Resident creditors can obtain guarantees, but where both the principal debtor and the surety are non-residents, the underlying transaction must comply with foreign exchange regulations
The Reserve Bank of India (RBI) on Monday issued the Foreign Exchange Management Regulations, under which resident Indians are prohibited from issuing credit guarantees in favour of non-resident Indians (NRIs).
“…no person resident in India shall be a party (principal debtor, surety or creditor) to a guarantee where any of the other parties to the guarantee is a person resident outside India,” the central bank said in a notification.
Meanwhile, resident Indians are allowed to act as a surety or principal debtor only if the underlying transaction is permitted under foreign exchange law and both parties are eligible to lend or borrow from each other under the borrowing and lending rules.
According to the central bank, these eligibility conditions do not apply in cases involving authorised dealer banks backed by counter-guarantees or full collateral from non-residents, guarantees issued by Indian agents of foreign shipping or airline companies for statutory dues, or where both the surety and the principal debtor are residents.
Resident creditors can obtain guarantees, but where both the principal debtor and the surety are non-residents, the underlying transaction must comply with foreign exchange regulations.
The rules also prescribe detailed reporting requirements. Depending on the structure, the obligation to report rests with the surety, principal debtor or creditor. Issuance, modification and invocation of guarantees must be reported quarterly to authorised dealer banks, which will forward the information to the Reserve Bank.
Delayed reporting attracts a late submission fee calculated on the amount involved and the period of delay.
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