Reserve Bank of India eases External Commercial Borrowings Regulations

Amidst the recent global challenges and trade-wars, many developing countries (including India) faced macroeconomic issues due to weakness in their currency. The Indian Government has taken many steps to protect the devaluation of its currency by carrying out open market operations in currency markets, boosting exports, putting in place additional import duties, etc. India has taken yet another step in boosting its foreign reserves by liberalizing the foreign currency loan regime. There was also a constant pressure and expectation from the Reserve Bank of India (RBI) to reduce the interest/borrowing costs.

External Commercial Borrowings (ECB) regime provides for a framework for the Indian corporates to avail foreign currency loans from an overseas lender.

Over the years, the ECB regime has undergone significant changes, however they are still perceived to be stringent and with many restrictions. Accordingly, the RBI, vide A.P. (DIR Series) Circular No. 17 dated 16 January 2019, has revised the extant ECB framework, which signifies a major change in the policy of the Indian Government. The new framework is instrument neutral and would further strengthen the Anti- Money Laundering/Combating Financing of Terrorism (AML/CFT) framework.

Below is a comparative analysis of the key changes:

Particulars Existing Regulations Revised Regulations
Definition of Indian Entity
Means a company or a corporate body or a firm in India.

Definition has been expanded to include Limited Liability Partnerships (LLPs).


This was one of the negative aspects for LLP, which is now rectified, and would be a big boost for LLP as a viable entity option for foreign investors.

Eligible Borrowers
Companies in manufacturing and software development, shipping and airlines companies, units in SEZ, EXIM Bank, companies in infrastructure sector, NBFC, REITs and INVITs, Microfinance Institutions, SEZ Developers, etc.
  • The definition of ‘Eligible Borrowers’ has now been expanded to include all entities that are eligible to receive foreign direct investments.
  • Other Entities, such as Port Trusts, Units in SEZ, SIDBI, EXIM Bank, registered entities engaged in microfinance activities, viz., registered not for profit companies, registered societies/trusts/co-operatives, non-government organizations and Startups1.


This would imply that service, trading entities, etc., would also now be allowed to avail the ECB facility. This is a significant change and would resolve issues of funding for these service and trading companies, which hitherto had relied only on Equity capital from parent companies for their fund requirements.

Eligible Lenders
International Banks & Capital Markets, Multilateral Financial Institutions, Foreign Equity Holders, Overseas branches or subsidiaries of Indian Banks, etc.
  • Eligible lender definition expanded to include any entity that is a member of FATF & ISCO for ECB raised in foreign exchange.
  • It is specifically provided that a foreign investor being an individual can be recognized as a lender only if he qualifies as a foreign equity holder.
Minimum Average Maturity Period
3/5/10 years depending on the quantum of ECB raised.
  • The revised ECB framework reduced the overall minimum maturity period to three years.
  • ECB raised from foreign equity holder and utilized for working capital or general corporate purposes, the MAMP would be five years;
  • For ECB up to USD 50 million per financial year raised by the manufacturing sector, which has been given a special dispensation, the MAMP would be one year.


This increases the attractiveness for the foreign lenders to provide short-term loans, who were earlier anxious to provide long-term loans.

End-use restrictions (Negative List)
  • Investment in real estate or purchase of land except affordable housing.
  • Construction and Development of SEZ, industrial parks/integrated townships,
  • Capital Market investments
  • Equity investments
  • Working Capital and General Corporate purposes except for foreign equity holder
  • Repayment of rupee loans
  • On-lending to entities for the above mentioned activities

In addition to the restrictions provided in the extant regulations, additional restrictions have been provided below:

Additional restrictions

  • Business of Chit Fund or Nidhi Company
  • Agricultural or Plantation activities
  • Trading in Transferable Development Rights
  • Real Estate Activities now have been specifically defined unlike the extant regulations
Individual limits of borrowing (per financial year)
Companies could raise up to USD 500 million (specific categories up to USD 750 million) or equivalent.
  • The general limit has been extended to USD 750 million or equivalent
  • Oil marketing companies can now raise USD 10 billion or equivalent to obtaining board approval
  • Start-ups can raise USD 3 million or equivalent (newly included in a list of eligible borrowers).


