RBI’s Draft Framework for Liberalising External Commercial Borrowings

The RBI’s draft amendments to the ECB regime: wider borrower and lender eligibility, limits linked to net worth, removal of the all-in-cost ceiling and the end-use restrictions that remain.

Introduction

The Reserve Bank of India (RBI) has proposed significant amendments to the External Commercial Borrowing (ECB) framework,¹ marking a major shift in the country’s regulatory outlook toward international debt financing. These proposed changes signal the RBI’s intent to strike a balance between liberalization and prudential oversight, ensuring that India remains an attractive destination for foreign capital while maintaining financial stability.

Through these amendments, the RBI seeks to broaden the scope of eligible borrowers, ease existing borrowing limits, and rationalize end-use restrictions. Such reforms are designed to enhance the accessibility of offshore funds for Indian corporates, financial institutions, and other permitted sectors, thereby strengthening their capacity to raise cost-effective capital for expansion, infrastructure development, and innovation.

This initiative reflects the RBI’s strategic move to align India’s external borrowing policies with global best practices, promote ease of doing business, and support the nation’s broader economic growth objectives through a more dynamic and flexible cross-border financing ecosystem.

Key Amendments Proposed by the RBI

1. Wider Eligibility for Borrowers

One of the most notable and impactful proposals under the draft ECB framework is the broad expansion of eligible borrowers, signaling a move toward a more inclusive and flexible borrowing regime. Under the revised framework, any entity resident in India, except individuals that are duly established or registered under the applicable Indian laws, may now raise funds through ECBs, provided such borrowing is permitted under domestic regulations. This expanded scope covers a wide spectrum of entities, including companies, partnership firms, limited liability partnerships (LLPs), and specific regulated financial institutions, thereby democratizing access to international capital and encouraging broader participation across sectors.

On the lender side, the draft framework introduces equally transformative changes. It permits any person resident outside India, along with foreign branches or International Financial Services Centre (IFSC)-based branches of entities engaged in regulated lending activities, to extend ECBs to Indian borrowers. This liberalization substantially widens the pool of potential lenders, enabling Indian entities to engage with a diverse range of global financial institutions, development banks, investment funds, and international credit providers. The inclusion of IFSC-based lenders further aligns India’s regulatory landscape with global financial hubs and promotes offshore financial intermediation within Indian jurisdictional reach.

However, this broader eligibility framework also heightens the need for robust legal and regulatory compliance. Borrowers must ensure that all loan documentation, security creation, and regulatory filings adhere to the Foreign Exchange Management Act (FEMA), the Companies Act, 2013, and the RBI’s detailed reporting and procedural guidelines. Given the multiplicity of jurisdictions and regulatory regimes involved, entities will increasingly require specialized legal and financial advisory support to structure transactions that meet both domestic and international standards. This careful alignment will be crucial in safeguarding against compliance risks while fully leveraging the expanded opportunities under the liberalized ECB regime.

2. Borrowing Limits Enhanced

The draft framework proposes that eligible borrowers may raise ECBs up to the higher of USD 1 billion or 300% of the borrower’s net worth, as reflected in the latest audited financial statements. This represents a significant relaxation from the earlier borrowing caps, which imposed relatively rigid limits irrespective of the borrower’s financial capacity. By linking the permissible borrowing limit to an entity’s net worth, the Reserve Bank of India (RBI) seeks to align external borrowing capacity with the financial strength, creditworthiness, and balance sheet resilience of the borrower. The move is intended to provide well-capitalized Indian companies greater flexibility to tap offshore markets for long-term funding needs, thereby enhancing capital inflows while retaining a measure of prudential control.

However, this expanded borrowing window places a greater onus on borrowers and lenders to accurately determine and verify net worth calculations based on audited accounts and to ensure that aggregate ECB exposure remains within the prescribed threshold. Legal and financial advisors will play a crucial role in structuring transactions, especially in cases involving complex corporate structures, group entities, or cross-holdings, where the computation of consolidated net worth may affect the permissible borrowing limit. Proper documentation, due diligence, and regulatory compliance under FEMA, 1999, and the Foreign Exchange Management (Borrowing and Lending) Regulations will be essential to safeguard the validity and enforceability of such arrangements.

