External Commercial Borrowings (ECBs) refer to commercial loans raised by eligible Indian borrowers from foreign lenders. These borrowings help Indian companies access global capital at competitive interest rates. ECBs may be in the form of bank loans, buyers’ credit, suppliers’ credit, foreign currency convertible bonds (FCCBs), and other debt instruments. ECBs are governed by the Foreign Exchange Management Act (FEMA), 1999, and are regulated by the Reserve Bank of India (RBI) through its Master Direction on ECB and Trade Credits.

Raising debt through ECBs provides longer maturity, lower interest costs, and greater flexibility for specific sectors, including infrastructure, manufacturing, and fintech. However, ECBs are subject to strict eligibility norms, usage restrictions, maturity conditions, and reporting compliance under FEMA.

In this article, CA Manish Mishra talks about Understanding ECB: Raising Debt from Foreign Lenders.

Routes for Raising ECB in India

There are two routes for accessing ECB in India:

Automatic Route

Under this route, eligible borrowers can raise ECBs without prior RBI approval, provided the borrowing adheres to prescribed norms concerning maturity, end-use, cost ceiling, and recognized lender.

Approval Route

If the proposed borrowing does not meet the prescribed norms under the automatic route, then the borrower must seek approval from the RBI through its Empowered Committee by submitting a detailed application via their Authorized Dealer (AD) Category-I bank.

Eligible Borrowers under ECB Guidelines

The RBI permits the following entities to raise ECB:

• Indian companies in manufacturing, infrastructure, telecom, and software development

• Startups recognized by DPIIT

• Non-Banking Financial Companies (NBFCs) for on-lending

• Units in Special Economic Zones (SEZs)

• Public Sector Undertakings (PSUs)

• Port trusts and eligible trusts

However, Limited Liability Partnerships (LLPs) and individuals are not allowed to raise ECB under the current framework.

Recognized Lenders under ECB Framework

Foreign lenders must be recognized under ECB guidelines. These include:

• International banks and capital market institutions

• Export credit agencies

• Multilateral financial institutions like IFC, ADB

• Foreign equity holders with a minimum 25% direct holding in the borrower company

• Foreign branches/subsidiaries of Indian banks (with restrictions)

The lender must be a resident of a country that complies with FATF guidelines and is not under the Financial Action Task Force (FATF) blacklist.

Permissible Currencies and Instruments

ECBs can be raised in freely convertible foreign currencies like USD, EUR, JPY, and also in Indian Rupees (INR) under certain conditions. INR-denominated ECBs require specific hedging and cost benchmarks.

Permissible instruments include:

• Loans

• Bonds (including FCCBs)

• Floating Rate Notes

• Credit facilities

• Securitized instruments

Minimum Average Maturity Period (MAMP)

The maturity of the ECB depends on its use and the borrower’s profile: The minimum average maturity period (MAMP) for ECBs varies based on the intended end-use. For general corporate purposes or working capital requirements, the minimum maturity is 5 years. When the funds are used for capital expenditure or infrastructure projects, the maturity requirement is 3 years. In cases where NBFCs are raising ECBs for on-lending purposes, a minimum maturity of 5 years is applicable. However, if the ECB is being raised specifically for the refinancing of rupee loans obtained from equity holders, the required minimum maturity period extends to 10 years. These maturity conditions must be strictly adhered to under the RBI’s ECB framework.

Startups recognized by DPIIT can raise up to USD 3 million per financial year under the automatic route with a minimum maturity of 3 years.

All-in-Cost Ceiling for ECB

The all-in-cost includes the interest rate, processing charges, fees, guarantee fees, and other costs associated with the borrowing. RBI has defined the cost ceiling:

• For foreign currency ECBs: Benchmark rate + 450 basis points

• For INR-denominated ECBs: Prevailing yield of Government of India securities + 450 basis points

Penalties or prepayment charges must also fall within this ceiling.

Permitted and Prohibited End-Uses

Permitted Uses:

• Capital expenditure like construction, equipment purchase

• Infrastructure development projects

• Refinancing existing ECBs and rupee loans (subject to conditions)

• On-lending by NBFCs

• Working capital (from foreign equity holders only)

Prohibited Uses:

• Real estate (except affordable housing and construction of industrial parks)

• Equity investments and capital market instruments

• Purchase of land for real estate or trading

• Investing in activities prohibited by FDI policy

ECB Reporting and Compliance Requirements

Borrowers must adhere to the following compliance steps:

• Loan Registration Number (LRN): File Form ECB with the AD-I bank to obtain the LRN from RBI before any drawdown.

• Monthly Returns: File Form ECB-2 monthly within 7 working days from the end of each calendar month detailing ECB utilization, repayment, and changes.

• Revisions: Any change in terms (interest, tenure, borrower/lender, etc.) must be reported within 7 days via revised Form ECB.

• Late Submission Fee (LSF): Non-compliance or late filings attract an LSF ranging from ₹5,000 to ₹100,000 per year.

Utilization and Parking of ECB Proceeds

ECB proceeds can be:

• Parked Abroad: In foreign currency, in liquid instruments rated AA and above, until required for use.

• Parked Domestically: INR proceeds must be kept in term deposits with AD-I banks for up to 12 months. These deposits cannot be used as collateral or pledged for other borrowings.

Hedging Requirements for ECB

To safeguard against currency fluctuations, RBI mandates hedging of ECB exposure for certain borrowers:

• For infrastructure companies: 70% of ECB exposure must be hedged if maturity is less than 5 years.

• Hedge must cover both principal and interest and be aligned with the loan tenure.

• Other borrowers are encouraged to hedge based on risk assessment.

Recent ECB Policy Updates (2023–2025)

• Union Budget 2024–25 introduced compliance relaxation for startups raising ECB.

• ECB inflows in FY 2024–25 crossed $60 billion, showing a rising preference for foreign debt among NBFCs and infrastructure players.

• RBI expanded ECB end-uses to include R&D, refinancing trade credits, and green finance.

• More sectors now fall under the automatic route, improving ease of access to global funding.

Risks and Considerations

While ECB offers cheaper and long-term funding, borrowers should carefully assess:

• Currency Risk: Rupee depreciation increases repayment obligations.

• Hedging Cost: May reduce overall cost advantage.

• Regulatory Delays: Especially under the approval route.

• End-Use Restrictions: Violation attracts FEMA penalties.

Startups and companies must evaluate their cash flow, debt servicing ability, and compliance readiness before opting for ECBs.

Frequently Asked Questions (FAQs)

Q1. What is the minimum maturity for raising ECB?

Ans. The maturity varies based on the purpose: 3 years for capital expenditure, 5 years for working capital, and 10 years for refinancing rupee loans from equity holders.

Q2. Can startups raise ECB under the automatic route?

Ans. Yes, DPIIT-recognized startups can raise up to USD 3 million per financial year under the automatic route, subject to conditions.

Q3. Is hedging mandatory for all ECBs?

Ans. It is mandatory for infrastructure firms with ECB maturity below 5 years (70% hedging required). Other borrowers are advised to hedge based on exposure.

Q4. What forms need to be filed for ECB compliance?

Ans. Form ECB (for LRN registration) and Form ECB-2 (monthly reporting). Any revisions must be filed within 7 days.

Q5. Can ECB be used to repay Indian rupee loans?

Ans. Yes, ECB can be used to refinance rupee loans from equity holders or domestic banks under the 10-year maturity condition.

Q6. What happens if the borrower delays ECB reporting?

Ans. Delayed filing results in a Late Submission Fee (LSF), which may range from ₹5,000 to ₹100,000 per year depending on the type of non-compliance.