[Analysis] Draft FEM (Guarantees) Regulations 2025 – Key Changes and Impact

The Draft FEM (Guarantees) Regulations, 2025, issued by the RBI, modernise India's framework on cross-border guarantees under FEMA. Replacing the two-decade-old 2000 regulations, it introduces a principle-based approach that allows most guarantees under the automatic route, provided they comply with FEMA. The draft defines key terms like guarantee, creditor, debtor, and surety, extends compliance obligations to all parties (surety, creditor, and principal debtor), prohibits AD banks from issuing LoUs/LoCs for trade credits, and mandates strict 7-day reporting of all guarantees. Designed to enhance transparency, compliance, and ease of doing business, the new regulations aim to simplify global financial transactions while strengthening regulatory oversight.

Table of Contents

1. 1. Introduction
   2. Background & Rationale
   3. Key Changes Involved
   4. Comparative Analysis of Key Changes
   5. Impact Analysis and Strategic Insights for Stakeholders
   6. Conclusion

1. Introduction

Guarantees are the backbone of trust in financial transactions, assuring that debts will be honoured if the borrower defaults. In today’s global economy, such guarantees play a significant role in enabling cross-border transactions. To modernise its two-decade-old framework, the RBI, vide its Press Release dated August 14, 2025, unveiled the draft FEM (Guarantees) Regulations, 2025. The draft regulations shift away from a transaction-specific framework and adopt a principle-based regulatory approach, simplifying cross-border transactions. With a focus on clarity, compliance, and transparency, the draft norms govern guarantees involving a surety, principal debtor, or creditor where a person resident in India provides or avails of a guarantee to or from a person resident outside India.

2. Background & Rationale

The existing FEM (Guarantees) Regulations, 2000, address general prohibitions, restrictions on obtaining overseas guarantees, permissible guarantees that can be issued by authorised dealers, and guarantees that can be issued by persons other than authorised dealers. While these regulations laid the basic framework for regulating cross-border guarantees, they have become outdated in light of evolving business practices and the growing complexity of international transactions.

To simplify compliance and promote the ease of doing business, the RBI has issued draft regulations on guarantees. These regulations adopt a principle-based framework, under which guarantees in cross-border transactions will generally be allowed under the automatic route, provided the underlying and resultant transactions comply with FEMA provisions. Further, the scope of guarantees permitted under the automatic route has been expanded, and a new requirement for comprehensive reporting of all guarantees issued and invoked has been introduced.

3. Key Changes Involved

The key changes involved are as follows –

3.1 Key Terms Defined Under Draft FEM (Guarantees) Regulations, 2025

Regulation 2 of the FEM (Guarantees) Regulations, 2000, provides only a few limited definitions and does not define terms such as guarantee, principal debtor, creditor and surety. In contrast, the draft FEM (Guarantees) Regulations, 2025, define certain key terms to provide greater legal clarity, which are as follows-

a. Guarantee – A contract to perform the promise, or discharge a debt, obligation or other liability in case of default by the principal debtor
b. Principal Debtor – A person in respect of whose default the guarantee is given
c. Creditor – A person to whom a guarantee is given
d. Surety – A person who gives a guarantee

3.2 Extended Compliance Obligations for Persons Resident in India Acting as Creditors or Principal Debtors

Regulation 3 of FEM (Guarantees) Regulations, 2000, places the onus of compliance on a person resident in India (PRII) who gives a guarantee or surety in favour of a person resident outside India (PROI).

The draft FEM (Guarantee) Regulations, 2025, extend this onus to a PRII acting as a creditor or principal debtor, where either the underlying transaction between the creditor and principal debtor or the resultant transaction upon invocation of the guarantee is a capital or current account transaction. This ensures that all guarantees involving cross-border obligations remain fully aligned with FEMA provisions, thereby preventing regulatory breaches.

 

Example

Mr. A, a person resident in India (PRII), provides a guarantee on behalf of Mr. B, a person resident outside India (PROI), who takes a loan of Rs 50,000 from Mr. C, another resident in India. Mr. B intends to use the funds to purchase machinery for his overseas business. In this case, under the existing FEM (Guarantees) Regulations, 2000, only Mr. A, the guarantor, is responsible for ensuring compliance with FEMA norms. However, under the draft Regulations, 2025, the responsibility for ensuring compliance is extended to Mr. C, also, as he is the creditor.

3.3 AD Banks are Disallowed from Issuing Letters of Comfort or Letters of Undertaking for Trade Credits on Imports Into India

Regulation 4 of FEM (Guarantees) Regulations, 2000, requires an authorised dealer (AD) to provide a guarantee, Letter of Undertaking or Letter of Comfort for any debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside India for the import of goods as permitted under the Foreign Trade Policy announced by the Government of India and subject to such terms and conditions as may be specified by the RBI.

