IBC Laws Blog

Analysis of the Framework for External Commercial Borrowings in India – By Ms. Nandini Shenai

The need for a new policy was urgent, given Government’s ongoing attempts to amend ECB rules, the former framework was conflicting with other legislative revisions to India’s foreign investment policies in particular. It was thought that significant and unambiguous improvements needed to be made to the current policy in order for it to be consistent with other recent changes in legislation governing different facets of the economy.

Ms. Nandini Shenai,
3rd Year BBA.LLB (Hons) at NMIMS School of Law, Mumbai

Analysis of the Framework for External Commercial Borrowings in India


 The debt borne by a qualifying company in India for purely business reasons that has been contracted by a recognised entity outside India is referred to as an ECB. These debts are required to adhere to the RBI’s rules and regulations. The provisions of the RBI that govern ECBs are outlined in the External Commercial Borrowings, Trade Credits and Structured Obligations[1] (Master Direction), and the Foreign Exchange Management Act, 1999[2] (FEMA). ECBs have proved to be valuable tools for Indian businesses and organisations seeking to generate funding from outside the country, primarily for attracting new investments.

The Legislature has established a number of eligibility requirements for people who choose to use the automatic route to obtain capital. These rules govern numbers, industries, and the final use of funding, among other things. Entities wishing to secure funding through the ECB must first satisfy these eligibility requirements; after that, funding may be secured without authorization. Businesses that come under some pre-specified categories, however, must seek specific authorization from the RBI or the government before soliciting funds via ECBs through the approval path. The Reserve Bank of India (RBI) has released circulars[3] and structured guidelines laying out the borrowing framework.

The RBI announced a new framework[4] for ECBs on January 16, 2019. It aims to amend the regulation that was previously in place under the Master Direction and was revised from periodically. This new framework will take effect immediately. The Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000[5], as well as the Foreign Exchange Management (Borrowing and Lending in Indian Rupees) Regulations, 2000[6], have been compiled to give rise to the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018[7]

The updated legislation is supposed to make doing business easier and reinforce the anti-money laundering and counter-terrorist financing framework. The new guidelines are instrument-agnostic. The funds lent by External Commercial Borrowing can be used to expand businesses, but they cannot be used for forward lending, paying back existing loans, or investing in property. This choice was attractive to both lenders and borrowers because of advantages such as simplified corporate law policies and lower withholding taxes.

The path has now been unified under the INR ECB route, but the regulatory changes are still in effect. A separate channel was developed[8] under the previous ECB framework for the issuing of Rupee denominated bonds (RDB) by Indian businesses. This was similar to a Rupee denominated ECB issued under the ECB scheme, but such bonds were given special treatment in terms of enforcement, in an effort by the government to externalise Rupee denominated financing.

Difference between Lenders and Borrowers

To guarantee the influx of safe funding, the RBI has categorized borrowers into qualified entities and lenders into recognised non-residents, and has implemented safeguards in the form of ECBs, end-use restrictions, and minimum maturity periods, among other things.

Eligible Borrowers: Foreign Currency ECBs (FCY ECB) and Indian Currency ECBs are the forms of ECBs (INR ECB). Eligible borrowers is a term that can be applied to any company that is qualified to receive FDI. Port Trusts[9], Units in Special Economic Zones[10], the Small Industries Development Bank of India[11], and the EXIM Bank of India are examples of such organisations. It includes:

  1. Corporate Companies.
  2. NGOs which indulge in micro finance are also allowed to take external commercial borrowings. 
  3. Companies working in Special Economic Zones. 
  4. Oil Marketing Companies.
  5. SIDBI is also a legitimate borrower. 
  6. All such entities which are eligible for FDIs. 
  7. All Limited Liability Partnerships. 
  8. Venture Capital Funds.

Recognized Lenders: A citizen of a FATF-compliant nation must be the creditor or investor[12]. Nevertheless, under this arrangement, international divisions of Indian banks, as well as offshore entities in which an Indian corporation has made investment in accordance with the current Overseas Direct Investment Policy[13], would not be deemed recognised creditors. These include:

  1. Any member of the Financial Action Task Force (FATF).
  2. International Organization of Securities Commissions. 
  3. Multilateral and Regional FIs. 
  4. Foreign Equity Holders.
  5. Foreign branches of Indian Banks

Benefits of the ECB framework

The ECB framework has a number of inherent advantages, some of which will be discussed below. To begin with, the valuation of funding borrowed from foreign sources is usually lower. For example, there are numerous economies with lower interest rates if Indian companies and organisations could borrow at reduced interest rates from the Eurozone and the US, they will undoubtedly benefit.

Businesses’ potential to meet increased criteria from foreign players is amplified when raising funds through the ECB, as compared to domestic market engagement, since the prospects are larger when securing funding through the ECB.  Another advantage is that ECBs are easy loans at their heart. The company’s assets shall not be diluted, notwithstanding the fact that they do not have to be equity-based.

