Background and Shift to Principle-Based Framework

On January 6, 2026, the Reserve Bank of India (“RBI”) notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (“Guarantee Regulation 2026”), superseding the Foreign Exchange Management (Guarantees) Regulations, 2000 (“Erstwhile Regulations”). The Guarantee Regulations 2026 adopt a principle-based approach to cross-border guarantees, replacing the older approval-heavy regime. Under the Erstwhile Regulations, Indian residents generally required RBI approval for guarantees involving non-residents, with only narrow exceptions. The Guarantee Regulations 2026, by contrast, permit such guarantees broadly so long as the underlying transactions comply with the Foreign Exchange Management Act, 1999 (“FEMA”) regulations and the parties satisfy the prescribed eligibility criteria.

This marks a fundamental shift, in the sense that instead of requiring RBI’s permission on a case-by-case basis, guarantees by Indian parties are now broadly allowed if they meet clear, rule-based conditions. The goal is to facilitate legitimate international trade, investment and financing guarantees while maintaining discipline and transparency.

Key Definitions

To clarify the regime’s scope, the Guarantee Regulations 2026 expressly defines the below key terms to mean:

·          Creditor: A person to whom the guarantee is given;

·          Guarantee (including counter-guarantee): A contract, by whatever name called, to perform the promise or discharge a debt, obligation or other liability (including a portfolio of debts or obligations) in case of default by the principal debtor;

·         Principal Debtor: A person in respect of whose default the guarantee is given; and

·          Surety: A person who gives a guarantee.

By clarifying that guarantees include counter-guarantees and portfolio guarantees, the Guarantee Regulations 2026, bring structured finance and multi-obligation arrangements clearly within the FEMA framework.

Prohibition and Regulatory Scope

The Guarantee Regulations 2026 state that, save as otherwise permitted under FEMA or with RBI approval, no person resident in India shall be a party (as principal debtor, surety or creditor) to a guarantee where any other party is a person resident outside India, except in accordance with these regulations.

This retains the core FEMA principle that foreign-exchange transactions involving Indian residents require explicit allowance. The prohibition clause serves as a gatekeeper. If the guarantee arrangement does not fall under the permitted categories set out below, RBI approval remains necessary.

Key Exemptions

The following guarantee categories are explicitly excluded from the scope of the Guarantee Regulations 2026, avoiding overlap with other regulations:

·          Foreign Authorised Dealer (“AD”) Branch/ International Financial Services Centre (“IFSC”) Guarantees: A guarantee undertaken by a branch of an AD bank outside India, or by an AD unit in an IFSC, is exempt, provided no party to the guarantee is an Indian resident. In practice, this means purely foreign or IFSC-based bank guarantees are outside the purview of these regulations.

·          Foreign Portfolio Investor (“FPI”) Payment Commitments: An irrevocable payment commitment issued by an AD bank acting as a custodian for a registered FPI, where the principal debtor is the FPI and the creditor is an authorised central counterparty in India, is exempt. This preserves the existing framework for FPIs’ payment commitments without subjecting them to duplicate regulations.

·          Overseas Investment Guarantees: Any guarantee given in accordance with the FEMA (Overseas Investment) Regulations, 2022 is exempt. In other words, guarantees related to regulated overseas investments (such as guarantees on outward foreign direct investments) are governed by such regulations and not by the Guarantee Regulations 2026.

These targeted exemptions align the Guarantee Regulations 2026 with the broader FEMA architecture, avoiding unnecessary duplication. If a guarantee falls within one of these categories, the Guarantee Regulations 2026 do not apply to it.

Permissible Guarantees: Role-Based Permissions

The Guarantee Regulations 2026 adopt a structured, role-based permissions framework depending on whether the resident Indian is acting as a surety, a principal debtor or a creditor.

1.        Resident Acting as Surety or Principal Debtor:

Regulation 5 of the Guarantee Regulations 2026 permits an Indian resident to act as a surety (guarantor) or as the principal debtor on a guarantee, subject to 2 (two) main conditions:

·         Lawful Underlying Transaction: The underlying transaction must not be prohibited under FEMA or rules, regulations or directions issued thereunder.

·         Borrowing/Lending Eligibility: The surety and principal debtor must be eligible to lend to and borrow from each other, respectively, under the FEMA (Borrowing and Lending) Regulations, 2018 (as amended).

If both conditions are satisfied, RBI approval is not required and the guarantee is permitted. This effectively ties guarantee permissibility to the existing rules for external commercial borrowings. An Indian company can guarantee a foreign obligation as long as the original transaction is allowed and the parties can lawfully lend to/borrow from each other.

Exceptions to Borrowing/Lending Eligibility Requirement

The eligibility test recognise the following common arrangements:

• AD Bank Guarantees: If an AD bank issues the guarantee and it is fully secured (i.e., backed by a counter-guarantee or 100% cash/non-interest-bearing deposit from the foreign party), the borrowing/ lending eligibility requirement is waived. A fully secured bank guarantee is deemed low-risk, so no further test is needed.

• Shipping/Airline Guarantees: If an Indian agent of a foreign shipping or airline company issues a guarantee for the company’s statutory or government dues in India (e.g. port dues or aviation fees), the eligibility requirement is waived.

• Domestic Guarantees: If both the surety and the principal debtor are resident in India, the eligibility test is naturally irrelevant (since it is essentially a domestic transaction) and is waived.

In effect, these provisions create a balanced, role-based framework. An Indian resident may give or receive cross-border guarantees provided the transaction is lawful under FEMA and any borrowing/lending conditions (if applicable) are met, with common exceptions for secured bank guarantees and standard carrier guarantees.

