ECB (External Commercial Borrowing)

What Is an ECB?

An External Commercial Borrowing (ECB) is a commercial loan raised by an eligible Indian entity from a recognized non-resident lender. The loan can be denominated in foreign currency (FCY-ECB) or in Indian rupees (INR-ECB). ECBs are a critical funding channel for Indian companies — particularly those with foreign parent companies or international investors — because they allow access to cheaper offshore capital at globally competitive interest rates.

ECBs include bank loans, suppliers' credit beyond 180 days, securitized instruments like floating/fixed-rate bonds, non-convertible debentures (NCDs), and Foreign Currency Convertible Bonds (FCCBs). In the financial year 2024-25, Indian companies raised over USD 40 billion through ECB channels, making it one of the largest sources of non-equity foreign capital inflows.

Legal Framework

ECBs are governed by the Foreign Exchange Management Act, 1999 (FEMA) and the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 notified under FEMA Notification No. 3/2018-RB dated December 17, 2018. Schedule I of those Regulations, which contains the ECB framework, was substituted by Notification FEMA 3(R)(5)/2026-RB dated 9 February 2026, in force 16 February 2026. The rules set out below are those of the substituted Schedule I.

Key regulatory provisions:

• FEMA Section 6(3)(d) — Empowers RBI to regulate borrowings from persons outside India
• Schedule I to the FEM (Borrowing and Lending) Regulations, 2018, as substituted with effect from 16 February 2026 — Sets eligible borrowers and lenders, the borrowing limit, minimum average maturity, pricing and reporting
• A.P. (DIR Series) Circulars — RBI issues periodic circulars updating ECB limits, end-use norms, and procedural requirements
• Income-tax Act, 2025, section 393 (sections 194LC and 195 of the Income-tax Act, 1961) — Governs withholding tax on interest payments to non-resident lenders

Maturity and Pricing

The Track I / Track II split no longer exists. One set of parameters now governs both foreign-currency and rupee ECB:

INR-denominated ECBs (formerly Rupee-denominated ECBs or "Masala Bonds") sit inside the same framework: a 3-year minimum average maturity, and no all-in-cost ceiling at or above that maturity.

The pre-February 2026 position was different: ECBs were split into Track I (3-year MAMP) and Track II (5-year MAMP, longer for some borrowers), ECB from foreign equity holders carried a 5-year MAMP, and every track was subject to an all-in-cost ceiling expressed as the benchmark rate plus a fixed spread. None of that applies to the current framework.

Eligible Borrowers

The following Indian entities can raise ECBs under the automatic route:

• Companies registered under the Companies Act, 2013
• Limited Liability Partnerships (LLPs) registered under the LLP Act, 2008
• Units in Special Economic Zones (SEZs)
• SIDBI, EXIM Bank, and other specified financial institutions
• Port Trusts, NBFC-IFCs, Holding Companies, and Core Investment Companies
• Startups recognized by DPIIT

Entities not eligible: individuals, trusts (except those authorized), proprietorships, and partnership firms (non-LLP).

Recognized Lenders

ECBs can be raised from:

• International banks and financial institutions (including multilateral institutions like IFC, ADB)
• Foreign equity holders — a direct/indirect equity holder with a minimum 25% direct holding (or 51% indirect holding) in the borrowing entity
• Foreign branches or subsidiaries of Indian banks (subject to prudential limits)
• Long-term investors such as sovereign wealth funds, insurance companies, and pension funds from FATF/IOSCO-compliant countries
• For INR-ECBs: Foreign Portfolio Investors (FPIs) registered with SEBI

ECB Limits

There are no longer sector-wise annual caps. Under the automatic route, an eligible borrower may raise the higher of:

• outstanding ECB of up to USD 1 billion; or
• total outstanding borrowing — external and domestic — of up to 300% of net worth as per the last audited standalone balance sheet.

Non-fund-based credit facilities and mandatorily convertible securities are excluded from the computation. The limit does not apply to borrowers regulated by a financial-sector regulator. Borrowings beyond the limit require RBI approval under the approval route.

Before 16 February 2026 the limits were set per financial year and by sector — USD 750 million a year for most eligible borrowers and for NBFCs and housing finance companies, USD 200 million for software companies, and USD 3 million for DPIIT-recognised startups. Those annual caps were replaced by the single outstanding-borrowing limit above.

