Corporate guarantee by a non-resident entity

This query is : Resolved

Sathyan Avinash (Querist)
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10 December 2013 Dear Experts,

Our Company is a subsidiary of an Italian Company.

Now inorder to meet the capital requirements of the Company, we are planning to arrange a term loan from a Financial Institution in India.

Also, we are contemplating to provide security to the FI only in the form of Corporate Guarantee from our parent Company in Italy.

Since extension of guarantee by a NR entity to an Resident Entity falls under Capital Account Transaction as defined in the FEMA, 1999 kindly let me know what are the procedural formalities to be complied with in this regard.

Awaiting your early response.

With warm regards,

Sathyan Avinash
e-mail: sathyanavinash@gmail.com

Sathyan Avinash

Sathyan Avinash (Querist)
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13 December 2013 Dear Experts,

Kindly throw some light on the query.

With warm regards,

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 When a non-resident entity, such as your parent company in Italy, provides a corporate guarantee to a financial institution in India for a subsidiary's term loan, it falls under the purview of Capital Account Transactions as defined by the Foreign Exchange Management Act (FEMA), 1999. Here’s a summary of the procedural formalities and considerations that need to be complied with:

### Procedural Formalities under FEMA for Corporate Guarantee by Non-Resident Entity

1. **Approval Requirements:**
- **Board Approval:** Obtain board resolution from both the Indian subsidiary and the parent company in Italy authorizing the issuance of the corporate guarantee.
- **Shareholder Approval:** Depending on the quantum of the guarantee relative to the parent company's capital, shareholder approval may also be required.

2. **Valuation of Guarantee:**
- Determine the fair valuation of the guarantee being extended. This valuation should be based on commercial principles and could involve assessing the subsidiary's financial position, loan terms, and risk involved.

3. **Filing with RBI:**
- The corporate guarantee provided by a non-resident entity needs to be reported to the Reserve Bank of India (RBI) through an Authorized Dealer bank (AD bank).
- Form FC-GPR (Foreign Currency-Guarantee Payment Report) or Form FC-TRS (Foreign Currency-Transfer of Shares) may need to be filed with the AD bank depending on the specifics of the guarantee and loan.

4. **Compliance with FEMA Regulations:**
- Ensure compliance with all provisions of FEMA, including those related to capital account transactions, reporting requirements, and any other guidelines issued by RBI.
- Engage with legal advisors or consultants with expertise in FEMA regulations to ensure thorough compliance.

5. **Documentation:**
- Prepare and execute the corporate guarantee agreement between the parent company in Italy and the financial institution in India.
- Ensure the agreement complies with Indian laws, including stamping requirements.

6. **Reporting Requirements:**
- Periodically report the status of the guarantee to RBI through the AD bank as per the applicable reporting norms.
- Maintain records and documentation of the guarantee transaction for audit and compliance purposes.

### Additional Considerations:

- **Tax Implications:** Evaluate the tax implications of the guarantee transaction in both India and Italy.
- **Legal Review:** Conduct a thorough legal review of the guarantee agreement to ensure it protects the interests of both the lender (financial institution) and the guarantor (parent company).
- **Currency Exchange Regulations:** Consider any implications related to currency exchange and hedging, especially if the guarantee involves foreign currency.

By adhering to these procedural formalities and considerations, your company can effectively arrange for a corporate guarantee from a non-resident entity to meet its capital requirements while ensuring compliance with FEMA regulations and other applicable laws in India.

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