Foreign Exchange Management (Guarantees) Regulations, 2026: Towards a Principle-based Approach for Cross Border Guarantees

Foreign Exchange Management (Guarantees) Regulations, 2026: Towards a Principle-based Approach for Cross Border Guarantees

Guarantees are one of the cornerstones of any financing transaction. With India’s credit markets increasingly oriented towards cross border transactions, an overhaul of the two-decade old Foreign Exchange Management (Guarantees) Regulations, 2000 (“2000 Regulations”) was long overdue. In an effort to rationalize and streamline the regulatory framework for cross border guarantees, the Reserve Bank of India (“RBI”), on January 06, 2026, notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (“2026 Regulations”), which replace the 2000 Regulations. Additionally, the RBI has made consequential amendments to the guarantee-related provisions in various other master directions to remove inconsistencies and overlaps in the regulatory framework.

In contrast to the transaction-based approach for permissible cross border guarantees under the 2000 Regulations, the 2026 Regulations adopt a principle-based approach that permit cross border guarantees if certain stipulated conditions are satisfied. As a consequence, the 2026 Regulations expand the scope of permissible cross border guarantees under the automatic route, albeit with tightened reporting requirements.

This note highlights and decodes the key features of the 2026 Regulations.

SCOPE AND APPLICABILITY

The 2026 Regulations define “guarantee” (which also includes counter-guarantees) broadly as “any contract to perform a promise or discharge a debt, obligation or other liability (including a portfolio of debts, obligations or liabilities) in case of default by a principal debtor”.

Regulation 4 of the 2026 Regulations specifically identifies the types of guarantees that are excluded from the purview of the 2026 Regulations:

1. a guarantee undertaken by a branch of an authorized dealer (“AD”) bank outside India or in an International Financial Services Centre, unless any of the other parties to the guarantee is a person resident in India (“PRII”): Transactions of this nature are between persons resident outside India (“PROIs”) and, as such, fall outside the scope of the Foreign Exchange Management Act, 1999 and the rules and regulations framed thereunder (“FEMA Framework”);

2. an irrevocable payment commitment (“IPC”) issued by an AD bank in its capacity as a custodian bank for principal debtors registered as foreign portfolio investors: Since IPCs are subject to a separate regulatory framework, the explicit exemption ensures there are no regulatory overlaps; and

3. a guarantee given in accordance with the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (“OI Regulations”): This refers to guarantees provided by PRIIs in favor of PROIs, which would have to comply with the OI Regulations.

Given the broad definition of “guarantees” and the principle-based approach adopted, the 2026 Regulations would be applicable in all other contexts where a PRII is a party to a guarantee (as a principal debtor, surety or creditor) and at least one of the other parties is a PROI.

SHIFT FROM TRANSACTION-BASED APPROACH TO PRINCIPLE-BASED APPROACH

Regulation 3 of the 2000 Regulations imposed a general prohibition on cross border guarantees which are not compliant with the 2000 Regulations. Regulation 3A, Regulation 4 and 5 of the 2000 Regulations then went on to specify the instances of cross border guarantees which were permitted under the 2000 Regulations, thereby reflecting a transaction-based approach. These included (i) the provision of guarantees by PROIs in compliance with the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 (as may be amended from time to time) (“ECB Directions”) in cases where the underlying transaction involved issuance of capital market instruments by PRIIs, (ii) instances in which an AD bank could provide cross border guarantees, and (iii) instances in which persons other than AD banks could provide cross border guarantees. Any guarantees that did not meet the requirements under Regulation 3A, Regulation 4 or Regulation 5 of the 2000 Regulations required prior permission of the RBI.

Now, under the 2026 Regulations, Regulations 5 and 6 provide the framework for a principle-based approach for determining the permissibility of a cross border guarantee under the automatic route.

1. Regulation 5 deals with instances wherein a PRII is either the surety or the principal debtor. In such scenarios, a cross border guarantee is permitted provided that, (a) the underlying transaction for which the guarantee is being obtained is not prohibited under the FEMA Framework; and (b) the surety and the principal debtor are eligible to borrow and lend to/from each other under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (“Borrowing and Lending Regulations”), which effectively lead to the conditions for eligible lenders and eligible borrowers specified under the ECB Directions.

Sub-paragraph (b) above, however, is not applicable to cases where the guarantee (a) is provided by an AD bank and is covered by a counter-guarantee or is issued against 100% (one hundred percent) collateral in the form of a deposit from a PROI; or (b) given by an agent in India of a shipping or airline company incorporated outside India on behalf of such company in connection with its obligation or liability owed to any statutory or Government authority in India; or (c) where both the surety and the principal debtor are PRIIs.

Regulation 5, thus, deals with three scenarios involving cross border guarantees: first, where the principal debtor is a PRII and the guarantee is being obtained from a PROI; second, where the surety is a PRII that is guaranteeing the obligation of a principal debtor that is a PROI; and finally, where the surety and the principal debtor are PRIIs and the creditor is a PROI. In determining whether the guarantee is permitted in each of these cases, stakeholders would be required to assess whether the underlying financing transaction is permitted under the FEMA Framework and, where applicable, whether the surety and principal debtor are permitted to borrow and lend to each other under the Borrowing and Lending Regulations, read with the ECB Directions.

2. Regulation 6 provides explicit permission to creditors that are PRIIs to obtain guarantees in their favor where both principal debtor and surety are PROIs provided that the underlying transaction for which such guarantee is being obtained is not prohibited under the FEMA Framework.

3. Guarantees which do not meet the conditions laid out under Regulation 5 and 6 of the 2026 Regulations will require RBI approval.

