Draft ECB Regulations 2025: A New FEMA Playbook For Foreign Borrowing

1. Introduction

India's external commercial borrowing (ECB) regime is poised for a major overhaul. The Reserve Bank of India has issued the Draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025 under FEMA, seeking comments on a framework that would substantially recast foreign currency borrowing by Indian entities. Released alongside the government's review of ECB policy and external debt, the draft signals a move towards a more liberal, market‑linked and risk‑based approach.

ECBs are foreign currency loans raised by eligible Indian residents from recognised non‑resident lenders are currently governed by the FEMA (Borrowing and Lending) Regulations, 2018 and RBI's ECB Master Directions. ECBs have been an important source of funding for infrastructure, capital expenditure, and refinancing, but they sit within a tightly regulated corridor of eligible borrowers, lenders, maturities, costs, and end‑uses. reflecting a decade of calibrated liberalisation using negative lists and prudential caps. Empirical work shows that ECB flows are highly sensitive to both regulation and global financial conditions, while official data confirm that commercial borrowings form a substantial share of India's external debt, making policy design critical for managing currency and rollover risks.

In this context, the 2025 can be seen as the next major step in aligning India's capital account management with its growth, infrastructure, and external debt objectives. For Indian corporates, NBFCs, infrastructure vehicles, and foreign lenders, the proposed framework matters on several fronts. It expands the universe of eligible borrowers, links borrowing limits more explicitly to financial strength, relaxes hard cost caps in favour of market‑determined pricing, and seeks to streamline certain operational aspects of the ECB process. At the same time maintaining strict expectations on end‑use, reporting and the gatekeeping role of authorised dealer (AD) banks.

2. Overview of the Draft Fourth Amendment Regulations

RBI issued the draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025, on 3 October 2025, with a consultation window for stakeholders to provide feedback before the framework is finalised. The draft would substantially re‑organise the existing ECB framework embedded in the 2018 Borrowing and Lending Regulations and the ECB Master Directions, with the stated aim of simplifying categories, modernising pricing, and aligning borrowing limits with the financial strength and regulatory status of Indian borrowers.

In particular, the draft regulation:

1. Broaden the class of eligible borrowers to encompass all entities incorporated or established under Indian law, including structures such as REITs and InvITs, subject to sectoral regulation where applicable.
2. Propose net‑worth linked borrowing limits, with specific exemptions or differentiated treatment for entities already under prudential oversight by regulators such as RBI, SEBI, IRDAI and PFRDA.
3. Replace prescriptive all‑in‑cost ceilings with a more flexible, market‑determined pricing framework overseen by AD banks, allowing parties to tailor terms while preserving an arm's‑length standard.
4. Retain a negative list of prohibited end‑uses, while offering more flexibility on refinancing, currency change, and conversion of debt into eligible equity or non‑debt instruments, subject to conditions.

The table below provides a snapshot comparison of the existing ECB regime and the key elements of the draft framework, drawing on the draft text and early professional commentaries.

Table 1: Existing ECB Framework vs Draft Fourth Amendment Regulations

These high‑level changes set the stage for a deeper doctrinal analysis of the draft regulations, particularly around who can now borrow, how much they can borrow, on what terms, and with what regulatory expectations.

3. Core Reforms Analysis

3.1. Expansion of "Eligible Borrower"

Under the existing framework, the universe of ECB‑eligible borrowers was closely aligned with entities eligible to receive foreign direct investment, with sector‑specific relaxations layered over time. The draft regulations adopt a more principle‑based approach by treating any entity incorporated or established under Indian law as potentially eligible, subject to applicable sectoral restrictions.

In practice, this opens the door more clearly to REITs, InvITs, statutory corporations and certain registered trusts, provided their governing statutes and regulators permit external borrowing. For infrastructure and real‑assets platforms, this may materially widen funding options, especially when paired with credit‑enhancement and blended‑finance structures such as the MIGA‑backed ECB raised by DFCCIL. The broadened definition also reduces the need for frequent piecemeal amendments whenever a new vehicle type or sector is admitted to the ECB regime.

3.2. Net‑Worth Linked Borrowing Limits and Exemptions

A second central reform is the move towards net‑worth linked caps on ECB exposure. The draft proposes that aggregate ECB for a borrower be constrained by reference to its net worth and/or specified quantitative limits, while offering differentiated treatment to entities already subject to prudential regulation by RBI, SEBI, IRDAI or PFRDA.

This approach seeks to match ECB headroom with a proxy for financial strength, rather than relying solely on flat USD caps or route‑based thresholds. Strong‑balance‑sheet corporates may obtain greater foreign currency borrowing capacity, whereas highly leveraged or thinly capitalised entities may find their space constrained unless they strengthen equity. Financial sector entities such as NBFCs and CICs are expected to be guided primarily by sectoral norms, recognising that their leverage and asset‑liability profiles are already closely supervised.

For lawyers and deal teams, this will require greater focus on consolidated net‑worth definitions, group exposure calculations and dynamic covenants that reference regulatory borrowing caps over the life of an ECB facility.

3.3. Shift to Market‑Determined Pricing

The proposed removal of hard all‑in‑cost ceilings is perhaps the most visible liberalisation. At present, RBI specifies maximum spreads over benchmarks such as SOFR, differentiated by maturity and route. The draft moves to a regime in which interest, fees and other costs are negotiated commercially, subject to AD banks ensuring that the terms are reasonable, at arm's length and consistent with prevailing market conditions.

