- with readers working within the Law Firm industries
- within Environment topic(s)
Introduction
In October 2025, the Reserve Bank of India (RBI) released a draft of its proposed External Commercial Borrowing (ECB) framework, signaling a transformative shift in India's regulatory approach to international borrowing. The draft framework represents a comprehensive attempt to liberalize India's cross-border financing regime while balancing prudential safeguards and risk management. By expanding eligibility, relaxing borrowing limits, and streamlining end-use restrictions, the RBI aims to facilitate greater access to foreign capital for Indian corporates, financial institutions, and certain permitted sectors.
For legal professionals and corporate advisors, understanding the proposed changes is critical, as they will impact contract structuring, compliance obligations, and the broader financial strategy of borrowers and lenders.
Evolution of the ECB Framework in India
India's ECB regime has historically been governed by a combination of the Foreign Exchange Management Act, 1999 (FEMA), and specific RBI regulations on external borrowings. The framework has sought to balance India's need for foreign capital with concerns regarding currency risk, debt sustainability, and systemic stability. Previous frameworks included restrictive eligibility criteria, caps on borrowing amounts, and tight control over the end-uses of funds.
Over the years, incremental relaxations allowed certain corporates and infrastructure companies to borrow abroad, but the process remained heavily prescriptive. The 2025 draft framework is notable for its attempt at a holistic liberalization, moving towards a more principles-based approach that encourages market-driven borrowing while retaining safeguards against misuse.
Key Features of the Proposed Framework
- Expanded Borrower Eligibility
One of the most significant changes under the draft framework is the broadening of eligible borrowers. Any entity resident in India, except individuals, that is established or registered under applicable Indian laws may now access ECB, provided it is permitted to borrow under domestic regulations. This includes corporates, partnership firms, limited liability partnerships, and certain regulated financial institutions.
On the lender side, the draft framework allows any person resident outside India, as well as foreign branches or International Financial Services Centre (IFSC)-based branches of entities engaged in regulated lending activities, to provide ECB. This effectively opens the borrowing market to a wider array of global lenders, creating opportunities for more competitive financing terms.
Legal Implication: From a legal standpoint, expanded eligibility means that loan agreements, security arrangements, and regulatory filings will need careful review to ensure compliance with FEMA, Companies Act, 2013, and RBI reporting requirements. Entities will need legal guidance to structure borrowings in a manner that meets both domestic and international regulatory expectations.
- Relaxed Borrowing Limits
The draft framework proposes that eligible borrowers may raise ECB up to the higher of: - USD 1 billion; or - 300% of the borrower's net worth, as per the latest audited financial statements.
This is a substantial relaxation compared to previous limits and aligns the borrowing capacity with the financial strength of the entity. By doing so, the RBI aims to enable creditworthy companies to access larger foreign capital while maintaining prudential oversight.
Legal Implication: Borrowers and lenders will need to assess net worth calculations and ensure that borrowing arrangements do not exceed these thresholds. Legal advisors will play a critical role in structuring transactions, particularly for complex corporate groups where net worth is consolidated across multiple entities.
- Removal of All-in-Cost Ceilings
Previously, ECBs were subject to an all-in-cost ceiling, calculated as a benchmark rate plus a prescribed margin. The draft framework proposes removing this ceiling, enabling borrowers and lenders to negotiate interest rates directly. This change encourages market-based pricing and may reduce borrowing costs for eligible entities.
Legal Implication: Loan agreements must reflect these negotiated terms clearly, ensuring enforceability and compliance with FEMA provisions. Additionally, borrowers should consider currency risk and hedging requirements, as fluctuations in foreign currency rates could affect overall cost of borrowing.
- Permitted and Prohibited End-Uses
While the framework liberalizes borrowing norms, it continues to impose restrictions on certain end-uses to prevent misuse of funds. Prohibited activities include: - Investment in chit funds and Nidhi companies - Agricultural or plantation activities, except as permitted under FDI laws - Real estate development not covered under FDI - Trading in transferable development rights (TDRs) - On-lending, except through regulated financial institutions or approved intra-group structures - Dealing in securities, except in specific circumstances such as overseas investments, mergers and acquisitions, or primary issuances by non-financial entities for further permitted on-lending
Legal Implication: Legal compliance will be key to avoid regulatory penalties. Borrowers must ensure that loan agreements and related documentation explicitly outline permitted uses and include covenants restricting prohibited uses. Lenders will likely require legal due diligence to mitigate regulatory and credit risk.
Sectoral Implications
- Real Estate
One of the notable relaxations is the allowance for ECBs in real estate projects where FDI is permitted. This is expected to provide a significant funding boost for infrastructure and housing projects, enabling developers to access international capital efficiently.
Legal Perspective: Lawyers will need to advise on structuring projects to comply with FDI norms and ECB reporting requirements. Agreements for cross-border financing will likely include detailed representations, warranties, and covenants ensuring that funds are deployed only for eligible projects.
- Infrastructure and Industry
Relaxed borrowing limits and broader eligibility can benefit industrial and infrastructure sectors. Capital-intensive projects in energy, manufacturing, and transportation can leverage ECBs to fund expansion, technology upgrades, or strategic acquisitions.
Legal Perspective: Transaction documentation will require careful structuring to align with project finance principles. Legal advisors must also consider security arrangements, cross-border enforcement of claims, and compliance with sector-specific regulations.
- Financial Institutions and On-Lending
The framework permits regulated lenders, including banks and NBFCs, to on-lend ECB funds under specified conditions. This can enhance credit availability to other sectors while maintaining oversight.
Legal Perspective: Advisors will need to ensure that on-lending structures comply with RBI regulations, risk management norms, and reporting obligations. Agreements should address liability allocation, interest rate pass-through mechanisms, and monitoring of borrower compliance.
Risk Management and Prudential Considerations
Despite liberalization, the RBI emphasizes prudential oversight. Borrowers are expected to maintain transparency, avoid excessive leverage, and adhere to sound financial practices. Lenders must conduct thorough due diligence, particularly with respect to the end-use of funds, financial health of borrowers, and compliance with cross-border regulations.
Legal Perspective: Lawyers advising ECBs will need to incorporate risk mitigation provisions in loan agreements, including covenants, representations, reporting obligations, and remedies for breach. Structuring security interests, guarantees, and escrow arrangements will be crucial to enforceability and regulatory compliance.
Consultative Process and Stakeholder Engagement
The RBI has invited comments from industry stakeholders, legal advisors, and financial institutions on the draft framework. This consultative process highlights the importance of stakeholder input in shaping the final regulations. By incorporating feedback, the RBI aims to ensure that the framework is practical, balanced, and aligned with India's broader economic objectives.
Conclusion
The RBI's proposed ECB framework represents a major step toward liberalizing India's cross-border borrowing landscape. By broadening eligibility, relaxing borrowing limits, and removing restrictive cost ceilings, the framework encourages greater market participation and efficient access to foreign capital. At the same time, prudential safeguards and prohibited end-uses ensure that systemic risk is contained and that funds are deployed for productive purposes.
For legal professionals, the framework underscores the need to provide comprehensive advice on structuring, compliance, and risk management. Borrowers and lenders must work closely with legal advisors to navigate FEMA regulations, Companies Act requirements, and sector-specific rules while maximizing the opportunities created by this liberalized framework. The evolution of the ECB framework is poised to reshape international borrowing in India, offering both opportunities and responsibilities for stakeholders in the financial and corporate sectors.
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.
