1.INTRODUCTION
1.1 The Reserve Bank of India (RBI) has recently announced certain regulatory measures which are likely to have a significant impact on the financing market. Some of these measures are reflected in draft regulations issued by the RBI, while drafts for the others are awaited
1.2 In this note, we analyse the impact of these measures in background of the current state of the corporate financing market in India. The note also aims to bring out issues on which further clarity is required from the RBI, and on which market participants can raise queries or provide their input to the RBI in the form of comments on the draft regulations.
Current financing market context
The current regulatory regime has resulted in a unique mix of instruments to serve financing needs in India.
(i) Banks and non-banking finance companies (NBFCs)in India are allowed to lend by way of Indian Rupee loans, while other market participants in India are largely not permitted to do so. Banks in India are restricted from lending for the purpose of acquisition of shares and are subject to specific requirements in relation to lending against shares; NBFCs can lend for acquisition of shares but are subject to certain stipulations in lending against shares.
(ii) Alternative investment funds (AIFs) registered with the Securities and Exchange Board of India (SEBI), mutual funds, pension funds and insurance companies in India can invest in INR bonds issued by way of private placement[1]subject to concentration norms and other requirements imposed by their respective regulators, including the extent to which each of them can invest in listed and unlisted bonds.
| Regulatory intent | · Greater access to financing sources for Indian borrowers · Strengthen Indian banks · Focus on acquisition financing |
| Changes announced | · Indian banks can finance acquisitions · ECB regulations to be substantially liberalized to allow for borrowing on market terms |
| Impact | · Market alignment may see ECB route used by a greater variety of lenders; foreign lenders may be able to directly lend in foreign currency for a broader set of purposes without an FPI registration and using the INR NCD route |
(iii) Offshore lenders have traditionally lent by way of foreign currency loans under the ECB route[1], which also expanded to cover capital markets issuances by way of foreign currency bonds (including foreign currency convertible bonds (FCCBs) which were very popular earlier, less so currently).
(iv) Over time, given the restrictions to which the ECB route was subject (particularly in terms of maturity, pricing and end-use of funds), subscription to INR denominated bonds by foreign lenders acting through foreign portfolio investor (FPI) vehicles became a popular route for foreign lenders to lend to Indian corporates[2].
(v) GIFT city entities are a relatively new class of lenders – these include bank branches in GIFT city (either of foreign banks or Indian banks) which have been providing ECBs to Indian corporates, and funds established in GIFT city, which have been investing in INR bonds through the FPI route.
2 DIRECTION OF REGULATORY CHANGE
2.1 The Statement on Developmental and Regulatory Policies issued by the RBI on 1 October 2025 contains two key announcements which will have an impact on the financing landscape:
(i) Substantial revision to the ECB regulations; and
(ii) Relaxation of the rules restricting financing of acquisition of shares by banks in India, and the rules in relation to capital markets exposure of banks.
Additionally, the requirements for large corporates to mandatorily borrow by way of INR bond issuances are proposed to be withdrawn.
2.2 In the background of the global geo-political scenario and trade related uncertainties, the regulatory thrust appears to be to: (a) create a simpler and more market-aligned route for borrowing by Indian corporates from offshore; (b)strengthen Indian banks and permit them to increase forms of credit provided to Indian corporates; and (c) provide Indian corporates with deeper financing sources for domestic acquisitions.
2.3 The revisions to the ECB regulations have been set out by the RBI in the form of draft amendments (Draft ECB Regulations) to the Foreign Exchange (Borrowing and Lending in Foreign Currency) Regulations, 2018. Revisions in relation to acquisition financing by banks in India, and capital market exposures of banks (Indian Bank Regulatory Amendments) are awaited.