RBI has always been conservative when it comes to capital account transactions. This liberalization would allow Indian corporates to fund their operations by availing ECBs, which could also provide interest arbitrage.

Late submission fees
No delay was allowed per se. In case of any delay, the only option is going for compounding, which is a tedious process at times.

Late submission fee regime has been introduced for the delay in reporting requirements in the range of INR 5,000 or INR 50,000 or INR 100,000 per year depending on the period of delay.

1. Start-ups are entities, which satisfies the conditions laid down in Notification No. G.S.R 180(E) dated 17 February 2016, as amended/updated from time to time

With liberalization of ECB regime, it is expected that many companies may wish to avail its fund requirements through ECB and would have an increase in the debt component. Higher debt component is an age-old tax planning aspect since interest on debt is a tax deductible item as compared to dividends, which are not tax deductible and attract additional 20% dividend distribution tax.

However, one must consider the following tax aspects before deciding on an appropriate debt-equity mix.

Interest limiting deduction – Section 94B of the Indian Income Tax Act, 1961

Section 94B of Indian ITA restricts deduction in respect of expenditure by interest (or of similar nature) paid to the non-resident associated entities to 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The provisions do not apply to a banking company and for others the threshold limit is INR 10 million. Furthermore, the interest over the 30% limit can be carried forward for set-off up to eight subsequent years.

The above provision was introduced from FY 2017-18 in line with Action Plan 4 of OECD’s Base Erosion & Profit Shifting (BEPS) project.

Indian corporates availing foreign currency loans from related parties should also be mindful of these provisions and properly plan their debt-equity structure so that there is no disallowance of excess interest.

Foreign Lender - Taxability in India and Withholding Tax

The interest paid on foreign currency borrowing would be liable to a reduced tax rate of 5% (plus applicable surcharge and education cess) as per the provisions of Section 194LC of the Indian ITA if the loans were raised prior to 1 July 2020. With these liberalizations in ECB, it is expected that the government may extend the time limit of 2020 to boost foreign inflows.

However, it would be advisable for companies to ensure that their ECBs/borrowings are done before the above date to enjoy the 5% tax rate. Since the tax rate is 5%, the Indian company paying interest must withhold tax also @ 5% (plus applicable surcharge and education cess).

Transfer Pricing – Interest rate to be at arm’s length

ECB regulations provide for maximum interest that can be charged on ECB. Currently, the limits provided under the ECB framework are benchmark rate plus 450 bps spread. Benchmark rate in case of foreign currency refers to a six-month LIBOR rate of applicable borrowing currency, and for rupee loans, it refers to the prevailing rate of the Government of India securities.

While the maximum ceiling is provided under the ECB regulations, the interest rate for related party loans must comply with the arm’s length interest rate from the transfer pricing perspective. Accordingly, corporates are advised to perform an interest rate benchmarking study to save themselves from protracted litigation with Indian tax authorities.


Most of the developed countries do not have any exchange control regulations, and India has always spoken about moving towards capital account convertibility. This liberalization can be considered as one of the significant move towards that. The revamped regulations are certainly a welcome move as it provides a larger platform for Indian Corporates to have access to global funding.

The revised framework has made certain pragmatic changes allowing trading companies and service companies to raise foreign funds. These would overall increase the attractiveness of India as an investment destination and go a long way in improving India’s ranking in ease of doing business index. Furthermore, the introduction of late fees for the delay in reporting is a welcome approach as it obviates unwarranted compounding mechanism.

Also, the foreign equity holder or companies would be in a better position to structure funding of their subsidiaries in a flexible manner. Nonetheless, it would have been better if the definition of foreign equity holder was streamlined to include interest in an LLP.

Corporates have been presented with a unique proposition to relook at their current funding structure, and debt-equity mix, and accordingly plan their activities to take maximum benefits of the above-mentioned liberalized framework. This must be planned holistically considering other tax and commercial aspects discussed above.