Written by Nimisha Agrawal and Raghav Chopra.

I. Introduction

Cross-border corporate guarantees have long raised a distinct regulatory concern under India’s foreign exchange framework, because they create contingent liabilities that may later turn into actual external exposure. The Foreign Exchange Management (Guarantees) Regulations, 2026, read with  A.P. (DIR Series) Circular No. 19 dated January 12th, 2026, are seen as a step towards liberalisation of India’s cross-border guarantee framework. The Foreign Exchange Management (Guarantees) Regulations, 2000 (FEMA 8/2000-RB, dated May 3, 2000) were clearly fragmented and heavily approval based.   The 2026 Regulations replaces this earlier regime with a broader principle-based framework, under which eligible transactions may proceed through the automatic route under Regulations 5 and 8, subject to structured reporting through Form GRN under Regulation 7. Permissibility now hinges on two conditions under Regulation 5. First, the underlying transaction must not be prohibited under the FEMA framework. Second, the surety and principal debtor must satisfy borrowing-lending eligibility under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

This article argues that characterising the 2026 Regulations as a liberalising reform is misleading. Rather than reducing regulatory control, the new framework intensifies it by replacing prior approvals with continuing supervision through reporting. Although, the RBI’s objective of tracking cross-border financial exposure is legitimate, the intensity and frequency of this reporting structure may still be disproportionate to that aim.-

II. Corporate Guarantees as Capital Account Transactions

Section 2(e) of FEMA, 1999 defines a “capital account transaction” as one that alters assets or liabilities, including contingent liabilities, of a resident outside India or a non-resident within India. Since a cross-border guarantee creates a contingent liability at execution, it falls squarely within this definition before any funds move. Whereas the 2000 Regulations didn’t define the tripartite structure of a guarantee, Regulation 2 of the 2026 Regulations expressly defines it by identifying the principal debtor, the surety who undertakes to perform upon default, and the creditor as beneficiary. While this definitional clarity has regulatory merit, it also expands the universe of reportable relationships, as the RBI can now assign reporting obligations based on the residency composition of the guarantee’s parties under Regulation 7. The regulatory intent in tracking such exposure is therefore legitimate. What remains questionable is whether the 2026 framework’s response is proportionate.

III. From Approval-Based Control to Continuous Surveillance

Under Regulation 3 of the 2000 Regulations, Indian residents were broadly prohibited from issuing cross-border guarantees. Regulations 4 and 5 carved out narrow exceptions. Regulation 4(1) permitted AD banks to issue guarantees for export obligations and imports on deferred payment terms. Regulation 4(3)(iv) extended this to guarantees on behalf of service importers, subject to prescribed monetary limits. Regulation 5(a) allowed non-bank entities to issue bid bonds for overseas contracts, capped at 5% of contract value, while Regulation 5(b) permitted corporate guarantees supporting overseas subsidiaries, subject to compliance with the ODI framework. The rationale behind these narrow permissions was that each transaction needed individual vetting before foreign exchange exposure could be created. This model was cumbersome, but finite. Once RBI approval was obtained, regulatory engagement ended. The old regime placed a one-time entry burden; the new one creates continuing reporting obligations.

The 2026 Regulations adopt a principle-based compliance architecture. Regulation 7 introduces a lifecycle reporting obligation requiring quarterly disclosure of every issuance, modification, and invocation through Form GRN. The reporting entity must file within 15 calendar days of the quarter’s end (Regulation 7(3)), and the AD bank must forward within 30 days. Filing instructions require that pre-2026 guarantee modifications be reported as “fresh issuances,” duplicating entries. Regulation 8 quantifies the late submission fee at ₹7,500 + 0.025% × A × n, consistent with the RBI’s standardisation of LSF across FEMA reporting regimes. Thence, the removal of front-end approval has not reduced compliance intensity, rather, it has redistributed it across the guarantee’s life though recurring Form GRN filings, AD-bank forwarding duties, and ongoing LSF exposure for every subsequent modification.

IV. The Proportionality Deficit

1. The Puttaswamy Framework Applied

In K.S. Puttaswamy (2017), the Supreme Court set up a four-part proportionality test for state actions that limit rights. The measure must (a) pursue a legitimate aim, (b) be suitable, (c) constitute the least restrictive alternative, and (d) not have a disproportionate impact on the individual subject to measure. Justice Chandrachud applied this framework in K.S. Puttaswamy (II) (the Aadhaar judgment) to strike down mandatory Aadhaar-bank linkage, holding that the provision was “completely disproportionate to the objective sought to be achieved” because there were possibly less restrictive measures. The reasoning is directly applicable.

