ECB structuring: the checklist before you raise.
Our FEMA practice.
1. The ECB framework, in one paragraph.
External Commercial Borrowings are commercial loans (in the form of bank loans, securitised instruments, buyers' credit, financial leases, foreign currency convertible bonds, foreign currency exchangeable bonds) raised by Indian entities from non-resident lenders. ECBs are governed by the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 and the RBI Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations, which sets out borrower eligibility, lender recognition, end-use restrictions, all-in-cost ceilings, maturity, hedging and reporting.
2. Eligible borrowers, recognised lenders.
Eligible borrowers: all entities eligible to receive FDI. Additionally, registered Trusts, Societies, Section 8 Companies and certain port trusts are eligible subject to specific conditions. Entities in the negative list (e.g. those engaged in real estate other than affordable housing, gambling) are not eligible.
Recognised lenders: a resident of an FATF or IOSCO compliant country, an Indian entity's foreign branch (subject to conditions), or a multilateral or regional financial institution where India is a member. Individuals as lenders are restricted; the lender must typically be an institutional or corporate entity.
Both borrower and lender eligibility tests are continuing requirements. A change in either (e.g. the lender's host country becoming non-FATF-compliant during the life of the loan) creates an ongoing exposure.
3. Limits, all-in cost, maturity.
Borrowing limit: up to USD 750 million (or equivalent) per financial year under the automatic route. Borrowings beyond this require RBI approval.
Minimum average maturity period (MAMP): 3 years for most ECBs. For ECBs raised for specific end-uses (e.g. on-lending by NBFCs for infrastructure projects), longer MAMP applies. For working-capital and general corporate purpose ECBs from foreign equity holders, 5 years MAMP.
All-in-cost ceiling: for foreign currency ECBs, capped at benchmark rate (typically SOFR or relevant overnight rate) plus a specified spread (currently 500 basis points). All-in cost includes interest rate, fees, expenses charged to the borrower, payments for arrangement, but excludes commitment fees and withholding tax.
4. End-use: what is permitted, what is not.
The permitted end-uses are listed positively in the Master Direction. The most relevant include:
- Capital expenditure - import of capital goods, fixed-asset acquisition.
- Modernisation and expansion of existing units.
- New projects, joint ventures, wholly-owned subsidiaries.
- Refinancing of existing trade credit.
- Refinancing of existing rupee or foreign-currency loans.
- Working capital purposes (subject to MAMP and lender restrictions).
- General corporate purposes (subject to MAMP and lender restrictions).
- On-lending by NBFCs for specified purposes.
Explicit prohibitions: real estate activities (other than permitted), purchase of land, investment in capital markets and equity investment, working capital and general corporate use from non-equity-holder lenders below the prescribed MAMP, on-lending other than as permitted, and any activity contrary to the FDI policy.
5. Hedging requirements.
Currency hedging requirements apply to specified categories of ECBs to limit foreign-exchange exposure of the Indian borrower. The general principle: ECBs raised by entities engaged in infrastructure sectors, and certain categories of foreign-currency exposures, are subject to minimum hedging (typically 70%) for the life of the loan. ECBs raised by entities with natural hedges (e.g. exporters with matching foreign currency receivables) can claim hedging exemption based on the natural hedge.
The hedge must be obtained through an AD bank in India. Self-hedging through foreign exchange held abroad or via offshore counterparties does not count.
6. Filings and ongoing reporting.
The ECB reporting framework has three steps:
- Form ECB. Pre-drawdown filing through the AD bank for obtaining the Loan Registration Number (LRN). Cannot draw down until LRN is allotted.
- Form ECB-2. Monthly return through the AD bank reporting drawdowns, principal payments, interest payments and any other ECB-related transactions.
- Closure intimation. When the ECB is fully repaid, the AD bank reports closure and the LRN is closed.
Annual reporting through the FLA covers outstanding ECB positions as part of the Indian entity's foreign liabilities.
7. ECB-to-equity conversion.
Conversion of outstanding ECB into equity (in full or in part) is permitted subject to conditions: the conversion price must be at fair value as per FEMA NDI Rules, the conversion must be reported through the AD bank, and the resulting equity holding must comply with applicable FDI sector caps and conditions.
Conversion is a useful exit mechanism for foreign-currency ECBs in a stressed currency environment, and is also commonly used by foreign equity-holder lenders to convert intercompany loans into equity capital.
Frequently asked
What is the difference between an ECB and a foreign-currency loan from an Indian bank?
ECB is a borrowing from a non-resident lender, governed by the FEMA borrowing regulations and the RBI Master Direction on ECBs. A foreign-currency loan from an Indian bank is a domestic borrowing in foreign currency, governed by RBI's domestic banking regulations. The two have different eligibility, end-use, hedging and reporting rules.
Can a parent company abroad lend to its Indian subsidiary under ECB?
Yes. ECBs from foreign equity holders (parent companies and recognised group companies) are permitted, often on more flexible terms than ECBs from third-party lenders, particularly on end-use (working capital and general corporate purposes are permitted under longer MAMP).
Are ECB interest payments subject to Indian withholding tax?
Yes, subject to the rate specified in the Income Tax Act, 2025 and any applicable DTAA between India and the lender's country of residence. The withholding tax rate has historically been lower for ECBs meeting specified conditions; the precise rate should be confirmed with reference to the current Act and the applicable DTAA.
Can an ECB be in Indian rupees?
Yes. The framework permits rupee-denominated ECBs (also known as Masala bonds, in the case of bonds). The all-in cost ceiling, MAMP and end-use restrictions apply differently to rupee ECBs compared to foreign-currency ECBs.
What happens if the borrower defaults on an ECB?
Default triggers continuing reporting obligations through Form ECB-2 and requires the AD bank to report to RBI. Restructuring of ECBs (extension of MAMP, change of terms) is permitted subject to compliance with the prevailing ECB framework at the time of restructuring; significant restructurings may need RBI approval.
