How Draft ECB Regulations 2025 Affect Borrowers, Lenders And AD Banks

1. From New Framework to Practical Impact

RBI's Draft Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025, issued under FEMA, propose a major redesign of India's external commercial borrowing (ECB) framework. The draft widens the pool of eligible borrowers, ties borrowing limits to net worth, and shifts from rigid all‑in‑cost ceilings to market‑linked pricing, while retaining a negative list of end‑uses and detailed reporting obligations. The article examines the structure and policy underpinnings of these reforms; focuses on what they mean in practice for borrowers, lenders and authorised dealer (AD) banks, and how legal risk and enforcement experience should shape compliance strategies.

2. Compliance, Monitoring and the Role of AD Banks

Even as the draft regulations liberalise who can borrow and on what terms, they reinforce that compliance and monitoring sit at the core of the ECB regime.

2.1 Reporting Architecture and Operational Mechanics

The draft retains the familiar operational spine of the ECB framework; Loan Registration Number (LRN), periodic returns and event‑based filings with scope for rationalisation as the revised categories take effect. Borrowers will still be required to:

1. Obtain an LRN from RBI through their AD bank before any drawdown.
2. File regular ECB‑2 returns capturing utilisation, outstanding amounts and repayments, and disclosing changes in terms such as maturity or cost.
3. Make prompt event‑based filings on refinancing, change in lender, change of currency or end‑use, and conversion into equity or other non‑debt instruments.

Given the expanded set of eligible borrowers, regulators and market commentators expect greater digitisation and integration of ECB reporting with banks' internal systems, reducing manual error and enabling data‑driven supervision.

2.2 AD Banks as Gatekeepers

Under the new framework, Authorised Dealer Category‑I banks act as the primary gatekeepers for ECB transactions. Their responsibilities extend beyond mechanical checks to substantive assessments of:

1. Eligibility – ensuring that borrowers fall within the expanded "incorporated/established under Indian law" definition and satisfy any sector‑specific conditions.
2. Borrowing limits – tracking aggregate ECB against net‑worth linked caps or other quantitative thresholds, including, where relevant, group‑level exposures.
3. Pricing – vetting that interest, fees and other costs are arm's‑length, aligned with prevailing market conditions and not used to disguise equity‑like or guaranteed‑return arrangements.
4. 4. End‑use – monitoring flows to verify that proceeds are applied only to permitted activities, not parked indefinitely in prohibited instruments or routed to related parties in contravention of the negative list.

This expanded role implies heightened supervisory expectations and potential exposure if banks are found to have systematically cleared non‑compliant transactions. Many institutions are therefore developing ECB‑specific internal policies and checklists, and investing in regulatory training and technology, to operationalise these gatekeeping duties.

3. Who Gains What?

The practical implications of the draft ECB framework vary across stakeholders. The following table synthesises likely first‑order impacts based on the draft text and professional commentary.

Table 1: Impact of the Draft ECB Reforms

For multinational groups and investors, the reforms may make foreign debt a more attractive complement to FDI, especially in capital‑intensive or platform‑based investments. For domestic boards and treasury teams, the same reforms underscore the need to treat ECBs as strategic instruments with board‑level oversight, rather than routine treasury products.

4. Legal Risks, Enforcement Experience and Case Law

The liberalisation proposed in the draft regulations operates against a background of robust FEMA enforcement and important Supreme Court guidance on how courts view foreign‑exchange contraventions.

4.1. FEMA Enforcement in ECB Context

Regulators have not hesitated to penalise misuse of ECB proceeds or non‑compliance with ECB conditions. In a widely cited case, Reliance Infrastructure Ltd. faced a substantial penalty when ECB funds were reportedly parked in domestic mutual funds rather than applied to the stated end‑use, with the transaction treated as a serious breach of ECB conditions under section 13 of FEMA. Other enforcement and compounding orders describe situations where loans from foreign group entities or directors were later categorised as ECBs. The Indian borrowers had failed to comply with eligibility or reporting norms and were required to pay penalties and seek compounding.

These examples underscore that:

1. First, Any foreign‑currency loan to an Indian entity can be brought within the ECB framework if it satisfies the definitions, regardless of the label used by the parties.
2. Second, End‑use and reporting conditions are enforced as substantive obligations, not mere formalities, with monetary exposure that can be material relative to the underlying facility.
3. Third, while courts have clarified that FEMA contraventions do not, by themselves, render contracts or arbitral awards unenforceable, parties will often be required to regularise transactions with RBI, for example, via post‑facto approval or compounding, before repatriation of funds.

Under the draft regime, misalignment between actual practice and the more liberalised but still prescriptive rules is therefore likely to trigger scrutiny and potential penalties, rather than regulatory forbearance.

4.2. Courts on FEMA Violations and Cross‑Border Obligations

Recent Supreme Court jurisprudence, although not ECB‑specific, has clarified the relationship between FEMA contraventions and enforceability of cross‑border obligations. In Vijay Karia v. Prysmian Cavi E Sistemi Srl, the Court held that a potential or actual FEMA violation does not by itself render a contract void or a foreign arbitral award unenforceable as being contrary to public policy; contraventions are generally capable of being regularised ex post, for example by RBI approval or compounding. Subsequent commentary has reinforced the principle that enforcement courts are not FEMA regulators, and that parties must separately approach RBI or other authorities to cure any foreign exchange irregularities.

