Regulation 5 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Regulation 5 lists the guarantees that may be issued to or on behalf of a foreign entity in which the Indian entity has made ODI, says who may give them, and sets rules on how each is counted against the financial commitment limit, on invocation and on roll-over. Paragraph 21(4) of the Reserve Bank's Master Direction adds detail for authorised dealers.
As per the copy of the notification consulted (No. FEMA 400/2022-RB, as notified on 22 August 2022), four kinds of guarantee may be issued for a foreign entity or its step down subsidiary: corporate or performance guarantees by the Indian entity, the same by a group company, a personal guarantee by the resident individual promoter, and a bank guarantee backed by a counter-guarantee or collateral. No guarantee shall be open-ended. A performance guarantee counts at fifty per cent, and an invoked guarantee is treated as lending.
The text and its footing
The Regulations are made by the Reserve Bank under sub-section (1) and clause (a) of sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999; see our articles on sections 47 and 48 and section 6. The text is from a third-party copy of the notification as notified on 22 August 2022; later amendments are not shown. The Master Direction - Overseas Investment is read beside it (FED Master Direction No.15/2024-25, July 24, 2024, "Updated as on April 01, 2026"), and where it states a point differently, it is the current direction to banks. Later amendments and circulars should be checked on the Reserve Bank and Gazette sites. The Overseas Investment Rules, 2022 that set the limit are not in the sources consulted. If you are planning a guarantee, our ODI reporting team can help you place it.
Regulation 5 is the overseas investment guarantee. It sits outside the general Guarantees Regulations: regulation 4 of those Regulations excludes a guarantee given in accordance with the Overseas Investment Regulations. See our article on the Guarantees Regulations, 2026. For the other forms of financial commitment, read the article on regulations 1 to 4.
Regulation 5(1): the four guarantees
The guarantees may be issued to or on behalf of the foreign entity, or any of its step down subsidiary in which the Indian entity has acquired control through the foreign entity:
| Clause | Guarantee | By whom |
|---|---|---|
| (i) | Corporate or performance guarantee | The Indian entity |
| (ii) | Corporate or performance guarantee | A group company of the Indian entity in India, being a holding company (which holds at least 51 per cent. stake in the Indian entity), a subsidiary company (in which the Indian entity holds at least 51 per cent. stake) or a promoter group company which is a body corporate |
| (iii) | Personal guarantee | The resident individual promoter of the Indian entity |
| (iv) | Bank guarantee backed by a counter-guarantee or collateral by the Indian entity or its group company as above | A bank in India |
Regulation 5(2): counting and the two provisos
Where the guarantee is extended by a group company, it counts towards the utilisation of the group company's own financial commitment limit independently. In the case of a resident individual promoter, it counts towards the financial commitment limit of the Indian entity.
- First proviso. Where the commitment is extended by a group company, any fund-based exposure to or from the Indian entity is deducted from the net worth of the group company in computing its limit.
- Second proviso. Where the guarantee is extended by a promoter, whether a body corporate or an individual, the Indian entity shall be a part of the promoter group.
- Explanation. "Promoter group" has the meaning in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018.
Regulation 5(3) to (7): rules of counting and life
- (3) No guarantee shall be open-ended.
- (4) The guarantee, to the extent of the amount invoked, ceases to be a part of the non-fund based commitment and is considered as lending.
- (5) Where a guarantee is extended jointly and severally by two or more Indian entities, hundred per cent of the amount is reckoned towards the individual limit of each of them.
- (6) For a performance guarantee, 50 per cent of the amount is reckoned towards the financial commitment limit.
- (7) Roll-over of a guarantee is not treated as fresh financial commitment where the amount on account of the roll-over does not exceed the amount of the original guarantee.
What the Master Direction adds (paragraph 21(4))
- (a) For a performance guarantee, the time specified for completion of the contract is treated as its validity period.
- (b) No prior approval from the Reserve Bank is needed for remitting funds from India on invocation of a performance guarantee extended in accordance with the Rules and Regulations.
- (c) Any guarantee, to the extent invoked, ceases to be part of the non-fund based financial commitment and is considered financial commitment by way of debt. The invocation is reported in Form FC.
- (d) Roll-over is not fresh financial commitment but is reported in Form FC.
- (e) A group company may extend a guarantee if it is eligible to make ODI under the Rules; the guarantee counts towards that group company's limit and is reported by it. For a resident individual promoter the guarantee counts towards the Indian entity's limit and is reported by the Indian entity. The concept of utilising the net worth of the subsidiary or holding company by the Indian entity has been discontinued. For the group company's limit, any fund-based exposure between it and the Indian entity is deducted from its net worth.
Paragraph 6(2) of the Master Direction also says that where an Indian entity had already issued a guarantee in accordance with the FEMA provisions before an investigation began or an account was classified as NPA or wilful defaulter and must later honour it, the remittance due to invocation is not fresh financial commitment, and no NOC is needed.
Example
Narmada Tools Ltd, an Indian company with control of a foreign entity in which it has made ODI, wants its parent (which holds at least 51 per cent of Narmada Tools) to give a corporate guarantee for the foreign entity's bank loan. Under regulation 5(1)(ii) a holding company qualifies. The guarantee counts towards the parent's own limit (regulation 5(2)), the parent deducts any fund-based exposure to or from Narmada Tools from its net worth, and the parent, not Narmada Tools, reports it (paragraph 21(4)(e)). The guarantee must not be open-ended. If the bank invokes it for an amount of ₹10 crore, that amount stops being a non-fund based commitment and counts as lending. If, instead, the guarantee is a performance guarantee for ₹10 crore, regulation 5(6) says fifty per cent, that is ₹5 crore, is reckoned towards the limit. If two Indian entities give a joint and several guarantee of ₹10 crore, each entity's limit is reduced by the full ₹10 crore.
Common mistakes
- Giving an open-ended guarantee; regulation 5(3) forbids it.
- Counting a performance guarantee at full value; regulation 5(6) says fifty per cent.
- Counting a joint and several guarantee only once; each entity counts the whole.
- Treating roll-over as exempt from reporting; the Master Direction says it is reported in Form FC.
- Forgetting that the promoter group condition in the second proviso applies when a promoter gives the guarantee.
Need help structuring a guarantee?
Choosing who gives the guarantee changes which limit is used and who reports. Our ODI reporting team can compare the options and prepare the Form FC filings that follow issue, change or invocation.
Key takeaways
- Four guarantees are allowed: by the Indian entity, a group company, the resident individual promoter, and a bank with a counter-guarantee or collateral.
- No guarantee shall be open-ended.
- A performance guarantee counts at fifty per cent; a joint and several guarantee counts in full for each entity.
- An invoked guarantee is lending; a roll-over within the original amount is not fresh commitment.
- The Rules that set the financial commitment limit are not in the sources consulted.
Read next
- Regulations 1 to 4: financial commitment other than equity
- Pledge and charge for a foreign entity: regulation 6
- Cross-border guarantees: the Guarantees Regulations, 2026
- ODI: financial commitment and reporting
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.