External commercial borrowing
How Indian companies borrow from abroad, the rules that govern it, and the currency risk it carries
Rules as on 16 October 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
External commercial borrowing, or ECB, is simply a loan an Indian company takes from a lender outside India. Open by asking: if money can be borrowed at a lower interest rate abroad, why does every company not do it? The answer is the currency risk this deck builds towards.
An ECB is a loan an Indian business takes from a lender outside India, under rules set by the RBI.
It can bring in money that is scarce at home and sometimes carries a lower interest rate. But a foreign-currency loan is repaid in that currency, so the rupee's movement changes its real cost.
Trainer notes
ECB is governed by the Foreign Exchange Management Act (FEMA). Keep two ideas in view: it widens access to capital, and it hands the borrower an exchange-rate risk that a rupee loan does not carry.
Four words to know first
Eligible borrower
Who may borrow. Since Feb 2026: any resident non-individual registered under a Central or State Act, if law permits.
Recognised lender
Any person resident outside India, an overseas branch of an RBI-regulated lender, or an IFSC financial institution.
Cost of borrowing
Interest plus fees. Since Feb 2026 it must reflect the market (arm's length if related); loans under 3 yrs keep a cap.
Minimum maturity
The shortest average life the loan may have. The general rule is three years, so ECB is not for very short-term money.
Take-away: An ECB can be in foreign currency or in rupees. The currency decides who carries the exchange-rate risk.
Source: RBI FEMA (Borrowing and Lending) Regulations, as amended 9 Feb 2026 (in force 16 Feb 2026).
Trainer notes
Until February 2026 a recognised lender had to be resident in a FATF or IOSCO compliant country. The amendment widened who may borrow and who may lend (any non-resident, overseas branches of RBI-regulated lenders, IFSC institutions) and moved pricing to a market basis.
Why the currency matters, with arithmetic
THE SET-UP
An Indian company borrows USD 10 million abroad at 6% a year for one year.
On the day it borrows, USD 1 = ₹80, so it receives ₹80 crore.
- At the end it owes USD 10.6 million (USD 10m plus 6%). That dollar amount is fixed, whatever the rupee does.
- If the rupee holds at ₹80: it repays ₹84.8 crore. The cost in rupees is 6%, as planned.
- If the rupee falls to ₹88 a dollar: it repays ₹93.28 crore. The cost in rupees rises to 16.6%.
- If the rupee strengthens to ₹76 a dollar: it repays ₹80.56 crore. The cost in rupees is only 0.7%.
Result: A low dollar rate can become a high rupee cost if the rupee weakens. The debt is fixed in dollars.
Illustration with assumed, round figures. The exchange rates are not forecasts.
Trainer notes
Work the numbers with the room: USD 10.6m at ₹88 = ₹93.28 crore, a ₹13.28 crore cost on ₹80 crore, which is 16.6%. This exchange-rate risk is why many ECB borrowers hedge. Do not present any rupee level as likely.
How an Indian company raises an ECB
Check eligibility and end-use
Confirm the borrower is eligible and that the money will be used for a purpose the rules permit; some end-uses are barred.
Find a recognised lender
Agree the amount, currency, interest and tenor with a lender the RBI recognises, keeping within the maturity and cost rules.
Get the loan number
Apply through your authorised dealer bank for a Loan Registration Number (LRN) from the RBI. Draw down only after it is issued.
Draw down and report
Take the money, then report receipts and repayments (Form ECB 2) through the bank within seven days of month-end.
Source: RBI Borrowing and Lending Regulations, Sch. I, as amended 9 Feb 2026; RBI circular, 16 Feb 2026.
Trainer notes
The authorised dealer (AD Category-I) bank is the company's designated point of contact: it gets the loan number and files the returns. End-use restrictions bar, for example, chit funds, most real estate business, most securities transactions and on-lending for barred purposes.
The rules at a glance
The framework was rewritten with effect from 16 February 2026. The main parameters:
| Parameter | What the rule now says |
|---|---|
| Who may borrow | Any resident that is not an individual and is registered under a Central or State Act, if law permits. |
| How much | Higher of USD 1 bn of ECB outstanding, or total borrowings up to 300% of net worth. |
| Minimum maturity | Generally three years; manufacturers may borrow for 1 to 3 years up to USD 150 million outstanding. |
| Cost of borrowing | As per prevailing market conditions; arm's length pricing where lender and borrower are related. |
| Reporting | To the RBI through the authorised dealer bank, now mainly on the occurrence of events such as drawdown. |
Source: RBI Borrowing and Lending (First Amendment) Regulations, 2026 (in force 16 Feb 2026), and related RBI circular.
Trainer notes
Net worth is on the last audited standalone balance sheet. The 300% test counts external and domestic borrowing together (non-fund-based credit and mandatorily convertible securities excluded); it does not apply to borrowers regulated by financial sector regulators. Loans with an LRN before 16 February 2026 continue under the earlier rules, except reporting. Figures checked against RBI notification FEMA 3(R)(5)/2026-RB.
Carrying the currency risk
Hedge it
Buy a forward or option that fixes or caps the rupee cost of the future dollar repayment. The hedge has its own cost, eating into the interest saving.
Natural hedge
An exporter that earns dollars can repay a dollar loan from those earnings, so a weaker rupee hurts less. Its income and debt move together.
