RBI/2025-26/221
A.P. (DIR Series) Circular No. 22 Dated February 16, 2026
FEMA (Borrowing and Lending) (First Amendment) Regulations, 2026
Key Changes and Liberalisation of Borrowing and Lending Regulations
Executive Summary
The 2026 FEMA borrowing and lending regulations represent a significant liberalisation of India’s External Commercial Borrowing (ECB) framework. These reforms eliminate restrictive ceiling-based pricing controls, expand the pool of eligible borrowers and lenders, standardise maturity requirements, and clarify end-use restrictions while permitting strategic corporate actions. The changes are designed to enhance capital market access for Indian entities while maintaining prudential safeguards.
1. Expanded Pool of Eligible Borrowers
Under the erstwhile regulations, ECB eligibility was limited to specific categories of entities: all entities eligible to receive Foreign Direct Investment (FDI), Port Trusts, Special Economic Zone (SEZ) units, SIDBI, and EXIM Bank, with certain restrictions on microfinance entities borrowing in INR.
The new framework dramatically broadens this scope. Any entity incorporated, established, or registered in India – provided it has been permitted to raise ECB under applicable law – now qualifies as an eligible borrower. This shift reflects a move from exclusionary to inclusive eligibility criteria.
2. Significant Liberalisation of Recognised Lenders
Historically, recognised lenders were confined to persons resident in FATF (Financial Action Task Force) or IOSCO (International Organisation of Securities Commissions) compliant countries, multilateral institutions, and specific categories of foreign equity holders. This restrictive framework limited borrowing opportunities.
The 2026 regulations have removed most restrictions on the identity and domicile of recognised lenders. The regulatory framework now encompasses:
- Persons resident outside India (no longer limited to FATF/IOSCO countries)
- Foreign branches of RBI-regulated lending entities
- Financial institutions (or their branches) established in International Financial Services Centers (IFSC)
- A substantially widened pool of foreign and domestic lenders
3. Pricing Flexibility: From Fixed Ceilings to Market-Based Rates
The most transformative change concerns the cost of borrowing. The old regime imposed rigid All-in-Cost ceilings linked to prescribed benchmarks, with detailed restrictions on FCCB issuance costs, prepayment charges, and penal interest. These controls limited pricing flexibility for both borrowers and lenders.
The 2026 framework introduces a more flexible approach:
- The concept of ‘All-in-Cost’ has been replaced with ‘cost of borrowing’
- Cost of borrowing includes interest and all charges, excluding commitment fees and statutory taxes
- No specific ceiling limits are prescribed; pricing follows prevailing market conditions
- Prepayment charges and penal interest are determined by market conditions rather than fixed caps
4. Standardised Minimum Average Maturity Period (MAMP)
Previously, MAMP requirements were category-driven, ranging from 1 to 10 years depending on end-use and borrower/lender classifications. This complex, differentiated approach created compliance challenges.
The new framework adopts a uniform approach with targeted flexibility:
- Uniform 3-year MAMP for all ECBs
- Manufacturing entities may access shorter maturities of 1-3 years, subject to a USD 150 million cap on outstanding ECB
- Specific exemptions from MAMP requirements apply to conversions to non-debt instruments, refinancing, debt waivers, and corporate actions (mergers, acquisitions, amalgamations, etc.)
5. End-Use Restrictions: Clarity and Strategic Flexibility
Earlier, the ECB Directions contained a broad and inclusive list of prohibited end-uses, including real estate activities, capital market investments, equity investments, working capital, general corporate purposes, repayment of rupee loans, and on-lending (subject to specified carve-outs). Additionally, under the Borrowing and Lending in INR Directions, companies borrowing in INR from NRIs/PIOs were restricted from undertaking agricultural/plantation/real estate business, trading in TDRs, or operating as Nidhi/Chit Fund companies; the loan proceeds had to be used only for the borrower’s own business and could not be used for farm house construction, investment, or on-lending.
