India’s New ECB Regime 2026: A Reset of FEMA Borrowing Rules

Since 16 February 2026 the provisions that decide whether an external commercial borrowing can be drawn have sat in Schedule I of the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026.

They were moved there by A.P. (DIR Series) Circular No. 22 of 16 February 2026.

The substance survived the move largely intact, so a reader who knew the Master Direction will recognise the tests. What changed is the instrument an argument now has to be made against, and who a borrower has room to argue with.

Who may borrow, how much may be carried, what the money may be used for and what has to be filed once it is drawn: those four questions decide a file, and the borrower answers all of them before a lender sees it.

Most files answer them at registration, when the term sheet is signed and the drawdown date fixed. That is late. An end-use outside Regulation 3A is a structural problem while the transaction is still being drafted, and an enforcement question six months after the money has landed.

I have set out the tests in the order I would put them to a treasury team, and closed on the questions that come up in almost every review. My reading is of the Regulations themselves, with Schedule I, Regulation 3A and the Circular of 16 February 2026 as the primary text, as it stood on 16 October 2026.

What External Commercial Borrowing Is, and What Changed in 2026

An external commercial borrowing is a foreign-currency loan a resident borrower draws from a recognised non-resident lender and repays with interest. It does not travel through the foreign-direct-investment route, though the two often sit in one structure and one set of security documents, and a treasurer usually has to answer for both at once.

Schedule I of the amended Regulations carries the definitions, the eligible-borrower test, the cap and the maturity norms. The prohibited end-uses sit in Regulation 3A, and the consequences of a filing failure sit somewhere else again. The Master Direction survives as background, which matters to a reader: a treasury policy still tracking it is following a text the Regulations have superseded, and a bank note written before February 2026 carries nothing on its face to say which regime it belongs to.

The move also changes the argument open to a borrower after a breach. A direction left room to read a transaction against the regulation standing behind it. A regulation is the statute speaking, and the FEMA consequence attaches to the text as printed, so an AD bank working to a written framework has less latitude to read a transaction outside it.

A board minute recording that a borrowing was permitted under the Master Direction answers nothing about Regulation 3A. Files get examined in a quarter long after the one that produced them, which is why the provision is worth naming while the end-use can still be redesigned.

Where the Regulations leave a term undefined I say so instead of closing the gap from practice. My cut-off for everything here is 16 October 2026.

A Unified ECB Framework: Who Can Borrow and How Much?

One instrument answers who may borrow and how much a borrower may carry. The ceiling works as a balance-sheet test as much as a figure fixed in dollars.

A related provision in the same chapter reaches resident individuals who borrow from relatives abroad. That is the route most readers miss when they take ECB to mean corporate borrowing.

Eligible Borrowers

Any person resident in India other than an individual may raise ECB, provided the borrower is incorporated or established under a Central or State Act. Both carve-outs are settled at registration.

An entity under restructuring or under the CIRP may borrow only where the resolution plan allows it. An entity under investigation keeps its access and discloses the position in Form ECB 1 when the loan is registered. That disclosure is a line in a form, not a bar.

Borrowing Limit: A Capital Discipline Mechanism

The cap now sits in the rules: an eligible borrower may carry ECB to the higher of USD 1 billion outstanding or 300% of net worth on the last audited standalone balance sheet, and financial-sector regulated entities are exempt.

The two legs do different work. The dollar leg stops a large group being held to a figure fixed before its balance sheet grew, and the net-worth leg ties the offshore book to capital, so a company with thin equity cannot borrow in place of it.

The balance sheet is the standalone one the Regulations name, on its last audited numbers. Consolidated accounts do not answer the question, and a term sheet modelled on figures still with the auditor is modelled on a different entity from the one that will be tested.

INR Borrowing from NRI/OCI: Simplified but Non-Repatriable

Regulation 6(B) lets a resident individual borrow rupees from an NRI or OCI relative on two conditions. The money must arrive by inward remittance or by debit to an NRE, NRO, FCNR(B) or SNRR account, and the borrowing must be on a non-repatriation basis, repayable only into an NRO account.

Both conditions point the same way. A rupee repayment into an NRO account cannot leave India as debt service, which is what keeps the transaction inside the capital account. What the borrower gets is lighter documentation and money that stays where it is, not a freer hand on the amount.

Maturity Norms: Stability Over Short-Term Arbitrage

The minimum average maturity period is three years, and the schedule writes two departures into that. Both are narrower than the wording suggests.