Borrow in rupees
A rupee-denominated bond issued overseas (a 'masala bond') is an ECB where the foreign lender, not the borrower, carries the currency risk.
Take-away: No method removes the risk for free. Each shifts it or pays to transfer it.
Source: RBI Borrowing and Lending Regulations, Schedule I, para 3.
Trainer notes
A masala bond pays the foreign investor in rupees, so if the rupee falls the investor is repaid in a weaker currency. Unhedged foreign-currency ECB is the case that most needs care.
Where the rules stand now
Regulatory position as on 16 October 2026. These are rules, not market prices.
- FRAMEWORK REWRITTEN
- 2026The ECB framework was overhauled with effect from 16 February 2026.
- BORROWING LIMIT
- 1 bnHigher of USD 1 bn ECB outstanding or total debt up to 300% of net worth.
- MINIMUM MATURITY
- 3 yrsMinimum average maturity; shorter only for some manufacturing loans.
- COST BASIS
- MarketInterest and fees must reflect the market, replacing the old fixed cap.
Source: RBI Borrowing and Lending (First Amendment) Regulations, 2026, in force 16 Feb 2026.
Trainer notes
Before 2026 the automatic-route limit was USD 750 million a year and the all-in-cost was capped at the benchmark rate plus 450 basis points (rupee) or 500 (new foreign-currency loans). The move to a market basis is the biggest change.
If you learnt this from older material
The ECB rulebook was rewritten in February 2026; older decks are out of date.
What older material says
- The cost is capped at 450-500 basis points over a benchmark rate.
- The automatic route allows up to USD 750 million a year.
- Older material may list only companies.
What holds now
- The cost must reflect market conditions; the fixed spread cap is gone.
- The limit: higher of USD 1 bn ECB or total borrowings of 300% of net worth.
- Any non-individual resident registered under a Central or State Act.
Take-away: The idea of borrowing abroad is unchanged. The limits, cost basis and who may borrow are not.
Sources: RBI ECB Master Direction (2019 framework); RBI Borrowing and Lending (First Amendment) Regulations, 2026.
Trainer notes
The framework was consolidated in the 2019 Master Direction (three tracks, a USD 750 million automatic route, a 450-500 bps cost cap) and then overhauled from 16 February 2026 to a market-based, net-worth-linked model.
Four things people get wrong
Misconception'A foreign loan at 6% costs 6%.'
What is trueOnly if the rupee stays at the starting rate. If it falls, the rupee cost can be far higher; a hedge has its own cost.
Misconception'ECB is free money from abroad.'
What is trueIt is debt under RBI rules, with limits on amount, maturity, cost and end-use, and it must be reported.
Misconception'Any company can borrow any amount.'
What is trueThe borrower must be eligible; ECB is capped at the higher of USD 1 bn or total borrowings of 300% of net worth.
Misconception'A masala bond carries the same risk.'
What is trueNo. It is in rupees, so the foreign investor, not the Indian borrower, carries the currency risk.
Check yourself
Question 1: A company borrows USD 5 million at ₹80 a dollar. It must repay USD 5.3 million. If the rupee falls to ₹90, what does it repay in rupees, and what is the rupee cost?
Answer: USD 5.3m × ₹90 = ₹47.7 crore. It borrowed ₹40 crore (USD 5m × ₹80), so the cost is ₹7.7 crore on ₹40 crore = 19.25% in rupees, not 6%.Question 2: Name two ways an Indian borrower can handle the currency risk of a foreign-currency ECB.
Answer: Any two of: hedge the repayment with a forward or option; use a natural hedge (dollar earnings, as an exporter has); or borrow in rupees through a masala bond, which shifts the currency risk to the foreign lender.Question 3: Under the framework in force from February 2026, how much may an eligible borrower raise?
Answer: The higher of USD 1 billion of outstanding ECB or total borrowings up to 300% of net worth, subject to the other rules (eligibility, maturity, cost, end-use).
Sources and disclaimer
Sources for the figures in this explainer
- Current ECB framework: eligible borrowers (non-individual residents registered under Central or State Act); limit (higher of USD 1 bn ECB outstanding or borrowings of 300% of net worth).
- Also current: minimum average maturity 3 years (manufacturing 1-3 years up to USD 150 million); market-based cost; event-based reporting.
- For both: RBI FEMA (Borrowing and Lending) (First Amendment) Regs, 2026, Notification FEMA 3(R)(5)/2026-RB, 9 Feb 2026, in force 16 Feb 2026; RBI circular RBI/2025-26/221, 16 Feb 2026.
- Checked against RBI notification text (rbi.org.in) and RBI press release 2025-2026/2127, 16 Feb 2026; EY India tax alert, 24 Mar 2026, as cross-check.
- 2019 framework (USD 750 mn automatic route; cost cap of benchmark + 450 bps, 500 bps for new foreign-currency loans from Dec 2021): RBI MD 5, 26 Mar 2019; circulars 8 Dec 2021, 1 Aug 2022.
- Recognised lenders: any non-resident, overseas RBI-regulated branches, IFSC institutions: Sch. I para 2, FEMA 3(R)(5)/2026-RB.
- All currency levels, loan sizes and interest rates in the worked example and quiz are invented for illustration, not forecasts or market quotes.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).