Research and Articles

• Borrowing limits aligned with financial strength and pricing shifted to market-determined interest rates.

• End-use restrictions and minimum maturity norms significantly simplified.

• Expanded eligible borrower and lender base to deepen cross-border credit access.

• Streamlined reporting framework aimed at reducing compliance burden.

• Overall transition towards a liberalised, principle-based ECB regime. 

Introduction 

On February 9, 2026, the Reserve Bank of India (“RBI”) notified the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (“2026 Regulations”)¹, amending the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (“2018 Regulations”)² and effectively superseding the provisions relating to external commercial borrowings (“ECB”) under the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 (“Erstwhile Master Directions”)³. The 2018 Regulations together with the Erstwhile Master Directions constituted the earlier ECB framework (“Erstwhile Framework”)

The 2026 Regulations follow the RBI’s consultation process initiated through the draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025⁴ issued in October 2025. Concurrently with the notification of the 2026 Regulations, the RBI has also published a feedback statement summarising stakeholder representation and its responses (“Feedback Statement”)⁵, providing useful insight into the policy rationale underlying the final framework.

The RBI has also withdrawn the Erstwhile Master Directions (except for trade credits) and has not yet issued updated directions. That said, given the past practice, it remains to be seen whether the revised directions will be issued to align operational requirements with the 2026 Regulations.

Principal Changes under the 2026 Regulations 

This article analyses the principal reforms introduced under the 2026 Regulations and evaluates how the revised ECB framework departs from the Erstwhile Framework, with particular focus on practical implications for borrowers and lenders.

a) Expansion of Eligible Borrower and Recognised Lender Base

The 2026 Regulations materially broaden the scope of eligible borrowers. Now, any person resident in India (other than an individual) that is incorporated, established or registered under a Central or State statute may raise ECBs, subject to being permitted to borrow under its governing law. This represents a departure from the Erstwhile Framework, where ECB eligibility was effectively linked to Foreign Direct Investment (FDI) eligibility.

This expanded, principle-based criteria bring within its scope companies, limited liability partnerships (LLPs), registered partnership firms and other entities duly incorporated or registered under applicable law. However, eligibility to raise ECBs needs to be assessed under the governing statute of the entity concerned. While LLPs and body corporates clearly fall within the revised definition, the position of trusts requires careful consideration.

The RBI has indicated in the Feedback Statement that trusts have not been expressly recognised as eligible borrowers, and that borrower eligibility must be assessed strictly in accordance with the principle laid down in the 2026 Regulations. In this context, the pooled investment vehicles such as Alternative Investment Funds (“AIFs”), Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) are commonly structured as trusts under the Indian Trusts Act, 1882 and registered with the Securities and Exchange Board of India (“SEBI”). Given that the 2026 Regulations adopt a principle-based test for an “eligible borrower,” a view may be taken that such registered trust structures satisfy the eligibility criteria and could therefore be permitted to raise ECBs subject to such borrowing permitted under the applicable SEBI regulations. Notably, the 2026 Regulations expressly permit conversion of ECB into non-debt instruments, which include units of AIFs, REITs and InvITs (discussed below). This inclusion may lend support to the argument that these vehicles are contemplated within the broader ECB framework.

The 2026 Regulations also remove the special carve-outs previously available to Indian startups and public sector oil marketing companies (OMCs) under the Erstwhile Master Directions. The framework now adopts a uniform, principle-based approach applicable across borrower categories.

With respect to the entities facing investigation, adjudication or appeal under Foreign Exchange Management Act, 1999 (“FEMA”), as permitted under the Erstwhile Framework, they will continue to be eligible to raise ECB, subject to prescribed disclosures. In contrast, the treatment of entities under restructuring or corporate insolvency resolution plan (CIRP) has been significantly streamlined. The Erstwhile Framework provided a separate, sector-specific stressed refinancing framework and, in certain cases, required approval-route compliance and imposed lender-based restrictions. The 2026 Regulations remove these limitations and subsume restructuring cases within the general ECB framework, permitting ECBs where specifically permitted under the approved resolution plan, without a distinct approval-route requirement for resolution applicants.

