The New Paradigm Of Cross-Border Guarantees

In a significant step toward modernizing India’s cross-border transactions framework, the Reserve Bank of India (“RBI”) notified the Foreign Exchange Management (Guarantee) Regulations, 2026 (“Guarantee Regulations”) on January 6, 2026, in supersession of the Foreign Exchange Management (Guarantees) Regulations, 2000 (“Erstwhile Regulations”).

The Guarantee Regulations also (i) supersede the A.P. (DIR Series) Circulars set out in the Annex to A.P. (DIR Series) Circular No. 19 which separately set out various compliance requirements including in relation to filing of returns for certain types of guarantees; (ii) result in the discontinuation of the quarterly reporting on issuance of guarantee for trade credit from the quarter ending March 2026; and (iii) amend the guarantee related provisions in the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations, Master Direction – Export of Goods and Services, Master Direction – Import of Goods and Services, Master Direction – Other Remittance Facilities, and Master Direction – Reporting under Foreign Exchange Management Act, 1999.

Scope of Guarantees Covered

While both, the Erstwhile Regulations as well as the Guarantee Regulations, contain a general prohibition with respect to guarantees, the scope differs.

The Erstwhile Regulations generally prohibited a person resident in India (“PRI”) from providing a guarantee or acting as a surety for (a) any liability, obligation, or debt owed by a PRI to a foreign resident or (b) for any liability, obligation, or debt owed by a foreign resident, unless expressly allowed under the Erstwhile Regulations or with the consent of the RBI.

On the other hand,, the new Guarantee Regulations now govern all transactions where a PRI is a party to a guarantee (whether as a principal debtor, surety or a creditor) and any of the other parties to the guarantee is a foreign resident. These transactions are generally prohibited unless expressly permitted or exempted under the Guarantee Regulations, or otherwise undertaken with the consent of the RBI.

While, on a plain reading, the prohibition under the current Guarantee Obligations may seem to be wider and broader than the Erstwhile Regulations, it is pertinent to note that, earlier, PART III (Structured Obligations) of the RBI Master Directions on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (“ECB Framework”) also governed certain aspects of cross-border guarantees separately. This earlier ECB Framework pertaining to cross-border guarantees has now been superseded by the new Guarantee Regulations and there are also other express overarching exemptions which are now included under the Guarantee Regulations. Hence, the notification of the Guarantee Regulations is more of an overhaul, consolidation, and streamlining of the framework in relation to cross border guarantee transactions rather than an expansion of the scope of governance for cross-border guarantees.

Permissible Cross-Border Guarantees

Erstwhile Regulations

Under the Erstwhile Regulations, a PRI was generally prohibited from providing any cross-border guarantees unless the relevant transaction fell into narrow, pre-defined buckets that were permitted. The Erstwhile Regulations specifically set out four situations/circumstances in which authorised dealers were allowed give cross-border guarantees and three situations/circumstances in which persons other than authorised dealers were allowed to give cross-border guarantees (more details on the same may be found  here).

Guarantee Regulations

While the Guarantee Regulations also prohibit PRIs from providing cross-border guarantees, unless expressly permitted, the ambit of permissions and exemptions have been broadened and streamlined. The Guarantee Regulations broadly prescribe the categories of cross-border guarantees that are exempt from the prohibition on general cross-border transactions and set out the conditions under which a PRI may act as a surety, principal debtor, or creditor in other cross border guarantees, subject to the underlying transaction being permissible under the Foreign Exchange Management Act, 1999 (“FEMA”).

Exemptions:

The following categories of cross-border guarantees are explicitly exempt from the restrictions set out in the Guarantee Regulations:

1. all guarantees undertaken by a branch of an authorised dealer bank outside India or in an IFSC (unless any of the other parties to the guarantee is a person resident in India);
2. an Irrevocable Payment Commitment ( Irrevocable Payment Commitments are legally binding, non-revocable guarantees issued by custodian banks to stock exchanges on behalf of institutional investors to ensure settlement of securities purchase transactions) issued by an authorised dealer in its capacity of a custodian bank, where the principal debtor is a registered Foreign Portfolio Investor and the creditor is an authorised central counterparty in India; and
3. a guarantee given in accordance with the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (“OI Regulations”).

Acting as a surety or a principal debtor:

The Guarantee Regulations allow PRI’s to act as a surety or a principal debtor provided that the twofold requirement of: (i) the underlying transaction being permissible under FEMA and the rules, regulations and directions made thereunder; and (ii) the surety and the principal debtor being eligible to lend and borrow from each other under the  Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, are met.

Further, the requirement of eligibility under the Borrowing and Lending Regulation is not applicable when the guarantee is:

1. given by an authorised dealer bank and covered by a counter-guarantee or issued against 100% collateral in the form of a deposit, from a person resident outside India;
2. 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
3. where both the surety and the principal debtor are persons resident in India.

Acting as a creditor:

A person resident in India may act as a creditor in a cross-border guarantee provided that the principal debtor and surety both are persons resident outside India and the underlying transaction is not prohibited under FEMA or the rules, regulations and directions made thereunder.

Compliance Requirements

The new framework puts stakeholders into three distinct legal categories, necessitating a precise determination of residency status before any transaction. Further, it also sets out certain reporting requirements, mandating that issuance of guarantee, any subsequent change in guarantee terms (such as guarantee amount, extension of period or pre-closure), and invocation of guarantee are reported in Form-GRN.

In line with other FEMA related reporting requirements, the obligation to report a cross-border guarantee lies on the resident party, as provided below:

Reporting is mandatory on a quarterly basis and must be filed in Form GRN within 15 calendar days from the end of the quarter through an authorized dealer bank. If reporting has been in contravention of the timeline set out, late submission fees, calculated in accordance with the formulae set out in the Guarantee Regulations, must be paid.

Argus Comments

The Guarantee Regulations mark a progressive shift in India’s cross-border guarantee framework, moving from a restrictive, prohibition-driven regime to a principles-based compliance approach. The emphasis has transitioned from operating within narrowly defined categories or seeking RBI approval to assessing the FEMA permissibility of the underlying transaction.

While the Erstwhile Regulations only regulated cross-border guarantees wherein the Indian resident acted as the guarantor, and other cross-border guarantees were regulated under the ECB Framework, the new Guarantee Regulations provide a comprehensive framework governing all cross-border guarantees where an Indian resident acts as guarantor, creditor, or principal debtor, thereby clarifying and consolidating the legal position on such arrangements.

The Erstwhile Regulations also did not contain an explicit carve-out excluding guarantees that were already regulated as ‘financial commitments’ under the OI Regulations. While, in practice, guarantees under the OI Regulations were permitted in accordance with provisions set out therein, there was an overlap with respect to their governance, since they were also technically cross-border guarantees falling within the ambit of the Erstwhile Regulations. The carve-out for such guarantees under the Guarantee Regulations resolves this ambiguity and explicitly removes the possibility of regulatory overlap.

Moreover, while reporting obligations were previously fragmented across circulars and master directions, the Guarantee Regulations consolidate them within a single framework, enabling more streamlined compliance. The late submission fee mechanism introduced also allows reporting delays to be regularised without the need to initiate compounding proceedings. Further, the introduction of a transparent Late Submission Fee formula for reporting delays allows businesses to quantify their legal risk.

Therefore, the Guarantee Regulations streamline the compliances to be undertaken in relation to cross border guarantees and provide clarity on the same, thereby assisting in the ease of doing business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.