As we enter into 2019 with some trepidation and given it is an election year in India, many will be glad to see the back of 2018. Against a backdrop of the Indian banking industry being under stress, a severe liquidity crisis for non-banking financial companies, an insolvency code with some but not enough operational restructuring success, the Indian Reserve Bank of India ("RBI") has on 16 January 2019 by way of "External Commercial Borrowings (ECB) Policy – New ECB Framework RBI/2018-19/109 A.P. (DIR Series) Circular No.17 ("New ECB Framework") further revised its regulatory framework. The New ECB Framework permits Indian companies to borrow from offshore capital providers by way of loans or bonds and denominated in foreign currency as well as Rupee ("ECB"). The RBIs declared intention is to improve the ease of doing business. Some of the key changes are as follows:

What continues to apply: The New ECB Framework supercedes and amends the previous Master Directions on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated January 1, 2016 as amended ("2016 ECB Directions") on foreign currency and Rupee denominated borrowing from offshore investors in loan and bond form. However, the 2016 ECB Directions continue to apply in respect of trade credit, borrowing by Indian banks and structured credit enhancement from offshore entities for their Indian subsidiaries' debt.

Track Compression: No longer are there 4 different tracks for (a) 3/5 year foreign currency debt; (b) 10 year foreign currency debt; (c) Rupee denominated loan; and (d) Rupee denominated bond. Now there 2 tracks based on foreign currency debt and Rupee denominated debt. All of these are under the automatic route, which is a welcome move, providing a simpler rationalised framework and also enabling Rupee denominated masala bonds to be under the automatic route.

Eligible borrowers: There is no longer a specified list of eligible borrowers based on the tenor or currency of the debt. Now all entities which are eligible to receive foreign direct investment in India are eligible to raise ECBs. An 'Indian Entity' under the RBI's "Foreign Exchange Management (Borrowing and Lending) Regulations, 2018" dated December 17, 2018 is defined as a company or a limited liability partnership incorporated in India.

Eligible lenders: A major liberalisation is that any resident of an FATF or IOSCO compliant country can be a lender. Previously only certain foreign entities could be lenders for foreign currency loans. Now foreign individuals may also be lenders if they are equity holders and can purchase foreign currency or masala bonds listed abroad. Foreign branches of Indian Banks are permitted as recognized lenders only for foreign currency loans (except foreign currency convertible bonds ("FCCB" or foreign currency exchangeable bonds ("FCEB")). A substantial change is that now foreign branches of Indian banks can lend for any tenor over 3 years. Previously they could only lend for a 5 year ECB, but now can also lend a 10 year foreign currency ECB. Additionally, the New ECB Framework is silent in respect of an offshore related party (defined under Ind-AS 24) subscribing or investing in or purchasing Rupee denominated bonds, suggesting that this is now permitted.

Borrowing Limits: All eligible borrowers are permitted to raise USD 750 million or its equivalent per financial year under the automatic route. This opens up the possibility of more ECB inflows into India, however this would be subject to a "rule-based dynamic limit" at 6.5% of India's gross domestic product at current market prices. So market participants should note that this could change in future.

Instruments: The RBI's stated aim for the New ECB Framework is to make the process 'instrument neutral', and the harmonization of products seems to be a step in this direction. FCEBs now fall under the automatic route and are no longer under the approval route. The intention to introduce specific regulations governing hybrid instruments such as optionally convertible debentures in the near future. In the interim, these hybrid debt instruments are governed by the New ECB Framework.

Minimum Average Maturity: All instruments (including FCCBs and FCEBs) under the New ECB Framework have a 3 year minimum average maturity period ("MAMP") except:

  • ECBs from foreign shareholders used for (i) working capital; (ii) general corporate purposes; and (iii) repayment of Rupee loans have a 5 year MAMP; and
  • 1 year MAMP ECBs utilised by manufacturing sector companies up to USD 50 million or equivalent per financial year.

Hedging: A broader concept of "companies in the infrastructure space" is now relevant as opposed to companies in the infrastructure sector. This includes companies in the infrastructure sector, housing finance companies, port trusts, infrastructure finance non-bank financial companies, holding companies or core investment companies. The consequence is that "infrastructure space" companies only have to hedge their ECB if it is less than 5 year MAMP.

Prohibited End Use: There are three major changes:

  • In summary the ECB proceeds can be used for any purpose except: (i) real estate activities; (ii) investment in capital markets; (iii) equity investment; (iv) working capital, general corporate purposes and repayment of Rupee loans (except from a foreign equity holder); and (v) on-lending to entities for the above activities. In this context, the prohibition on end-use for real estate activities is clearly defined as: (a) buying, selling and renting of commercial and residential properties or land and services related thereto and (b) construction or development of industrial parks or integrated township or special economic zones, purchase or long term leasing of industrial land as part of new project or modernisation within the infrastructure sector is permitted;
  • Previously a 10 year ECB could be used to refinance Rupee debt. This has been removed, with the only exception that any ECB (which has a 5 year MAMP) can be provided by a foreign equity holder or group company having a common overseas parent); and
  • By RBI circular "External Commercial Borrowings (ECB) Policy – ECB facility for Resolution Applicants under Corporate Insolvency Resolution Process" RBI/2018-19/121 A.P. (DIR Series) Circular No. 18 dated 7 February 2019 ("IBC ECB Circular"), resolution applicants bidding for companies under the Indian Insolvency and Bankruptcy Code 2016 as amended, can raise ECB funding (except the branches/ overseas subsidiaries of Indian banks), for repayment of Rupee term loans of the target insolvent company with prior RBI approval. This is an interesting development as it enables foreign debt capital to be used to repay Indian financial sector debt for an insolvent company, whilst at the same time not permitting ECB to be utilised for the same purpose for a non-defaulting company which is not in insolvency.

All-In-Cost: the proceeds from an ECB can no longer be used for payment of interest or other charges. Prepayment charges, while still outside the all-in-cost ceiling, are now along with penal interest for default for breach of covenants, capped at 2% over and above the interest rate.

Reporting: In a unique step the RBI has commenced a penalty system for failure to maintain ongoing report requirements, either physically or electronically for 2 years. The new standard operating procedure for these 'untraceable entities' involves filing a form with RBI. The outstanding amount is treated as written off from the external debt of India from a macroeconomic perspective, however it can be retained in the financial statements of the lenders for recovery; (ii) no fresh ECB application can be processed for the untraceable entity; (iii) the directorate of enforcement needs to be informed; and (iv) no inward remittance or debt service is permitted for this entity through the automatic route.

Insolvency: In an interesting addition, the RBI has enabled a specific provision so companies under a restructuring or in a corporate insolvency resolution process under the Indian Insolvency and Bankruptcy Code 2016 can raise ECBs if permitted under its resolution plan approved by the National Company Law Tribunal.


  • Under the foreign portfolio investor ("FPI") route, the investment horizon can be 1 year minimum average maturity, so FPIs may choose that route in respect of investment in debt over an ECB.
  • Restrictions on repayment of Rupee debt at a time when India Inc is raising debt capital for refinancing given limited new capital expenditure and investment, makes the ECB route challenging. Time will tell how this impacts foreign debt capital into India.

Originally published February 13, 2019.

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at for any queries.