However, the RBI vide Circular dated March 13, 2018, discontinued the issuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits on imports into India by AD banks. To ensure clarity, this discontinuation has been expressly incorporated in the draft Regulations.

Accordingly, under the draft Regulations, 2025, a person resident in India may act as a surety, principal debtor, or creditor for a guarantee, subject to certain conditions. One of these conditions is that an AD bank must not issue a Letter of Comfort or a Letter of Undertaking for trade credits on imports into India.

Illustration 1

“India Imports Ltd.” purchases specialised machinery from an “Overseas Supplier” in Japan on deferred payment terms. To assure the Japanese supplier that payment will be made, India Imports’ AD bank issues a bank guarantee on its behalf. Parties (Import): Surety: India Imports’ AD bank (a PR Principal Debtor: India Imports Ltd. (a PRII) Creditor: The Overseas Supplier (a PROI) The issuance of guarantees for bona fide exports and imports is a key function of AD banks. The new regulations will explicitly prohibit AD banks from issuing Letters of Undertaking (LoUs) and Letters of Comfort (LoCs), which were previously used for trade credits. All other forms of permissible trade guarantees must be reported to the RBI within seven days by the AD bank acting as the surety.

Illustration 2 – Performance Guarantee

Vision Construction Pvt. Ltd., an Indian company, has been awarded a contract to build a stadium for a local government in an African country. The contract stipulates that Vision Construction must provide a performance guarantee to the government to ensure the project is completed as per the terms of the agreement. Parties: Surety: Vision Construction Pvt. Ltd. (a PRII) Principal Debtor: Vision Construction Pvt. Ltd. (a PRII) Creditor: The African government (a PROI) A person resident in India (in this case, the exporting company) can give a performance guarantee for a project outside India. The new regulations will require Vision Construction to report this transaction to the RBI within seven calendar days of its issuance, change, or invocation.

3.4 Reporting Requirements Under Draft Regulations

The existing FEM (Guarantees) Regulations, 2000, did not prescribe any reporting requirements. However, the RBI’s Master Directions on Reporting required a statement for reporting non-resident guarantees issued and invoked with respect to fund- and non-fund-based facilities between two persons resident in India. The RBI vide Circular dated June 9, 2022, discontinued this requirement with effect from the quarter ending June 2022.

The draft Regulations, 2025, mandate the reporting of guarantees to the RBI by a person resident in India through AD banks in the prescribed format.
Any changes in the amount and validity of the guarantee, and invocation of the guarantee, if any, must be reported to the RBI through AD Banks within seven calendar days by a person resident in India acting as –

a. Surety
b. Principal Debtor (where a surety is a PROI)
c. Creditor (being a beneficiary of the guarantee provided by PROI)

Further, the facility of delayed reporting with late Submission Fees is available only up to a period of three years from the due date of reporting. Additionally, the formats for reporting guarantees by surety, principal debtor, and creditor are provided under the draft regulations.

3.5 Certain Specific Exemptions Inserted Under Draft FEM (Guarantees) Regulations, 2025

The following are exempted from the provisions of these regulations –

a. A branch of an AD outside India acting as a surety or a principal debtor or a creditor in the normal course of its banking business outside India, unless any of the other parties to the guarantee is a person resident in India.
b. An AD, in its capacity as a custodian bank issuing Irrevocable Payment Commitments, where the principal debtor is a registered FPI and the creditor is a Stock Exchange or Clearing Corporation of the Stock Exchange in India, and the underlying transaction is permitted under the provisions of FEM (non-debt instruments) Rules, 2019.

Tabular explanation of the exemptions from the new Foreign Exchange Management (Guarantees) Regulations, 2025.

Exempted Entity	Conditions for Exemption	Rationale
Branch of an Authorised Dealer (AD) outside India	The branch is acting as a surety, principal debtor, or creditor. The transaction is in the normal course of its banking business outside India.	Crucially, no other party to the guarantee is a person resident in India (PRII). This exemption is designed for transactions that are entirely foreign-to-foreign and do not involve an Indian resident, thereby falling outside the scope of FEMA’s core jurisdiction.
An AD Acting as a Custodian Bank	The AD is issuing Irrevocable Payment Commitments (IPCs). The principal debtor is a registered Foreign Portfolio Investor (FPI). The creditor is a Stock Exchange or a Clearing Corporation of a Stock Exchange in India. The underlying transaction is permitted under the Foreign Exchange Management (non-debt instruments) Rules, 2019.	This exemption streamlines the process for foreign portfolio investments in India by removing a layer of regulatory reporting for a specific, well-defined type of transaction that is already governed by other rules.

