A practical overview of the regulatory framework governing External Commercial Borrowings (ECB) under FEMA. The article covers eligible borrowers and lenders, permitted end-use, borrowing limits, pricing, maturity, reporting requirements and key compliance obligations for Indian entities raising funds from overseas.

ECB under FEMA: Understanding the Complete Regulatory Framework

External Commercial Borrowing (ECB) is one of the principal ways Indian businesses raise foreign capital in debt form. It offers access to longer tenors and often cheaper pricing than domestic credit, and in return the borrower accepts a regulatory framework that governs who can borrow, from whom, for how long, for what purpose, and how each step is reported. In February 2026 the Reserve Bank of India substantially rewrote that framework. This article sets out how the regime is structured today, what changed, and what borrowers need to do to stay compliant.

1. The Legal Architecture

ECB is regulated under FEMA, 1999, principally through the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. For years the regime was layered: the Regulations, a Master Direction, periodic circulars, and FAQs together made the rules, and the result was increasingly fragmented.

The current position stems from the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, notified as FEMA 3(R)(5)/2026-RB on 9 February 2026 and effective from 16 February 2026. The amendment consolidates eligibility, end-use, maturity, cost, security, refinancing, conversion, and reporting requirements into a more structured regime. The revised Schedule I now carries the substantive ECB rules, and the RBI has also substituted revised Forms ECB 1 and ECB 2 in the Master Direction.

Two practical consequences follow. First, older commentary on ECB, including caps on all-in cost, end-use-linked maturities, and the USD 750 million per-year ceiling, should not be relied on without checking it against the 2026 text. Second, ECBs raised under the earlier regime continue to carry their own terms and reporting history, so a borrower with legacy facilities may be dealing with both frameworks at once.

2. What the 2026 Amendment Changed

The reforms expand the pool of eligible borrowers and recognised lenders, rationalise borrowing limits and maturity requirements, remove restrictions on the cost of borrowing, review end-use restrictions, and simplify reporting. In summary:

3. Who Can Borrow

The eligible borrower category is now wide. Any resident of India other than an individual, incorporated, established or registered under a Central or State Act, is eligible to raise ECB, subject to applicable laws. The amendments also expressly clarify that Limited Liability Partnerships can avail ECBs.

A notable feature is that entities facing pending investigation or adjudication under FEMA may still raise ECB, provided full disclosure is made in Form ECB 1 or its revised version. The compliance burden thus shifts to disclosure and not to disqualification, but a borrower should still be careful about what it declares.

4. Who Can Lend

The recognised lender base has broadened materially. One law-firm analysis notes that recognised lenders now include all persons resident outside India, including individuals and NRIs, as well as overseas branches and subsidiaries of entities whose lending business is regulated, and that borrowing from related parties on an arm's-length basis is also permitted. Other commentary describes residual conditions linked to FATF or IOSCO-compliant jurisdictions, particularly on transfers of ECB, so the lender-eligibility position should be confirmed against the notified text for each facility. Lenders from land-border countries also remain a sensitivity under the FDI framework when equity or conversion is involved.

5. How Much Can Be Borrowed

Borrowers may raise ECB up to the higher of outstanding ECB of USD 1 billion, or total outstanding borrowing (external and domestic, excluding non-fund based credit and compulsorily convertible instruments) not exceeding 300% of net worth as per the last audited standalone balance sheet. The limit does not apply to borrowers regulated by financial sector regulators.

The net-worth test is calculated on the standalone balance sheet and counts domestic borrowing too, so a leveraged company may find that its real headroom is smaller than the USD 1 billion headline suggests.

6. Maturity and Cost

Minimum average maturity (MAMP). The standard is a minimum average maturity period of three years, which now applies even to ECBs for general corporate purposes. The exception is for manufacturers: manufacturing sector borrowers may raise ECB with maturity between one and three years, subject to a cap of USD 150 million. Where the average maturity is under three years, the cost of borrowing is subject to the applicable trade credit ceiling.

Note that this is a weighted average maturity test, which allows amortising structures, though the borrower must calculate it correctly.

Cost. Pricing has been made market-based instead of being capped at a benchmark plus a specified spread. Market-based does not mean unexamined. Related-party loans must still be priced at arm's length, which matters for transfer pricing, and the AD bank will expect a rate that is defensible.