2.4 Key points to note in relation to the Draft ECB Regulations are as follows:
(i) pricing has been made market-based instead of being capped at a benchmark plus specified spread, though some more clarity on the manner of determination of such pricing will be helpful;
(ii) minimum average maturity of borrowings has been largely standardised at 3 years and the longer tenor requirements of 7 and 10 years have been done away with;
(iii) the end-use restrictions have been significantly reduced – in particular, borrowing under the ECB route to repay rupee debt is permitted without having to have a longer maturity for the ECB, and funding of domestic acquisitions has been permitted at least to some extent, although some more clarity on the extent of the permission will be helpful;
(iv) the borrowing limits per corporate have been enhanced from USD 750 million to the higher of (A) USD 1 billion and (B) 300% of the borrower’s net worth less the sum of domestic and external borrowings;
(v) there are exceptions to the minimum average maturity requirements, the key ones being repayment from foreign equity raising and acquisition of the borrower; and
(vi) there are procedural relaxations including Form ECB 2 filing being cashflow based, not monthly, and “no-objection certificates” no longer being required from designated authorised dealer banks (AD Banks) for creation of security, changes to the terms of the ECB and transfer of ECBs by lenders.
Please see annexure 1 for a summary of changes proposed to the ECB regulations, along with some notes on issues where further clarity is required.
3 IMPACT
3.1 The impact of these changes will be that Indian corporates will have access to funding from foreign lenders for most end-uses with a minimum average maturity of 3 years. The changes will allow a much wider pool of lenders and investors to participate in the ECB route as compared to the existing scenario where the pricing and maturity requirements meant that third party lenders were largely banks, development finance institutions and export credit agencies. Unlike for subscription to INR bonds under the FPI route, the lenders do not need to be registered in India and are not subject to any eligibility requirements.
3.2 The ability to repay ECBs earlier than 3 years using foreign equity proceeds means that ECBs can be used to fund equity bridges – this will provide greater flexibility insofar as bridge funding sources are concerned.
3.3 Acquisition of the borrower being a carve out to the minimum average maturity is a helpful change, as change of control of the borrower is typically a mandatory prepayment event from a credit perspective.
3.4 The impact of the Indian Bank Regulatory Amendments will need to be analysed once RBI releases the draft regulations for such amendments. However at a macro level, Indian acquirers will have access to bank funding for domestic acquisitions, which is not currently available.
4 CONCLUSION
4.1 The efforts of the Government and the RBI to simplify the ECB route and provide access to a greater pool of financing sources to Indian corporates are commendable. The RBI has also undertaken a massive exercise of collating and updating around 9000 existing circulars and has issued 235 draft master directions covering various lending entities in an effort to streamline and simplify the existing regulatory regime
4.2 Given the Draft ECB Regulations permit borrowing in any form, including bonds and loans, it should be ensured that tax treatment for all forms of borrowing should be consistent. As on date, there is a difference between withholding tax on loans and bonds
4.3 It goes without saying that given the financing needs of the Indian economy, Indian corporates need access to multiple pools of capital, both onshore and offshore. Private credit, in particular, has been and will continue to play an important role in providing financing to borrowers, bringing both an additional pool of capital as well agility to the table. Greater flexibility to lend in the form of either loans or bonds and simplification of rules governing INR bonds should be considered.
Footnotes
[1]INR non-convertible debentures can also be issued by way of a public issue. We have not considered public issuances for the purposes of this note as the note deals with institutional credit sources.
[2]The ECB route was expanded a few years back to include funding in INR.However the uptake for INR funding under the ECB route has been relatively muted,
[3]Other regulatory stipulations have led to further segmentation in the market – for instance: (i) FPIs are not permitted to subscribe to unlisted bonds for certain end-uses, but can subscribe to listed bonds for those end-uses; (ii) FPIs can lend either under the general route or the voluntary retention route (VRR); each is subject to its own stipulations. Importantly, amounts invested through VRR need to (substantially) remain in India for a minimum of 3 years; (iii) Listed INR bonds are for the most part subject under regulations issued by the Securities and Exchange Board of India (SEBI) to issuance by way of the electronic book-building platform (EBP) mechanism of the stock exchanges which is not consistent with bilateral or club financing transactions as the rules require the issuer to make the bonds available to all qualified institutional investors (QIBs) registered on the platform.