Annex I carries a worked example of the average-maturity sum, so a treasury team can compute the number instead of arguing for it: drawdowns weighted by amount and tenor.

Run that arithmetic before the facility is structured. A tranche's tenor is a commercial decision and the average is a regulatory one. A one-year bridge inside a five-year facility is the ordinary way a compliant structure fails the test, and the fix costs less at drafting than at drawdown.

The floor exists to stop working-capital arbitrage. ECB is meant to fund medium- to long-term capital, and the three-year average is how that intent is enforced.

Cost of Borrowing: Market-Linked Discipline

For ECB maturing in under three years the cost must sit within the trade-credit ceiling, which puts short-term ECB and trade credit on the same footing and closes the rate arbitrage that used to sit between them. My earlier all-in-cost and hedging analysis sets out how the ceiling is built, and the regulator’s own FAQ on ECB and trade credit covers both questions in its own words.

I state the ceiling without a figure, because it is reset by circular and any number printed on a page is out of date by the next drawdown. What does not move is the test. The price is measured against the ceiling for that tenor, and measured before the term sheet is signed.

A Stronger End-Use Regime: Policy Tightening with Clarity

Regulation 3A, on the restriction of end-use of borrowed funds, is the part of the amendment that changes the most deals. Funds cannot be applied to:

• Chit funds

• Nidhi companies

• Real estate business, with defined carve-outs

• Construction of farmhouses

• Trading in transferable development rights

• Transacting in listed or unlisted securities, except for strategic corporate actions

• Repayment of rupee loans that funded a restricted end-use or have been classified as a non-performing asset

• On-lending for a purpose that would itself be prohibited

Most of the risk sits in two of those limbs. The repayment bar comes first, because a refinancing that looks clean can fail on the history of the loan it replaces: the test attaches to what the rupee loan funded and to whether it has been classified as a non-performing asset.

On-lending is the second. A group that borrows at the holding level and pushes the money down has to show that the ultimate use would have been permitted at the top.

The purpose registered when the loan registration number is obtained is the purpose every later filing is measured against. Change it after the money has landed and the change becomes a reporting event in its own right, filed by a borrower who has already spent the funds.

Strategic Securities Exception

Borrowing to trade securities is permitted only for a strategic end: a merger, a demerger or the taking of control. A buyer funding a share purchase with ECB has to record that reason, and the note has to survive a reader who asks whether the purchase was financial engineering carrying a strategic label.

The line runs between control of a business and a position in a security. A stake that carries no control, no merger and no demerger sits on the wrong side of it, whatever the investment note calls the purchase.

Real Estate and Industrial Parks: Conditional Flexibility

The carve-outs sit inside the definition of real estate business, and they reward reading before a project is designed. Construction and development projects, infrastructure work and industrial parks are allowed, subject to conditions.

For an industrial park the conditions are these:

• At least 10 units

• No single unit over 50% of the allocable area

• At least 66% of the allocable area for industrial use

Each condition is a design constraint. An allotment plan that hands one anchor tenant 55% of the area fails the second test however industrial the use is, and the failure sits in the plan months before anyone requests a drawdown.

Arm’s Length Principle: Explicit Codification

ECB from a related party must be on an arm’s length basis, and since February 2026 that requirement sits in the Regulations themselves.

The same interest is tested a second time under the income-tax transfer-pricing provisions, and the two tests do not always want the same answer. FEMA asks whether the borrowing was permitted; transfer pricing asks whether the price was right. A loan can clear the first and fail the second, and the consequence then falls under a different statute, before a different officer.

The benchmark has to be settled before signature, and three choices sit inside it. Is the rate a base rate plus a spread, or the price of a comparable loan? In which currency, given that a rupee loan to an offshore parent and a dollar loan from it are different instruments? And against which comparables: the group lender’s own cost of funds, or an unrelated lender’s price to a borrower of similar credit?

Answer one and leave the other two open, and the file will be reopened. A reviewer wants a source, not a range: the loan agreement, the comparable, the date the comparable was struck, and, where the lender is a group treasury, its own cost of funds. A spread defended by reference to group policy is the thinnest version of the file, because the policy is the thing being tested.

I have written elsewhere about benchmarking interest on a related-party loan. The point to carry into a term sheet is that the rate needs a defensible source attached to it when it is signed, not produced after a notice arrives.

