CS Deepak Pratap Singh

We are in the modern era in which whole world became our play ground. Gone are the days, when people were afraid of for going abroad. We Indian proved our mantle all over the world, through our business sense and information technologies developments. Our multinational companies are spreading their business all over the world and they are competing with many multinationals of other countries. The government has provided various facilities and support to increase export and reduce import to the country.

 The Indian companies doing business abroad through their Joint Ventures/ Wholly Owned Subsidiaries generally required providing guarantee or security for export and import and doing of business to their Joint Ventures/ Wholly Owned Subsidiaries.

The provisions of Foreign Exchange Management (Guarantees) Regulations, 2000 are applicable in case of giving of Guarantees otherwise the permission of RBI is required.

Regulation 4 of Foreign Exchange Management ( Guarantees) Regulations, 2000 authorised an Authorised Dealers in respect of any debt, obligation or other liability incurred by a person resident in India to or to an exporter on account of export out of India or to an importer in respect of imports on deferred payment basis to give guarantee according to directions of RBI.

An Authorised Dealer can also give guarantee in favour of foreign airlines/International Air Transport Association on behalf of (ITAT) approved travel agents, in ordinary course of business.

An Authorised Dealer can give guarantee in respect of any debt, obligation or trade liability of any person resident in India in connection with bona fide trade transaction.

Issue of Guarantee for Import of Services;

An Authorised Dealer can give guarantee in favour of non-resident service provider , on behalf of resident customer , who is service importer , upto US$500,000 or its equivalent. The service importer will report the RBI in case guarantee is invoked. The permission of Ministry of Finance is required if service importer if Public Sector undertaking or Central or State Government Company etc., for an amount exceeding US $100,000 or its equivalent.

Irrevocable Payment Commitments;  the Authorised Dealers can issue Irrevocable Payment Commitments in favour of stock exchanges/ clearing corporations of the Stock Exchanges on behalf of their registered FII clients for purchase of shares and convertible debentures under Portfolio Investment Scheme (PIS).

Guarantee for FDI Transactions; the Authorised Dealers may issue Bank Guarantee without approval of RBI, on behalf of a non-resident acquiring shares or convertible debentures of an India company through open offer/delisting/exit offer, as per SEBI (SAST) Regulations, 1997.

Guarantee by Indian entities other than Authorised Dealers;

Guarantee can be given by a company in India to its Joint Ventures / Wholly Owned Subsidiary abroad according to the provisions of Foreign Management Exchange ( Transfer and Issue of Foreign Security ) Regulations, 2000. The guarantee will be within overall limit prescribed for overseas investment.

Guarantee can be given by promoter company, Group Company, sister concern or associate company in India. Guarantee can be personal or corporate. It can be a primary or collateral. The Financial Commitments including guarantee shall be within overall prescribed ceiling for overseas investment of Indian party i.e. 400% of Net Worth of Indian Company subject to condition that Financial Commitment exceeding US 1 Billion required approval of RBI even though the limit is under 400 % of Net Worth of Indian party.

Note : The Guarantee should not be an Open Ended, i.e. the amount of Guarantee should be specified in the documents and same will be reported to RBI in for ODR-RBI AP(DIR) Circular No. 29 dated 27-03-2006.

Note: In case of Performance Guarantee only 50% of the commitment will be considered, while computing overall limit of financial commitments of India party.

Guarantee by Exporter Company for Contract outside India;  an Exporter can give Bid Bond Guarantee , for bidding for contract abroad without approval, if the amount of such guarantee does not exceed 5% of the Contract Value.

Guarantee for a project outside India; An Exporting Company can give guarantee for performance of project outside India or for availing credit facility from bank or financial institution abroad in connection worth execution of project outside India. In this case prior approval of approving authority is required.

Guarantee of Joint Ventures/ Wholly Owned Subsidiaries abroad; an Indian party, while setting up JVs/ WOSs abroad can give guarantee if the terms and conditions of FEMA has been complied with and Financial Commitments including value of guarantee given will be within the limit prescribed by the RBI. An Authorised Dealer can also give guarantee for their clients, establishing JVs/WOSs abroad.

Guarantee by agent of Shipping/ Air Line Companies; an agent of Foreign Shipping/ Air Line companies in India can give guarantee on behalf of its principal to any obligations or liabilities to any statutory or Government authority in India.

Guarantee in connection with Margin Money for Hedging Transactions;  Authorised dealers in India can give guarantee or standby letter of credit in respect of obligation incurred by a person in Indian in connection with the payment of Margin Money in respect of approved commodity hedging transactions, subject to such conditions as may be prescribed by RBI and according to Foreign Exchange Management (Guarantees) Regulations, 2000.

Guarantee in favour of overseas lender or security trustees; Authorised Dealer category I can issue No Objection under FEAM for creation of charge on immovable assets, financial securities of corporate or  personal guarantee in favour of overseas lender/security trustee, to secure the ECB to be raised by borrower[ Regulation 5(d) of Foreign Exchange Management ( Guarantee) Regulation, 2000]. “NO OBJECTION” can also be issued for issue of Corporate Guarantee in favour of overseas lessee, for operating lease in respect of import of Air Craft/ Air Engine/ Helicopter.

Corporate Guarantee to Overseas Lessor for financing import thorough Operating Lease; Regulation 5(e) of Foreign Exchange Management ( Guarantee) Regulation, 2000, authorises Authorised Dealers to issue Corporate Guarantee in favour of their clients  to the overseas lessors for financial import through Operating Lease according the Foreign Trade Policy of India.

Irrevocable Payment Commitments to Stock Exchange on behalf of FIIs: the Custodian Banks can issue Irrevocable Payment Commitments in favour of Stock Exchange/ Clearing Corporations of the Stock Exchanges on behalf of FII clients for purchase of shares under Portfolio Investment Scheme.

Note: A Company in India cannot obtain guarantee by International Banks, International Financial Institutions or JV Partners for obtaining Credit Enhancement in India without prior permission of RBI.

However a person resident in India and eligible to raise foreign currency loans, under Regulation 6(1) of FEM( Borrowing or Lending in Foreign Exchange) Regulation,2000 can obtain credit enhancement in the form of guarantee from a person resident outside India, for its domestic debts raised through bonds and debenture without approval from RBI.

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