The Reserve Bank of India (RBI) has recently released draft guidelines on foreign exchange guarantees, setting out clear conditions for Indian citizens and institutions involved in such transactions. These rules are designed to ensure compliance with the Foreign Exchange Management Act (FEMA) and bring greater transparency to cross-border dealings.
Key Highlights of the Draft Rules
1. RBI Approval is Mandatory
Indian citizens cannot act as a **surety, principal debtor, or creditor** for any guarantee linked to current or capital account transactions without the RBI’s prior approval.
2. Restrictions on Dealers
Authorised dealers are not permitted to issue letters of comfort or letters of undertaking in connection with foreign exchange guarantees.
3. Reporting Requirements
Any Indian resident acting as a surety must report details of the guarantee—including changes in amount or invocation—**within seven days** of the issuance or modification.
4. Late Reporting and Fees
If reporting is delayed, a late submission fee must be paid within seven days. This facility is available for a maximum of **three years** from the due date, after which non-compliance cannot be regularised through late fee payment.
Why This Matters?
For individuals and businesses engaged in cross-border transactions, these rules underline the importance of regulatory compliance. By mandating timely reporting and restricting unauthorised commitments, the RBI aims to strengthen oversight, minimise risks, and ensure alignment with FEMA provisions.
Practical Implications for Banks and Customers
For Banks
* Must exercise greater caution while advising customers on foreign exchange guarantees.
* Cannot issue letters of comfort or undertaking for such guarantees.
* Need stricter due diligence to ensure compliance and avoid reputational risks.
For Customers (Individuals & Businesses)
* Prior RBI approval is mandatory before acting as a surety in foreign exchange transactions.
* Guarantees and related changes must be reported within **seven days**.
* Delayed reporting can result in late fees, and repeated lapses may attract penalties.
✅ Key Takeaways
* RBI approval is compulsory before acting as a surety in foreign exchange guarantees.
* Reporting within seven days is critical to remain compliant.
* Late submission fees are allowed but only for up to three years.
* Banks cannot issue letters of comfort or undertaking under these rules.
* Both banks and customers must adopt a compliance-first approach to avoid regulatory and financial risks.
In short, both banks and customers need to treat these draft norms seriously, as they significantly raise the bar for compliance in cross-border financial dealings.
