RBI Proposes Game Changing Amendments To Liberalise Foreign Lending Into India Through External Commercial Borrowings Route

The Reserve Bank of India ('RBI') has, in a Press Release dated October 1, 2025, issued its Statement on Development and Regulatory Policies, setting out proposed measures relating to, inter alia, foreign exchange management and financial markets.

Major changes are now proposed to revamp the regulations governing external commercial borrowings ('ECBs') by foreign lenders to domestic borrowers under the draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025 ('Draft Amendments') that was published by the RBI on October 3, 2025, for public comments.

The Draft Amendments, if implemented, are expected to herald a brave new world of foreign credit into India, with foreign lenders being expected to re-engage under a more liberalised, investor friendly and market driven ECB regime.

Key strategic implications of the Draft Amendments include:

i. Enhanced Financing Flexibility: Broader borrower and lender base, higher borrowing limits, and flexibility in currency and maturity structures;

ii. Improved Foreign Capital Access: Facilitates funding for investment, restructuring, and refinancing and easing dependence on domestic credit;

iii. Stricter End-use Safeguards: Restricts speculative, real estate, and unregulated on-lending and ensuring funds flow to productive sectors;

iv. Expanded Role for Banks and International Financial Services Centres ('IFSC'): Positions IFSCs and foreign branches of Indian banks as key conduits for cross-border funding and strengthening the onshore-offshore credit ecosystem; and

v. Strengthened Governance and Transparency: Promotes arm's length terms, market-based pricing and stronger disclosure norms.

The key changes contemplated under the Draft Amendments are as follows:

i. Pricing of ECBs to be Market Driven:

For the uninitiated, the present ECB regulations impose a cap on the 'all-in-cost' (i.e., rate of interest, other fees, expenses, charges, guarantee fees and Export Credit Agency charges) of ECB loans – being the benchmark rate plus 450/ 500 bps spread. This was a key deterrent to foreign investors using the ECB route. This cap is now proposed to be done away with; with RBI permitting pricing to be driven solely by prevailing market conditions, subject to the satisfaction of the relevant Authorized Dealer Category-I bank ('AD Bank'). Market participants believe that this proposed change is intended to align with maturing credit conditions and to allow greater flexibility to borrowers and lenders.

However, a key concern is the scope of review by the AD Bank. The aspects that the AD Bank is expected to/ would review or consider, to be satisfied that the lending is in line with market conditions, is presently uncertain. It is expected that market practice in this regard will evolve shortly once the final amendments come into force.

Certainly, there are concerns that if not implemented in keeping with the regulatory intention of introducing market flexibility, this could result in AD Banks exercising oversight over commercial matters, and even to 'AD Bank shopping', both of which can be avoided by mature commercial practice of AD Banks coupled with appropriate guidance to AD Banks by the RBI.

Another point which would be useful to have confirmation on from the regulator is that acceleration of an ECB pursuant to a genuine event of default before expiry of the specified Minimum Average Maturity Period ('MAMP') should be permissible and should not interfere with or impact the otherwise market driven interest/ returns or require the returns to be aligned with costing applicable to trade credits (which is otherwise the general approach under the Draft Amendments, which is to treat less-than-three-year credit arrangements as trade credits ^[1]).

In other good news, there is now an improved case for permissibility of make-whole arrangements for ECBs, in view of the provision in the Draft Amendments which states that 'prepayment charge/ penal interest, if any, for default or breach of covenants shall be in line with prevailing market conditions, subject to satisfaction of the designated AD Category I bank'.

ii. MAMP of ECBs Proposed to be Reduced Significantly:

Another block to rampant use of the ECB route is the protracted MAMPs prescribed for ECBs. The MAMP presently ranges from one year to 10 years, depending on the end-use and lender to the ECBs. These MAMP thresholds are now proposed to be significantly shortened and unified as follows:

This pivotal change is also expected to bolster the use of ECBs for credit investments in India.

iii. End-uses of ECB Loans Proposed to be Liberalised:

The present regime has strict prohibitions against use of ECB funds for the following 'negative end-uses', some of which are now proposed to be significantly liberalised as below:

a. Transacting in Securities: Importantly, to align with changes being considered by the RBI to permit Indian banks to advance acquisition financing ^[2], it appears that even ECB loans are now intended to be permitted for acquisition financing. The existing restrictions on use of ECB proceeds for investment in capital markets and equity instruments are proposed to be revised to carve out utilisation of ECB proceeds towards:

