The Reserve Bank of India’s Foreign Exchange Management (Guarantees) Regulations, 2026, notified on 6 January 2026, mark a quiet but important shift in India’s cross-border regulatory framework. This development will require deal teams to rethink how cross-border guarantees are structured in M&A transactions.
By replacing an approval-led regime with a condition-based system, the RBI has reduced procedural friction—but has also shifted significantly greater responsibility onto dealmakers, lenders, and in-house legal teams. For cross-border M&A and acquisition financing, this is not just a regulatory update. It is a structural change in how guarantees are analysed—and how deal risk is allocated.
Why this matters now
Guarantees sit at the heart of deal risk allocation. They are used by sellers seeking recourse beyond thinly capitalised acquisition vehicles; lenders requiring group-level credit support; and buyers structuring indemnity protection, and by sellers seeking security around deferred consideration and earn-outs.
For instance, where an offshore buyer acquires an Indian business through a newly incorporated SPV with minimal capital, sellers and lenders often look to the parent for support. That support—whether framed as a guarantee, indemnity or undertaking—becomes critical to closing the deal.
Under the earlier regime, the key question was often whether RBI approval was required. That question has now been replaced with a more demanding one: Does the guarantee satisfy the conditions prescribed under Foreign Exchange Management Act, 1999 (FEMA) and allied regulations?
The reform does not reduce regulatory risk—it shifts it from ex-ante regulatory approval to ex-post structuring judgment and compliance discipline.
What has changed?
The framework is shorter, clearer, and more principles based.
First, a baseline prohibition: No Indian resident can act as principal debtor, surety, or creditor in a guarantee involving a non-resident, except as “permitted or with specific RBI approval”.
Second, conditional permissions: Many guarantees can now proceed without prior approval, provided the underlying transaction is not prohibited under FEMA, and the parties are eligible to lend to and borrow from each other under applicable regulations.
The framework suggests that, at the time of issuance, parties are required to ensure eligibility to lend and borrow under applicable regulations, without necessarily needing to demonstrate full compliance with all detailed conditions of the underlying transaction at that stage.
Third, reporting-led oversight: Quarterly reporting through authorised dealer (AD) banks replaces prior approvals, covering issuance, modification and invocation of guarantees, with defined timelines and allocation of reporting responsibility based on party residency.
The real shift: Substance over form
The most significant change lies in the definition of “guarantee”. The regulations adopt a broad, substance-driven approach, covering any arrangement— “by whatever name called”—where one party undertakes to discharge another’s obligation on default.
This has important consequences. For example, an earn-out arrangement where a parent undertakes to pay the seller if the acquisition vehicle fails to meet agreed financial thresholds may, in substance, operate as a guarantee, even if it is not described as one. Similarly, indemnity backstops or payment support undertakings embedded in transaction documents may fall within the same framework.
In other words, nomenclature will not determine regulatory treatment. Substance, as assessed in the context of the underlying transaction, will.
Implications for cross-border M&As
For many transactions, the new framework is directionally positive. Where a guarantee structure clearly fits within the framework, execution timelines should improve as one layer of regulatory uncertainty is removed. However, this comes with a corresponding shift in responsibility.
Greater interpretive responsibility now rests with parties and their AD banks, whose approach to classification and permissibility is likely to be determinative in practice, particularly in the absence of upfront regulatory approvals.
This plays out in common deal scenarios in:
· Inbound transactions, offshore buyers support obligations of Indian acquisition vehicles
· Outbound deals, Indian parents support offshore borrowing by overseas subsidiaries
· Acquisition documents, parties structure protection around deferred consideration, earn-outs or indemnity exposure.
These are not always viewed as financing arrangements, but may, depending on structure, qualify as guarantees. In practice, issues often arise late. A clause intended as standard commercial protection—such as a parent undertaking to “ensure” payment—may be flagged by the AD bank as a guarantee, potentially delaying closing while the structure is reassessed.
What in-house teams should do?
· Identify guarantee-related issues early, particularly where structures involve parent support, credit enhancement, earn-outs or indemnity protection
· Test substance over form across transaction and financing documents
· Engage early with AD banks where classification or permissibility is unclear
· Align guarantee analysis with the underlying FEMA framework governing the transaction
Conclusion
The 2026 regulations are a clear improvement. They make legitimate cross-border guarantees more usable and reduce procedural delays. But they also introduce a more disciplined compliance framework. The question is no longer whether a guarantee is permitted—it is whether it has been correctly identified in the first place.
For deal teams, the margin for error has not reduced. It has simply moved—from regulatory approval to structuring judgment, and to how the arrangement is ultimately interpreted in practice.
Prasenjit Chakravarti is Partner and Govinda Toshniwal is Counsel at Khaitan & Co. The views expressed are personal.