ECBs assist private businesses in borrowing considerable amounts of capital.  The funds obtained from the ECBs have a lengthy maturity period. ECBs interest rate is lower as compared to debts from Indian financial institutions.

Although ECBs allow borrowers to broaden their investor pool, they also provide borrowers with wider access to international markets allowing them to take advantage of global prospects. This is not to imply that ECBs do not support the economy of the country.  The Union Government will guide inflows into the market, thereby amplifying the market’s growth prospects.

Risks associated with the ECB framework

Although many of the ECB’s benefits have been addressed, certain drawbacks should also be considered. ECBs are one of the most popular types of financing present. Nevertheless, it comes as no surprise that businesses must be cautious about the effect of debt on their financial statements as well as risks associated with foreign currency due to rates of exchange.

One might speculate that the business would adopt a more relaxed approach as they gradually come across funds with lower interest rates. This might lead to businesses borrowing indiscriminately, resulting in higher leverage on the financial statements and a negative impact on financial ratios. Businesses with greater debt on their financial statements are viewed negatively, which could result in a market downgrade. Subsequently, the company’s stock can experience a drop in market valuation.

While it is clear that ECBs can be obtained at lower prices, there are a number of requirements and limitations that must be followed.  The sum that can be lent and the maturity of the ECB are the two main constraints.

Seeing that funds are raised by External Commercial Borrowing in different exchange, the amount and interest must be paid in the same exchange currency as well. As a result, the business exposes itself to the uncertainties of fluctuating exchange rates. This might also contribute to cost-hedging by the business.

Effectiveness of the ECB Framework

The GDP is anticipated to remain stable now that the RBI has allowed ECB funding to be used to see debts through to repayment; and simultaneously, Indian companies have been provided with flexibility to seek much-needed funding from the international market at remarkably low interest rates. Given the above advantages and disadvantages, the ECB route can be a very useful alternative in certain cases:

  1. Captive Lending: Where overseas companies have Indian divisions that are involved in a variety of operations, the ECB provides a viable alternative for capitalising the division. The end-use constraints are simplified, and the end-use limitations are often less restrictive as an equity holder. ECB provides a good choice for consistent cash recovery as well as quick relocation of money, all in a tax-efficient fashion, rather than capitalising the division by equity investment.
  2. Social Impact Lending: ECB has been identified as the favoured method of financing for Indian borrowers by a significant amount of global social impact financing or ESG financing. The disadvantages of the ECB method benefit these investors because they usually have a broad outlook and are not seeking big returns. The fact that there is no registration criteria in India makes it even more appealing to such investors.
  3. Overseas Borrowing: When borrowing from overseas institutions, Indian businesses find the ECB method to be very efficient, particularly when refinancing existing loans taken in INR. The interest charged by overseas institutions are usually lower than Indian interest, and the necessary hedging conditions do not arise due to the minimum maturity.
  4. Issuance of Bonds[14]: The ECB provides a strong model of securing funding through bond issuances for markets that need funding for a longer period of time, such as the construction industry. A huge proportion of construction businesses have used the ECB route to sell low-cost bonds to the general public. A significant amount of international funds, comprising of sovereign funds and intergovernmental commercial banks, have contributed to these issuances.
  5. Control Funds: Control funds tend to procure such debts and seek to restructure/resolve the debtor’s capital expenditure in order to gain leverage over the debtor. Though, as noted previously, controlled lenders may not view ECB favourably. The ECB system allows qualifying ECB lenders to obtain INR loans from Indian creditor accounts if the debtor is in the construction or industrial business and the debts are for capital expenditure

RBI framework on ECBs

1. Classifications:

Old framework: The erstwhile framework segregated ECBs into three types:

  1. Track 1 which dealt with ECB that was denominated by international exchange and had a maturity period of 3 years
  2. Track 2 which dealt with ECB that was denominated by international exchange and had a maturity period of 5 years
  3. Track 3 which dealt with bonds that were Rupee denominated and had a maturity period between 3 – 5 years.

New Framework: The track classifications have been eliminated, and ECBs are now divided into two classes:

  1. ECBs denominated by foreign currency (FCY ECB)
  2. ECBs denominated by Indian Rupee (INR ECB) that include within their ambit Masala Bonds

2. Limit and Control:

Old Framework: ECBs was subjected to strict limitations depending on the business or occupation in which the potential eligible borrower was involved.

New Framework: The maximum sum of ECB that an eligible borrower will receive under the automatic route in a fiscal year is USD 750 million or INR parallel. The eligible borrower must also follow the instructions provided by the distributional or institutional authority in connection to loan capital ratio.

3. Eligible Borrower:

Old Framework:  Only organizations that met the requirements of Tracks 1, 2, and 3 of the Erstwhile Framework were eligible for ECBs.