Annexure 1 – Draft ECB Regulations
| Issue/subject | Existing Position | Amended Position | Comments | Clarification needed/suggestions | ||||||||||||
| Eligible Borrowers | · Any entity eligible to receive foreign direct investment as well as port trusts; units in SEZ; SIDBI; and EXIM Bank of India.· Additionally, for INR ECBs, registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ cooperatives and Non-Government Organisations. |
· A person resident in India (other than an individual) incorporated, established or registered under a Central Act or State Act may raise ECB, subject to the condition that it is permitted to borrow in terms of the applicable laws. · An eligible borrower that is under a restructuring scheme or corporate insolvency resolution process may raise ECB only if specifically permitted under the restructuring or resolution plan.
|
The requirement to be FDI eligible has been removed. The existing position resulted in REITs and INVITs being excluded from being eligible borrowers as foreign investment in REITs and INVITs is not technically foreign direct investment, it is pursuant to a separate route of foreign investment.
|
· The reference to entities established under a Central Act or a State Act should be expanded to cover entities established under any regulations including regulations governing REITs, INVITS and AIFs. · The position of partnership firms and private trusts, which, while may not be registered under a statute, are subject to the Indian Partnership Act and the Indian Trusts Act, should also be clarified. · It would also be helpful to clarify that banks are also an eligible borrower for ECBs. |
||||||||||||
| Eligible Lenders |
· Resident of FATF or IOSCO compliant country as defined in the ECB policy, including on transfer of ECBs. · Multilateral and Regional Financial Institutions where India is a member country. · Foreign branches / subsidiaries of Indian banks are recognised lenders only for ECBs raised in foreign exchange.
|
· A person resident outside Indiaor a branch outside India or in the IFSC of an entity whose lending business is regulated by the Reserve Bank.
|
The requirement for the lender to be from a FATF or IOSCO compliant country has been done away with, which will allow for greater flexibility including where the lending vehicle is to be structured as an SPV. There is no restriction on foreign branches and subsidiaries of Indian banks in lending INR ECBs. | Tax clarity on the use of treasury centres established in GIFT City to lend ECB to Indian companies will be helpful. | ||||||||||||
| Maturity |
|
· Standardised minimum average maturity period of three years with one exception for an eligible borrower engaged in manufacturing sector which may raise ECB with average maturity period between one year and three years, subject to the condition that outstanding stock of such ECBs shall not exceed USD 50 million. · Cases where early repayment (prior to the MAMP) is permitted: · Conversion of ECB (including FCCB and FCEB) to equity. · Repayment of ECB using the proceeds from issuance of foreign equity. · Waiver of debt by the lender. · Closure, merger, acquisition, resolution or liquidation of either the lender or the borrower. |
· A standard minimum average maturity of 3 years instead of different maturity requirements linked to different end-uses provides a simpler and more market-aligned framework. · The carve outs provided for repayment from foreign equity and on resolution, liquidation or acquisition are helpful, as these events are usually early prepayment events from a credit perspective. · Notably, the non-applicability of MAMP for repayment of ECBs through raising of foreign equity this will provide greater flexibility in structuring transactions. |
· RBI may also consider providing a carve out under the maturity requirements for illegality and payment events of default. | ||||||||||||
| Cost of borrowing |
· Benchmark rate of any widely accepted interbank rate or ARR of 6-month tenor, applicable to the currency of borrowing plus 500 bps for foreign currency ECBs. · Benchmark rate of prevailing yield of the Government of India securities of corresponding maturity plus 450 bps for INR ECBs. |
· The cost of borrowings of an ECB is required to be in line with prevailing market conditions, subject to the satisfaction of the AD Bank. · The current ceiling of 2% on penal/default interest and prepayment penalty is proposed to be done away with and linked with prevailing market conditions. · It has been clarified that the cost of borrowing excludes all statutory taxes payable in relation to an ECB (which is limited to only withholding taxes in the currently applicable definition of “all-in cost”).