Prongs (a) and (b) are satisfied, as the RBI’s aim of tracking undisclosed contingent external exposure, which may crystallise into unanticipated outflows and distort balance-of-payments data, is legitimate, and reporting is a suitable means. The issue is not oversight itself, but its intensity and frequency.

However, on prong (c), the framework falters. An event-based reporting model, triggered only on issuance, modification, and invocation, rather than quarterly for every subsisting guarantee regardless of change, would achieve equivalent visibility with a substantially lighter compliance footprint. The SC further reinforced this reasoning in Anuradha Bhasin v. Union of India, holding that the state must “assess the existence of any alternative mechanism” to achieve the objective in a less restrictive manner. By the same logic, quarterly reporting of unchanged guarantees is difficult to justify if event-based reporting can deliver equivalent oversight.

On prong (d), Instruction 6 to Form GRN reserves the RBI’s authority to place commercially sensitive data, including guarantee commissions and counterparty details, in the public domain; while the prudential tracking objective could equally be served by aggregate or anonymised disclosure as entity-level publication imposes a disproportionate competitive cost without a corresponding supervisory gain.

2. Comparative Regulatory Practice

The problem becomes clearer when one compares the Indian framework with other jurisdictions. Section 3B(1)(b) of the UK Financial Services Act, 2012 establishes a principle of proportionality, requiring that any regulatory burden must be “proportionate to the benefits … expected result.” The FCA’s Consultation Paper CP25/32 (November 2025) for example, cut the number of reporting fields from 48 to 37 after evaluating “the proportionality of every aspect of the regime.” This is expected to save more than £100 million a year. A 2025 UK Parliamentary Committee report further warned that regulators “do not have a clear understanding of the cumulative burden” and that their approach “tends to lack proportionality.” Singapore’s Monetary Authority (MAS) similarly provides that regulation should only be introduced when risks are “material or cross a certain threshold” and must be “proportionate to the risk posed,” with cross-border arrangements notified on an ex-post, event-based basis rather than through recurring quarterly returns.

The divergence extends further. The United States imposes no federal requirement for quarterly reporting of corporate guarantees to a central bank. Cross-border guarantees are governed by commercial contract law, with regulatory relevance arising only under specific regimes such as bank capital adequacy rules under the Dodd-Frank Act or SEC disclosure requirements for publicly listed companies. A private company issuing a guarantee for a foreign subsidiary faces no recurring reporting obligation to the Federal Reserve.

Japan’s Foreign Exchange and Foreign Trade Act, significantly liberalised in 1998, shifted from a prior-approval model to a post-notification system. Cross-border guarantees generally appear to be subject to  ex-post  reporting to the Ministry of Finance, not recurring quarterly returns.

At the EU level, there is no dedicated guarantee reporting regime applicable to corporations as such. Guarantees are treated as commercial transactions, with regulatory relevance arising only under bank prudential rules (CRR/CRD) or IFRS accounting standards.

The contrast is stark. No major jurisdiction imposes a quarterly lifecycle reporting obligation for every subsisting corporate guarantee. Most operate on event-based notification or have no dedicated reporting at all. The 2026 Regulations’ 19-field quarterly reporting form, formulaic LSF mechanism, and possibility of public disclosure appear unusually demanding by comparative standards discussed above.

V. Conclusion

The 2026 Regulations do relax entry barriers, but only by altering the mode of control. Visible prior permissions have been replaced with continuous supervision through structured reporting. Viewed through the lens of Puttaswamy, the difficulty with the new regime lies not in its objective, but in the intensity of the means it adopts to achieve it. The 2026 framework requires quarterly reporting under Regulation 7 even where a subsisting guarantee has undergone no change. It also permits possible public disclosure of commercially sensitive data under Instruction 6 and shifts the interpretive burden to AD banks under Regulation 5.

Despite this, the framework does not demonstrate why less intrusive alternatives would fail to achieve the same objective. Across the major comparative jurisdictions discussed here, the prevailing approach is either the absence of a dedicated guarantee reporting regime or reliance on event-based notification rather than quarterly lifecycle returns. The larger point, therefore, is that the removal of prior approvals cannot by itself be treated as liberalisation when it is replaced by a continuing reporting burden whose necessity has not been clearly established. What appears to be liberalisation is better understood as a regulatory shift: the 2026 regime reduces visible entry barriers, but replaces them with deeper informational oversight.