The newly inserted Regulation 3A now consolidates all end-use restrictions into a single negative list. The prohibited uses include: chit funds and Nidhi companies; real estate business and farm house construction (with additional conditions for certain projects and industrial parks); agricultural and animal husbandry activities (subject to specific exemptions); plantation activities (except specified plantations such as tea, coffee, rubber, cardamom, palm oil and olive oil); trading in TDRs; transactions in listed or unlisted securities except for strategic corporate purposes (e.g., M&A or IBC-driven acquisitions aimed at long-term value creation); repayment of domestic INR loans where the original loan was for a restricted purpose or classified as NPA; and on-lending for any restricted activity.
Importantly, while the negative list remains comprehensive, key relaxations have been introduced – ECB proceeds are now expressly permitted for strategic corporate actions (such as M&A and IBC acquisitions) and certain permitted real estate activities. Further, the earlier blanket restriction on utilisation of ECB proceeds for working capital and general corporate purposes has been removed, providing significantly greater operational flexibility to borrowers.
Real Estate: Activity vs. Business
A critical refinement distinguishes between ‘real estate activities’ and ‘real estate business.’ The former was broadly restricted; the latter is narrowly defined as transactions involving purchase, sale, or lease of land or immovable property ‘with a view to earning profit.’
The following activities – even if funded by ECB – do not constitute ‘real estate business’ and are thus permitted:
- Construction and development of industrial parks, integrated townships, and SEZ
- Modernisation or expansion of existing manufacturing units
- Infrastructure sector activities
- Construction-development projects (including residential and commercial)
- Commercial or residential properties for the borrower’s own use
- Real estate broking services
6. Enhanced Borrowing Limits and Financial Flexibility
The new framework provides entities with significantly higher ECB access:
- General eligible borrowers may raise ECB up to the higher of: USD 1 billion in outstanding ECB, or 300% of net worth (based on latest audited standalone balance sheet)
- Regulated financial entities (RBI, SEBI, IRDA regulated) have access to ECB as per their respective regulatory frameworks, without general borrowing limits
7. Currency Conversion Liberalisation
A notable restriction under the old regulations prohibited conversion of INR-denominated ECB into foreign currency. This limitation constrained flexibility for borrowers managing currency exposures.
The 2026 framework now expressly permits conversion of INR-denominated ECB into foreign currency without approval requirements which should not exceed original liability.
Conclusion
The 2026 FEMA borrowing and lending regulations represent a paradigm shift from a prescriptive, ceiling-based framework to a market-driven, principles-based approach. The key achievements include:
- Broader eligibility for borrowers and lenders, democratising access to ECB
- Market-based pricing flexibility in place of rigid cost ceilings
- Standardised maturity requirements with targeted flexibility for manufacturing
- Clarified end-use restrictions with strategic carve-outs for M&A and corporate restructuring
- Enhanced borrowing limits reflecting financial capacity rather than arbitrary caps
- Operational flexibility through unrestricted currency conversion
These changes position India’s ECB framework as a more competitive and flexible regime, facilitating greater cross-border capital flows while maintaining appropriate prudential safeguards. Entities planning to raise ECB should reassess their capital strategies in light of these expanded opportunities.
A.P. (DIR Series) Circular No. 23
RBI/2025-26/223 | February 18, 2026
RBI Updates ECB Reporting Formats – Revised Form ECB 1 and ECB 2 Effective Immediately
The Reserve Bank of India has revised the reporting framework for External Commercial Borrowings (ECB) by updating the prescribed formats under the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations.
Through Circular No. 23, the RBI has substituted Part V – Annex I and Part V – Annex II of the Master Direction with revised Form ECB 1 and Form ECB 2, respectively. The revised reporting formats are effective immediately.
Key Highlights of the Revision
The updated forms significantly expand disclosure requirements and now mandate comprehensive reporting on:
- Detailed borrower and lender particulars
- Terms and conditions of borrowing
- End-use of funds
- Interest structure and fee components
- Receipt and utilisation of proceeds
- Debt servicing details
- Hedging arrangements
- Loan Registration Number (LRN) closure information
These changes aim to strengthen transparency, improve regulatory oversight, and align reporting standards with the recently liberalised ECB framework under the amended FEMA borrowing regulations.