|
· Allowing market participants to borrow and lend at a market determined rate rather than subject to a regulatory cap is a commendable change. · However, providing AD Banks with the discretion to decide on the prevailing market rate may well cause more uncertainty, as AD Banks may not be able to effectively step into the shoes of a lender’s risk/credit teams and determine the market rate applicable to each ECB (which would depend on various factors including collateral package, end-use, project risk, leverage ratios etc.). Different AD Banks may also apply different criteria, resulting in inconsistent market practice across different institutions. |
· RBI may consider removing the reference to satisfaction of the AD Bank.Additionally, the term “benchmark rate” has been defined but not used under the Draft ECB Regulations. The reference should be deleted | ||||||||||||
| End Use |
The negative list, for which the ECB proceeds cannot be utilised consists of: · Real estate activities (not including development of industrial parks/integrated townships/SEZ purchase / long term leasing of industrial land as part of new project / modernisation or expansion of existing units or any activity under ‘infrastructure subsectors’). · Investment in capital market. · Equity investment. · While working capital, repayment of rupee debt and general corporate purposes are not prohibited end uses, ECBs for these purposes are subject to longer maturity requirements as detailed above. · On-lending for prohibited purposes and for working capital, repayment of rupee debt and general corporate purposes, except where the on-lending is by an NBFC. Additionally application of ECB proceeds towards agricultural or plantation activities, construction of farmhouses, the business of chit funds or nidhi companies and trading in transferable development rights is restricted.
|
The negative list for end use has the following significant changes: · Application of ECB proceeds has been permitted for real estate business activities or sectors in which foreign direct investment is permitted. Accordingly, as compared to the narrower permission for industrial parks and townships, ECB proceeds can be applied towards development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, as well as in connection with leasing of properties. · Application of ECB proceeds has been permitted for any agricultural or plantation activities in which foreign direct investment is permitted. · In contrast to the restrictions on use towards investment in capital markets and equity investments, the Draft ECB Regulations restrict transacting in listed/unlisted securities except formerger, 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 (as amended from time to time). · On-lending has been permitted in two separate buckets: o On-lending by any person resident in India whose lending business is regulated by the RBI; o on-lending any company or body corporate incorporated in India, to its group company. · It has also been clarified that: o this on-lending shall not be undertaken for a prohibited end-use or to a person who is not an eligible borrower; o Investment in primary market instruments issued by non-financial entities for on-lending is permitted. · Application of ECB proceeds for overseas acquisitions continues to be permitted.
|
· Alignment of the ECB regulations with the FDI regulations insofar as the real estate sector is concerned is a helpful changeand will allow for additional sources of funding to the construction/development sector. It will also allow foreign shareholders to provide both equity and debt funding to entities in this sector from offshore. · Narrowing down the restriction on use of ECBs for equity investments is a much-needed change as Indian corporates need multiple sources of funding to fund acquisitions and investments. However the scope of the carve-out vis-a- vis “transacting in securities” needs to be clarified. Further, reference to “listed/unlisted securities” as defined in the Securities Contracts(Regulation) Act, 1956will expand the restriction to cover debt securities as well, which is not the case under the existing regulations. · On-lending by non-regulated entities has been restricted to group entities (being holding companies, subsidiaries and associate companies). · However, the requirement that the on-lending can only be to an eligible borrower will create issues particularly for NBFCs which are in the business of providing loans to individual borrowers. |
· Clarification is required on the scope of the carve-out for equity investment. Reference to transacting in listed/unlisted securities should be amended to refer only to equity instruments. Further, the scope of the carve-out vis-a vis the scope of the restriction should be clarified. It is submitted that parties should be free to determine the quantum and route for acquisition as this will be driven by commercial factors. · The requirement for on-lending to only be to eligible borrowers should be amended to permit lending to individuals by regulated entities. |
||||||||||||
| Amount of borrowing | USD 750 million per borrower per financial year. |
· The applicable ECB limit proposed to be increased to the higher of (A) aggregate outstanding ECBs of upto USD 1 Billion (taking into account the proposed ECB); and (B) 300% of the borrower’s net worth as per its last audited balance sheet (taking into account the total outstanding borrowings (external and domestic) of the borrower). · The above limit does not apply to eligible borrowers which are regulated by financial sector regulators (such as NBFCs, Housing Finance Companies etc.) under the Draft ECB Regulations.
