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The New Guarantee Framework replaces the approval-heavy erstwhile regime with a principle-based approach under which cross-border guarantees are generally permitted, subject to FEMA compliance and borrowing eligibility conditions.
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The New Regulations provide clearer and broader definitions (including counter-guarantees and portfolio-based obligations) and expressly address inbound guarantees and IFSC-related exemptions.
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A quarterly lifecycle-based reporting framework through Form GRN has been introduced, supported by a Late Submission Fee mechanism to regularise procedural delays and reduce reliance on compounding.
Introduction:
On January 06, 2026, the Reserve Bank of India (“RBI”), as part of its efforts to rationalise and streamline the regulatory framework governing cross-border guarantees, notified the Foreign Exchange Management (Guarantees) Regulations, 20261 (“New Regulations”), replacing and superseding the two-and-a-half-decade old Foreign Exchange Management (Guarantees) Regulations, 20002 (“Erstwhile Regulations”).
Outlined below are the principal distinctions between the New Regulations and the Erstwhile Regulations:
Regulatory Approach Shift:
The Erstwhile Regulations operated under a restrictive framework in which guarantees by Indian residents in favour of non-residents were generally prohibited unless expressly permitted under specific categories, resulting in transaction-specific approvals and, in some cases, interpretational uncertainty. Regulation 3 imposed a broad prohibition, while Regulations 3A, 4 and 5 carved out limited circumstances where cross-border guarantees were permissible, including those linked to structured obligations under the External Commercial Borrowing (“ECB”) framework3 guarantees issued by Authorised Dealer (“AD”) banks, and certain guarantees by other resident entities. Transactions outside these categories required prior RBI approval, reflecting a transaction-based approach.
In contrast, the New Regulations (particularly Regulations 5 and 6) adopt a principle-based compliance framework under which guarantees are generally permitted, provided the underlying transaction is not prohibited under FEMA and the parties satisfy the lending and borrowing eligibility conditions under the Foreign Exchange Management (Borrowing and Lending) Regulations, 20184 (“Borrowing & Lending Regs”).
Regulation 5 of the New Regulations governs cases where an Indian resident party acts as either the surety or the principal debtor. In such situations, a cross-border guarantee is permitted if: (a) the underlying transaction is not prohibited under FEMA; and (b) the surety and principal debtor are eligible to lend to or borrow from each other under the Borrowing & Lending Regs, thereby aligning guarantee permissibility with the lender and borrower conditions under the ECB framework. The borrowing eligibility requirement does not apply where the guarantee is issued by an AD bank against a counter-guarantee or 100% non-resident cash collateral, where it is issued by an Indian agent of a foreign shipping or airline company in connection with statutory or government dues in India, or where both the surety and principal debtor are residents of India.
Accordingly, compliance with Regulation 5 must be assessed in scenarios where an Indian resident principal debtor obtains a guarantee from a non-resident, where an Indian resident surety guarantees the obligation of a non-resident principal debtor, or where both the surety and principal debtor are residents, but the creditor is a non-resident.
Further, Regulation 6 expressly permits an Indian resident creditor to obtain a guarantee in its favour where both the principal debtor and surety are non-residents, provided the underlying transaction is not prohibited under FEMA. Guarantees that do not meet the conditions prescribed under Regulations 5 and 6 will continue to require prior approval of the RBI.
Clarity in Definitions:
The Erstwhile Regulations lacked detailed definitions, leaving key terms such as “guarantee” and “surety” open to interpretation. The New Regulations address this by expressly defining “guarantee,” “surety,” “principal debtor,” and “creditor.” Notably, “guarantee” is defined broadly to include any contract to discharge a debt, obligation or other liability (including a portfolio of liabilities) upon default by the principal debtor, and expressly includes counter-guarantees, thereby bringing structured finance and securitisation-related arrangements within scope
Scope of Prohibited Guarantees
Both the Erstwhile Regulations and New Regulations contain a prohibition clause as per which, no person resident in India shall issue or be a party to a cross-border guarantee unless permitted. Regulation 3 of the Erstwhile Regulations imposed a broad restriction, with only limited carve-outs available through specific provisions and RBI approvals. Under the New Regulations, however, this prohibition operates differently, as once the guarantee transaction is FEMA-compliant and the parties involved satisfy the lending and borrowing eligibility test, such transaction becomes automatically permitted.
