External Commercial Borrowings: Comparative Analysis of Revised Framework

Niranjan Shah 25 Feb 2026 744 Views 0 comment Print Fema / RBI | Articles

Introduction:

External Commercial Borrowings (ECBs) continue to serve as a significant source of offshore funding for Indian corporates seeking competitive borrowing costs and access to global capital markets. The regulatory framework governing ECBs is issued under the Foreign Exchange Management Act, 1999 (FEMA), under which the Reserve Bank of India periodically revises the norms in line with macroeconomic stability and evolving financial conditions.

The Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 introduce a structural transition in India’s ECB regime by moving from a prescriptive and spread based framework to a principle driven, disclosure oriented and market aligned model. This article presents a concise comparison between the existing and revised ECB frameworks, highlighting the key regulatory changes.

Particulars	Earlier ECB Framework	Revised ECB Framework
Eligible Borrowers	Eligibility was generally restricted to entities eligible to receive Foreign Direct Investment (FDI), along with specified entities such as SEZ units, Port Trusts, SIDBI and EXIM Bank, subject to conditions Entities under investigation were permitted to raise ECB subject to disclosures Restructuring cases were considered under specific regulatory framework Resolution applicants under the IBC, 2016 could raise ECB under the approval route, except from foreign branches/subsidiaries of Indian banks, for repayment of Rupee term loans of the target company.	Any person resident in India (other than individuals) incorporated under a Central or State Act is eligible to raise ECB, subject to sectoral eligibility norms, thereby broadening the borrower base. Entities undergoing restructuring or Corporate Insolvency Resolution Process (CIRP) may raise ECB if permitted under the resolution plan Entities under investigation may raise ECB subject to mandatory disclosure in Form ECB 1. Key Takeaway: Now, Limited Liability Partnerships (LLPs) are categorised as eligible borrowers for raising ECBs.
Recognised Lenders	Recognised lenders were required to be residents of FATF or IOSCO compliant countries, and included √ Multilateral and regional financial institutions √ Individuals only if they were foreign equity holders √ Foreign branches/subsidiaries of Indian banks only for FCY ECB (excluding FCCBs and FCEBs)	New ECB regulation has significantly expanded the lender base. ECB may now be raised from: √ Any person resident outside India √ Overseas branches of RBI-regulated entities √ Financial institutions operating in International Financial Services Centres (IFSCs) Key Takeaway: Any Individuals resident outside India, including NRIs, are now expressly permitted to lend funds as the requirement of qualifying as foreign equity holders has been done away with. Further, lenders are no longer restricted to FATF or IOSCO compliant jurisdictions. Foreign branches/subsidiaries of Indian banks are now permitted to lend INR ECB
Prohibited End Uses	The earlier regime prohibited utilisation of ECB proceeds for certain activities, including: √ Real estate activities √ Investment in capital markets and equity shares √ Working capital and general corporate purposes (except under longer maturity conditions) √ Repayment of INR loans subject to restrictions √ On-lending except in specified cases such as NBFC structures	The revised framework introduces a clearly defined and consolidated negative list under which ECB proceeds cannot be used for: √ Chit funds and Nidhi companies √ Real estate business and construction of farmhouses √ Agricultural and animal husbandry activities (except specified permitted activities) √ Plantation activities except tea, coffee, rubber, cardamom, palm and olive oil √ Trading in Transferable Development Rights (TDRs) √ Investment in listed or unlisted securities, except for corporate restructuring transactions √ Repayment of INR loans classified as Non-Performing Assets (NPAs) or originally used for restricted purposes ü On-lending for prohibited activities
Currency of Borrowing and Conversion	ECB could be raised in freely convertible foreign currency or INR; however, currency conversion flexibility was limited and INR to FCY conversion was not permitted.	ECB may be raised in foreign currency or INR, and the framework now permits FCY to FCY, FCY to INR and INR to FCY conversions, subject to exchange rate safeguards. Key Takeaway: It is to be noted that conversion of INR ECB to FCY ECB is now permitted.
Minimum Average Maturity Period (MAMP)	The earlier regime prescribed multiple maturity categories depending on purpose and lender as under General – 3 years Manufacturing – 1 year (up to USD 50 million) Working capital/general corporate (foreign equity holder) – 5 years Repayment of INR loans (capex) – 7 years Other specified cases – 10 years	The revised framework simplifies maturity norms as below General – 3 years Manufacturing – 1–3 years (USD 150 million cap) Call/put options only after MAMP MAMP exemptions for conversion to equity, refinancing, waiver, merger, demerger, liquidation and other corporate restructuring actions
Borrowing Limits	Borrowers were permitted to raise ECB up to USD 750 million per financial year under the automatic route (temporarily enhanced to USD 1.5 billion), and in certain cases a debt-equity ratio of 7:1 applied.	Borrowing capacity is now linked to financial strength, permitting ECB up to the higher of USD 1 billion; or 300% of net worth while regulated financial entities are exempt from this limit.
Cost of Borrowing (All-in-Cost Ceiling)	The earlier framework prescribed a benchmark-based all-in-cost ceiling linked to LIBOR/ARR plus a fixed spread of 450–550 basis points, and penal interest was capped at 2% above the contracted rate.	The revised framework removes fixed spread ceilings and allows market determined pricing, subject to trade credit ceiling for short term ECB and arm’s length principles for related party borrowings.
Forms of ECB	Permitted instruments included: Bank loans FCCBs and FCEBs Trade credits >3 years Financial leases Non-convertible preference shares/debentures/bonds	The revised framework broadly defines ECB as any commercial borrowing arrangement involving payment of interest and repayment of principal, except Trade credit ≤3 years Export advances FVCI debt instruments Convertible notes under NDI Rules
