that governs a specific contract depends entirely on what that contract is for, not simply on who the buyer is.

Two Frameworks, Two Different Answers

The single most important thing a contractor needs to understand about insurance surety bonds and defence PSUs is that the same buyer can operate under two completely different procurement frameworks depending on the nature of the purchase.

Framework	Governed By	ISB Status	Key Security Instrument
GFR 2022 + DFS September 2024	Ministry of Finance / Department of Financial Services	Accepted at par with bank guarantee for all central government procurement	GFR Rule 170 (bid security), Rule 171 (performance security)
DAP 2020	Ministry of Defence / Defence Acquisition Council	Restricted: bank guarantee required in competitive bidding; ISB only for iDEX/TDF MSMEs	Performance Cum Warranty Bank Guarantee (PWBG) at 5% of contract value

The Ministry of Finance GFR 2022 amendment placed insurance surety bonds on equal legal footing with bank guarantees across all government procurement. The September 2024 DFS directive converted that permission into an obligation for all central government departments and PSUs. For civil and administrative procurement at DPSUs, this framework applies.

DAP 2020 governs defence acquisitions specifically: procurements made by the armed forces, defence ministries, and DPSUs for items that go into India's defence capability. These include weapons, platforms, electronics for military use, vessels, and defence-specific components. For these contracts, DAP 2020 is the governing document and it operates independently of GFR.

The practical question for a contractor is: is the contract I am bidding on a defence acquisition governed by DAP 2020, or a civil/administrative purchase governed by GFR? The answer determines whether an insurance surety bond is an option.

Where DAP 2020 Restricts Insurance Surety Bonds

Under DAP 2020, defence acquisition contracts require a Performance Cum Warranty Bank Guarantee (PWBG) of 5% of the total contract price, including taxes and duties. Here is what that means in practice:

Competitive bidding cases: All participating private contractors must furnish bank guarantees. There is no provision to substitute an insurance surety bond for the PWBG on a standard defence acquisition.
DPSUs and their JVs: In single-vendor cases, DPSUs can furnish indemnity bonds instead of bank guarantees. Note that indemnity bonds are distinct from insurance surety bonds and apply only to DPSUs acting as prime contractors.
Private contractors in all competitive cases: A bank guarantee is required. An insurance surety bond will not be accepted unless the contractor qualifies under the iDEX or TDF provision.

The shipbuilding case confirms this in practice. In January 2025, the Shipyards Association of India documented that private shipyards furnishing insurance surety bonds to the Indian Navy and Coast Guard were facing outright rejection. One private shipbuilder that had won an Indian Coast Guard hovercraft contract worth ₹387.44 crore could not get a bank guarantee from any bank and could not submit an insurance surety bond either. SAI has formally called for DAP 2020 to be amended to allow insurance surety bonds for private shipbuilders.

The restriction traces back to the collapses of ABG Shipyard, Bharati Defence and Offshore Engineering, and Reliance Naval and Engineering. The same risk caution that makes banks reluctant to issue bank guarantees to private defence contractors has carried over to the acceptance of insurance surety bonds.

Where Insurance Surety Bonds ARE Permitted in Defence Procurement

DAP 2020 contains one explicit carve-out for insurance surety bonds. For startups and micro, small, and medium enterprises operating under iDEX (Innovations for Defence Excellence) and TDF (Technology Development Fund), the performance security requirement is relaxed. These entities can furnish their performance cum warranty security at a minimum of 3% of the contract value, in the form of either an insurance surety bond or a bank guarantee, at their convenience.

This provision applies to procurement cases with a cumulative value of up to ₹250 crore, including any repeat orders.

Contract Type	Framework	ISB Accepted?	Rate	Notes
Defence acquisition, competitive bidding, private contractor	DAP 2020	No	PWBG 5%	Bank guarantee required
Defence acquisition, iDEX/TDF startup or MSME	DAP 2020	Yes	Minimum 3%	Up to ₹250 crore cumulative
Defence acquisition, DPSU as vendor, single-vendor RFP	DAP 2020	Indemnity bond only	PWBG applicable	DPSUs and JVs with DPSUs only
Civil or administrative procurement at a DPSU	GFR 2022	Yes	Per GFR Rules 170 and 171	DFS September 2024 mandate applies

The GFR framework also applies when a DPSU procures goods or services that are not defence acquisitions: IT systems, facility management, non-defence equipment, consumables, and general-purpose contracts. For these, the September 2024 DFS directive is in force and an insurance surety bond should be accepted.

The iDEX and TDF Provision in Detail

iDEX (Innovations for Defence Excellence) funds startups and MSMEs to develop defence technology prototypes under the Defence Innovation Organisation. TDF (Technology Development Fund) is administered by DRDO and targets established MSMEs for component and subsystem development. Both programmes create a route for smaller entities to bid on defence orders.

For a startup or MSME with an iDEX or TDF order, the DAP 2020 provision means:

The standard 5% PWBG requirement does not apply
Performance security can be set at a minimum of 3% of the contract value
That security can be furnished as an insurance surety bond or a bank guarantee, at the entity's convenience
The cumulative cap of ₹250 crore covers all contracts under this provision, including repeat orders

This matters because iDEX and TDF recipients are often early-stage companies with no bank guarantee limit. A startup that has cleared technical validation can actually deliver on the contract without being blocked at the financial security stage. The IRDAI Surety Insurance Contracts Guidelines 2022 provide the regulatory framework under which licensed insurers issue these bonds.