On the lender side, the concept of “recognised lender” has been substantially liberalised. An eligible borrower may now raise ECB from: (i) any person resident outside India; (ii) a branch outside India of an entity whose lending business is regulated by the RBI; and (iii) a financial institution or branch of a financial institution set up in International Financial Service Centre (“IFSC”). The earlier requirement that the overseas lender be resident in a FATF-compliant jurisdiction or a jurisdiction whose securities regulator is a member of International Organization of Securities Commissions (“IOSCO”) has been removed. This significantly broadens the universe of eligible lenders and facilitates structuring through offshore funds and special purpose vehicles (SPVs). However, while the FATF/IOSCO eligibility filter has been dispensed with, Authorised Dealer (“AD”) banks remain subject to KYC and AML obligations under the RBI’s regulatory framework. Accordingly, lender eligibility will continue to be examined at the AD bank level.

Further, foreign branches and overseas subsidiaries of Indian banks are now expressly permitted to lend, and entities established in IFSCs are recognised lenders. These changes align the ECB framework with India’s broader policy objective of promoting IFSC participation and enhancing offshore capital intermediation.

b) Revised Borrowing Limit Linked to Financial Strength

The earlier per-financial-year cap of USD 750 million has been replaced with an aggregate outstanding limit of the higher of (i) USD 1 billion; or (ii) total outstanding domestic and external borrowings (excluding non-fund-based facilities and mandatorily convertible instruments) upto 300% of the borrower’s net worth.

Under the Erstwhile Framework, a borrower could raise up to USD 750 million in each financial year, which in certain cases allowed outstanding ECB exposure to accumulate over successive years beyond USD 750 million. The new structure addresses this by imposing a consolidated outstanding cap applicable at any given time, while permitting a higher ECB limit for borrowers with stronger net worth.

Under the Erstwhile Framework, FCY ECB raised from a direct foreign equity holder under the automatic route was subject to a 7:1 ECB liability-to-equity ratio, with an exemption where total outstanding ECB did not exceed USD 5 million. This ECB liability-to-equity ratio requirement has been removed under the 2026 Regulations.

These borrowing limits do not apply to entities regulated by financial sector regulators, thereby providing greater flexibility to NBFCs, housing finance companies and other regulated borrowers. Pertinent to note that these entities will remain subject to other specific prudential norms prescribed by the concerned regulator.

Since the language appears to exempt all eligible borrowers regulated by financial sector regulators, an interpretational issue may arise as to whether other RBI-regulated entities such as payment aggregators and payment service providers, which are not lending institutions, would also be entitled to avail the borrowing limit exemption.

Further, ECB raised for refinancing is excluded from the borrowing limit computation, recognising that refinancing constitutes a substitution of existing debt rather than incremental leverage.

c) Flexibility in Currency Conversion

The 2026 Regulations provide increased flexibility in the currency of borrowing. While ECBs could earlier be raised in either foreign currency (“FCY”) or Indian Rupees, the 2026 Regulations now expressly permit conversion of INR-denominated ECBs into FCY ECBs and vice versa. Any such conversion should however be effected at the exchange rate prevailing on the date of the conversion agreement, or at a rate that does not result in a liability exceeding that computed using the exchange rate prevailing on the date of the agreement.  This provides borrowers and lenders with greater flexibility to recalibrate currency exposure during the tenure of the loan. However, any post-conversion foreign exchange exposure should be carefully evaluated from a risk management perspective. 

d) End-Use Significantly Rationalised

The insertion of Regulation 3A under the 2026 Regulations consolidates the negative list of prohibited end-uses in a structured manner. ECB proceeds remain restricted for, inter alia, chit funds, nidhi companies, trading in transferable development rights (TDRs), speculative or passive investment in securities (other than permitted corporate actions), construction of farmhouses, specified agricultural activities, real estate business (subject to defined carve-outs), repayment of domestic INR loans availed for restricted purposes or classified as non-performing assets (NPA), and on-lending for prohibited end-uses. This codification clarifies the distinction between speculative or passive asset deployment and productive, development-oriented activity.

• ‘Real Estate Business’ with clarified boundary: Regulation 3A continues to prohibit ECB utilisation for “real estate business,” defined broadly as purchase, sale or lease of immovable property with a view to earning profit. Accordingly, acquisition of completed, income-generating assets for passive leasing without any construction or development activity would generally fall within the restricted category. By contrast, under the FDI policy, investment for earning rent or lease income (not amounting to transfer) is permitted. Therefore, while passive leasing models may be funded through FDI, they remain restricted under the ECB route. 

