India: ECB Policy Overhauled - Two Steps Forward, One Step Back

The much anticipated revisions to the External Commercial Borrowings (ECB) regime was announced by the Reserve Bank of India (RBI) on 30 November 2015 and became effective from 2 December 2015 upon relevant regulatory notifications being made in the official gazette of the Government of India as the revised framework of the ECB policy (the Revised ECB Framework). The Revised ECB framework was preceded, earlier this year, by a liberalised framework for the issuance of rupee denominated bonds overseas ('Masala Bonds', as they are popularly called), which was introduced by the RBI on 29 September 2015.

The Revised ECB Framework is, inter alia, intended to:

  1. liberalise the ECB regime, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings;
  2. incentivise INR denominated ECBs so as to transfer the currency risk to the lender;
  3. expand the list of overseas lenders to include long-term lenders such as, insurance companies, pension funds and sovereign wealth funds;
  4. align the list of infrastructure entities eligible for availing ECBs with the 'Harmonised List' of the Government of India.

The key highlights of the Revised ECB Framework are as follows:

Classification of ECBs based on tenor – introduction of a 3-Track approach

The bifurcation of ECBs into approval and automatic routes (with parameters such as eligible borrowers, recognised lenders, permitted end-uses and other restrictions) under the extant ECB guidelines has been largely modified and linked to three identified 'Tracks' under the Revised ECB Framework, on the basis of Minimum Average Maturity (MAM) and currency denomination, as follows:

Track 1

Medium term foreign currency denominated ECBs can be availed with a MAM of 3/5 years

Track 2

Long term foreign currency denominated ECBs can be availed with a MAM of 10 years

Track 3

Indian rupee denominated ECBs can be availed with a MAM of 3/5 years

While ECBs availed under any of the above Tracks are under the automatic route (provided such ECBs are in compliance with the specified limits and parameters applicable for such Track), the RBI approval route continues to be applicable in comparatively limited cases such as: (i) ECBs beyond the borrowing limits specified under each Track, (ii) Foreign Currency Exchangeable Bonds, (iii) borrowings and on-lending by the Export Import Bank of India, and (iv) ECBs for the purposes of importing second-hand goods. The intent behind this revision appears to be to discourage applications under approval route beyond the limited categories as set out above.

Larger pool of Recognized Lenders/Investors

One of the key positive changes to the Revised ECB Framework is the introduction of a new category of 'overseas long term investors' as recognised lenders, which includes prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds and financial institutions located in 'Institutional Financial Services Centres' in India. However, the term 'prudentially regulated financial entities' is not defined and requires further clarity.

In addition, the RBI has also included group companies of eligible borrowers (which have a common overseas parent) within the realm of a 'foreign equity holder'. The expansion in the list of recognized lenders is a welcome move and is expected to increase the flow of funds from these sources, keeping in mind the increasing interest recently shown by these long term investors to participate in the Indian debt market.

However, overseas branches / subsidiaries of Indian banks cannot provide ECBs under Track II and Track III, which may end up restricting this source of funding, particularly to the Infrastructure sector.

Liberalisation of Borrowing Limits for certain sectors

Under the Revised ECB Framework, companies in the infrastructure sector (which includes hotels and hospitals) and the manufacturing sector are now permitted to avail ECBs up to USD 750 million in a financial year, under the automatic route, as opposed to the earlier limit of USD 200 million applicable to companies in the hotels and hospitals sector under the erstwhile regime.

However, the borrowing limits for companies in the software sector have been retained at USD 200 million per financial year. Further, entities engaged in micro-finance activities can now avail up to USD 100 million while all other entities have to comply with a ceiling of USD 500 million in each financial year.

Although the limits have been significantly relaxed for certain sectors which fall within the definition of 'infrastructure sector' under the Harmonised Master List of Infrastructure sub-sectors dated 27 March 2012 (the Harmonised Master List), overall, the borrowing limits available to companies in all other sectors have been reduced from USD 750 million to USD 500 million in a financial year.

Importantly, the RBI has clarified that the limits under the Revised ECB Framework are separate from and in addition to the USD 750 million limit specified under the Masala Bonds regime.

