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14 October 2025

RBI Update | ECB Framework Liberalization And M&A Financing Proposals

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The Reserve Bank of India (RBI) has proposed comprehensive liberalizations to the external commercial borrowing (ECB) framework through the Draft Foreign Exchange Management Amendment Regulations, 2025, aimed at enhancing overseas funding access for Indian entities by removing cost caps.
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The Reserve Bank of India (RBI) has proposed comprehensive liberalizations to the external commercial borrowing (ECB) framework through the Draft Foreign Exchange Management (Borrowing and Lending) Amendment Regulations, 2025, (Draft Regulations) aimed at enhancing overseas funding access for Indian entities by removing cost caps, expanding eligibility, and aligning limits with financial strength. In parallel, during its recent bi-monthly monetary policy review, the RBI announced a draft framework proposing to enable domestic banks to underwrite mergers and acquisitions (M&As) financing for Indian corporates, addressing prior regulatory constraints that favoured foreign lenders.

Proposed ECB Framework:

The Draft Regulations extend eligibility to all incorporated Indian entities, including limited liability partnerships (LLPs) and those undergoing restructuring or under corporate insolvency resolution processes (subject to plan approval), provided borrowing is permitted under applicable laws. Financial sector entities are exempt from caps. Recognized lenders now include any non-resident entity, such as individuals and non-resident Indians (NRIs), with repayments to appropriate accounts. Forms of ECBs are simplified to cover commercial arrangements, including foreign currency convertible bonds (FCCBs) and fully convertible exchange bonds (FCEBs), while excluding trade credits, export advances, or investments under separate FEMA provisions. Currency flexibility is introduced, allowing changes between foreign currencies or to/from INR at the prevailing exchange rate or one that results in lower liability.

M&A Financing Proposals:

Announced as part of the monetary policy review, the draft framework proposes to enable domestic banks to provide acquisition financing, including for share purchases in M&A deals by Indian corporates. Previously restricted to foreign banks, non-bank financial institutions, bond markets, and private equity due to regulatory barriers, this proposed enabling framework introduces safeguards such as credit limits and oversight norms to ensure a level playing field. In FY24, M&A deals exceeded USD 120 billion in value, with a potential 40% debt component; therefore facilitating 30% bank participation could generate up to INR 1.2 trillion in annual credit growth.

Salient Features:

The proposals incorporate the following key enhancements, with primary focus on ECB reforms integrated with M&A and policy elements:

  • ECB limits increased to the higher of USD 1 billion per financial year or 300% of net worth (including domestic borrowings), replacing the prior USD 750 million cap and linking capacity to balance-sheet strength.
  • Removal of all-in-cost ceilings (previously benchmark plus 500 basis points for foreign currency ECBs and 450 basis points for INR denominated) and prepayment charges (up to 2%), shifting to market determined levels.
  • Minimum average maturity period (MAMP) standardized at three years for most ECBs, with 1-3 year options for manufacturing entities (outstanding stock not exceeding USD 50 million) and exemptions for conversions to equity, debt waivers, closures, mergers, or resolutions.
  • End-use restrictions simplified to permit proceeds for acquisitions under securities acquisition regulations or insolvency codes, unrestricted on lending by banks and NBFCs (excluding prohibited uses or ineligible borrowers), and overseas investments in deposits, certificates of deposit, or high-quality treasury bills up to one year maturity.
  • For M&A, the proposed framework would authorize domestic banks for underwriting and lending with prudential controls, reducing foreign reliance and supporting deal activity.

MHCO Comment:

These RBI measures, anchored in ECB liberalization, foster a more adaptive regulatory landscape that could significantly expand corporate funding options, mitigate external borrowing costs, and stimulate M&A activity, complemented by the repo easing for broader economic support. This article was released on 10 October 2025.

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.

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