  Under the Master Direction – Non-resident Investment in Debt Instruments Directions, 2025⁶, Foreign Portfolio Investors (“FPIs”) are permitted to invest in corporate debt securities, including non-convertible debentures, subject to end-use restrictions aligned with the definition of “real estate business” under the FDI policy. Accordingly, FPIs may subscribe to non-convertible debentures issued by companies engaged in passive leasing activities, whereas ECB proceeds cannot be utilised for such purposes.

  Conversely, construction-development projects are expressly excluded from the definition of real estate business. ECB utilisation is permitted for residential and commercial development, industrial parks (subject to prescribed conditions), SEZs, infrastructure-linked projects, property for the borrower’s own use, and real estate broking services. The revised framework therefore facilitates development-oriented and intermediation activities while continuing to restrict passive property investment.

• Agriculture and Plantation: Regulation 3A(d) introduces calibrated liberalisation by permitting cultivation under controlled conditions (including floriculture, horticulture and greenhouse-based operations), as well as specified allied activities. General agricultural and plantation activities remain restricted, subject to limited enumerated exceptions.

• General Corporate, Working Capital and CAPEX purposes: Under the Erstwhile Framework, utilisation of ECB for general corporate purposes, working capital and capital expenditure was permitted only subject to higher minimum average maturity period (“MAMP”) of 5 (five) to 10 (ten) years. The 2026 Regulations remove these differentiated maturity conditions, thereby providing greater flexibility in deployment of ECB proceeds.

• Acquisition Financing via ECB, a structural reform: The 2026 Regulations expressly permit ECB utilisation for acquisition of control of Indian entities, marking a material shift from the earlier framework where acquisition financing through ECB was either restricted or subject to interpretational uncertainty.

  This reform, when read alongside the recent liberalised acquisition financing norms for Indian banks⁷, materially expands funding avenues for strategic transactions. Here, “Control” carries the meaning assigned under the Companies Act, 2013 in the case of companies, and in the case of LLPs refers to the right to appoint a majority of designated partners having control over policy decisions.

  However, unlike the acquisition financing norms applicable to Indian banks, the 2026 Regulations do not expressly provide for funding incremental or threshold-based stake increases (e.g., acquisitions crossing 26%, 51% or similar thresholds). If this omission reflects regulatory intent, domestic bank financing may retain an advantage in incremental or creeping acquisition structures, potentially placing external lenders at a relative disadvantage.

  In the case of Indian entities which are foreign owned or controlled (“FOCCs”), while downstream investment involving acquisition of control using domestically borrowed funds (including bank financing) is restricted under Rule 23(4)(b) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”)⁸, no corresponding restriction expressly applies to utilisation of ECB proceeds by FOCCs for such purposes.

  Further, ECB utilisation for corporate actions (i.e., merger, demerger, amalgamation, arrangement, or control acquisition and the like) is permitted subject to a qualitative condition that the transaction be undertaken for “strategic purposes only” and aimed at “creating long-term value through potential synergies rather than short-term gains”. As these expressions remain undefined, transactions funded through ECB with short holding periods may invite regulatory scrutiny where the commercial substance appears inconsistent with long-term value creation. In this context, tax law investment holding benchmarks (i.e., 12 months for listed shares and 24 months for unlisted shares) may serve as reference points in assessing investment intent. Additionally, since the list of permitted corporate actions is illustrative rather than exhaustive, the possibility of deploying ECB proceeds for other actions, such as buyback etc., subject to satisfaction of qualitative threshold, remains unclear.

e) Rationalisation of Minimum Average Maturity Period (MAMP)

Under the Erstwhile Framework, MAMP requirements varied based on end-use, with certain categories subject to longer minimum maturities of 5 (five) or 10 (ten) years. The 2026 Regulations significantly simplify this framework by prescribing a uniform MAMP of 3 (three) years across borrowers and end-uses. Further, a calibrated relaxation is provided for manufacturing sector borrowers, who may raise ECB with a maturity between 1 (one) and 3 (three) years, subject to an aggregate outstanding cap of USD 150 million.