New Framework: Borrower eligibility requirements have now been relaxed. All organizations qualified to attract FDI are now entitled to obtain ECBs, along with those particular organizations that were eligible borrowers under the previous ECB Structure.

4. Recognized Lenders:

Old Framework:  Under the Erstwhile Scheme, the lenders were also categorized into three parts.

New Framework:  The track classifications have been removed. For providing ECB facilities to qualified borrowers, organizations that are residents of Financial Action Task Force or International Organization of Securities Commission friendly nations are regarded as lenders.

5. Maturity Period:

Old Framework:  Maturity period was mentioned in the three types of classification for ECBs specifically based on their nature. 

New Framework: The three types of classifications have been eliminated, and ECBs must now have a minimum maturity span of 3 years.

6. Reporting Form:

Old Framework:  Form No. 83

New Framework: Form ECB has taken the position of Form 83. Qualified borrowers must fill out Form ECB to obtain a debt identification number and to notify RBI of any modifications to the provisions of the ECBs they have already taken out.

7. End use restriction:

Although ‘Real Estate Activities’ were part of both regimes’ End-Uses list (reasons for which the ECB funds cannot be utilised) an exception was made for consolidated settlements and subsidized housing programmes under the previous framework, which is absent from the 2019 guidelines.

8. Late Submission Fee:

In the New Framework the late submission fee mechanism has been implemented, giving borrowers the ability to correct minimal delays such as failing to record ECB profits before receiving the LRN or failing to apply Form ECB on time.

Implications of New Policy

The elimination of classification is a positive move that should greatly ease the process of determining the requirements for obtaining ECBs, giving a boost to the Indian market’s financing through ECBs. Furthermore, since the ECB option is available to all organisations that are entitled to obtain FDI, those organizations that were previously unable to obtain ECBs under the previous structure are now able to do so.

In the case of Eligible Borrowers and Recognized Lenders, a systemic transition has emerged.  The preceding policy’s segregation is no longer applicable. Given that the above factors are the most important components of an ECB, the decision to make them standardized is reflective of the government’s desire to loosen ECB rules.

Also, the broadening of the definition of “eligible borrowers” is a positive development because it demonstrates the government’s willingness to allow even non-commercial organisations to obtain ECB, i.e., those whose sole purpose is not to generate profits. When it comes to the merger of Track 3 ECBs and Rupee Denominated Bonds, the move is ground breaking considering that Masala Bonds, which previously had their own regulatory regime, will now fall under the ambit of ECBs, and be regulated appropriately.


The need for a new policy was urgent, given Government’s ongoing attempts to amend ECB rules, the former framework was conflicting with other legislative revisions to India’s foreign investment policies in particular. It was thought that significant and unambiguous improvements needed to be made to the current policy in order for it to be consistent with other recent changes in legislation governing different facets of the economy.

Critics also praised the strategy as beneficial to the ECB’s liberalisation efforts. The implication that the range of eligible borrowers has been significantly extended is the shift that has been most embraced. This is likely due to the point that, while different requirements, protocols, and limitations were engaged for ECBs under each of the three different tracks under the former legislation, the new strategy has tried to generalise several issues by codifying a similar clause for both foreign exchange and Indian Rupee denominated ECBs.

With beneficial offshore factors such as reduced interest rates and funding, the ECB is considered to be the preferred option for bringing investment/loans for new ventures, which the RBI has approved. For the next few years, the offshore market is projected to be promising, resulting in higher borrowings.


[1] Reserve Bank of India, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510, last visited on April 22, 2021.

[2] Foreign exchange Management Act, 1999, Act No. 42 of 1999.

[3] Reserve bank of India, https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?Id=3640&Mode=0, last visited on April 22, 2021.

[4] Reserve bank of India, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46031, last visited on April 22, 2021.

[5] Reserve Bank of India, https://rbidocs.rbi.org.in/rdocs/notification/PDFs/13253.pdf, last visited on April 22, 2021.

[6] Reserve Bank of India, https://m.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=158, last visited on April 22, 2021.

[7] Reserve Bank of India, https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11441, last visited on April 22, 2021.

[8] Reserve Bank of India, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11128&Mode=0, last visited on April 22, 2021.

[9] Port Trusts Act, 1963, Act no. 38 of 1963.

[10] Reserve Bank of India, https://rbidocs.rbi.org.in/rdocs/notification/PDFs/39683.pdf, last visited on April 22, 2021.

[11] Reserve bank of India, https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=7679, last visited on April 22, 2021.

[12] Reserve Bank of India, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12027&Mode=0, last visited on April 22, 2021.

[13] Department of Economic Affairs, https://dea.gov.in/overseas-direct-investment, last visited on April 22, 2021.

[14] Id at 1.

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