Abstract

Cross-border guarantees is an integral part of international business finance. Guarantees can be given by an Indian company in relation to any borrowing made by a subsidiary of the Indian company in respect of a foreign country and vice versa. The transactions can give rise to contingent foreign exchange liabilities and thus be subject to the regulation of Foreign Exchange Management Act, 1999 (FEMA).

The Foreign Exchange Management (Guarantees) Regulations, 2026 provide for a new regime for guarantees with persons resident in India and persons resident outside India. The regulation follows the previous one issued in 2000 and aims at offering a more comprehensive framework of guarantees issuance, modification and invocation. The next reporting framework by the RBI also mandates reporting of guarantees issued, modified and invoked.

This article explores the legal framework of cross-border guarantees in the FEMA, the prior regime (2000) and the new regime (2026), and assesses the implications of the changes for Indian companies, multinational groups and financial institutions. It also examines if the new framework actually does simplify compliance or whether it moves the compliance focus further to ongoing reporting and monitoring requirements.

Introduction

The Reserve Bank of India (RBI) issued the Foreign Exchange Management (Guarantees) Regulations, 2026 which superseded the earlier Foreign Exchange Management (Guarantees) Regulations, 2000 in January 2026.

Multinational companies and cross-border investments have proliferated as business ventures in India are now more likely to venture abroad. In this context, guarantees provided in relation to international transactions have also become an integral element of commercial and financing transactions. It is over 20 years since the Foreign Exchange Management (Guarantees) Regulations, 2000 were brought in and the regulatory regime in place under these regulations, has not been always appropriate to the complexity and diversity of transactions that have emerged over the years.

In this regard the Foreign Exchange Management (Guarantees) Regulations, 2026 aim to fix this problem through a transactional perspective. The new framework gives great importance to the permission of the underlying transaction under the Foreign Exchange Management Act, 1999 (FEMA) for the issue of an overseas guarantee. In this regard, the regulations abandon the idea of the guarantee as a single contract and turn to the question of the legality of the contract in question.

The 2026 Regulations also give more focus on transparency and regulatory monitoring. In a formal reporting framework, relevant guarantees, including subsequent modifications, and situations where they are invoked, would need to be reported on a quarterly basis via authorised dealer banks (AD banks) and then the necessary information to be reported to the Reserve Bank of India.

The new framework could also impact on various matters other than regular compliance, especially in the context of foreign judgments and foreign arbitral awards enforcement disputes in India. Some Indian debtors have been using alleged breaches of FEMA or the previous guarantee regulations to oppose enforcement. The implications of the changes that are proposed for 2026 could thus affect the scope of possible regulatory objections being raised as technical objections in enforcement proceedings.

This discussion highlights the key aspects of the 2026 Regulations and whether the new structure provides greater clarity in relation to cross-border transactions, less grounds for technical objections in enforcement actions, and allows for more efficient compliance and repayment.

In response to the comments received from the stakeholders on the Draft – Foreign Exchange Management (Guarantees) Regulations, 2025 (Draft Guarantee Regulations) released on 14 August 2025 by the RBI, RBI has finalised the Regulations.

The 2026 Regulations include the following features:

To the extent that this is permitted, General restricts the granting of guarantees.

The 2026 Regulations introduce a blanket prohibition for a Person Resident in India (PRI) from being a party to a guarantee where any other party to the guarantee is a non-resident. It can be guaranteed only if the transaction is allowed under the Foreign Exchange Management Act, 1999 (FEMA) and the rules or regulations issued under it or in general or special permission granted by the Reserve Bank of India (RBI).

Eligibility of a party to act as Surety or Principal Debtor:

In terms of the 2026 Regulations, a Person Resident in India can be a surety or a principal debtor in relation to a guarantee, only where the underlying transaction is not prohibited under FEMA or the rules and regulations under FEMA. Moreover, the parties should have the authority to lend or borrow in accordance with Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

The right for Residents to obtain guarantees:

The Regulations allow a creditor who is a Person Resident in India to obtain a guarantee from a non-resident creditor in its favour if underlying transaction is not barred under FEMA or rules and regulations issued under it.

There are exemptions for General Requirements:

The 2026 Regulations make exceptions to some of the general requirements. These include:

1.The overall requirement of the Regulations are waived for guarantees issued by overseas/IFSC branches of Authorised Dealer banks.

