Earnest Money Deposit (EMD) - Explained in Hindi - YouTube

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Namashkar, my name is Mukul and welcome to Asset Yogi

Where we unlock the knowledge of finance rather than locking it

Whenever you go for a big deal

For example, a real estate deal

or maybe one company want to buy another company

Maybe you want to invest in a big project

or you may want to pick a government project and you have to place your tender

or this tender may be for any private company

In these big deals, you might have heard a term known as Earnest Money Deposit

What does earnest money deposit mean and why is it used in these big deals?

How does this concept work in these deals?

In this video, we'll understand all these points

So watch this video till the end so that you understand the concept properly

Let's switch to the blackboard

In short, Earnest Money Deposit is called EMD

If we talk about its definition

Earnest money is a type of security deposit used in big transactions

Basically, the seriousness of a buyer is checked

Earnest means sincere or serious so whenever a buyer or multiple buyers are involved in large transactions

To check their seriousness, a token amount is taken

This token amount is called earnest money

and generally, it is 1-2% of the transaction amount

Let's say there is a deal worth Rs 1 Cr then the EMD can vary between Rs 1-2 lakhs

What is the role of EMD in real estate deals?

Let's understand an example of real estate transfer

Let's say this is a buyer, a seller and this is a property

The seller wants to sell this property at Rs 50 lakhs and the deal closes at Rs 50 lakhs

In this case, the buyer will give EMD to the seller

And EMD is called token amount in India

So the buyer can give any amount between Rs 50k to Rs 1 lakhs to the seller

So this amount is a type of a token amount

For the insurance of not selling this property to anyone else

This is not the advance amount

Firstly, a token amount is given to the seller and after that in the second step, an advance is given

This amount is a big amount of around 10%

In the case of Rs 50 lakhs, you have to give Rs 5 lakhs in advance

and an agreement to sell is signed while giving the advance

In EMD, there is no agreement to sell signed. Only a receipt is taken

showing that the seller agreed to sell the property to the buyer

Once you paid the advance, you have to pay the rest of the payment in the 3rd step

and you get 2-3 months time to pay the remaining amount

I have already discussed the whole process in detail

How to buy ready to move property, how to buy an under-construction property?

You can watch these videos of mine and you'll get the whole process of buying a real estate property

So I was highlighting the concept of EMD

EMD means a token amount or earnest money deposit

So this was about the real estate transaction

Similarly, if you want to involve EMD in a business transaction then you can definitely do it

Let's say there is a project or a small business that a big company want to buy

In that also, EMD can be involved

Now let's take an example of a project

Let's say a government or a private contract is announced and multiple companies are interested in that

Let's say there is a road project worth Rs 500 Cr

Let's say 4 companies are interested in this

So all these 4 companies will bid here

We call it bid or tender. So they place their bids

And a government project is appointed only after the bidding process

In fact, in today's date, private companies also call multiple companies or vendors

And then only a project is awarded after the bidding process

When these companies will do the bidding, to check their seriousness

A bid bond is signed

We can call EMD as bid bond as well

Maybe in a tender you hear EMD and bid bond in another one

There can be bid security and tender security

So the meaning is exactly the same

And as I told you before, it is 1-2% of the project cost

So if this project is worth Rs 500 Cr, then all these companies will have to pay Rs 5 Cr each as bid security

So in this way, all these companies will pay Rs 5 Cr each

After this when the bid will open, let's say company B had the lowest bid

In this case, they will award this company and

and the other companies will get the bid security amount back

It is returned within 2-3 months. So it will be returned to the 3 companies

But the company that won the award will not get the bid amount back

So in the further process, project security has to be filled

Project security is around 10%. So in this case, it will be Rs 50 Cr

Out of Rs 50 Cr, Rs 5 Cr bid bond will get adjusted and the company B would have to pay Rs 45 Cr project security to do this project

In this way, the bidding process goes and the main role of the bid bond is to check the seriousness of the companies

so that anyone doesn't leave the bid in between. This is the main purpose

Let me show you the exact clause that how the bid security is asked in a contract and what are the clauses

I have this exact clause of a contract whose actual cost is Rs 500 Cr

So if the estimated project cost is Rs 500 Cr. This is actually the estimated cost, later on, the bidders pay the actual cost

So if the estimated cost is Rs 500 Cr

The bid security asked is 50 Million, i.e Rs 50 Cr

So let's read the exact clause

In terms of the RFP, it is a bid document and its full form is Request For Proposal

A bidder will be required to deposit, along with its bid, a bid security equivalent to INR 50 million, i.e Rs 5 Cr

the bid security is refundable and it is refunded to all those who didn't win the bid

not later than 60 days from the bid due date

On the date when the bid is opened, it is to be returned under 60 days from that date

Except in the case of the highest bidder

The bid security of the highest bidder is not returned. Instead, it is subtracted from the project security

And how is it filled?

One option is the demand draft. So the bidders can fill the demand draft

Or irrevocable or unconditional bank guarantee

as per the format in RFP. So there is a format given in the RFP and according to that, a bank guarantee is given

acceptable to the authority and in such event, the validity period of the demand draft or bank guarantee, as the case may be,

shall not be less than 180 days from the bid due date

So whenever there is a bid due date, you have to give 6 months validity

Whatever demand draft or bank guarantee you will fill as EMD or bid security,

the validity should be at least 180 days

This is basically the clause written in this particular contract

Different clauses can be written in different contracts

Here we are only talking about 1% EMD

In some cases, it can be 1 or 2% also

But generally, it is not more than 2-3%

I mean it is less than 3% so it lies somewhere between 1-3% in any contract

Similarly, in real estate transactions also, we give 1-2% token amount or EMD

I tried to cover all the major points in this video

But still, if there was any point missing or you want to add something then you can comment down below

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