Parking of ECB Proceeds	Unutilised portion of ECB proceeds could be parked abroad for foreign currency expenditure and can be invested in rated instruments. Domestically, for rupee expenditure, it can be invested in in fixed deposits up to 12 months, with temporary relaxations during exceptional periods.	Under new regime drawdown allowed only after obtaining Loan Registration Number (LRN) and funds to be credited to designated INR/FCY accounts within prescribed timeline. Unutilised proceeds can be invested in in unencumbered deposits/debt instruments up to one year.
Reporting and Compliance	Borrowers were required to obtain LRN through Form ECB and submit monthly ECB-2 returns,	The revised framework prescribes structured reporting through: Form ECB 1 for LRN Revised ECB 1 for changes in terms within 7 days from end of month Monthly Form ECB 2 within 7 days from end of month of ECB received or debts servicing was undertaken.
Untraceable entities/Borrower	Under existing framework, the SOP for untraceable entities applied to borrowers who had raised ECB and failed to submit prescribed returns for eight quarters or more. A borrower was treated as an “untraceable entity” if: √ The entity/auditor/director/ promoter was non-responsive for at least two quarters, with minimum six documented communication attempts √ The entity was not found operative at its registered office √ Statutory Auditor’s certificate was not submitted for last two years or more. The outstanding ECB amount was treated as written-off from the country’s external debt liability, though the lender could continue recovery through judicial or non-judicial means and the Directorate of Enforcement (DoE) was required to be informed when an entity was designated as untraceable.	A borrower with an active Loan Registration Number (LRN) will be treated as untraceable if specified returns are not submitted for four consecutive quarters or more after a scheduled drawdown or debt servicing A borrower will be treated as “untraceable” if: √ Returns are not filed for four consecutive quarters √ The AD Bank confirms that the borrower and its directors/ promoters/ auditors were not reachable despite multiple documented attempts √ The borrower was not found operative at its registered office as per bank records. The revised framework does not provide for automatic write-off of outstanding external debt from country liability however AD Bank must inform both the Reserve Bank of India and the Directorate of Enforcement once a borrower is classified as untraceable.
Conversion into Equity	Conversion of ECB into equity was permitted subject to compliance with FDI policy, pricing norms, lender consent and reporting under applicable forms.	Conversion into equity continues to be permitted subject to compliance with Non-Debt Instrument Rules, 2019, lender consent and reporting requirements, with built-in safeguards for exchange rate protection.
Security	Mandatory compliance with sectoral/prudential hedging guidelines for foreign currency exposure Infrastructure companies required to hedge minimum 70% of ECB exposure (if maturity < 5 years) with Board-approved risk policy and AD Bank monitoring. Compulsory hedging of principal and interest from inception with minimum one year tenor and rollover Overseas investors specifically permitted to hedge INR exposure through AD Category-I banks Non-resident guarantees permitted with detailed discharge and repatriation mechanisms (NRE/FCNR(B)/rupee balances) Detailed asset wise security provisions including pledge of shares, escrow accounts and FDI compliance on enforcement	No fixed percentage or operational hedging requirements prescribed under ECB regulations. No specific 70% infrastructure hedging norm continued. Hedging coverage, tenor and natural hedge conditions not detailed in ECB framework Investor side hedging provisions not specifically reiterated Guarantees governed under FEMA (Guarantees) Regulations, 2026, with RBI regulated entities prohibited from issuing guarantees Consolidated security framework allowing charge on movable, immovable, financial and intangible assets subject to agreement clause and NOC from existing lenders.
Refinancing	Existing ECB could be refinanced (fully or partly) only if weighted maturity was not reduced and fresh ECB carried lower all-in-cost; Indian banks could participate only for AAA-rated corporates and Maharatna/Navratna PSUs. Stressed manufacturing/ infrastructure borrowers (SMA-2/NPA) could raise ECB for one-time settlement subject to cost and MAMP norms, and foreign branches/subsidiaries of Indian banks were not permitted to lend.	Existing ECB may be refinanced, provided that the applicable Minimum Average Maturity Period (MAMP) of the original borrowing is not breached. However, it is important to note that an apparent inconsistency arises under the revised framework, as Paragraph 6 specifically exempts refinancing of ECB from MAMP requirements. This creates interpretational ambiguity regarding whether refinancing transactions must strictly adhere to the original MAMP or can avail the stated exemption, and therefore may require further regulatory clarification.

Conclusion:

The 2026 ECB framework represents a calibrated and forward-looking reform of India’s external borrowing regime. It replaces rigid numerical thresholds and spreads-based caps with principle-based oversight, links borrowing limits to financial strength and permits market determined pricing. At the same time, it enhances clarity through a consolidated negative list, structured reporting requirements and a comprehensive security framework.

Collectively, these reforms strengthen regulatory transparency and governance while providing Indian corporates with improved flexibility, competitiveness and integration with global capital markets

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Niranjan Shah | Chartered Accountant | S N S S & Co | niranjan@snssindia.in

Disclaimer: This blog is intended for educational purposes only and should not be interpreted as advice. It is recommended to seek guidance from a qualified professional for advice relevant to your circumstances. For any feedback, inquiries, or suggestions, please feel free to reach out to the author.