No substantive alterations to the list of Eligible Borrowers

Except a few additions, the list of 'eligible borrowers' has not been significantly altered but has been spread out under the three Tracks. These additions include Real Estate Investment Trusts (REITs) /Infrastructure Investment Trusts (INVITs) (under Track II and Track III) and companies providing logistic services (under Track III).

Similar relaxations have been extended to developers of Special Economic Zones (SEZs) and National Manufacturing Investment Zones (NMIZs) (who could earlier avail ECBs under the approval route), as they have now been listed as eligible borrowers under Track III.

Further, under the erstwhile regime, airline companies were permitted to avail ECBs only for working capital purposes under the Approval Route. Under the Revised ECB Framework, airline and shipping companies have been identified as 'eligible borrowers' (for import of aircrafts or vessels only) under all three Tracks. Limited liability partnerships continue to remain ineligible for availing ECBs.

Another key change is in respect of non-banking financial companies (NBFCs), which can now avail ECBs only under Track III, which entirely eliminates access to foreign currency denominated ECBs for NBFCs.

Significant implications for the Infrastructure sector

Under the new regime, companies in the 'infrastructure sector' can avail ECBs under Track II and Track III. As a result, infrastructure companies would no longer have access to shorter term foreign currency denominated ECBs under Track I but only long term ECBs under Track II and INR denominated ECBs, under Track III.

Moreover, the definition of 'infrastructure sector' has now been linked with the Harmonised Master List. It may be worthy to note that, although the definition of 'infrastructure sector' under the erstwhile ECB regulations remains largely similar to the definition set out under the Harmonised Master List, certain additional infrastructure sub-sectors which appear in the Harmonised Master List are slurry pipelines and parks with industrial activity such as food parks, textile parks, agricultural markets and terminal markets. On the other hand, certain important sectors such as mining, exploration, refining and fertilizers have been removed from the ambit of 'infrastructure sector' according to the Harmonised Master List, which means that only the Masala Bonds route would now be available to companies engaged in mining, oil and gas exploration and refining and fertilizers, who are seeking to avail financing from non-resident lenders.

Similarly, developers of low-cost affordable housing projects (who could earlier avail ECBs under the approval route), have now been removed as 'eligible borrowers' under the present ECB regime and would therefore have access to debt financing from non-resident lenders only in the form of Masala Bonds, after 31 March 2016.

All-in-Cost Ceilings tightened further

Under the Revised ECB Framework, guarantee fees (payable in INR or foreign currency), and all other fees, charges, expenses payable in INR are now included within the calculation of the all-in-cost ceiling.

Further, the Revised ECB Framework mandates a reduction of 50 basis points for ECBs under Track I as compared to the erstwhile ECB regulations. However, for ECBs availed under Track III, the all-in-cost shall be in conformity with the prevailing market conditions.

In addition, whilst the erstwhile ECB regulations stated that penal interest should not be more than 2% of the all-in-cost (which would include rate of interest, fees and expenses in foreign currency), the Revised ECB Framework states that the penal interest should not be more than 2% over and above the 'contracted rate of interest'.

No Major Relaxations in the Permitted End-uses

The Revised ECB Framework has segregated the permitted end-uses under the different Tracks and has included fewer restrictions on end-uses. For example, direct / indirect foreign equity holders and group companies are now permitted to provide ECBs for general corporate purposes with a lower MAM period of 5 years (as opposed to 7 years under the erstwhile regime).

Further, the Revised ECB Framework has extended the benefit of borrowing for 'general corporate purposes' as a permissible end-use to all eligible borrowers under Track I and Track II, and Track III other than for NBFCs, developers of SEZs / NMIZs, other eligible MFIs, NGOs and non-profit companies.

Separately, the Revised ECB Framework has also provided for certain additional end-uses which are now permitted under the automatic route. For example, payment of capital goods already shipped/imported but unpaid has been added as a permitted end-use under the Revised ECB Framework. Shipping and airlines companies can now raise ECB only for import of vessels and aircraft respectively and refinancing of existing trade credits raised for import of capital goods are now permitted under Track I.