2.       Obtaining Guarantees as a Creditor:

Regulation 6 of the Guarantee Regulations 2026, addresses the scenario where the Indian resident is a creditor (the guarantee beneficiary). It expressly permits an Indian creditor to arrange or obtain a guarantee in its favour even if both the principal debtor and the surety are non-residents, provided the underlying transaction is permitted under FEMA. In practice, this means an Indian company can secure a guarantee from foreign parties for an overseas obligation without RBI approval, as long as that obligation (the underlying contract) is FEMA-compliant. This explicitly brings inbound guarantee arrangements (in favour of Indian entities) under the automatic permissions, subject only to FEMA compliance.

To sum up, Regulations 5 and 6 allocate permissions based on the role of the Indian party (surety, principal debtor, or creditor). If a guarantee transaction meets these role-based conditions, it proceeds under the automatic route. If not, the parties must seek RBI’s explicit permission under FEMA.

Reporting and Compliance Obligations

The Guarantee Regulations 2026 introduce a new quarterly reporting framework for guarantees. Any guarantee covered by these regulations must be reported to RBI through the AD bank.

Who to Report: The designated Indian resident party involved in the guarantee must file the report:

·          The resident surety- If a guarantee involves a foreign obligor.

·          The resident principal debtor- If he arranged the guarantee and the surety is a non-resident.

·          The resident creditor- If both the surety and principal debtor are non-residents or if the creditor arranged the guarantee.

In each case, exactly 1 (one) Indian party is responsible for reporting each guarantee. This ensures clear accountability.

What to Report: The reporting party must submit details of the guarantee’s lifecycle events:

·          Issuance: The initial guarantee issuance.

·          Amendments/Modifications: Any changes to the guarantee terms, including changes in the amount, extensions of tenure, or pre-closure.

·          Invocation: Any invocation or call on the guarantee (i.e., when the guarantee is claimed).

Thus, each new guarantee, any material amendment and any invocation must be reported.

When and How to Report: Reports are made quarterly. The resident party must submit the report to the AD bank within 15 (fifteen) calendar days from the end of the quarter. The AD bank then forwards consolidated returns to RBI within 30 (thirty) calendar days from the end of the quarter, using RBI’s prescribed format (Form GRN).

This formal quarterly reporting requirement is a major new compliance obligation. Previously, guarantees were not subject to dedicated periodic reporting under FEMA. Indian companies, branches and banks will now require to put in place processes to capture guarantee data and meet the strict timelines.

Late Submission Fee

The Guarantee Regulations 2026 has introduced a structured late submission fee (“LSF”) regime to enforce timely reporting. Where reporting obligations are delayed, the resident Indian must pay the LSF. The LSF is calculated as follows:

·          A base amount of INR 7,500/- (Indian Rupees Seven Thousand and Five Hundred Only);

·          Plus 0.025% (zero point zero two-five per cent) of the amount involved in the delayed report, for each year (or part of a year) of delay. The delay is measured in years and rounded up to the next full month.

·          The total LSF (base plus delay charge) is then rounded up to the nearest INR 100/- (Indian Rupees Hundred Only).

Example: A delay of 1 (one) year on INR 10,00,00,000/- (Indian Rupees Ten Crores Only) guarantee would result in a fee of INR [7,500 + (0.025%×100,000,000×1)]/- = INR 32,500/- (Indian Rupees Thirty-Two Thousand and Five-Hundred Only). This formalises penalties for late filings and replaces the earlier practice of seeking compounding for delays. The LSF mechanism serves as a deterrent and allows companies to self-assess LSF for reporting delays, providing transparency on penalties.

Compliance Steps and Key Takeaways

In essence, the Guarantee Regulations 2026 reflect a calibrated regulatory approach on:

·          Reduced ex-ante approvals;

·          Greater reliance on eligibility conditions; and

·          Enhanced ex-post reporting oversight.

Key actions for businesses and advisors include:

·          Review Guarantee Arrangements: Identify all existing cross-border guarantees and examine their underlying transactions. Confirm that those underlying contracts are permitted under FEMA. Determine whether each guarantee now falls under the automatic permissions (meeting the above conditions) or whether it still requires RBI approval, renewal or cancellation.

·          Check Eligibility Conditions: For any guarantee given by or for an Indian resident, verify that the parties meet the borrowing/lending eligibility test under the FEMA (Borrowing and Lending) Regulations, 2018. If the test is not met, consider restructuring (for example, adding collateral) or falling within one of the exceptions, so that the guarantee can qualify under the automatic route.

·          Implement Reporting Controls: Since quarterly reporting is mandatory, set up processes to track each guarantee’s issuance and changes. Clearly assign the reporting responsibility to the correct Indian party (surety, debtor or creditor) as per the rules. Work with the AD bank to file the required Form GRN on time after each quarter-end.

·          Plan for LSF: Incorporate awareness of the new LSF into compliance budgets and procedures. A missed deadline now results in a calculable penalty, so companies should aim for timely reporting or be prepared to compute and pay LSF for any delays.

By taking these steps, entities can align their internal controls with the new regime and avoid enforcement issues.

Conclusion

The Guarantee Regulations 2026 represent a modernized, principle-driven framework for cross-border guarantees. By replacing the old list-based approvals with broad eligibility conditions, RBI has eased compliance for legitimate international guarantees. At the same time, clear definitions, targeted exemptions, stringent reporting requirements and a formal penalty for late filing reinforce discipline and oversight. Legal and compliance professionals should ensure that any cross-border guarantee is grounded in a FEMA-compliant transaction and that robust reporting processes are in place. With these updates, India’s guarantee regime is better aligned with international practices while safeguarding financial stability and transparency.