4. Comparative Analysis of Key Changes

S. No.	Key Changes	Existing Regulations, 2000	Proposed Draft Regulations, 2025	Comments/ Impact Analysis
1.	Key Terms Defined	Contained limited definitions, leading to interpretational ambiguity [Regulation 2]	Provide explicit definitions of Guarantee, Principal Debtor, Creditor and Surety [Regulation 2]	By clearly defining key terms, the draft regulations aim to enhance legal precision, reduce interpretational disputes and ensure consistency in implementation across transactions. This strengthens confidence among AD banks and corporates, facilitating smoother compliance.
2.	Compliance obligations on persons resident in India (PRII)	The onus of compliance lies only on PRII, giving guarantee or surety to PROI [Regulation 3]	Onus of compliance extended to PRII acting as creditor or principal debtor where the underlying/resultant transaction is a capital or current account [Regulation 3]	Strengthens regulatory safeguards by ensuring that not just guarantors but also creditors and principal debtors are accountable. This responsibility framework minimises the gap, prevents circumvention of FEMA provisions and ensures that every party to a guarantee agreement checks for compliance.
3.	Issuance of Letters of Comfort (LoCs) or Letters of Undertaking (LoUs) by AD banks	AD banks may issue LoUs/LoCs for trade credits on imports into India [Regulation 4]	AD banks are explicitly disallowed from issuing LoUs/LoCs for trade credits on imports into India [Regulation 5]	Provides regulatory clarity and finality by codifying the RBI’s circular discontinuing the issuance of LoCs/LoUs. This move reduces the risk of misuse or fraud in trade credit financing, strengthens banking discipline and safeguards financial stability.
4.	Reporting Requirements	No mandatory reporting of guarantees [No such Regulation]	Mandatory reporting of guarantees issued, or invoked, by the PRII via AD Banks within seven calendar days; delayed reporting allowed with late submission fees [Newly Inserted Regulation 6 & 7]	Mandating the reporting of guarantees to the RBI via AD banks enables the RBI to track, supervise, and regulate guarantees in an organised manner, allowing for the early detection of risks and ensuring accountability. Also, permitting delayed reporting with late submission fees balances compliance while maintaining operational flexibility.
5.	Specific exemptions	No explicit exemptions are available [No such Regulation]	Exemptions inserted for (a) AD branches outside India acting in the capacity of surety, creditor or principal debtor and (b) AD in its capacity as a custodian bank issuing Irrevocable Payment Commitments [Newly Inserted Regulation 4]	The exemptions inserted for branches of ADs outside India, acting in the normal course of their banking business, and ADs in their capacity as custodian banks, ease compliance and allow the smooth conduct of cross-border transactions. It also reduces unnecessary regulatory hurdles while ensuring that safeguards remain in place for transactions.

5. Impact Analysis and Strategic Insights for Stakeholders

The new regulations will have a far-reaching impact on all participants in cross-border transactions. While they offer significant benefits, they also introduce new compliance challenges that require proactive adaptation.

5.1 Impact on Corporate Entities

The shift to a principle-based framework provides Indian businesses with unprecedented flexibility and autonomy. The new automatic route will lead to a significant reduction in bureaucratic delays and complexities, enhancing the “ease of doing business” for companies engaged in international trade and investment. This liberalisation will empower businesses to respond more quickly to market opportunities without being constrained by lengthy approval processes.

However, this increased autonomy comes with a heightened responsibility. The new reporting regime introduces a new and stringent compliance burden. The strict 7-day reporting timeline is particularly challenging and necessitates the development of robust, real-time internal systems to track and report guarantee-related events. Companies must transition from a reactive, case-by-case approach to a proactive, system-driven compliance model. Failure to meet these new reporting standards could result in the imposition of the Late Submission Fee or other penalties.

5.2. Impact on Authorised Dealers (ADs)

The role of Authorised Dealers (ADs) is fundamentally redefined by the new regulations. They will no longer act as the primary gatekeepers of specific approvals for a wide range of transactions. Instead, their role will transition to that of a conduit and verifier, responsible for receiving and transmitting the mandatory reports from their clients to the RBI.

The explicit prohibition on LoUs and LoCs will require ADs to re-evaluate and innovate their trade finance product offerings to meet the needs of their clients in a compliant manner. Furthermore, ADs must invest in technology and training to ensure they can manage the volume and complexity of the new reporting requirements. They are tasked with ensuring that all guarantees are “duly backed by an agreement” and that the submitted information is accurate.

6. Conclusion

The draft FEM (Guarantees) Regulations, 2025, aim to simplify the existing framework through a principle-based approach. By extending compliance obligations on persons resident in India acting as surety, principal debtor or creditor, mandating comprehensive reporting to the RBI, disallowing the issuance of Letters of Comfort and Letters of Undertaking for trade credits, and providing specific exemptions, the regulations seek to enhance transparency, strengthen regulatory alignment and promote ease of doing business in cross-border transactions.