FEMA (Guarantees) Regulations, 2026 Notified

Cross-border guarantees occupy a sensitive position in India’s foreign exchange framework. While they are essential instruments for facilitating international trade, investment, shipping, aviation, and overseas financing, they also create contingent liabilities with potential balance-of-payments and systemic implications. Despite the expanding scale and sophistication of India’s cross-border commercial activity, the regulatory framework governing such guarantees had remained largely unchanged since 2000.

Recognising this disconnect, the Reserve Bank of India (RBI) has notified the Foreign Exchange Management (Guarantees) Regulations, 2026, vide Notification bearing reference no. FEMA 8(R)/2026-RB dated January 6, 2026, superseding the erstwhile FEMA (Guarantees) Regulations, 2000. The 2026 Regulations signal a shift towards a principle-based and transaction-aligned regime, balancing regulatory facilitation with enhanced transparency, discipline, and oversight.

The 2026 Regulations adopt a comprehensive approach to cross-border guarantees. As a foundational rule, no person resident in India shall be a party to a guarantee, whether as principal debtor, surety, or creditor, where the other party is a non-resident, except in accordance with FEMA, the regulations framed thereunder, or with specific RBI permission.

The definition of the term ‘guarantee’ includes counter guarantee as a contract undertaken to perform a promise or discharge a debt, obligation, or other liability, including a portfolio of such obligations, in the event of default by the principal debtor. This unified treatment replaces the fragmented approval-driven regime with a single regulatory lens, anchored in the permissibility of the underlying transaction.

A key feature of the new regime is that a person resident in India may act as a surety or principal debtor without prior RBI approval, provided that:

1. The underlying transaction is not prohibited under FEMA or related regulations; and
2. The surety and principal debtor are eligible to lend to and borrow from each other under the FEMA (Borrowing and Lending) Regulations, 2018. The regulations also preserve targeted carve-outs. The borrowing–lending eligibility condition does not apply to guarantees issued by authorised dealer banks backed by one hundred percent deposit-backed collateral, guarantees issued by Indian agents of foreign shipping or airline companies for statutory dues in India, or guarantees where both the surety and principal debtor are residents.

The framework equally addresses situations where Indian residents are beneficiaries of guarantees. A resident creditor may arrange or obtain a guarantee in its favour, including where both the principal debtor and the surety are non-residents, subject to the overarching condition that the underlying transaction is FEMA-compliant and not prohibited.

This provision underscores the RBI’s intent to distribute compliance responsibility across all parties to a guarantee, ensuring that resident creditors remain accountable for the legitimacy of the underlying exposure.

To prevent duplication and regulatory friction, certain categories are expressly excluded from the scope of the Regulations. These include guarantees issued by overseas branches of authorised dealer banks or IFSC units unless another party is resident in India, Irrevocable Payment Commitments (IPC) issued by authorised dealer banks acting as custodian banks for Foreign Portfolio Investors, and guarantees issued in accordance with the FEMA (Overseas Investment) Regulations, 2022.

These exclusions preserve coherence across FEMA’s broader regulatory framework while recognising established market practices.

While the 2026 Regulations liberalize access through the automatic route, they significantly strengthen post-facto oversight through detailed reporting obligations. Guarantees covered under the Regulations must be reported on a quarterly basis, covering:

1. issuance of the guarantee,
2. any subsequent modification, including amount, tenure, extension, or pre-closure, and
3. invocation of the guarantee, if any.

Reporting responsibility is clearly allocated based on residency, with the obligation resting on the surety where the surety is resident in India, the principal debtor where the guarantee is arranged by it and the surety is a non-resident, or the creditor where both the surety and principal debtor are non-residents or where the creditor has arranged the guarantee ensuring that every guarantee is backed by a single, identifiable reporting entity. Reports must be submitted to an authorised dealer bank within fifteen days from the end of the relevant quarter, with authorised dealers forwarding consolidated returns to the RBI within thirty days from the end of the respective quarter.

To reinforce compliance, the 2026 Regulations introduce a Late Submission Fee mechanism, calculated as a base amount of Rs. 7,500, together with an additional charge of 0.025% of the amount involved in the delayed reporting for each year of delay, with the delay period rounded up to the nearest month and the final fee rounded up to the nearest hundred. This formalized penalty structure replaces ad hoc regularization and signals a firmer supervisory stance.

Taken together, the 2026 Regulations mark a calibrated regulatory reset, easing the procedural barriers through an expanded automatic route while strengthening oversight by linking guarantee permissibility to underlying transaction eligibility, comprehensive reporting, clear accountability, and quantified penalties for non-compliance. By replacing a two-decade-old framework with a modern, principle-driven regime, the RBI has repositioned cross-border guarantees within FEMA’s risk-based architecture, facilitating legitimate cross-border transactions while reinforcing transparency, discipline, and systemic safeguards.