RBI’s New Forex Guarantee Rules Could Change How Banks and Businesses Operate - Here’s What’s Inside

The Reserve Bank of India (RBI) has drafted norms on foreign exchange guarantee which say that an Indian citizen cannot act as a surety, principal debtor, or creditor for a guarantee involving current or capital account transaction without the central bank's permission.

When Can A Resident Provide Guarantee?

An Indian resident can only provide guarantee in case where it is not in contravention of the FEMA Act. Authorised dealers are not allowed to give a letter of comfort or a letter of undertaking for a guarantee.

Additionally, an Indian resident acting as surety under these regulations shall report the guarantee including any change in the amount and invocation of such a guarantee, if any, within seven days from the date of issuance/aforementioned change or invocation of guarantee.

Further, Indian citizens who do not meet the reporting requirement have to also pay a late submission fee within seven days at the rates and in the manner as per the directions issued by the RBI.

Late payment facilities are available only up till a period of three years from the due date of such reporting.

Key Aspects Of FEMA and RBI Regulations

The Foreign Exchange Management Act (FEMA), 1999, and its associated rules and regulations, framed by the Reserve Bank of India (RBI), govern foreign exchange transactions in India.

According to FEMA, transactions are classified into current account and capital account transactions, and it restricts certain activities related to foreign exchange. The RBI, through its notifications and circulars, provides detailed guidelines and clarifications on various aspects of FEMA.

Certain key aspects include foreign exchange transactions, current account transactions, capital account transactions, foreign investment, external commercial borrowings (ECB), import and export, immovable property, compounding of contraventions, resident foreign currency accounts and more.

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