Guarantees under FEMA: Structured compliance and enforcement

The Reserve Bank of India (RBI) notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (2026 Regulations) in January 2026, replacing the Foreign Exchange Management (Guarantees) Regulations, 2000 (2000 Regulations). The new regulations aim to rationalise the framework and improve regulatory safeguards for guarantees involving residents and non-residents of India.

With the rise in overseas investments, multinational corporate structures, and the ease of entering international financial markets, cross-border guarantees have become an increasingly common feature of commercial arrangements. The 2000 Regulations, framed over two decades ago, were limited in scope and could not adequately cater to the realities of increasingly complex modern transactions.

Against this backdrop, the 2026 Regulations adopt a more transaction-centric approach by linking the permissibility of issuing an overseas guarantee to the permissibility of the underlying transaction under the Foreign Exchange Management Act, 1999 (FEMA). This marks a shift from a form-based regulatory regime to one that connects guarantees to the broader legality of the overall transaction.

The 2026 Regulations also introduce measures to enhance transparency and regulatory oversight. These include a structured reporting mechanism requiring guarantees (including any modifications and invocations) to be reported quarterly to authorised dealer banks (AD bank) for further submissions to the RBI.

An interesting, ancillary consequence of the 2026 Regulations is their likely effect on enforcement litigation in India, as Indian debtors have frequently challenged the enforcement of foreign judgments and foreign arbitral awards, arguing that the underlying transaction violates FEMA and the 2000 Regulations.

The key features of the 2026 Regulations, how they may streamline enforcement, curb such technical defences, and deter debtors from delaying repayment are discussed below.

Under the 2000 Regulations, a person resident in India was prohibited from issuing a guarantee in favour of a person resident outside India without obtaining either general or special permission from the RBI. While the 2026 Regulations retain the requirement to obtain RBI’s permission, the most significant change from the earlier framework is the introduction of a structured reporting regime for guarantees applicable to all stakeholders.

It mandates that all stakeholders must report the issuance, modification and invocation of a guarantee to an AD bank on a quarterly basis. This is a marked departure from the 2000 Regulations, which lacked comprehensive reporting requirements.

The responsibility for reporting is placed on different stakeholders in the following manner:

This clear allocation of reporting obligations also seeks to close regulatory gaps and ensure that at least one stakeholder is responsible for ensuring compliance.

The 2026 Regulations permit Indian residents who fail to comply with the reporting requirements to do so at a later stage upon payment of a late submission fee. Thus, it seems that the new Regulations follow the principle that in cases where requisite RBI permission has not been obtained for issuing a guarantee, the only consequence is delayed reporting of the guarantee, along with payment of a late submission fee. The necessary implication, without expressly stating it, is that the violation can be regularised and non-compliance does not render the guarantee unenforceable, which is also in line with the interpretation made by courts, discussed below.

The process of enforcing a foreign judgment before Indian courts, under the Code of Civil Procedure, 1908, involves a stage at which debtors can file objections, but only on narrow grounds. Similarly, the Arbitration and Conciliation Act, 1996, allows a debtor to object to the enforcement of a foreign arbitral award on the ground that the award is in breach of fundamental Indian law, i.e., a principle or legislation so intrinsic to Indian law that it cannot be compromised (a facet of the public policy objection).

Regulation 3 of the 2000 Regulations required RBI’s permission for guarantees issued by a person resident in India in favour of a person resident outside India, but did not explicitly require prior permission. In practice, such permission (prior to or after issuance) was not always obtained.

Debtors have often relied upon the language of Regulation 3 to challenge the enforcement of a foreign judgment or arbitral award against them, on the ground that the guarantee (under which they have been made liable to pay the creditor) was void because the prior permission of the RBI was not obtained (although the regulations did not require prior permission).

Indian courts and tribunals have consistently rejected such objections, clarifying that FEMA is a regulatory statute and that its contraventions do not automatically invalidate commercial transactions. The courts have also recognised that post facto permission of the RBI may be obtained where permission was required (but previously not obtained) under the FEMA or its regulations, if such violation can be condoned, so as not to render an award or judgment unenforceable under Indian law on this ground.

In a landmark case, the Supreme Court rejected the guarantor’s objection that a foreign award violated the fundamental policy of Indian law on the ground that it contravened FEMA rules, and held that the failure to obtain RBI’s prior permission would not render the foreign award unenforceable.³ The High Courts have followed suit. Similarly, the National Company Law Tribunal, Delhi, also rejected such an objection in insolvency proceedings initiated by a foreign creditor against a guarantor.⁴

Despite this settled jurisprudence, guarantors have continued to raise objections, causing needless delays, additional costs, and prolonged litigation for creditors in the enforcement of decrees and arbitral awards in India. Given that the 2026 Regulations expressly permit the regularisation of certain technical defaults, including reporting the issuance of guarantees, at a later date, the scope of technical objections by guarantors is likely to be significantly curtailed.

The 2026 Regulations are a significant step towards updating the statutory provisions to keep pace with the complexities of modern commercial transactions. The approach of linking the permissibility of guarantees to the permissibility of the underlying transactions, and the introduction of a structured reporting regime, aims to bring greater clarity and transparency to overseas guarantee arrangements. The new regulations also reflect an attempt to strengthen compliance and oversight in cross-border financial transactions.

While the approach of introducing the reporting requirements and regularisation through payment of late submission fees is consistent with the judicial reasoning that a guarantor should not be permitted to use its own regulatory default, the actual impact of these changes on litigation related to enforcement remains to be seen. Whether these changes will substantially reduce objections at the enforcement stage will depend on their implementation. However, the shift in regulatory focus to encourage compliance and accountability is a promising step in the right direction.

Overall, the 2026 Regulations indicate a move towards a more compliance-based and transparent approach to guarantees under FEMA. Their effectiveness, particularly with respect to enforcement-related litigation, will depend on how courts interpret and apply the new provisions in the coming years.