RBI Proposes New FEMA Rules On External Borrowing, Fund Use, And Reporting

The Reserve Bank of India (RBI) has released a draft amendment to the Foreign Exchange Management (Borrowing and Lending) Regulations, introducing updated rules on external borrowing, permissible fund utilization, and reporting requirements for Indian entities. The proposed changes aim to enhance transparency and streamline cross-border borrowing under FEMA, 1999.

The draft, titled Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025, proposes updates to the 2018 framework and is now open for stakeholder feedback. The regulations will come into effect once notified in the official gazette.

Updated Definitions and Scope

The draft revises key definitions to provide clarity and align them with current financial practices. Terms such as external commercial borrowings (ECB), external commercial lending (ECL), recognised lenders, authorised dealers, benchmark rates, net worth, and cost of borrowing are now clearly defined. These changes aim to standardize interpretation and reduce ambiguity in cross-border lending and borrowing.

Restrictions on Use of Borrowed Funds

The amendment introduces restrictions to prevent funds from being diverted into unregulated or high-risk activities. Borrowed funds cannot be used for chit funds, Nidhi companies, unapproved agricultural or plantation activities, real estate businesses including farmhouses, trading in transferable development rights, or on-lending outside approved channels.

Investments in securities are allowed only for permissible mergers, overseas investments, or primary market instruments intended for on-lending to eligible borrowers. These measures ensure borrowed funds are used productively and compliantly.

Revised ECB Framework under Schedule I

The amendment revises the ECB framework, defining eligible borrowers as entities registered in India, excluding individuals. Entities under restructuring or insolvency can raise ECB if permitted under the resolution plan, and borrowers under investigation must disclose proceedings to the authorised dealer bank.

Recognised lenders include any non-resident entity and overseas or IFSC branches of RBI-regulated banks. Borrowings may be in foreign currency or Indian rupees, with currency conversion permitted under specified conditions. Instruments such as foreign currency convertible and exchangeable bonds remain under ECB. Borrowing limits are set at the higher of $1 billion or 300% of the entity's net worth, with financial sector-regulated entities exempt. Minimum average maturity periods are generally three years, with certain allowances for manufacturing companies. Borrowing costs must reflect market rates, and drawdowns require a Loan Registration Number (LRN). Unutilised funds must be held in specified accounts or deposits.

Security, Conversion, and Refinancing

Borrowers may provide security on assets to overseas lenders under defined conditions. Existing ECBs can be refinanced without exceeding the original cost or maturity terms. Conversion of ECBs into equity instruments is allowed with lender consent and in compliance with FEMA. Any changes to loan terms require lender approval and adherence to reporting procedures.

Strengthened Reporting Requirements

The draft emphasizes timely reporting. Borrowers must obtain an LRN using Form ECB, report drawdowns and repayments via Form ECB 2, and submit revised forms for any changes in loan structure. Delays may attract late fees, ensuring compliance and better monitoring of cross-border borrowings.