End-Use Restrictions

ECB proceeds can be used for:

• Capital expenditure — new projects, modernization, expansion
• Working capital (general corporate purposes) — up to a specific proportion, typically for entities in specific sectors
• Repayment of existing rupee loans from the banking system (subject to conditions)
• On-lending by NBFCs for specified purposes
• Acquisition of shares in India under an approved merger/acquisition

ECB proceeds cannot be used for:

• Investment in real estate activities (other than development of integrated townships/affordable housing)
• Investing in the capital market or equity
• On-lending to other entities for non-permitted activities
• General corporate purposes without RBI approval (for certain borrower categories)

Interest Rate and All-in-Cost

The all-in-cost of an ECB includes:

• Rate of interest (fixed or floating)
• Other fees and expenses in foreign currency (arrangement fees, management fees, upfront fees, commitment fees)
• It does not include commitment fees up to 0.5% per annum on undrawn amounts, withholding tax, or expenses in INR

For ECB with an average maturity of three years or more there is no all-in-cost ceiling: interest and fees must simply be in line with prevailing market conditions, and on an arm's length basis for related-party borrowings. Prepayment and penal charges are market-determined on the same basis. ECB with an average maturity under three years must comply with the Trade Credit ceiling — the benchmark rate plus 300 bps for foreign-currency ECB, or plus 250 bps for rupee ECB.

Hedging Requirements

Hedging requirements depend on the borrower and end-use:

• Infrastructure borrowers with INR revenue must hedge 70% of their ECB exposure if the average maturity of the borrowing is below 5 years
• All other borrowers are encouraged but not mandated to hedge, though specific RBI circulars may impose hedging requirements during periods of currency volatility
• Hedging must be done through Authorized Dealer (AD) banks in India using permitted derivative products

Reporting and Compliance

ECB transactions involve three mandatory reports:

1. Form ECB 1 — Filed with RBI through the AD bank before drawdown, to obtain the Loan Registration Number (LRN). This is the master loan registration.
2. Form ECB 2 Return — No longer a monthly return. It is filed through the designated AD Category-I bank — never on the FIRMS portal — within 7 calendar days from the end of the month in which ECB proceeds were received or debt servicing was undertaken, reporting drawdowns, interest payments, and repayments. The trigger is the end of that month, not the drawdown date, and the rule applies to pre-existing Loan Registration Numbers as well
3. Annual Return on Foreign Liabilities and Assets (FLA) — Filed by July 15 each year with the RBI, reporting outstanding ECB as of March 31

Additionally, any material change in ECB terms — prepayment, refinancing, conversion to equity — requires prior RBI approval or AD bank intimation depending on the nature of the change. Changes to ECB parameters are reported on Revised Form ECB 1, which runs on the same clock as Form ECB 2: within 7 calendar days from the end of the month in which the change occurred, filed through the designated AD Category-I bank. The two returns are distinct — Revised Form ECB 1 for parameter changes, Form ECB 2 for drawdowns and debt servicing.

Withholding Tax on ECB Interest

Interest payments on ECBs to non-resident lenders attract withholding tax under the Income Tax Act:

Section 194LC is a provision of the Income-tax Act, 1961; under the Income-tax Act, 2025 the obligation to deduct tax on interest paid to a non-resident sits in section 393. The 5% concessional rate under section 194LC was introduced to incentivize foreign borrowing, and applied to loan agreements entered into up to 30 June 2025. To claim this rate, the borrowing must be in compliance with ECB guidelines. If applicable, DTAA benefits may reduce the rate further, subject to Form 41 (formerly Form 10F) and TRC requirements.

For each interest payment, the borrower must file Forms 145 and 146 (formerly Forms 15CA and 15CB) certifying the tax deduction before remitting funds abroad.

How ECBs Affect Foreign Investors in India

For foreign investors setting up or funding operations in India, ECBs offer several strategic advantages:

Parent-to-Subsidiary Lending

A foreign parent company can lend to its Indian wholly-owned subsidiary via the ECB route. This is often more efficient than equity infusion because:

• Interest payments are tax-deductible for the Indian subsidiary (reducing effective corporate tax)
• Principal repayment is not subject to dividend distribution constraints
• The 5% concessional withholding rate makes it cost-effective
• No dilution of ownership

However, transfer pricing rules under Section 161 of the Income-tax Act, 2025 (section 92 of the Income-tax Act, 1961) apply. The interest rate must be at arm's length — if the rate exceeds what an unrelated party would charge, the excess is disallowed as a deduction.

Debt-Equity Ratio Considerations

Under Section 177 of the Income-tax Act, 2025 (section 94B of the Income-tax Act, 1961) (Thin Capitalisation), interest deduction on ECBs from associated enterprises is limited to 30% of EBITDA or the actual interest paid, whichever is lower, for interest exceeding INR 1 crore. Foreign investors structuring parent-to-subsidiary ECBs must factor this cap into their funding models.

FEMA Reporting for FDI-ECB Interplay

If an ECB is later converted into equity (with RBI approval), the conversion is treated as FDI and must be reported in Form FC-GPR. The pricing guidelines under FEMA (Non-Debt Instruments) Rules, 2019 apply to the conversion price.