  1. An Irrevocable Payment Commitment (IPC) made by an Authorised Dealer as a custodian bank is exempted. While IPC was specifically defined under the 2000 Regulations, there is no specific definition in the 2026 Regulations. While awaiting clarity from the regulators, market participants may continue to apply IPCs with the understanding and treatment in place as per the previous regulatory framework.
  2. “Guarantees” under the Overseas Investment Regulations, 2022: Guarantees issued pursuant to the Foreign Exchange Management (Overseas Investment) Regulations, 2022 are not covered by the general requirements of the 2026 Regulations.

Reporting Requirements

In contrast to the erstwhile FEMA Guarantee Regulations, the New Guarantee Regulations introduce a broader reporting framework corresponding to the expansion of guarantees permitted under the automatic route. The Regulations require comprehensive reporting of guarantees, including their issuance, modification, and invocation, based on the residential status of the parties involved.

The responsibility for reporting a guarantee is determined as follows:

  1. Surety is a PRI: Where the surety is a Person Resident in India (PRI), the surety is responsible for reporting the guarantee.
  2. Surety is a PROI: Where the surety is a Person Resident Outside India (PROI), the principal debtor who arranged the guarantee is responsible for reporting it.
  3. Surety and principal debtor are PROIs / creditor arranged the guarantee: Where both the surety and principal debtor are PROIs, or where the guarantee has been arranged by the creditor, the creditor is responsible for reporting the guarantee.

The person responsible for reporting is required to report the following events in the prescribed format under the New Guarantee Regulations:

  • Issuance of the guarantee;
  • Any modification to the guarantee, including changes in the guaranteed amount, extension of the guarantee, or early closure of the facility or guarantee; and
  • Invocation of the guarantee, wherever applicable.

Timeline and Mode of Reporting

The reporting is required to be undertaken quarterly, within 15 calendar days from the end of each calendar quarter, by submitting the prescribed information to an Authorised Dealer (AD) bank.

The AD bank is then required to forward the relevant returns to the Reserve Bank of India (RBI) within 30 calendar days from the end of the relevant quarter.

Late Reporting

Where a PRI responsible for reporting fails to submit the required information within the prescribed timeline, the reporting may subsequently be completed along with the payment of the applicable Late Submission Fee (LSF), in accordance with the provisions of the New Guarantee Regulations.

Consequences of non-compliance with the reporting requirements

The 2026 Regulations permit Indian residents who fail to comply with the reporting requirements to do so at a later stage upon payment of a late submission fee. Thus, it seems that the new Regulations follow the principle that in cases where requisite RBI permission has not been obtained for issuing a guarantee, the only consequence is delayed reporting of the guarantee, along with payment of a late submission fee. The necessary implication, without expressly stating it, is that the violation can be regularised and non-compliance does not render the guarantee unenforceable, which is also in line with the interpretation mae by courts, discussed below.

Underlying Transaction as the Regulatory Anchord

One of the features of the 2026 Regulations is the emphasis placed on the underlying transaction. A guarantee should not be examined in isolation from the transaction that it supports. Where an Indian resident participates as a surety or principal debtor the regulatory analysis requires consideration of whether the underlying transaction’s prohibited under FEMA and whether the parties satisfy the applicable borrowing and lending requirements.

This approach is commercially significant because a guarantee is generally an obligation. Its existence is connected to an underlying obligation such as a loan, financing arrangement or other commercial transaction. By linking the permissibility of the guarantee to the transaction the 2026 framework seeks to ensure that guarantees do not become a mechanism for indirectly supporting transactions that would otherwise be impermissible, under FEMA.

Common Objections to the Enforcement of Guarantees and Judicial Approach

The courts and tribunals in India, however, have generally distinguished between a contravention of the rules of FEMA and the validity or enforceability of the underlying commercial transaction. The courts have found that the main purpose of FEMA is to provide a regulatory regime for foreign exchange transactions, and that failure to comply with the provisions does not automatically vitiate or make unenforceable any commercial contract.

The judicial route also has accepted the retrospective availability of RBI permission, if required, in suitable cases where permission to operate was not secured at the time but was deemed to have been secured subsequently. The failure to obtain advance approval does not make a basis for a refusal to enforce a foreign judgment or award in India, where the contravention can be regularised or condoned.

In a landmark ruling, the Supreme Court in the case of Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors., (2020) 11 SCC 1 granted permission to enforce a foreign arbitral award over a foreign transaction on the argument that the latter was inconsistent with the provisions of the FEMA. The Court has also found that if such prior RBI permission was subsequently amenable to being addressed within a regulatory framework, then failing to secure such permission did not automatically render the foreign award unenforceable in India. After this ruling by the Supreme Court, several High courts have taken a similar approach. The National Company Law Tribunal, Delhi, has also rejected objections filed by a guarantor to insolvency proceedings filed by a foreign creditor on FEMA grounds.

