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The Reserve Bank of India (“RBI”) has notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (“Guarantees Regulations 2026”), replacing the Foreign Exchange Management (Guarantees) Regulations, 2000 (“Guarantees Regulations 2000”). Issued under the Foreign Exchange Management Act, 1999 (“FEMA”), the new regulations aim to comprehensively govern cross-border guarantees involving persons resident in India and persons resident outside India. The framework signifies a shift from an approval-centric, fragmented regime to a principle-based structure focused on regulatory certainty, transparency, and consistency.
The Guarantees Regulations 2026 establish an overarching framework covering prohibitions, exemptions, permissions, reporting obligations, and consequences of non-compliance. Unlike the earlier regime, which primarily addressed resident guarantors, the new regulations apply whenever a resident becomes a party to a guarantee involving a non-resident, whether as a principal debtor, surety, or creditor. The regulations expressly define these roles and link permissibility to compliance with FEMA and allied regulations governing borrowing, lending, and overseas investment.
The Guarantees Regulations 2026 impose a general prohibition on persons resident in India from being parties to guarantees involving non-residents, except in accordance with the regulations. Specifically, a resident may not act as a principal debtor, surety, or creditor in relation to a guarantee where any other party is a person resident outside India, unless such participation is expressly permitted. This prohibition establishes a uniform regulatory baseline for all cross-border guarantees involving residents.
The regulations carve out specific exemptions to the general prohibition. These include guarantees undertaken by branches of authorised dealer banks located outside India or in an International Financial Services Centre, provided none of the other parties is a resident in India. Exemptions also extend to irrevocable payment commitments issued by authorised dealers acting as custodian banks, where the principal debtor is a registered Foreign Portfolio Investor and the creditor is an authorised central counterparty in India. Additionally, guarantees issued in accordance with the Foreign Exchange Management (Overseas Investment) Regulations, 2022 fall outside the scope of the prohibition.
A person resident in India may act as a surety or principal debtor under a guarantee, subject to compliance with FEMA. The underlying transaction must be permitted, and the surety and principal debtor must be eligible to lend to and borrow from each other under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. This reflects the regulatory treatment of guarantees as substitutes for cross-border credit exposure and subjects them to corresponding prudential discipline.
These conditions do not apply in certain cases, including where an authorised dealer bank issues a guarantee against a counter-guarantee or 100% non-resident cash collateral, where an Indian agent issues a guarantee on behalf of a foreign shipping or airline company for statutory or governmental obligations in India, or where both the surety and principal debtor are residents in India.
Permission to Obtain Guarantee as a Creditor
The Guarantees Regulations 2026 also recognise the ability of residents to obtain guarantees in their favour as creditors. A person resident in India may obtain a guarantee where both the principal debtor and the surety are persons resident outside India and the underlying transaction is permitted under FEMA. By equating guarantees with credit exposure, the regulations ensure that such arrangements are subject to the same prudential standards applicable to cross-border lending.
A key innovation under the Guarantees Regulations 2026 is the introduction of a structured, residency-based reporting mechanism. Responsibility for reporting depends on the residency of the parties and the entity that arranged the guarantee. Reporting obligations may lie with the resident surety, the resident principal debtor who arranged the guarantee where the surety is a non-resident, or the creditor where both the principal debtor and surety are non-residents.
Reporting is required for the issuance of guarantees, subsequent changes in terms including changes in amount, extensions, pre-closures and invocation of guarantees. Such reporting must be made to an authorised dealer bank on a quarterly basis within fifteen calendar days from the end of the relevant quarter. The authorised dealer bank must forward the information to the RBI within thirty calendar days from the end of the quarter.
The Guarantees Regulations 2026 introduce a quantified mechanism for regularising delays in reporting. A person resident in India may regularise non-compliance by completing the required reporting and paying a late submission fee calculated as ₹7,500 plus 0.025% of the amount involved, multiplied by the period of delay, rounded to the nearest month, with the final amount rounded up to the nearest hundred. This replaces the discretionary enforcement model under the earlier regime with a predictable, compliance-oriented approach.
The Guarantees Regulations 2026 mark a significant evolution in the regulation of cross-border guarantees under FEMA. By replacing an approval-centric framework with a comprehensive, principle-based regime, the regulations provide clarity on permissible participation, delineate the roles of parties, and establish structured reporting and regularisation mechanisms. By enhancing transparency, defining compliance obligations, and reducing regulatory uncertainty, the Guarantees Regulations 2026 strengthen regulatory oversight while facilitating the ease of doing business in cross-border guarantee transactions.
Expositor(s): Adv. Archana Shukla
