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India is the cynosure of global investors and corporations, as it has already become the third largest economy in the world in terms of purchasing power parity and is said to become No. 3 in the real gross domestic product by the year 2030.[1] At an accelerated pace, India is becoming an eye catcher for trade and commerce as well as international investments. The ever growing domestic consumption and growth opportunities in India are encouraging more and more foreign investors. Financial institutions, private equity funds, foreign banks are looking for investments to accelerate their growth plans.

The unprecedented growth of businesses in India has also triggered a massive amount of borrowing by Indian businesses. Indian businessmen prefer to borrow from foreign lenders as the rate of interest offered by the foreign lenders is considerably low, and this is the primary reason as to why borrowing from foreign financial institutions, foreign banks, etc is increasing at a rampant pace in India. Commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g., floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders is referred to as external commercial borrowings.[2]

External commercial borrowings can mainly be accessed via two routes namely[3]:

  1. Automatic Route.

In order to borrow under the automatic route, the borrower can enter into a loan agreement without the prior approval of the Reserve Bank of India. However, the said loan agreement must be registered with Reserve Bank of India. Service sector organizations, software corporations, units in Special economic zones for their own business requirements, Non-Governmental Organisations which are engaged in microfinance activities and Infrastructure Finance Companies are permitted to borrow under the automatic route.

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  1. Approval route.

In order to borrow under the approval route, the prospective borrower will first have to submit an application to the Reserve Bank of India, in the prescribed form through the authorized dealer as specified by the Reserve Bank. Generally, all the financial institutions engaged in infrastructure financing and institutions not specified in Automatic Route are supposed to borrow money under approval route.

Before sanctioning a loan to an Indian businessman or an Indian business, foreign lenders insist on the creation of some form of security, personal or corporate guarantee by the promoter or the promoting company, in order to safeguard their interests. The borrower may give a charge over the immovable assets or/and financial securities such as shares in favour of the foreign lenders, in order to secure the external commercial borrowing.

Under the Foreign Exchange Management Act, 1999, the borrower is supposed to take a no objection for the creation of charge on immovable assets, financial securities and issue of corporate or personal guarantee in favour of the overseas lender.[4] In order to obtain a no objection certificate from an authorized dealer bank, certain conditions are to be fulfilled:

  • The external commercial borrowing must be in strict compliance with the external commercial borrowing regulation and guidelines.
  • The loan agreement between the lender and the borrower must have a specific security clause that makes it mandatory for the borrower to create charge on financial securities, immovable assets, furnish personal or corporate guarantee.
  • The loan agreement has been signed by both the parties that are the overseas lender and the domestic borrower.
  • The borrower must have obtained a loan registration number from the Reserve Bank of India.
  • The period of charge on the immovable asset has to be in consonance with the maturity of the underlying external commercial borrowing.
  • A no objection should not be understood as a permit for acquiring immovable assets in India by the overseas lender.
  • In the event of enforcement or invocation of charge, the immovable asset must be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding external commercial borrowing.

Banks, financial institutions, and Non- Banking financial companies are not generally allowed to issue a guarantee for securing the loan under the external commercial borrowing regulations.[5] However, the Reserve Bank of India, under the approval route may consider applications for providing guarantee or standby letter of credit or letter of comfort by banks, financial institutions relating to external commercial borrowing on merits subject to prudential norms. It is also imperative to note that the Reserve Bank of India may only consider applications for providing guarantee under the approval route in cases of small and medium enterprises, textile companies. In order to obtain a no objection certificate, small and medium enterprises and textile companies have certain conditions which are required to be fulfilled under the Foreign Exchange Management Act, 1999[6]:

  • A board resolution must be obtained for the issue of personal or corporate guarantee, specifying the names of the officials authorized to execute such guarantees on behalf of the company or in individual
  • It must be ensured that the period of such corporate or personal guarantee is co- terminus with the maturity of the underlying external commercial borrowing.
  • Specific requests from individuals to issue a personal guarantee in connection with the borrowing, indicating the details of the external commercial borrowing.

Further, the Reserve Bank of India has allowed individual promoters of Indian party to give their personal guarantee within the total commitment of 400% of net worth of the Indian party (financial commitment exceeding USD 1 billion or its equivalent would require prior approval of the reserve bank) in relation to the Joint Venture and Wholly Owned Subsidiaries abroad, subject to following conditions[7]:

  • The amount and period of guarantee should be specified up front. A guarantee must not be open-ended.
  • If a personal guarantee ensures the performance of the relevant party under any contract, the time specified for the completion of the terms of the contract shall be the validity period of related performance guarantee.
  • Such personal guarantee is required to be reported to the Reserve Bank of India.

The Foreign Exchange Management Act and the Foreign Exchange Management Act circulars do not define the term promoter, and thus, a reference to this term must be taken from the definition provided under the Companies Act, 2013.

Except in cases of external commercial borrowing transaction or a transaction relating to joint venture or wholly owned subsidies as mentioned above, there are no other instances of foreign exchange laws where the Reserve Bank of India has allowed  individual promoters of an Indian party to give personal guarantees in favor of the foreign lender. Hence, issuance of personal guarantee in relation to any other international commercial transaction will require the prior permission of the reserve bank.


Indian companies or businesses while structuring any international commercial transaction must keep in mind that the personal guarantee of the individual promoters is not permitted in the case of every commercial international transaction except with the prior approval of the Reserve Bank of India. There is no specific provision under FEMA / FEMA Circulars, whereby, the personal guarantee given by the individual promoters in violation of the provisions of FEMA is considered as void. However, in case of violation of any provisions of FEMA including FEMA Circulars, the defaulting party shall, upon adjudication, be liable to a penalty[8] up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

[1] March 23, 2016)

[2] 23,2016)

[3] Id

[4] Section 3, Foreign Exchange Management Act, 1999

[5] March 25, 2016)

[6] Regulation 3 Foreign Exchange Management ( Borrowing or lending in foreign exchange) Regulations, 2000, Notification No.FEMA 3 /2000-RB dated 3rd May 2000.

[7] Supra note 5

[8] Section 13, Foreign Exchange Management Act.


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