The Reserve Bank of India ("RBI") has issued the draft Foreign Exchange Management (Guarantees) Regulations, 2025 ("Draft Regulations") on 14 August 2025 for public feedback. Replacing the 2000 framework, the Draft Regulations shift from a transaction-specific approach to a principle-based regime, introducing mandatory reporting and extending compliance responsibilities for persons resident in India involved in cross-border guarantee arrangements. [Click here to view the draft issued by RBI.]
Introduction
The Draft Regulations, issued under Sections 6(2) and 47(2) of the Foreign Exchange Management Act, 1999 ("FEMA"), apply to guarantees between persons resident in India ("PRII") and persons resident outside India ("PROI"). Unlike the 2000 framework, which prescribed case-specific approvals, the Draft Regulations adopt a principle-based approach, permitting guarantees subject to FEMA compliance and introducing reporting obligations for the first time. By aligning with broader FEMA frameworks such as ECB, ODI, and borrowing and lending rules, RBI seeks to balance business facilitation with regulatory control.
Key Provisions
- Compliance responsibility, earlier confined to PRIIs acting as surety, now extends to PRIIs acting as creditors and principal debtors. Guarantees may be issued only if both underlying and resultant transactions, including invocation, comply with FEMA.
- Furthermore, the Draft Regulations codify the prohibition on Authorised Dealer (AD) Banks issuing Letters of Undertaking (LoUs) and Letters of Comfort (LoCs), which were discontinued in 2018. PRIIs giving guarantees for PROIs must also comply with FEMA's Borrowing and Lending Regulations, 2018.
- In addition, exemptions cover AD Bank branches abroad acting in the ordinary course of business where no party is resident in India, and custodian banks issuing irrevocable payment commitments for Foreign Portfolio Investments ("FPIs") in line with the Non-Debt Instruments Rules, 2019.
- Moreover, for the first time, PRIIs must report issuance, modification, and invocation of guarantees within seven days through AD Banks, using prescribed formats. Delayed reporting can be regularised with a Late Submission Fee for up to three years. All guarantees must be backed by an agreement, and RBI may disclose reported information publicly.
MHCO Comment
The Draft Regulations modernise India's guarantee regime by expanding responsibilities, introducing mandatory reporting, and codifying the prohibition on LoUs and LoCs. While enhancing transparency, the strict seven-day reporting timeline may burden corporates, particularly in legacy cases. Clear implementation guidance and alignment with other FEMA regulations will be key to ensuring the framework achieves its objectives without creating undue compliance challenges.
This article was released on 22 August 2025.
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