Explicit Regulation of Inbound Guarantees
The Erstwhile Regulations did not comprehensively address inbound guarantees, i.e., non-resident guarantees supporting obligations of Indian parties. Such arrangements were earlier governed indirectly under Regulation 3A through the “Structured Obligations” conditions in the ECB framework, which imposed restrictions on guarantees for domestic credit facilities and capital market debt such as non-convertible debentures. Regulation 6 of the New Regulations now expressly covers these inbound guarantee structures and places the reporting responsibility on the resident party involved, thereby enhancing regulatory clarity and coverage. In line with this shift, the earlier “Structured Obligations” related provisions in the ECB framework have been deleted pursuant to the New Regulations.
Explicit Exemptions Introduced:
The New Regulations introduce targeted exemptions which were absent in the Erstwhile Regulations namely the exemptions granted to the guarantees issued by AD bank branches in International Financial Services Centre (“IFSC”), FPIs' irrevocable payment commitments, and guarantees governed under the Foreign Exchange Management (Overseas Investment) Regulations, 20225. These exemptions promote ease of doing business and eliminate duplication of compliance where specialized rules already apply.
Structured Reporting and Late Fee Mechanism
The Erstwhile Regulations did not prescribe any dedicated reporting obligation for resident parties in guarantee transactions. The New Regulations introduce a structured quarterly reporting framework through Form GRN, requiring resident parties (whether as surety, principal debtor or creditor, depending on the transaction structure) to report key lifecycle events such as issuance, amendment, invocation and pre-closure. The New Regulations also extend the late submission fee (“LSF”) mechanism to guarantee reporting, enabling corporates and banks to self-assess and regularise reporting delays without resorting to compounding, consistent with the RBI’s broader objective of simplifying compliance and reducing regulatory burden. Similar LSF mechanisms already apply for regularising reporting delays in other capital account transactions such as FDI, ECB and ODI.
Transitional and Reporting Clarifications and Framework Alignment
To facilitate a smooth transition and address practical reporting scenarios, the New Regulations clarify that where multiple sureties, principal debtors or creditors are involved, any one of them may be designated to report the guarantee transaction. Modifications or closures of previously reported guarantees must be linked to the original transaction number. Further, any change to guarantees issued prior to the commencement of the New Regulations must be reported as a fresh issuance from the date of modification. Where a guarantee is issued and modified within the same reporting period, it must be reported as two separate guarantees i.e., one ending immediately before the modification and the other commencing from its effective date.
Additionally, the RBI has carried out consequential amendments across various Master Directions to remove overlaps and ensure consistency with the New Regulations. In particular, the earlier quarterly reporting framework for bank guarantees relating to trade credits and the structured obligations provisions under the ECB framework6 have been deleted. References to guarantee issuance by AD banks in the context of export7, import8 (including deferred payment imports), service import transactions9 and FEMA reporting matters10 have also been streamlined, with such matters now being aligned to the New Regulations and the new Form GRN reporting framework. These changes consolidate guarantee-related compliance under a single framework and reduce duplication across FEMA directions.
Key Takeaways:
Overall, the New Regulations represent a shift from an approval-centric and fragmented framework to a consolidated, principle-based regime. Under the Erstwhile Regulations, routine guarantee structures were confined to narrow carve-outs, such as ODI-linked corporate guarantees and project-based performance guarantees, with other transactions often requiring RBI’s permission or facing regulatory uncertainty. The New Regulations broaden permissibility under the automatic route, subject to FEMA compliance and the borrowing eligibility test, while also addressing inbound guarantees and providing targeted exemptions for IFSC-based AD branches and foreign portfolio investors (“FPIs”). They further introduce wider definitions, quarterly lifecycle reporting through Form GRN, and a transparent LSF mechanism.
Collectively, these reforms enhance clarity, reduce procedural friction, and align India’s guarantee framework with contemporary global financing practices while retaining necessary safeguards.
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