Borrowing in Rupees on basis of guarantee issued by NRI

By | August 14, 2015

Borrowing in Rupees on basis of guarantee issued by NRI

Question : Can the Person resident outside India gave guarantee of a loan  taken in Indian currency by resident in India from another  person resident in India ?

A person resident in India can borrow in Indian rupees from another person resident in India. Such loan can be guaranteed by a person resident outside India with approval of RBI. If the Indian borrower makes a default, the guarantee may be invoked and the non-resident guarantor is required to meet liability.

In such case, a person resident in India, who is Principal debtor, can make payment to person resident outside India who has met the liability under the guarantee. General permission has been granted by RBI for this purpose under Notification FEMA 29/2000-RB dated 26-9-2000.

This facility has been extended to non-fund based facilities (such as LC, guarantees, Letter of Undertaking, Letter of Comfort) entered into between two persons resident in India – RBI circular No. 20 dated 29-8-2012.

Question : What are the reporting requirements in such cases ? 

Reporting of all guarantees issued and invoked – Authorised dealers shall submit details of such guarantees issued and invoked by e-mail to RBI on quarterly basis – RBI circular No. 20 dated 29-8-2012.

Question: can the guarantee be provided in case of Borrowing by Indian companies engaged in Infrastructure Finance ?

Infrastructure Finance Companies (IFCs) can raise domestic debt through issue of capital market instruments like debentures and bonds. IFC should be classified as IFC as per RBI guidelines dated 12-2-2010.

The credit enhancement (by providing guarantee) can be provided by multilateral/regional financial institutions and Government owned Development Financial Institution. Underlying debt instrument should have minimum average maturity of seven years. Guarantee fee and other costs shall not exceed 2%. All-in-cost ceiling will be as specified depending on maturity period – RBI circular No. 40 dated 2-3-2010.

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