The Foreign Exchange Management (Guarantees) Regulations, 2026: Expanding Scope, Enhanced Oversight
Introduction
Cross-border guarantees have long occupied a sensitive position within India’s foreign exchange regulatory framework, balancing the facilitation of international trade and investment against concerns of capital flight and systemic risk. With a view to facilitate business in India, the Reserve Bank of India (“RBI”) has introduced some key amendments to streamline and regulate cross border guarantees given under various rules and regulations of Foreign Exchange Management Act, 1999 (“FEMA”). Accordingly, on January 12, 2026, the RBI notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (“Guarantee Regulations, 2026”)[1], which supersedes the Foreign Exchange Management (Guarantees) Regulations, 2000 and supplemental circulars (“Guarantee Regulations, 2000”) that had governed cross-border guarantees for over two decades. These regulations were notified following detailed stakeholders feedback and consultation on the draft regulations released by RBI on August 14, 2025.[2]
The Guarantee Regulations, 2026 aim to consolidate and standardize the regulatory framework for cross border guarantees. This article discusses these amendments and seeks to assess its implications on various stakeholders including financial institutions (AD Banks), overseas group entities of Indian companies, and foreign creditors and lenders.
Key Amendments
1. Guarantee Definition
The term ‘Guarantee’ under the Guarantee Regulations, 2000 was referred to as a guarantee given in respect of any discharge of ‘debt, obligation or other liability.’ The Guarantee Regulations, 2026 define “Guarantee” to include a “counter-guarantee”, meaning ‘a contract, by whatever name called, to perform the promise, or discharge a debt, obligation or other liability (including a portfolio of debts, obligations or other liabilities), in case of default by the principal debtor’. This expanded definition provides clarity in interpretation and limits the party’s ability to structure transactions to avoid reporting or regulatory oversight.
2. Automatic approval
The most significant change introduced by the Guarantee Regulations, 2026 is automatic approval for guarantees given, or arranged for in accordance with FEMA. As per Regulation 5 of the Guarantee Regulations, 2026, a person resident in India can act as a principal debtor or a surety provided that:
- the transaction for which the guarantee is given or being arranged is not barred under FEMA (including rules and regulations framed under it); and
- the surety and the principal debtor are eligible borrowers and lenders under Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.
However, Regulation 5(b) of the Guarantee Regulations, 2026 does not apply to any guarantee given:
- by an AD Bank and which is issued against a 100% (hundred percent) collateral in the form of a deposit or covered by a counter guarantee, given by a person resident outside India;
- by an agent of an airline or a shipping company incorporated outside India to fulfill its statutory obligations towards governmental authorities in India; or
- when both the principal debtor and the surety are ‘persons resident in India’.
The Guarantee Regulations, 2026 follow a principal-based regulations approach wherein the guarantees provided do not require any specific approvals if the underlying transaction under which the person acting as a surety or principal debtor is not prohibited under FEMA.
3. Exemptions
The Guarantee Regulations, 2026 do not apply to the following types of guarantees:
(a) Guarantees undertaken by a branch of an AD bank located outside India or in an International Financial Services Centre (IFSC), provided none of the other parties to the guarantee is a person resident in India;
(b) Irrevocable Payment Commitments (IPCs) issued by an authorized dealer in its capacity as a custodian bank are excluded where the principal debtor is a registered foreign portfolio investor and the creditor is an authorized central counterparty in India; and
(c) Guarantees issued in compliance with the Foreign Exchange Management (Overseas Investment) Regulations, 2022.
4. Reporting requirement and Late Submission Fee
With the expansion of guarantees permitted under the automatic route under the Guarantee Regulations, 2026 as explained above, necessitated the introduction of comprehensive reporting of all guarantees issued and invoked and modified. Under the earlier regime, the reporting framework depended on multiple factors, including type of guarantee being issued (such as trade credit or other guarantees), and largely followed an event-based reporting system. With the introduction of the Guarantee Regulations, 2026 the following changes are brought to the reporting of guarantees:
Persons required to report:
The Guarantee Regulations, 2026 require the following persons to report under these regulations:
- the surety, in case he is a ‘person resident in India’;
- the principal debtor who arranged for the guarantee, in case surety is a ‘person resident outside India’; or
- the creditor, in case both the surety and the principal debtor are persons resident outside India or the guarantee is arranged by the Creditor.
(each referred to as “Obligated Persons”)
(d) Events triggering reporting
The Obligated Persons have to report the following events:
- issuance of any guarantee;
- change in the terms of the guarantee arrangement including revision of guarantee amount, and postponement or preponement of the guarantee period; and
- invocation of the guarantee by the creditor.
(e) Timeline for reporting
- The Obligated Persons are required to report the above events on a quarterly basis to the AD Bank in FORM–GRN, within a period of 15 (fifteen) calendar days from the end of each quarter.
- The AD Bank has to submit the returns filed under these regulations within 30 (thirty) days from the end of each quarter.
Furthermore, with the introduction of the Guarantee Regulations, 2026, the quarterly reporting requirement for issuing guarantee for trade credit under FEMA has been discontinued with effect from the quarter ending March 31, 2026. Any non-compliance in filling of the FORM-GRN by the Obligated Persons shall attract a late submission fee (“LSF”), calculated through the following formula:
LSF = INR 7,500 (Indian Rupees Seventy Five Hundred) + [0.025% (Zero Point Zero Two Five percent) x Amount involved in delayed reporting (INR) x Number of years of delay].
With the introduction of a single integrated form and demarcating reporting obligations, the Guarantee Regulations, 2026 have harmonized the reporting obligations and reduced the risk of overlapping or duplicate fillings. Further, by prescribing a formula-based LSF computation mechanism, RBI has provided much needed clarity and predictability, replacing earlier reliance on circulars and discretionary instructions issued by RBI.
Conclusion
The RBI has notified the Guarantee Regulations, 2026 and directed authorized dealer banks to ensure compliance from the date of notification. The regulations signal a regulatory shift towards greater clarity, transparency, and oversight of guarantee arrangements, while retaining necessary commercial flexibility. Although the full practical implications will unfold over time as market participants adapt. The framework represents a constructive step towards strengthening regulatory discipline and reducing ambiguity in the treatment of guarantees under FEMA.
References
[1] Foreign Exchange Management (Guarantees) Regulations, 2026, RBI, accessed on https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13268&Mode=0
[2] Guarantee regulations under Foreign Exchange Management Act (FEMA), 1999 – Draft for feedback, RBI, accessed on https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=61032