• Overseas investments;
• merger, amalgamation, arrangement, or acquisition in accordance with the Companies Act, 2013 (as amended from time to time), Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (as amended from time to time) and Insolvency and Bankruptcy Code, 2016; and
• investment in primary market instruments issued by non-financial entities for permissible on-lending as covered in paragraph (c) below e., primary market debt securities for permitted on-lending.It would be critical to understand the scope of acquisition financing intended to be permitted, especially considering what is otherwise intended to be prohibited is 'transacting' in securities, and the specific permission contemplated under sub point (C) above for primary investments – which only appears to be for primary securities for permitted on-lending. Importantly, this framing of the Draft Amendments suggests (pending appropriate clarifications from the regulator) that ECB proceeds may still not be contemplated or permitted to be used for acquisition of minority stakes in listed securities which could be considered as 'transacting' in securities. The scope of this negative end-use needs to be clarified further.

b. Real Estate, Agriculture and Plantation Activities: Activities generally permitted for foreign direct investment are proposed to be exempt from the end-use restrictions.

c. On-lending Activities: Carve outs are contemplated for use of ECB proceeds for on-lending by:

• On-lending by any person resident in India whose lending business is regulated by the RBI; and
• on-lending by corporates to its group entity, provided the on-lent funds are not used for any prohibited end-use and the entity to whom funds are on-lent is otherwise eligible to avail the ECB from the offshore lender.

Notably, 'group entities' are now proposed to be defined to be limited to holding companies, subsidiary companies and associate companies (i.e., companies in which the ECB borrower has 20% or more investment).

iv. Widened Lender and Borrower Base:

Presently, the ECB route is largely available only for entities eligible to raise foreign direct investment and other specified entities such as port trusts and EXIM Bank of India. This is now proposed to be widened to cover any person resident in India (other than an individual) incorporated, established or registered under a central or state statute, and having power to borrow under applicable laws.

The permitted lender base is also proposed to be widened, which will enable a wider access to foreign credit:

v. Increased Borrowing Limits

The monetary cap on availing ECBs is proposed to be revised from USD 750 million per borrower/ USD 30 million per borrower (which is a startup), in each case per annum to the higher of:

a. Outstanding ECBs up to USD 1 billion; or

b. Total outstanding borrowings (external and domestic) up to 3x net worth as per last audited balance sheet.

And, importantly, borrowing limits are proposed to be removed altogether for borrowers regulated by financial sector regulators (such as Securities and Exchange Board of India and RBI).

There are concerns in the market – and appropriate clarifications are likely to be sought – that the revised cap (of USD one billion per borrower) is intended on an absolute basis (as opposed to the present cap of USD 750 million which is applied on a per year basis ^[3]).

vi. Increased Flexibility in Changing Currency of ECB loan:

It has now been proposed to permit change in the currency of Rupee denominated ECB loans to any foreign currency, without the requirement of prior RBI approval.

vii. Simplification of Process and Liberalisation of Reporting Timelines:

Market participants also expect that the requirement of no-objection from AD Banks will be dispensed with for the following actions:

a. amendments to ECB terms (other than any change to the conversion terms of a foreign currency convertible bond or a foreign currency exchange bond); and

b. security creation/ issuance of guarantee,

as long as the provisions of Indian foreign exchange regulations including the ECB regulations are complied with.

Longer timelines are proposed for the borrower to make regulatory filings with the AD Bank (from presently seven days to the proposed 30 calendar days).

Some aspects of the proposed amendments require further clarity (such as the manner of exercise of AD Bank's discretion in approving the cost of borrowing and other costs), which we expect to be clarified through the public consultation process.

There is also feedback that these amendments should be supported by a re-introduction of the concessional tax of five percent (plus applicable surcharge and cess), in order to create a favorable market for the foreign investors.

A point of general caution observed is that these benefits come with heightened exposure to interest rate and currency risks, making effective risk management frameworks essential.

Footnotes

1. The Draft Amendments prescribe that in case of ECBs with average maturity period of less than three years, the cost of borrowing should also be in compliance with cost ceiling specified for Trade Credit in the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

2. As per the RBI Statement on Development and Regulatory Policies issued on October 1, 2025, based on feedback from key market participants, the RBI is proposing to rationalise extant guidelines and broaden the scope for capital market lending by banks and other regulated entities, and in this vein, to inter alia: (i) provide an enabling framework for banks to finance acquisitions by Indian corporates; and (ii) enhance the limit for lending by banks against shares, units of real estate investment trusts, units of infrastructure investment trusts, while removing the regulatory ceiling altogether on lending against listed debt securities.

3. Relevant extract is as follows: 'Under the aforesaid framework, all eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route.'

Originally published 07 November 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.