Tightening the regime for overseas guarantees for securing ECBs

Broadly, the regime for securing ECBs remains consistent with the erstwhile ECB Regulations. However, ECBs can now be credit enhanced or guaranteed by an overseas party only if the guarantor qualifies as a recognized lender under the Revised ECB Framework. The restrictions on issuance of guarantees, SBLCs, letters of undertaking or letters of comfort by Indian banks, all India financial institutions and NBFCs relating to ECB continue to prevail. Further, financial intermediaries have been specifically restricted from investing in FCCBs.

Extension of time for parking ECB Proceeds

While the conditions in relation to parking of ECB proceeds are similar to erstwhile guidelines, the Revised ECB Framework permits eligible borrowers to park ECB proceeds (meant for Rupee expenditure) in unencumbered term deposits with AD banks up to 12 months (previously 6 months).

Additional 'no-objection' required for prepayment

Under the Revised ECB Framework, any pre-payment of ECBs availed under the new regime, subject to compliance with the stipulated MAM, will now require a prior No-Objection Certificate (NOC) from the AD Bank. Under the erstwhile regime, so long as the MAM of the original ECB was maintained, no approvals/NOCs were required.

Sunset provisions

ECBs can be raised under the erstwhile ECB regime up to 31 March 2016, provided the loan agreement is signed before 2 December 2015. Additionally, ECBs can be raised under the erstwhile regulations by:

  1. airline companies for meeting their working capital requirements;
  2. consistent foreign exchange earners under USD 10 billion Scheme; and
  3. low cost affordable housing projects, provided the loan agreement is signed and the Loan Registration Number is obtained prior to 31 March 2016.


The Revised ECB Framework has been drafted with a view to provide a simplified and more liberalized regime for ECBs. While the new regime attempts to streamline the applicable regulatory framework and has opened up opportunities for a wider category of lenders to participate in lending to Indian borrowers, further clarity is required on some aspects (as set out below), in order to properly achieve the policy objectives:

  • The Revised ECB Framework is silent on the provisions in the erstwhile ECB regulations on structured obligations, trade credits and bridge financing. Consequently, it is unclear whether these provisions continue to remain applicable and may require clarifications from RBI in due course;
  • It is unclear whether or not the Masala Bonds regime is to be read in conjunction with the new ECB framework (under Track III). If the former view is adopted, it would open up a 'IVth Track' whereby companies such as software companies that have limits under the Revised ECB Framework would be able to borrow an additional USD 750 million through the Masala Bond route;
  • The revised definition of "infrastructure sector" seems to have unintentionally left out certain key sectors like mining and oil & gas exploration, which largely relied on ECBs for their capital expenditure requirements. The revised definition will potentially have implications for other RBI or SEBI Regulations which refer to the ECB Guidelines for the definition of 'infrastructure'. For example, per SEBI's previous notifications, foreign portfolio investors (FPIs) would be permitted to invest in unlisted NCDs issued by corporates in the 'infrastructure sector' (as defined in the ECB guidelines);
  • Financing for low cost housing schemes and working capital facilities for airline companies would be phased out by 31 March 2016 and this may dry up sources of financings for such cash-strapped sectors;
  • Permissions set out under the erstwhile ECB regime for spectrum allocation have been omitted under the Revised ECB Framework, which may be interpreted as the intention of RBI to disallow such end-uses, despite the telecom sector being a recognized 'infrastructure sector' borrower. RBI may, on a case-to-case basis, consider ECBs to be availed for spectrum allocation, under the approval route, such that Telecom companies have access to ECBs as and when a fresh round of spectrum auction is contemplated by the Government of India;
  • The all-in-cost requirements under Track III have been left to 'prevailing market conditions' and are dependent on the interest of foreign lenders to take exposure in Rupees to Indian borrowers. RBI may, in the future, consider re-assessing whether the all-in-cost requirements under Track II should be subject to a ceiling or should be left to market conditions;
  • NBFCs and NBFC-MFIs have been clubbed under Track III only for certain specific end-uses. Considering that such financial market players may be more sophisticated in terms of determining the foreign currency risks and have been raising foreign currency borrowings, RBI may consider providing such NBFCs access to foreign currency denominated ECBs under Track I and Track II.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions