Due diligence in relation to non-resident guarantees availed by persons resident in India

Current Context: The Reserve Bank of India (RBI) recently issued a circular addressing due diligence requirements for non-resident guarantees availed by persons resident in India. 

• Here are the key points:
• Regulatory Compliance: The RBI has observed instances where guarantees, including Standby Letters of Credit (SBLCs) and performance guarantees, issued by non-residents in favor of residents, do not comply with the Foreign Exchange Management Act (FEMA) regulations.
• Role of AD Category-I Banks: Authorized Dealer (AD) Category-I banks are instructed to ensure that any guarantee contracts they advise on or facilitate for their resident clients adhere to FEMA regulations.
• Notification to Constituents: Banks are required to inform their constituents about these regulations to ensure compliance.
• Legal Framework: This directive is issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999.

Question:

1 Which entity is primarily responsible for ensuring that guarantee contracts adhere to FEMA regulations as per the RBI circular?

• A) Indian residents
• B) Non-resident entities
• C) Authorized Dealer (AD) Category-I banks
• D) The Ministry of Finance

Answer: C) According to the RBI circular, Authorized Dealer (AD) Category-I banks are responsible for ensuring that any guarantee contracts they advise on or facilitate for their resident clients comply with FEMA regulations.