Despite this judicial method, objections continue to be raised by guarantors in the enforcement proceedings involving FEMA. Such objections may lead to further litigation, to higher expense and to a postponement of amount recovery under foreign judgments and arbitral awards. The scope for such technical challenges is likely to be further reduced by the 2026 Regulations, given the specific provisions that allow for the regularisation of some procedural or reporting shortcomings, such as late reporting of issuance of guarantees. Therefore, the fact that there is a technical non-compliance – which can be regularised in the future – may play a more limited part in challenging enforcement proceedings.

Conclusion

The Regulations 2026 are a major overhaul of the statutory provisions to allow them to meet the demands of contemporary commercial activity. This strategy, where guarantees are permitted only where underlying transactions are permitted, as well as a structured reporting regime, will seek to provide increased clarity and transparency to overseas guarantee arrangements. The new rules are also an effort to enhance compliance and oversight of foreign financial operations.

The principle of introducing reporting requirements and regularisation by payment of the fee for late submission is consistent with the judicial reasoning that the use of its own regulatory default should not allow a guarantor to escape the obligations of reporting requirements. The effect of these changes on the litigation on enforcement will remain to be seen. It will be up to the implementation of these changes whether they will actually make a significant difference at the enforcement stage. But a shift in the regulatory focus to ensure compliance and accountability is a positive move in the right direction.

Overall, the 2026 Regulations indicate a move towards a more compliance-based and transparent approach to guarantees under FEMA. Their success will rely on how the new provisions in the legislation will be interpreted and applied by courts in the years ahead, especially in terms of enforcement litigation.

Author : Ketan Joshi, Associate Partner
Co-Author : Divyanshu Rai, Intern

  1. https://fifp.gov.in/Forms/FEMA_1999.pdf
  2. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13269&Mode=0
  3. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12381
  4. https://api.sci.gov.in/supremecourt/2019/11180/11180_2019_4_1502_20493_Judgement_13-Feb-2020.pdf

 

FAQs

What are the FEMA (Guarantees) Regulations, 2026?

The Foreign Exchange Management (Guarantees) Regulations, 2026, issued by the Reserve Bank of India (RBI), establish the regulatory framework for guarantees involving persons resident in India and persons resident outside India. They replace the earlier FEMA (Guarantees) Regulations, 2000, and introduce a structured framework governing cross-border guarantees.

The regulations aim to establish a more comprehensive framework for cross-border guarantees by clarifying the obligations of the parties involved and strengthening reporting and compliance requirements. They provide a structured approach to guarantees issued, arranged, modified, or invoked in transactions involving non-residents.

A cross-border guarantee is a contractual undertaking to discharge a debt, obligation, or liability if the principal debtor defaults, where the transaction involves a person resident in India and a person resident outside India. Depending on the transaction structure, the guarantee may involve an Indian company, a foreign parent company, an overseas lender, or another eligible party.

The principal debtor is the person whose default triggers the guarantee. The surety is the person providing the guarantee, while the creditor is the person in whose favour the guarantee is given. Identifying these parties is important because the applicable regulatory conditions depend on their respective roles and residential status.

The regulations primarily address guarantees involving persons resident outside India. Accordingly, a guarantee involving only persons resident in India, without a relevant cross-border element, would not ordinarily fall within their scope merely because it is a guarantee. Other applicable laws and regulations may nevertheless govern the transaction.

An Indian company may provide a guarantee in connection with the borrowing of its foreign subsidiary, subject to the applicable FEMA framework and the conditions governing the relevant transaction. The parties should examine the nature of the borrowing, the residential status of the parties, the applicable borrowing and lending regulations, and any sector-specific restrictions before issuing the guarantee.

A foreign parent company may provide a guarantee supporting obligations of its Indian subsidiary, subject to the applicable Indian regulatory framework. The transaction must be examined in light of the relevant FEMA provisions, the underlying borrowing or commercial arrangement, and any applicable reporting requirements.

No. A blanket requirement to obtain prior RBI approval for every cross-border guarantee should not be assumed. The regulatory treatment depends on the nature of the guarantee, the parties involved, and the applicable FEMA provisions. Transactions that do not satisfy the conditions for a permitted route may require specific regulatory approval.