Options. Call and put options cannot be exercised before the MAMP is complete, which affects how lenders structure early-exit rights.

7. End-Use: Regulation 3A

The 2026 amendment inserts Regulation 3A, which codifies and refines the end-use restrictions and establishes an exhaustive list of prohibited end-uses. Earlier regimes used a mix of permitted and prohibited uses spread across several documents. The prohibited list still restricts use of ECB funds in specified sectors including real estate and securities trading, although the commentary notes eased rules for certain real estate and infrastructure projects.

An important detail on acquisitions: the 2026 Regulations make clear that any acquisition as an end-use is permitted only if it involves acquisition of "control" as defined in the Regulations. A borrower planning to use ECB proceeds for an acquisition should therefore test the transaction against that definition at the outset.

8. Refinancing, Restructuring, and Conversion

The framework addresses several lifecycle events:

• Refinancing. The average maturity of a refinancing ECB should be at least equal to the outstanding average maturity of the existing ECB, rather than the full three years.
• Corporate actions. There are specific clarifications on refinancing of existing ECBs or stressed domestic loans, and on debt arising out of mergers, demergers, and business restructurings.
• Conversion into equity. Conversion into non-debt instruments is part of the consolidated framework. It must also satisfy the FDI pricing, sectoral cap, and FC-GPR reporting requirements, as discussed in our companion article on conversion of foreign currency loans.
• Currency conversion. A restriction on converting INR-denominated ECB into foreign currency has been relaxed, expressly permitting the conversion without approval, provided the amount does not exceed the original liability.

9. Reporting: Form ECB, LRN, and Form ECB-2

Reporting remains the operational core of ECB compliance:

1. Form ECB 1 is filed through the AD bank before drawdown, setting out the terms of the borrowing, including lender, amount, maturity, cost, and end-use. The RBI issues a Loan Registration Number (LRN), which is needed before any drawdown.
2. Form ECB 2 reports actual transactions such as drawdowns, repayments, and interest servicing. The RBI has substituted revised Form ECB 1 and Form ECB 2 in the Master Direction. One commentary indicates that reporting has moved from monthly to event-based, within seven days of month-end of any drawdown or servicing, and you should verify the exact timeline against the current form instructions.
3. Changes in terms must be reported through the AD bank and reflected in the ECB-2 return.
4. Conversion events are reflected in ECB-2 with the appropriate remarks and in FC-GPR for the equity issue.

10. Consequences of Non-Compliance

Delays in ECB reporting are covered by the RBI's Late Submission Fee mechanism, under which transactional returns such as Form ECB and Form ECB-2 attract a fee of ₹7,500 plus 0.025% of the amount involved multiplied by the years of delay. Substantive contraventions, such as a prohibited end-use, a breach of the maturity or limit requirements, or drawdown without an LRN, usually require compounding. That process is now governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024. In the most serious cases, Section 13 of FEMA permits penalties of up to three times the amount involved.

11. A Practical Compliance Checklist

1. Confirm borrower eligibility and disclose any pending FEMA proceedings in Form ECB 1.
2. Verify lender eligibility and, for related lenders, document arm's-length pricing.
3. Test the proposed amount against the higher-of limit and the net-worth ceiling.
4. Structure the tenor to meet the MAMP, or confirm eligibility for the manufacturing window.
5. Check the end-use against Regulation 3A, and for acquisitions confirm control.
6. Obtain the LRN before the first drawdown.
7. File ECB-2 as required, and update for any change in terms.
8. Plan refinancing, options, or conversion events in light of the 2026 rules.
9. Keep an ECB register covering terms, drawdowns, repayments, and filings.

Conclusion

The 2026 reforms make ECB more accessible: more borrowers, more lenders, higher limits, and market pricing. But they do not remove the discipline the regime demands. Borrowers must still get the tenor, end-use, limit, and reporting right, and the same flexibility that benefits a well-advised borrower can create traps for one who relies on pre-2026 assumptions. Because the framework is newly consolidated and still being interpreted through RBI clarifications and FAQs, the best practice is to check the current regulation and form instructions before each facility.