FOREIGN EXCHANGE MANAGEMENT (GUARANTEES) REGULATIONS, 2000 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

 Regulation

The Reserve Bank of India (‘RBI’ for short) made the Foreign Exchange Management (Guarantees) Regulations, 2000 (‘Regulations’ for short) vide Notification No. FEMA 8/2000-RB, dated 03.05.2000. These regulations came into effect from 01.06.2000.

Prohibition

Regulation 3 provides that except with the general or special permission of RBI and subject to these regulations, no person shall give a guarantee or surety in respect of, or undertake a transaction, by whatever name called, which has the effect of guaranteeing, a debt, obligation or other liability owed by a person resident in India to, or incurred by, a person resident outside India.

Restriction

A new Regulation 3A was inserted with effect from 29.06.2012 vide Notification No. FEMA 251/2012-RB, dated 06.12.2012. Regulation 3A provides that no company shall avail domestic rupee denominated structured obligations by obtaining credit enhancement in the form of guarantee by international banks, international financial institutions or joint venture partners, except with the prior approval of the RBI.

The proviso to Regulation 3A provides that a person resident in India who is eligible to raise foreign currency loan under  Regulation 6 (1) of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 read with Schedule I thereto, may obtain, without the prior approval of the Reserve Bank, credit enhancement in the form of guarantee from a person resident outside India for the domestic debts raised by such companies through issue of capital market instrument like bonds and debentures subject to satisfying the terms and conditions as may be stipulated by the Reserve Bank, from time to time, in this regard

Guarantee

These regulations provide for giving guarantee by the company. These guarantees are of two types-

• Guarantees by Authorized dealer;
• Guarantees by a person other than Authorized dealer.

Guarantees by Authorized dealer

1.An Authorized dealer may give guarantee in respect of any debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside India-

• To an exporter, on account of exports from India; and
• an importer, in respect of import on deferred payment terms

in accordance with the approval granted by the Reserve Bank for import on such terms.

2.An Authorized Dealer may give guarantee, Letter of Undertaking or Letter of Comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside India (being an overseas supplier of goods, bank or a financial institution), for import of goods, as permitted under the Foreign Trade Policy announced by the Government of India from time to time and subject to such terms and conditions as may be specified by Reserve Bank from time to time.

3. An authorized dealer may give guarantee or standby Letter of Credit to an obligation incurred by a person resident in India and owed to a person resident outside India in connection with payment of margin money in respect of approved commodity hedging transaction of such person residing in India subject to such terms and conditions as may be stipulated by the Reserve Bank from time to time.

4.An authorized dealer may give a guarantee to any debt, obligation or other liability incurred by a person resident outside India, in the following cases-

• in connection with a bona fide transaction – this is covered by a counter-guarantee of a bank of international repute resident abroad;
• as a counter-guarantee to cover guarantee issued by his branch or correspondent outside India, on behalf of Indian exporter in cases where guarantees of only resident banks are acceptable to overseas buyers.
• for acquiring shares or convertible debentures of an Indian company through open offers/ delisting/ exit offers, provided-

• the transaction is in compliance with the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations;
• the guarantee is covered by a counter guarantee of a bank of international repute

the guarantee shall be valid for a tenure co-terminus with the offer period.

5. An authorized dealer may give a guarantee in the following other cases-

• on behalf of his customer or branch or correspondent outside India in respect of missing or defective documents, or authenticity of signatures
• in favor of organizations outside India issuing travelers cheques stocked for sale in India by the authorized dealer or by his constituents who are authorized persons.
• in favor of foreign airlines/International Air Transport Association (IATA), on behalf of IATA approved travel agents.
• in favor of a non-resident service provider, on behalf of a resident customer who is a service importer, subject to such terms and conditions as stipulated by the Reserve Bank from time to time.

No guarantee for an amount exceeding USD 500,000 or its equivalent shall be issued on behalf of a service importer other than a Public Sector Company or a Department / Undertaking of the Government of India / State Government.

The service importer is a Public Sector Company or a Department / Undertaking of the Government of India / State Government, no guarantee for an amount exceeding USD 100,000 or its equivalent shall be issued without the prior approval of the Ministry of Finance, Government of India.

6.An authorized dealer (custodian bank), subject to the directions issued by the Reserve Bank, from time to time, may issue Irrevocable Payment Commitments (IPCs) in favor of the Stock Exchanges/Clearing Corporations of the Stock Exchanges, on behalf of their registered FII clients for purchase of shares and convertible debentures under the portfolio investment scheme.

Regulation 2(iv) defines the expression ‘Irrevocable Payment Commitments’ as irrevocable confirmation issued by the custodian bank in favour of a stock exchange/clearing corporation of a stock exchange on behalf of its customers, to meet the payment obligation arising out of a 'buy' transaction.

Guarantees by persons other than Authorized dealer

A person other than an authorized dealer may give a guarantee in the following cases-

• an exporting company may give a guarantee for performance of a project outside India, or for availing of credit facilities, whether fund-based or non-fund based, from a bank or a financial institution outside India in connection with the execution of such project with the previous approval for undertaking the project obtained from the approving authority in India;

• an exporter company may give guarantee in lieu of Bid Bond Guarantee, for bidding for a contract outside India without the approval of the Approving Authority provided that the amount of such guarantee shall not exceed 5% of the contract value.
•  An Indian Party promoting or setting up outside India, a Joint Venture or a Wholly Owned Subsidiary may give a guarantee to or on behalf of the latter in connection with its business. For this guarantee the terms and conditions stipulated in FEM (Transfer and Issue of Foreign Security) (Amendment) Regulations, 2004 for promoting or setting up such company or subsidiary are continued to be complied with. This guarantee may also be given an Authorized dealer.
• An agent in India of a shipping or airline company incorporated outside India may give a guarantee on behalf of such company in connection with its obligation or liability owed to any statutory or Government authority in India.
• A bank which is an authorized dealer may, subject to the directions issued by the RBI in this behalf, permit a person resident in India or on behalf such person to issue guarantee in favor of an overseas, lender or security trustee to secure an external commercial borrowing availed under the provisions of the FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000.
• A bank, an authorized dealer, may, subject to the directions issued by the RBI in this behalf, permit a person resident in India to issue corporate guarantee in favor of an overseas lessor for financing import through operating lease effected in conformity with the Foreign Trade Policy in force and under the provisions of the FEM (Current Account Transactions) Rules 2000 and the Directions issued by Reserve Bank under the Act from time to time.