This reform removes the earlier linkage between end-use and maturity, resulting in a simpler and more market-aligned structure. It affords borrowers greater flexibility in structuring transactions, particularly for working capital and refinancing purposes.

Additionally, the 2026 Regulations carve out certain transactions from the MAMP requirement, including conversion of ECB into non-debt instruments, waiver of debt by the lender, refinancing of ECB, repayment through proceeds of foreign equity issuance, and repayment pursuant to resolution, liquidation or acquisition of control. These exemptions reflect commercial realities, recognising that such events typically result in prepayment from a credit perspective. Notably, the exclusion of MAMP where ECB is repaid using foreign equity proceeds provides greater flexibility in structuring capital restructurings and liability management exercises. 

g) Conversion of ECB into non-debt instrument

Under the Erstwhile Framework, conversion was restricted to conversion of ECB into equity and was subject to detailed FDI-linked conditions, including sectoral caps, route eligibility, pricing norms and specific reporting requirements.

The 2026 Regulations materially expand this position by permitting conversion into any non-debt instrument, subject to compliance with the NDI Rules. As defined under the NDI Rules, the scope of “non-debt instruments” is significantly broader and includes equity shares, CCPS and CCDs issued by an Indian company, capital contribution in LLPs, units of AIFs/REITs/InvITs, certain mutual fund/ETF units, equity tranches of securitisation structures, contribution to trusts, depository receipts and even dealings in immovable property. This represents a shift from an equity share-only mechanism to a wider, integrated capital restructuring framework under FEMA. 

h) Cost of Borrowing, a Market-Driven Framework 

Under the Erstwhile Framework, ECB pricing was subject to prescribed benchmark-linked caps (typically a fixed spread over LIBOR/ARR for FCY ECB and Government of India security yields for INR ECB).

Now, for ECBs having a MAMP of 3 (three) years or more, the 2026 Regulations remove pre-existing numerical ceilings and instead require that the cost of borrowing be “in line with prevailing market conditions.” Although the Draft ECB Regulations, 2025 had proposed that the AD bank ensure compliance with this standard, that requirement has not been retained in the final framework. For ECBs with a MAMP of less than 3 (three) years, pricing should continue to comply with the trade credit ceiling (benchmark plus 250 basis points), including swap-equivalent limits for fixed-rate loans.

The earlier 2% cap on penal/default interest and prepayment charges has been removed, and such costs are now subject to the market-condition test. All the statutory taxes are expressly excluded from the definition of cost of borrowing, and the restriction on utilisation of ECB proceeds for payment of borrowing costs has been deleted.

In practice, pricing should now be commercially defensible by reference to benchmark rates, comparable transactions, credit profile, tenor and security structure. Going forward, the benchmark rates will largely serve as a reference point, with the pricing for ECBs having a MAMP of 3 (three) years or more now being fully market-driven. Further, in related-party transactions, strict adherence to the arm’s length principle remains essential. 

i) Creation of Security - Expanded Flexibility 

Under the Erstwhile Framework, security over immovable and movable assets (other than financial securities) was generally understood to be limited to assets of the borrower, and creation of security required prior approval or no-objection from the AD bank. The 2026 Regulations significantly liberalise this position. Security may now be created over immovable assets, movable assets, financial assets and intangible assets (including intellectual property rights), without restricting the collateral to assets of the borrower alone. The earlier requirement of obtaining AD bank permission for creation of security has been removed. Importantly, third-party security is now expressly permissible even in respect of immovable and movable assets, thereby materially enhancing structuring flexibility for ECB transactions.

j) ECB Refinancing Liberalised

Under the Erstwhile Framework, refinancing of an existing ECB by way of a fresh ECB was permitted only if (i) the outstanding maturity of the original borrowing was not reduced, and (ii) the all-in-cost of the fresh ECB was lower than that of the existing ECB. Additionally, Indian banks were permitted to participate in refinancing only in limited cases, such as highly rated (AAA) corporates and specified Maharatna/Navratna PSUs. Restrictions also applied on refinancing INR ECBs with FCY ECBs.