How to Identify Which Framework Governs Your Contract

Read the security deposit or bid security clause in the tender document. These signals tell you which framework applies:

The contract is likely under GFR (ISB accepted) if the SBD references:

"General Financial Rules 2022" or "GFR Rule 170 / Rule 171"
"Insurance Surety Bond" listed alongside bank guarantee as an accepted instrument
Standard central government civil or administrative procurement language

The contract is under DAP 2020 (bank guarantee required) if the SBD references:

"Defence Acquisition Procedure 2020" or "DAP 2020"
"PWBG" or "Performance Cum Warranty Bank Guarantee"
An iDEX or TDF programme reference (this is the only DAP 2020 route to an ISB)

If the SBD is silent on insurance surety bonds:

For a civil/admin contract at a DPSU: you have standing to submit a written representation alongside the bond, citing the GFR 2022 amendment and DFS September 2024 directive. The approach is documented in the PSU acceptance guide for contractors. Most field-level rejections at central government entities resolve on this basis.
For a defence acquisition contract under DAP 2020: a representation letter does not work. The bank guarantee requirement in competitive bidding is a domain-specific rule, not a documentation gap.

Compliance Checklist

For contractors bidding on civil or administrative contracts at a DPSU (GFR framework):

Step	Action
Confirm the contract is non-defence civil procurement	Check the SBD for GFR references
Check the SBD for ISB language	If present, submit the bond as specified
If the SBD is silent	Submit ISB with a written representation citing GFR OM dated 2 February 2022 and DFS September 2024 directive
Verify insurer credentials	Confirm the issuing insurer holds an IRDAI licence for surety underwriting
Match bond specifics	Beneficiary name, penal sum, and validity must match the SBD exactly

For iDEX or TDF startups and MSMEs bidding on defence orders:

Step	Action
Confirm the order is issued under iDEX or TDF	Check the RFP for explicit iDEX or TDF reference
Confirm cumulative value	Total of all iDEX/TDF contracts including repeat orders must be within ₹250 crore
Confirm the rate	Performance security may be set at minimum 3% under the DAP 2020 carve-out
Choose ISB or BG	The provision is at the entity's convenience; ISB preserves working capital
Secure IRDAI-compliant bond	Work with a licensed insurer; confirm the bond format matches the PWBG requirement

For independent verification of bond acceptance for a specific tender in your pipeline, talk to an axiTrust consultant.

About axiTrust

axiTrust is a technology and consulting platform that helps MSMEs and contractors navigate the insurance surety bond process in India. The platform provides digital underwriting workflows, issuance support, and verification infrastructure that enables contractors to move from application to a confirmed bond faster and with a complete audit trail.

axiTrust does not underwrite or issue bonds. All underwriting decisions are made by IRDAI-licensed insurance companies. axiTrust helps contractors understand which bond is required, verify acceptance for their specific tender, and manage the bond process across contract stages.

Talk to an axiTrust consultant to verify ISB eligibility for your defence PSU tender before the submission deadline.

FAQs

Does the September 2024 DFS directive apply to HAL, BEL, and BEML procurement?

Yes, for their civil and administrative contracts under GFR 2022. It does not apply to defence acquisitions governed by DAP 2020.

Can a private company submit an insurance surety bond instead of a bank guarantee for a defence contract?

Not in competitive bidding under DAP 2020. Only iDEX and TDF startups and MSMEs have a specific provision allowing ISBs at minimum 3%, up to ₹250 crore cumulative.

What is the iDEX provision and who qualifies?

iDEX and TDF startups and MSMEs can furnish performance security as an insurance surety bond at minimum 3%, instead of the standard 5% PWBG, for orders up to ₹250 crore cumulative.

Why is the Indian Navy not accepting insurance surety bonds from private shipbuilders?

DAP 2020 requires bank guarantees from private contractors in competitive bidding. The rule has not changed as of July 2026, though the Shipyards Association of India has called for an amendment.

What should a contractor do if their DPSU SBD is silent on insurance surety bonds?

For civil GFR contracts, submit a written representation citing the GFR 2022 amendment and DFS September 2024 directive. For DAP 2020 defence acquisitions, a representation does not apply; a bank guarantee is required.

References

India Seatrade News. Private shipyards face uncertainty due to non-acceptance of surety bonds for defence contracts. January 21, 2025. https://indiaseatradenews.com/private-shipyards-face-uncertainty-due-to-non-acceptance-of-surety-bonds-for-defence-contracts/

Ministry of Defence. Defence Acquisition Procedure 2020 (as amended). https://www.mod.gov.in/sites/default/files/DAP2030new.pdf

PIB. Defence Acquisition Procedure 2020 amended to promote Make in India and Aatmanirbharta in defence. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1819937

Ministry of Finance, Department of Expenditure. Amendment to General Financial Rules 2017 to Include Insurance Surety Bonds as Security Instrument. Office Memorandum No. F.1/1/2022-PPD, February 2, 2022. https://doe.gov.in/files/procurement-policy-division/Amendment_to_General_Financial_Rules_2017.pdf

PIB. Insurance Surety Bonds for NHAI Contracts Crosses Rs. 10,000 Crore Landmark. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2165663

IRDAI. Surety Insurance Contracts Guidelines 2022. Ref. No. IRDAI/NL/GDL/SIC/01/01/2022, January 3, 2022. https://irdai.gov.in/documents/37343/366029/IRDAI+(Surety+Insurance+Contracts)+Guidelines+20220103_signed.pdf/3cc74752-2c32-c008-c7a1-303874c2e497

Indian Infrastructure. Promising Instrument: Surety bonds emerge as a preferred option for the infrastructure sector. July 3, 2026. https://indianinfrastructure.com/2026/07/03/promising-instrument-surety-bonds-emerge-as-a-preferred-option-for-the-infrastructure-sector/

axiTrust. PSUs Accepting Insurance Surety Bonds in India: Verified List 2026. https://www.axitrust.com/blog/psus-accepting-insurance-surety-bonds-india