ECB vs. Other Foreign Funding Options

Common Mistakes

• Assuming the old all-in-cost ceiling still applies — or that pricing is now unconstrained. Since 16 February 2026 there is no ceiling for ECB of three years or more, but the all-in cost must still be in line with prevailing market conditions and at arm's length for related-party loans. Short-tenor ECB under three years remains capped at the Trade Credit ceiling (benchmark + 300 bps foreign currency, + 250 bps rupee), and arrangement, upfront, or guarantee fees count towards that cap. Breaching it makes the ECB non-compliant and can trigger compounding penalties under FEMA.
• Ignoring MAMP calculations. The minimum average maturity period is the weighted average of all repayment instalments. A bullet repayment at year 3 easily meets the MAMP; an amortizing schedule may not if early repayments pull the weighted average below the threshold.
• Using ECB proceeds for prohibited end-uses. Routing ECB funds into real estate investments, capital markets, or on-lending without authorization is a FEMA violation that can result in penalties up to three times the amount involved (Section 13 of FEMA).
• Missing Form ECB 2 filings. Since the revised ECB framework effective 16 February 2026, the Form ECB 2 return is event-based: it must be filed within 7 calendar days from the end of any month in which there was a drawdown or debt servicing, and this applies to pre-existing ECBs as well. Missing filings attract Late Submission Fees (LSF) from the RBI and can complicate future ECB applications.
• Not factoring thin capitalisation limits. Foreign parents lending aggressively to Indian subsidiaries often hit the Section 177 cap (30% of EBITDA), rendering a portion of interest non-deductible and destroying the tax advantage of debt over equity.

Practical Example

TechNova Inc., a US-based technology company, owns 100% of TechNova India Pvt. Ltd., a private limited company in Bengaluru. TechNova India needs USD 5 million to set up a new development centre.

Option A: Equity infusion. TechNova Inc. invests USD 5 million as share capital. The money is not tax-deductible for TechNova India. Future repatriation requires declaring dividends (taxed at 20% withholding in India, reduced to 15% under the India-US DTAA).

Option B: ECB from parent. TechNova Inc. lends USD 5 million to TechNova India at SOFR + 400 bps, priced in line with prevailing market conditions as the framework requires. The average maturity is 5 years with a bullet repayment, comfortably above the 3-year minimum. The interest rate works out to approximately 8.3% per annum.

Annual interest: USD 415,000. Withholding tax at 5% (section 194LC of the Income-tax Act, 1961, which applied to loan agreements entered into up to 30 June 2025): USD 20,750. TechNova India claims the USD 415,000 as a tax deduction, saving approximately USD 104,000 in corporate tax at the 25.17% effective rate.

TechNova India files Form ECB 1 through its AD bank (HDFC Bank), files the Form ECB 2 return through that AD bank whenever a drawdown or debt-servicing event occurs, deducts withholding tax, and files Forms 145 and 146 before each interest remittance. At the end of 5 years, the principal of USD 5 million is repatriated without any dividend tax implications.

Net benefit of ECB over equity: approximately USD 83,000 per year in tax savings, plus clean principal repatriation.

Key Takeaways

• ECBs allow Indian entities to borrow from foreign lenders in foreign currency or INR under RBI-regulated frameworks
• The minimum average maturity period is 3 years, with a manufacturing-sector carve-out for 1-3 year ECB capped at USD 150 million outstanding
• There is no all-in-cost ceiling at or above a 3-year average maturity — pricing follows prevailing market conditions; only ECB under 3 years is capped, at the Trade Credit ceiling of benchmark + 300 bps (foreign currency) or + 250 bps (rupee)
• The automatic-route limit is the higher of USD 1 billion of outstanding ECB or 300% of net worth of total outstanding borrowing, external and domestic
• The concessional 5% withholding tax under section 194LC of the Income-tax Act, 1961 (loan agreements entered into up to 30 June 2025) makes ECBs tax-efficient for cross-border lending
• Foreign parent companies frequently use ECBs to fund Indian subsidiaries — interest is deductible, unlike dividends
• Thin capitalisation rules (Section 177) limit interest deduction to 30% of EBITDA for associated enterprise loans
• Form ECB 2 is filed through the designated AD Category-I bank within 7 calendar days from the end of the month in which proceeds were received or debt was serviced, and Form 145/Form 146 compliance is mandatory for every interest remittance
• ECB proceeds have strict end-use restrictions — real estate, capital markets, and on-lending are generally prohibited

Need help structuring an ECB for your Indian subsidiary? Beacon Filing assists foreign companies with ECB registration, RBI filings, and ongoing compliance.