|
· The revised limit does not specify that it is a per financial year cap. · Further, while linking the amount of proposed borrowing to the financial strength of the borrower is a helpful change, including domestic borrowings in such calculation may create operational issues, as domestic borrowings may keep fluctuating from time to time. |
· The limit of USD 1 billion should be clarified to be a per financial year limit. · As an exception, the borrower can be allowed to borrow more than USD 1 billion in a financial year, if the aggregate offshore borrowings (not including guarantees or other non-fund based commitments) of the borrowertogether with such proposed borrowing are less than 300% of the net worth of the borrower as per its last audited balance sheet (calculated in a manner similar to the calculation under the overseas investment regulation). |
||||||||||||
| Security | The reading of the existing regulations is that security over immovable and movable assets (other than financial securities) can only be provided over the borrower’s assets. |
· The security provisions in the Draft ECB Regulations have been slightly broadened from the existing provisions which refer to security being provided only by the Borrower except in certain specific cases · Further, theDraft ECB Regulations do not specify a requirement to obtain AD Bank permission for creation of security
|
· It appears that third party security can be created even in the case of immovable and movable assets (and not just financial securities) | · Given the current views of AD Banks on security creation, It would be helpful to get a confirmation that any third-party security is now permitted to be created to secure ECBs, and no consent is required from the AD Bank. | ||||||||||||
| Refinancing |
Refinancing of an existing ECB by fresh ECB is permitted provided the outstanding maturity of the original borrowing is not reduced and all-in-cost of fresh ECB is lower than the all-in-cost of existing ECB. Indian banks are permitted to participate in refinancing of existing ECB, only for highly rated corporates (AAA) and for Maharatna/Navratna public sector undertakings.
|
· The key change for refinancing is that the comparison between the existing ECB and the new ECB is in relation to the credit spread, rather than the all-in cost, as is the case under the existing regulations. · The refinancing should not result in a breach of the MAMP of the original borrowing which is being refinanced. · The restriction in the existing regulations on refinancing INR ECBs with foreign currency ECBs has been removed. Further change in currency of an ECB has been freely permitted. · The requirement limiting Indian banks to refinancing only in the cases of highly rated borrowers and certain public sector undertakings has been removed. |
· Given that the pricing under the Draft ECB Regulations is market linked rather than to any specific benchmark, the borrower and lenders in respect of a refinancing ECB will need to show relevant computations to the AD Bank to demonstrate that the creditspread for the two ECBs remains the same
|
· It should be clarified if a refinancing ECB with a minimum average maturity of less than 3 years but matching the remaining maturity of the existing ECB is permitted. · It should also be clarified if current longer tenor ECBs (such as for working capital or general corporate purposes, including ECBs from foreign equity holders) can be refinanced by ECBs having a minimum average maturity of 3 years. |
||||||||||||
| Hedging | The existing regulations have detailed requirements for hedging of foreign currency exposure. | · Requirements for hedging have been removed. | · Allowing borrowers to evaluate hedging requirements from a commercial perspective, without mandatorily requiring hedging is a helpful change and follows the market-aligned approach of the Draft ECB Regulations. | |||||||||||||
| Change in ECB terms | Any change in ECB terms requires approval from the AD Bank. | No requirement for AD Bank approval has been specified for any change in terms of an ECB loan which be made with the lender’s prior consent | · The omission of the requirement to obtain the AD Bank’s consent is a helpful procedural change | |||||||||||||
| Transfer | Transfer of an ECB from one lender to another requires AD Bank approval. | No requirement for AD Bank approval has been specified for for transfer of an ECB has been done away with. | · The omission of the requirement to obtain the AD Bank’s consent is a helpful change, particularly in situations where the borrower is in insolvency, or is otherwise uncooperative. | |||||||||||||
| Reporting |
· Form ECB-2 for reporting of actual ECB transactions is required to be filed on a monthly basis within 7 working days of the close of the month. · Changes to ECB parameters are required to be reported within 7 days of the change being effected. |
· Form ECB-2 is required to be filed within 30 days of the relevant cashflow. · Changes to ECB parameters need to be reported within 30 days of the change being effected. |
· Simplification of reporting requirements is a helpful change. |
Authors: Gautam Saha – Joint Managing Partner; Sonali Mahapatra; Rituparno Bhattacharya; Rahul Gulati; Pallavi Meena; Priyanka Kumar; Ambarish Mohanty and Pragya Sood – Partners
Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this alert do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this alert should be considered an advertisement or solicitation of TT&A’s professional services.
By browsing this website you agree that you are, of your own accord, seeking further information regarding TT&A. No part of this website should be construed as an advertisement of or solicitation for our professional services. No information provided on this shall be construed as legal advice.