Security and Guarantees: Structured but Controlled

Security may be created over immovable property, movable assets, financial assets or intangibles, and a guarantee may be given under the draft FEMA guarantee regulations. The framework does not turn security into a right to own the asset.

• Entities regulated by RBI cannot issue guarantees.

• Enforcement remains subject to FEMA compliance.

• Creation of a charge is not permission to acquire Indian assets.

The third point is the one lenders push against, and the one that decides a workout. Enforcement that ends in a transfer of shares is an acquisition of Indian assets, and it has to be permitted in its own right, whatever the security document provides.

A guarantee issued out of India for a group borrower abroad runs through a regime separate from the loan it supports. That is how a structure which clears every ECB test can still stall at the point the guarantee is called.

Conversion to Equity: A Clean Exit Route

ECB can be converted into non-debt instruments under the FEMA Non-Debt Instrument Rules, 2019, provided no additional cost is borne, the lender consents and the exchange rate complies with the norms. For a group in stress, it cuts debt without a fresh infusion. It also changes the register of who owns what, which makes it a cap-table event as much as a treasury one.

Reporting Tightened: Governance Is Central

The forms are the same three. What has changed is that the consequence of missing one now sits in the Regulations.

1. Form ECB 1 obtains the loan registration number before the drawdown.

2. A revised Form ECB 1 records any change to the parameters already registered.

3. Form ECB 2 reports each drawdown and each servicing payment.

A late submission fee applies to delay.

The Regulations also name the borrower who goes quiet. Where scheduled activity has taken place and nothing has been filed for four consecutive quarters, the borrower can be reported to RBI, and the Directorate of Enforcement may be told as well.

That provision belongs in front of a board. The clock starts from a scheduled activity, not from a reminder, and it runs whether or not anyone is still reading the file. A missed second form on a small facility escalates at the same speed as one on a large facility, and what a FEMA contravention costs at compounding is a separate question from the late fee.

Servicing is the part that gets forgotten. The obligation runs through every interest date and every principal repayment and does not end when the drawdown is reported. Much of the filing passes through the AD bank, which is why a change of banker mid-facility deserves its own entry in the file.

Ownership of the calendar is the practical fix. These filings fall due on events rather than on dates, which is how they slip, so a named person and a monthly check against the facility register catch more than a compliance calendar does.

Practical Business Implications

The sequence I would put to a board takes an afternoon and costs a good deal less than answering a notice two years later. Run the tests against the draft, in this order, and minute the answers.

1. The cap. Compute both legs on the last audited standalone balance sheet and record the headroom in the board note.

2. The end-use. Match the stated purpose to Regulation 3A. Where securities are involved, put the strategic reason on file before the term sheet.

3. The industrial park. Test the allotment plan against the 10-unit, the 50% and the 66% conditions before any area is allotted.

4. The interest file. Settle the rate, the currency and the comparables, and keep the working.

5. The calendar. Register the loan number before drawdown, revise Form ECB 1 on any change, and file Form ECB 2 on every drawdown and servicing date.

None of that needs a new system. It needs the answers produced before the term sheet, because that is the last point at which each one can still be changed.

Questions I Am Asked Most About ECB

The same questions come up in most reviews, and each has a short answer that rests on a provision the reader can check.

What is the difference between ECB and FDI?

ECB is debt: foreign currency borrowed from a non-resident lender, repayable with interest. FDI is equity, or capital close enough to it that it stays invested through a bad year. They sit under different regulations, are tested against different limits and are reported on different forms, and the draft rules on foreign investment govern the equity side.

What is the current interest rate for external commercial borrowing?

No rate is administered. The borrower and the lender set the price, and the framework constrains it from two directions: a related-party loan must be at arm’s length, and a loan maturing in under three years must sit within the trade-credit ceiling.

What are the RBI guidelines for external commercial borrowings?

They sit in the Regulations now, not in the Master Direction. Schedule I of the amended Regulations, placed there by Circular No. 22 of 16 February 2026, carries the definition, the eligible-borrower test, the cap of the higher of USD 1 billion or 300% of net worth, the maturity norms and the reporting forms. The prohibited end-uses sit separately, in Regulation 3A.

Who is eligible for ECB?

Any person resident in India other than an individual, provided the borrower is incorporated or established under a Central or State Act. A CIRP entity needs a resolution plan that allows the borrowing, and a borrower under investigation discloses it in Form ECB 1. A resident individual borrows only under Regulation 6(B), in rupees, from a relative abroad.