Reserve Bank of India (RBI) issues Draft regulations on External Commercial Borrowings (ECB)

The Reserve Bank of India (RBI) released Draft Foreign Exchange Management (Borrowing and Lending) Regulations, 2025 (Draft Regulations) for public consultation, proposing a comprehensive overhaul of the ECB framework. The changes aim to simplify compliance and provide greater flexibility to borrowers and lenders.

Key changes proposed, inter-alia, include the following:

• Broadened eligibility criteria for borrowers and lenders: The Draft Regulations expand eligibility under the ECB framework by allowing any person resident in India (other than an individual) who is established or registered under a Central or State Act, and permitted to borrow, ECB. Similarly, the category of recognized lenders includes any person resident outside India, as well as foreign branches or International Financial Services Centres (IFSC) -based branches of entities engaged in regulated lending activities of the RBI.
• Uniform MAMP: A uniform Minimum Average Maturity Period (MAMP) of 3 years would be proposed, with a limited 1 to 3 year window for manufacturing companies for up to USD 50 million equivalent outstanding ECBs for shorter-tenor ECBs. Adherence to MAMP is mandatory, with exceptions in cases such as conversion to equity, waiver by the lender, or closure/merger scenarios. The adoption of a uniform MAMP aims to simplify regulations by removing complexities related to the purpose or end use of the ECB.
• Flexible currency options for ECBs: It is proposed to permit borrowers to convert borrowings from INR to foreign currency, which is currently restricted under the existing framework. This move gives companies more options to manage currency exposure and align borrowings with international financial strategies.
• Refined end-use restrictions:  While the existing regulations list several prohibited activities—such as investment in chit funds, real estate, agriculture, capital markets, and on-lending—the proposed provisions retain many of these but introduce specific exceptions.
• Removal of all-in-cost ceiling: RBI has proposed removing the fixed ceiling on borrowing costs for ECB, allowing interest rates to be determined by prevailing market conditions. This would give borrowers more flexibility, but the final pricing must be approved by the designated bank. For ECBs with shorter maturities (less than three years), the cost must still comply with trade credit limits. Further, borrowers would not be able to use ECB proceeds to pay interest or other borrowing costs, ensuring funds are used for productive purposes. RBI has introduced a new provision requiring that ECBs from group entities or related parties be conducted on an arm’s length basis. This means the terms—such as interest rates and repayment conditions—must reflect fair market value and not be influenced by internal relationships.
• Borrowing limits liberalized: ECBs up to the higher of USD 1 billion or 300% of net worth are now permissible, compared to the current cap of USD 750 million per financial year under the automatic route. However, this borrowing limit would not apply to eligible borrowers regulated by financial sector regulators, such as Non-Banking Financial Companies (NBFCs).
• Domestic acquisition financing: RBI has proposed a significant shift by allowing Indian banks to finance domestic acquisitions, a move that was previously restricted. While Indian banks’ foreign branches could support overseas acquisitions, domestic branches are not permitted to fund similar transactions within India. Under the Draft Regulations, Authorized Dealer (AD) banks would be allowed to extend such financing, provided they comply with their internal lending limits.

Source: Press Release: 2025-2026/1235 dated 3 October 2025 and Draft Notification No. FEMA 3(R)(xxx)/2025-RB of October 2025