For borrowers, this increases flexibility to secure competitive pricing during benign market conditions and to adopt innovative structures such as sustainability‑linked or hybrid instruments. For foreign lenders, particularly global banks and funds, it aligns Indian ECBs more closely with general credit pricing policies and risk‑based returns. The flip side is that volatility in global rates and credit spreads will transmit more directly to ECB costs, placing a premium on timing, hedging and liability‑management strategies.

AD banks will be expected to exercise more substantive judgement when vetting deals, moving from a box‑ticking role under prescriptive caps to a prudential gatekeeper function backed by internal policies and supervisory oversight.

3.4. End‑Use, Refinancing and Conversion Flexibility

The draft regulations continue to rely on a negative list of prohibited end‑uses, such as real estate speculation, capital market activities and on‑lending to related parties, which reflects long‑standing policy positions.

However, they offer expanded flexibility around :

1. Refinancing existing ECBs: subject to conditions on residual maturity and cost, enabling active liability management and opportunistic repricing.
2. Change of currency: allowing borrowers to better align currency profiles with underlying cash flows and risk appetites.
3. Conversion of ECBs into equity or other non‑debt instruments: particularly relevant for PE/VC‑backed companies and distressed situations where lenders may prefer an equity stake.

These tools give sponsors, treasuries and counsel greater room to rebalance capital structures over time, while keeping transactions within the FEMA and sectoral regulatory perimeter.

4. Policy Perspective and Academic Insights

The draft ECB framework should be viewed within India's broader capital‑account and debt‑management strategy. Official data in the India's External Debt Status Report 2024–25, show that commercial borrowings account for a significant portion of external debt, with policy calibrated to prevent excessive currency and rollover risk even as India seeks to attract long‑term foreign capital.

Academic studies reinforce this picture. Work on "India's external commercial borrowing: Pulled by domestic fundamentals or pushed by global conditions?" finds that ECB inflows are shaped by both global liquidity and domestic factors, and that regulatory liberalisation episodes materially influence volumes and maturity profiles. Another study on the "Impact of Regulations on ECB Inflows" identifies structural breaks in ECB trends following major policy changes, underlining how regulatory tweaks can alter the composition and risk profile of external debt.

Viewed through this lens, the 2025 draft regulations can be read as pursuing three interlocking objectives:

1. Deepening access to global capital by widening eligible borrowers and permitting more flexible, market‑driven pricing and structures.
2. Embedding risk filters through net‑worth linked limits and a retained negative list of end‑uses.
3. Shifting from rigid rules to supervised market discipline, relying more on AD banks' judgements and ex post supervision than on granular RBI cost caps.

The success of this strategy will depend heavily on how effectively banks, corporates and regulators implement these changes in practice.

5. The Key Takeaways and Implications

If finalised in their current form, the draft ECB regulations will give Indian borrowers and foreign lenders a significantly more flexible framework, but also demand stronger governance and risk management.

Borrowers should start mapping existing and proposed ECBs against the draft eligibility criteria and net‑worth linked caps, and upgrade treasury capabilities to operate in a more market‑sensitive pricing environment.

Legal and compliance teams need to re‑examine documentation standards, ensuring that representations, covenants and conditions precedent reflect the new framework while anticipating RBI and AD‑bank scrutiny.

Policymakers and AD banks must prepare for a more judgement‑based supervisory model, building internal capacity to evaluate market‑linked pricing and evolving borrower profiles.

The Draft ECB Regulations 2025 sit within a wider policy context in which commercial borrowings already constitute a large share of India's external debt, and in which empirical work shows that ECB flows respond strongly to both domestic regulation and global financial conditions. The draft framework therefore attempts to deepen access to global capital while embedding guardrails via net‑worth linked caps, a retained negative list of end‑uses, and a more prominent gatekeeping role for authorised dealer banks.

For market participants, the message is twofold. First, ECB will become a more central and more nuanced tool in the capital structure of Indian entities, especially infrastructure platforms, large corporates and regulated financial institutions. Second, the shift towards supervised market discipline means that the success of the regime will depend heavily on how corporates, lenders and AD banks interpret and operationalise these new flexibilities in practice. Early engagement with the consultation process, careful reading of the final regulations and Master Directions, and proactive alignment of internal policies with the new architecture will be critical to realising the benefits of the 2025 reforms while containing their risks.

REFERENCES

1. "India's External Commercial Borrowing – Features, Trends and Policy Issues", in Paradigm (SAGE) special section on India's external debt, 2022.
2. Ministry of Finance, India's External Debt – Status Report 2024–25.
3. Prachi, "Impact of Regulations on ECB Inflows", ESI International Journal of Development & Policy Research, 2024.
4. Reserve Bank of India, Draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025 (Consultation draft, 3 October 2025).
5. RBI, FEMA (Borrowing and Lending) Regulations, 2018 and Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (background framework).
6. Sur, A., "India's external commercial borrowing: Pulled by domestic fundamentals or pushed by global conditions?", Journal of Asian Economics.
7. SRCC Research Paper, "Dynamics of External Commercial Borrowings in India".

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.