For foreign lenders and Indian borrowers, this line of authority provides some comfort that validly documented ECB facilities and resulting awards will usually be enforced, even if there are regulatory issues to be resolved.

At the same time, it reinforces a dual‑track reality:

1. Enforcement proceedings focus on contractual rights and arbitral awards.
2. Regulatory proceedings under FEMA focus on compliance and may still lead to penalties, conditions or delays in remittance, until any irregularities are cured.

Well‑crafted documentation and timely engagement with AD banks and RBI thus remain essential, even in a more liberal framework.

4.3 Risk Management Under the Draft Framework

Taken together, the enforcement history and judicial trends suggest that under the new regime:

1. Contractual enforceability and regulatory compliance are related but distinct tracks. A well‑drafted ECB facility can be enforced even if certain FEMA issues arise, but the parties remain exposed to penalties and regulatory action until those issues are cured.
2. Documentation must anticipate regulatory expectations; representations and covenants on eligibility, limits, end‑use, pricing, and reporting should be carefully drafted, with ongoing information rights for lenders and AD banks.
3. Boards should treat ECB compliance as an enterprise‑level risk, not a back‑office matter. Given the net‑worth linked limits and expanded borrower set, lapses may carry reputational and financial consequences beyond a single facility.

5. Practical Checklist and Action Points

With the final form of the regulations still pending, stakeholders can use the consultation window to prepare and, where appropriate, shape the regime.

For Indian Corporates and Infrastructure Borrowers

• Map existing and planned foreign‑currency borrowings against the draft eligibility criteria, recognised lenders and net‑worth based limits.
• Stress‑test ECB exposures for FX and interest‑rate shocks in a world without hard all‑in‑cost caps; update hedging and liability‑management strategies accordingly.
• Audit ECB documentation and reporting history, ensuring LRN allotments, ECB‑2 filings and end‑use records are complete, consistent and readily auditable.

For NBFCs and Other Regulated Financial Entities

• Engage early with regulators and AD banks to understand how sectoral exposure and leverage norms will interact with the revised FEMA‑level limits.
• Review on‑lending, co‑lending and refinancing models for alignment with the updated negative list and prudential expectations.

For In‑House Legal, Compliance and External Counsel

• Update standard ECB templates and closing checklists to reflect the draft regime's provisions on eligibility, limits, pricing, refinancing and conversion.
• Embed robust FEMA covenants and information rights in facility agreements, including obligations to maintain eligibility, adhere to end‑use restrictions, and promptly notify regulatory developments.
• Monitor FEMA enforcement and case law trends, particularly on re-characterisation of foreign loans and the interface between arbitration awards and RBI approvals.

For Foreign Lenders and Credit Funds

• Align internal credit policies and pricing frameworks with the proposed Indian regime, identifying sectors and borrower profiles where net‑worth linked caps and end‑use restrictions may constrain structures.
• Invest in FEMA capability, either internally or through local counsel and AD bank partnerships, to ensure realistic risk assessment, documentation and exit strategies.

For All Stakeholders

• Participate in RBI's consultation process by submitting clear, reasoned feedback on issues such as net‑worth calculations, treatment of group exposures, scope of recognised lenders and refinancing conditions.
• Track final regulations and revised Master Directions when issued, as important calibration may occur between the draft and final text.

6. Key Takeaways and Implications

The draft ECB framework significantly widens who can borrow and how they can structure foreign debt, but it simultaneously raises the bar on internal controls and bank‑level scrutiny. Borrowers gain flexibility through broader eligibility, net‑worth linked headroom, and market‑linked pricing, yet face greater exposure to FX and global rate volatility, making robust treasury and hedging strategies essential rather than optional. AD Category‑I banks move to the centre of the regime as true gatekeepers, with regulators expecting them to police eligibility, pricing and end‑use in real time, not merely channel paperwork to RBI.

From a legal and compliance perspective, recent enforcement actions and Supreme Court jurisprudence send a clear message; documentation can remain enforceable even where FEMA issues arise, but regulatory contraventions will still attract penalties and require regularisation. Misuse of ECB proceeds, weak reporting and casual treatment of foreign‑currency loans as "shareholder support" can lead to re‑characterisation, compounding and reputational risk, especially once gatekeeping expectations on AD banks harden. The implication for boards, in‑house counsel and foreign lenders is that ECBs must be treated as an enterprise‑level risk and governance topic, embedded in risk registers, board agendas and contract templates rather than as a narrow treasury product.

Looking ahead, entities that invest early in FEMA‑savvy documentation, integrated reporting systems and clear internal ownership of ECB compliance are likely to benefit most from the new regime. Conversely, those that treat the 2025 reforms as merely another round of liberalisation, without strengthening controls, may discover that liberalisation with guardrails can still bite through AD‑bank refusals, supervisory findings or post‑facto enforcement.

REFERENCES

1. Compounding and enforcement summaries on ECB/FEMA contraventions (non‑reporting, mis‑classification of foreign loans as ECBs).
2. Discussion of the Reliance Infrastructure ECB misuse enforcement (penalties for diversion of ECB proceeds).
3. Ministry of Finance, Department of Economic Affairs, Review of External Commercial Borrowings (ECB) Policy, 2025.
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 (operational background).
6. Vijay Karia & Ors v. Prysmian Cavi e Sistemi Srl & Ors , Supreme Court of India (analysis of FEMA contraventions and enforcement of foreign arbitral awards).

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.