Towards the end of 2019, India's central bank (Reserve Bank of India) introduced significant changes in its regulations covering External Commercial Borrowings or ECBs. While ECBs are governed by the Foreign Exchange Management Act, 1999 (FEMA), the most recent Master Direction covering ECBs was updated in August 2019. The Master Direction significantly simplified ECB regulations, opening ECBs up as a funding route for many more companies than the previous Master Direction.

The ECB process is an approval-based process through the RBI. It is to be noted that loans that meet the requirements of the ECB regulations will usually be granted approval, i.e. the approval process is simply to ensure compliance with law. We have recently assisted multiple clients with ECB applications and the timelines for approval have varied between 2 weeks and 2 months from application.

Benefits of ECBs over loans from domestic sources

Small and large businesses belonging to multinational groups find ECB loans a very useful funding mechanism. While equity becomes locked in, ECB is a loan that is set up with a pre-planned repayment schedule and early repayment, refinancing or modifications remain possible. An ECB loan can be secured or unsecured.

Further, overseas borrowing is usually available at significantly lower rates than Indian bank rates. This represents a mutually beneficial proposal as the Indian company can receive funds at low rates (under 5%) and the overseas company can earn interest on surplus funds at higher than its usual bank rates. In case of an INR denominated ECB, the overseas company could earn significantly higher interest while accepting currency fluctuation risk.

Primary changes in ECB regulations


Eligible borrowers

Then: Under previous ECB regulations, 3 tracks were defined for borrowers to apply for ECB. Eligible borrowers were infrastructure companies, companies in SEZ, companies in manufacturing and software development sectors, real estate and REIT companies, microfinance institutions and research institutes. As such, service entities not covered above were left out. Trading companies were also left out.

Now: All entities that are allowed to receive FDI (Foreign Direct Investment) are now allowed to receive ECB. Under the current FDI regulations, this would include practically all companies except in key sectors such as agriculture and defence.

Eligible Lenders

Then: Eligible lenders for ECB included international banks and capital markets, government and multilateral financial institutions, export credit agencies, equipment suppliers of the borrower, overseas shareholders of the borrower, and overseas wealth funds. As such, if an Indian borrower had access to a third party overseas which could provide funds, the ECB would still be disallowed.

Now: Eligible lenders for ECB include any resident of a FATF or IOSCO compliant country. This is a significant change because as long as the lender belongs to such a country, no conditions of eligibility apply, allowing borrowers access to more lenders.

End-use of ECB

Then: ECB proceeds could not be used for real estate activities, investing activity, working capital uses (except in certain specific cases), general corporate purposes, repayment of rupee loans and on-lending except in the case of NBFCs. As such, service or trading companies, which require funds primarily for working capital and general purposes, would not qualify.

Now: ECB proceeds cannot be used for the activities mentioned above, except for working capital and general corporate purposes which are now allowed. This simplifies the issue for many companies which may require funds for general purposes, especially in the first few years of business.

Minimum average maturity period (MAMP) of ECB

ECB regulations have always included a requirement of a minimum average maturity period for loans, to disallow short-term borrowing.

Then: 1-5 years for Track 1 and Track 3 companies, depending on purpose and amount of the ECB. 10 years for Track 2 companies.

Now: 1-10 years depending on purpose and amount, if they are covered by specific circumstances mentioned in the ECB Master Direction. If not covered by the list of circumstances therein, 3 years is the MAMP.

Form of ECB

Then: Loan, securitised instruments, buyer or supplier credit, FCCBs and FCEBs, financial lease
Now: Same, no significant change

Interest and all-in-cost of ECB

Then: Benchmark rate plus 450 bps (Benchmark rate is different for foreign currency and INR denominated ECBs)
Now: No change


Then: ECB limits per annum (i.e. cap on funds that can be raised) were between USD 100-750 million p.a. depending on sector and purpose. These applied to both foreign currency and INR denominated ECBs, and a drawdown of greater than this per annum limit would require special approval. Further, if the ECB was from a foreign equity holder, the gearing ratio needed to be maintained under 7:1 at all times, except when ECB was under USD 5 million.

Now: A uniform ECB limit of USD 750 million p.a. is applicable for ECBs irrespective of sector and purpose, above which a drawdown would require special approval. The gearing ratio of 7:1 is applicable only to foreign currency ECBs above USD 5 million.

Conversion of ECB to equity

Then: Permitted subject to certain terms and conditions

Now: No change

ECB for Startups

Then: No specific provision

Now: ECB regulations include a specific provision for startups that may wish to borrow via the ECB route. While most of the parameters are the same as outlined above, the ECB limit for startups is USD 3 million per annum.

Compliance requirements under ECB regulations

Monthly ongoing reporting is required wherein the borrower discloses its drawdowns, uses and interest and principal repayments to the RBI as per current ECB regulations.

All compliances are routed through the borrower's bank.


In our experience, while overseas group companies are willing to fund their Indian entities, a large amount of equity funding is often not preferred because it locks in capital for an unforeseen period of time. In the last two years, overseas group companies have preferred using the ECB route to fund their Indian entities, because it provides flexibility, transparency as well as fixed returns on the amount loaned to the Indian company. Indian companies benefit as well, because the ECB route provides low-cost funds and if it is from a group company, repayment flexibility can be retained.

We have assisted numerous clients with ECB applications as a result of the relaxations in 2019's ECB regulations, and we expect that more and more companies will explore this as an option in the coming years.

Originally Published by Asit Mehta & Associates, January 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.