The 2026 Regulations materially liberalise on this front also. The requirement that the all-in-cost of the refinanced ECB be lower than the existing ECB has been removed, consistent with the shift to a market-based pricing framework. Refinancing should not result in a breach of the applicable MAMP of the original borrowing, although the refinancing ECB may have a residual maturity of less than 3 (three) years if aligned with the remaining tenor. The earlier restriction on refinancing INR ECBs with FCY ECBs has been eliminated. Further, Indian banks may now participate in refinancing transactions without rating-based or PSU-specific limitations. However, ECBs originally raised with longer tenors i.e., more than 3 years, upon refinancing, should maintain the remaining balance maturity, as the 2026 Regulations do not provide any specific relaxation in this respect.

k) Simplified ECB Reporting and Change of Terms

The 2026 Regulations has streamlined and rationalised the ECB reporting. ‘Form ECB’ has been redesignated as ‘Form ECB 1’ for obtaining the Loan Registration Number (“LRN”), and changes in ECB parameters should now be reported through Revised Form ECB 1 within 7 (seven) calendar days from the end of the month in which the change takes effect replacing the earlier 7 (seven) working-day timeline. Form ECB-2 has shifted from monthly reporting to an event-based format and need to be filed within 7 (seven) calendar days from the end of the month in which drawdown or debt servicing occurs, aligning reporting with actual cash flows.

The earlier concept of “untraceable entity” (eight quarters of non-reporting) has been replaced with “untraceable borrower,” triggered after 4 (four) consecutive quarters of non-reporting coupled with non-reachability, requiring the AD bank to report the matter to the RBI and the Directorate of Enforcement.

Under the Erstwhile Framework, any modification to ECB terms or transfer of ECB exposure between lenders required prior approval of the AD bank. The 2026 Regulations dispense with this approval requirement. Changes in ECB terms may now be undertaken with the lender’s consent, subject to compliance with the said regulations, without the need to obtain separate approval form the AD bank.

Prospective Applicability 

The 2026 Regulations apply prospectively. Accordingly, ECBs in respect of which a LRN was obtained prior to the coming into force of the 2026 Regulations (i.e., prior to February 9, 2026) will continue to be governed by the provisions of the Erstwhile Framework. However, the revised reporting requirements introduced under the 2026 Regulations will apply uniformly to both existing and new ECBs. Consequently, borrowers with pre-existing ECBs are required to comply with the updated reporting timelines and formats prescribed under the new framework. 

Conclusion 

From a policy perspective, the 2026 Regulations mark a significant overhaul India’s ECB framework, transitioning from a calibrated and prescriptive regime to a more liberalised, principle-based, market aligned, and industry-friendly structure. At the same time, they retain core FEMA safeguards through arm’s length standards, structured end-use restrictions, and strengthened reporting mechanisms.

For borrowers, the 2026 Regulations significantly enhance flexibility by expanding the eligible borrower base, permitting ECB for acquisition of control (including distressed transactions), liberalising refinancing, shifting to market-based pricing, simplifying MAMP, removing mandatory hedging, and allowing currency conversion between INR and FCY. Entities under CIRP may access ECB (where permitted under the resolution plan) and development-oriented real estate is now clearly recognised as a permissible end-use, with related-party ECB allowed on an arm’s length basis.

For lenders, the removal of all-in-cost caps, relaxed refinancing norms, expanded security creation (including third-party collateral), and a broader recognised lender base including IFSC entities deepen India’s offshore credit market and expand opportunities in acquisition, infrastructure and secondary debt financing.

Collectively, the reforms under the 2026 Regulations signal India’s clear intent to align its external borrowing framework with global credit practices while preserving robust regulatory oversight.

Darshna Negandhi and Chandrashekar K
You can direct your queries or comments to the authors.

¹https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13306&Mode=0

²https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441&Mode=0

³https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510

⁴https://rbidocs.rbi.org.in/rdocs/Content/PDFs/DRAFTFEMA031020252366EBCC728340E8BEBAB8D9CD626E11.PDF

⁵Feedback16022026_A.pdf

⁶https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12765

⁷https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13297&Mode=0

⁸https://enforcementdirectorate.gov.in/media/fema/ab93a739-71e4-4db5-977d-d6652850de2d_Foreign%20Exchange%20Management%20(Non-Debt%20Instrument)%20Rules,%202019%20-%20without%20amendment_2.pdf