New FEMA Guarantees Framework: From Approval-Centric Controls to a Principle-Led Regime

India’s central bank has replaced the 2000 guarantee regime with the Foreign Exchange Management (Guarantees) Regulations, 2026, introducing a principle-based, eligibility-driven framework under FEMA while retaining the statutory prohibition structure.

The Reserve Bank of India has notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (New Regulations), comprehensively replace the FEM (Guarantees) Regulations, 2000. Issued under the Foreign Exchange Management Act, 1999 (FEMA), the new framework governs cross-border guarantees involving persons resident in India and introduces a consolidated, compliance-driven regime.

While this brings an architectural shift from an approval-heavy model to a principle-based approach, the regulations retain a statutory prohibition structure, subject to clearly articulated permissions and exemptions.

Scope and applicability of FEMA 2026 

Regulatory coverage

The new regulations, announced on January 6, 2026, apply where at least one party to a guarantee is a person resident in India and another party is a non-resident. The framework regulates situations in which an Indian resident acts as surety, principal debtor, or creditor in a cross-border guarantee arrangement.

Find Business Support

Our teams support investors with feasibility studies, entity structuring, and localization planning.

The regime applies to Indian companies, limited liability partnerships (LLPs), partnership firms, authorized dealer (AD) banks, resident individuals, Indian subsidiaries of foreign companies, and resident creditors participating in cross-border financing structures.

Importantly, the new norms regulate Indian residents rather than foreign entities directly. However, any foreign company, overseas lender, private equity investor, or multinational group structuring India-linked financing will be commercially affected, as the Indian counterparty must comply with FEMA conditions.

CLICK HERE: FEMA Compliance Guide for Foreign Investment in India

Relevance to foreign stakeholders

The framework is particularly relevant to:

Find Business Support

Our advisors help foreign companies navigate investment frameworks, licensing, and compliance across key sectors.

1. Foreign parent companies providing guarantees for Indian subsidiaries or receiving guarantees from Indian entities.
2. Overseas lenders extending credit to Indian borrowers backed by corporate or parent guarantees.
3. Foreign portfolio investors relying on payment commitment mechanisms.
4. Multinational groups structuring treasury, upstream/downstream guarantees, or layered financing arrangements.
5. IFSC-based financial institutions engaged in cross-border structured finance.

In practice, the 2026 regime influences cross-border lending, group support structures, and capital market-linked guarantees involving India.

CLICK HERE TO KNOW MORE: Transfer Pricing Guide for US Companies with Indian Subsidiaries

Core regulatory architecture

Statutory prohibition with conditional permissibility

The regulations maintain a baseline prohibition: no person resident in India may be party to a cross-border guarantee unless permitted under the framework or approved by the Reserve Bank of India (RBI).

However, unlike the 2000 regime, permissibility is now determined through objective compliance criteria rather than narrow carve-outs or case-specific approvals. The shift is operational rather than structural; the prohibition remains, but the pathway to compliance has been liberalized.

Acting as surety or principal debtor

An Indian resident may issue or arrange a cross-border guarantee if two core conditions are satisfied. First, the underlying transaction must not be prohibited under FEMA or subordinate regulations. Second, the surety and principal debtor must meet lending and borrowing eligibility conditions prescribed under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

This alignment harmonizes guaranteed permissibility with cross-border borrowing eligibility, including external commercial borrowing (ECB)-linked transactions, thereby eliminating prior regulatory fragmentation.

Certain exceptions apply to the borrowing eligibility test. These include:

1. Guarantees issued by AD banks backed by counter-guarantees or full non-resident collateral,
2. Guarantees issued by Indian agents of foreign shipping or airline companies for statutory dues, and
3. Transactions where both surety and principal debtor are residents.

Expanded definitions and scope

A critical update under the 2026 regulations is the introduction of clear and expansive definitions of “guarantee,” “surety,” “principal debtor,” and “creditor.” The definition of “guarantee” is deliberately broad, covering obligations to discharge debt or liability upon default, including portfolio-based liabilities and counter-guarantees.

This ensures structured finance transactions, layered security packages, and securitization-linked guarantees fall squarely within regulatory oversight, eliminating prior ambiguity.

Quarterly reporting and compliance mechanism

The 2026 regime introduces a mandatory quarterly reporting system through Form GRN (goods received note). The reporting obligation is allocated based on transaction structure:

• The resident surety reports where applicable;
• If the surety is non-resident, the resident principal debtor reports;
• Where both debtor and surety are non-residents, the resident creditor assumes responsibility.

Reporting covers issuance, modification, invocation, and closure of guarantees. Returns must be submitted to the AD bank within 15 calendar days from the end of each quarter, following which the AD bank forwards consolidated returns to the RBI within 15 days.

Guarantee modifications must be linked to the original transaction reference, and issuance and modification within the same quarter are treated as separate reporting events.

Late submission fee mechanism

The framework extends the late submission fee (LSF) mechanism to guarantee reporting. This enables entities to regularize reporting delays through prescribed fees rather than resorting to compounding proceedings, aligning with RBI’s broader compliance rationalization across foreign direct investments (FDI), ECB, and overseas direct investments (ODI) transactions.

Why reform was necessary

The 2000 regime was structurally restrictive and approval-driven. Guarantees were broadly prohibited unless specifically permitted, many transactions required RBI approval, and reporting obligations were fragmented across circulars and master directions. Key terms lacked definitional clarity, and structured finance arrangements often operated within interpretational grey zones.

Over the past two decades, India has witnessed substantial growth in ECB borrowings, private equity participation, multinational treasury operations, IFSC activity, and complex cross-border financing structures. The earlier framework did not adequately address portfolio-backed guarantees, counter-guarantee chains, inbound support structures, or central counterparty payment commitments.

Moreover, borrowing eligibility rules and guarantee permissibility rules operated in parallel but misaligned tracks, creating duplicative compliance burdens.

Investment and market impact

The 2026 regulations materially enhance India’s attractiveness for cross-border capital flows.

By shifting toward an eligibility-based automatic route, the framework reduces reliance on transaction-specific approvals and improves deal execution speed. Clear definitional architecture and express recognition of inbound guarantees improve enforceability confidence for foreign lenders and investors.

Structured quarterly reporting and the LSF mechanism reduce enforcement friction and compliance anxiety. Harmonization with overseas investment rules, IFSC operations, and capital market frameworks lowers structuring complexity for multinational groups.

For foreign banks, private equity funds, and institutional investors, the regime reduces regulatory unpredictability and transaction risk, thereby lowering the perceived sovereign and compliance risk premium associated with Indian cross-border financing.

Conclusion

The 2026 overhaul represents a calibrated shift from discretionary, approval-heavy oversight to structured, compliance-based regulation. While safeguards under FEMA remain intact, the framework now prioritizes predictability, definitional clarity, and harmonized reporting.

For Indian corporates, foreign lenders, multinational groups, and institutional investors, the regime offers greater legal certainty, faster execution timelines, and reduced regulatory friction. Collectively, these reforms strengthen India’s position as a more predictable and globally aligned jurisdiction for cross-border investment and financing activity.

• Previous Article India’s Antitrust Regulator CCI Fines Intel US$3.01 Million for Abuse of Dominant Position
• Next Article