3. All-in-Cost Ceilings Removed

Under the existing framework, ECBs were regulated through an all-in-cost ceiling, calculated as a benchmark rate plus a prescribed margin. This ceiling served as a safeguard to prevent excessive borrowing costs and to maintain prudential control over foreign debt exposure. The draft framework, however, proposes to remove this ceiling, thereby allowing borrowers and lenders to negotiate interest rates and other financial terms directly. This shift towards market-based pricing aligns with international best practices and is expected to enhance competitiveness, attract a wider pool of foreign lenders, and potentially reduce borrowing costs for creditworthy entities. It marks a significant liberalization of India’s external borrowing regime, offering borrowers greater flexibility in accessing global capital.

At the same time, this relaxation increases the importance of compliance and risk management. The loan agreement must clearly reflect all negotiated terms, including interest rates, fees, and repayment obligations, to ensure enforceability and adherence to the provisions of FEMA, 1999, and related RBI regulations. Borrowers must also give due consideration to currency risk and comply with hedging requirements, as fluctuations in exchange rates can materially affect the effective cost of borrowing. Accordingly, entities availing ECBs should adopt prudent risk mitigation strategies such as forward contracts or currency swaps and maintain transparent documentation to safeguard against regulatory and financial exposure.

4. End-Use Restrictions Revisited

While the draft framework liberalizes several aspects of the ECB regime, it continues to maintain restrictions on specific end-uses to prevent diversion or misuse of funds. The prohibited activities under the framework include investment in chit funds and Nidhi companies; agricultural or plantation activities (except where expressly permitted under the Foreign Direct Investment (FDI) policy); real estate development not eligible under FDI norms; trading in Transferable Development Rights (TDRs); and on-lending other than through regulated financial institutions or approved intra-group structures. Additionally, dealing in securities remains restricted, except in narrowly defined situations such as overseas investments, mergers and acquisitions, or primary issuances by non-financial entities for further permitted on-lending. These restrictions reflect the RBI’s intent to ensure that ECB proceeds are directed towards productive and compliant economic activities.

To ensure compliance, borrowers must explicitly specify the intended end-use of ECB proceeds in the loan agreement and supporting documentation. Legal covenants should clearly prohibit deployment of funds for restricted purposes, and lenders are expected to conduct comprehensive legal and financial due diligence to verify adherence to the permitted use framework. Any deviation or ambiguity in documentation could expose both parties to regulatory scrutiny and potential penalties under the FEMA, 1999, and the associated Borrowing and Lending Regulations. Consequently, careful drafting, monitoring of fund utilization, and ongoing regulatory reporting will be essential components of prudent ECB governance.

Conclusion

The RBI’s proposed ECB framework marks a significant stride toward the liberalization of India’s cross-border borrowing regime. By expanding borrower eligibility, enhancing borrowing limits, and removing restrictive all-in-cost ceilings, the framework seeks to promote greater market participation and more efficient access to foreign capital. At the same time, the continued presence of prudential safeguards and restrictions on certain end-uses reflects a balanced regulatory approach encouraging capital inflows while ensuring that funds are utilized for productive, compliant, and transparent purposes.

For legal professionals, the evolving framework reinforces the importance of comprehensive advisory support in areas such as transaction structuring, documentation, compliance, and risk management. Borrowers and lenders will need to work in close coordination with legal and financial advisors to ensure adherence to the FEMA, the Companies Act, 2013, and other sector-specific regulations. As India’s external borrowing environment transitions toward a more market-oriented model, the revised framework is poised to reshape the contours of international financing, offering both new opportunities and heightened responsibilities for stakeholders across the financial and corporate ecosystem.

Footnotes

1. Reserve Bank of India, Draft Foreign Exchange Management (Borrowing and Lending) (Amendment) Regulations, 2025, released for public comments. ↩