It is pertinent to note that under Regulation 3A of the 2000 Regulations, cross border guarantees were subject to the conditions applicable to “Structured Obligations” laid down under Paragraph 19 and Paragraph 20 of the ECB Directions. However, as discussed below and as part of certain consequential amendments made to guarantee-related provisions in other master directions, Paragraphs 19 and 20 of the ECB Directions have been deleted by way of an amendment to the ECB Directions on January 12, 2026. Previously, Paragraphs 19 and 20 of the ECB Directions imposed various conditions under which a PROI could issue guarantees for domestic fund-based and non-fund based facilities and for domestic debt raised through the issue of capital markets instruments, such as non-convertible debentures. The deletion of “Structured Obligations” from the ECB Directions is, therefore, a significant relaxation that expands the scope of permissible guarantees that may be issued by PROIs for domestic debt.

REPORTING REQUIREMENTS

While the2000 Regulations did not provide for any reporting obligations on the parties to a cross border guarantee, the 2026 Regulations have introduced extensive reporting requirements for cross border guarantees.

1. Obligation: The reporting obligation lies with: (a) the surety, if the surety is a PRII; or (b) the principal debtor who has arranged the guarantee from a surety who is a PROI; or (c) the creditor, where both the surety and the principal debtor are PROIs or where the creditor has arranged the guarantee. In the event there is more than one surety/ principal debtor/ creditor to the same guarantee, any of them can be designated to report that guarantee.

2. Reporting requirement: Reporting is required upon: (a) issuance of the guarantee; or (b) any subsequent change in guarantee terms, namely – guarantee amount, extension of period or pre-closure; and (c) invocation of the guarantee. However, any changes to guarantees issued prior to the 2026 Regulations coming into effect, are required to be reported as a fresh issuance of guarantees as of the date of modification to such guarantees.

3. Format: Form GRN which is annexed to the 2026 Regulations.

4. Timeline: On a quarterly basis to the AD bank, within 15 (fifteen) days from the end of the respective quarter. The AD bank is required to report to the RBI within 30 (thirty) days from the end of the respective quarter.

PENALTIES

Any PRII who fails to comply with the reporting requirements in accordance with Regulation 7 of the 2026 Regulations shall undertake the reporting along with a late submission fee equivalent to (INR 7500 + 0.025% x A x n), rounded upwards to the nearest hundred, where,

1. “n” is the number of years of delay in submission, rounded-upwards to the nearest month and expressed up to 2 (two) decimal points; and

2. “A” is the amount involved in the delayed reporting in INR.

CONSEQUENT AMENDMENTS TO OTHER DIRECTIONS

In order to harmonize and streamline the guarantee-related provisions in existing master directions with the 2026 Regulations, the RBI has undertaken consequential amendments across multiple master directions to ensure that there are no overlaps or inconsistencies.

1. ECB Directions

a. Paragraph 17.2: Deletion of the quarterly reporting requirement in relation to information pertaining to bank guarantees for trade credits furnished by the AD bank.

b. Paragraph 19 and 20: Deletion of “Part III – Structured Obligations” of the ECB Directions containing terms and conditions for non-resident guarantee for domestic fund- based and non-fund-based facilities under Paragraph 19 and terms and conditions for credit enhancement by eligible non-resident entities for domestic debt raised through issue of capital market instruments under Paragraph 20.

2. Master Direction – Reporting under Foreign Exchange Management Act, 1999 dated January 01, 2016 issued by RBI

a. Part V – Annex IV: Deletion of the format of the quarterly reporting requirement in relation to information pertaining to bank guarantees for trade credits furnished by the AD bank under ECB Directions.

b. Part X: Introduction of Form GRN as set out under the 2026 Regulations.

3. Master Direction – Export of Goods and Services dated January 01, 2016 issued by RBI

Provisions pertaining to issuance of guarantees by AD banks for any debt, obligation or other liability incurred by a PRII as an exporter, on account of exports from India, have been deleted and references to the 2026 Regulations have been introduced.

4. Master Direction – Import of Goods and Services dated January 01, 2016 issued by RBI

Provisions pertaining to issuance of guarantees by AD banks for any debt, obligation or other liability incurred by a PRII as an importer, in respect of import on deferred payment terms, have been deleted and references to the 2026 Regulations have been introduced.

5. Master Direction – Other Remittance Facilities dated January 01, 2016 issued by RBI

Provisions pertaining to issuance of guarantees by AD banks for any debt, obligation or other liability incurred by a PRII as a service importer, in respect of import of services, have been deleted.

CONCLUDING REMARKS

Obtaining cross border guarantees was a complex proposition under the 2000 Regulations. The fragmented regulatory landscape required stakeholders to navigate multiple frameworks, including the 2000 Regulations themselves, the ECB Directions (particularly Part III - Structured Obligations), and various master directions governing exports, imports, and remittances. This multi-layered compliance structure often resulted in uncertainty and delays in executing cross border financing transactions.

The 2026 Regulations provide for a more liberalized framework for cross border guarantees, coupled with greater regulatory oversight through enhanced reporting requirements. A helpful feature of the 2026 Regulations is that it streamlines the approach for determination of permissible cross border guarantees and removes the ambiguities and regulatory overlaps that had resulted from the multi-layered regulatory framework. The introduction of a principle-based approach offers stakeholders greater flexibility and clarity and, together with the consequential amendments to other master directions, expands the scope of permissible cross border guarantees under the automatic route. The enhanced reporting requirements will increase transparency and the standardized Form GRN with elaborate instructions and quarterly reporting timelines establish a predictable compliance calendar for stakeholders.

In conclusion, the 2026 Regulations are a welcome step towards a simplified and more predictable regime for issuance of cross border guarantees.