Date of Notification: February 9, 2026
Effective From: February 16, 2026 (on publication in the Official Gazette)
Official Notification: rbi.org.in

Overview

The Reserve Bank of India (RBI) has notified the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, revising the earlier Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. The changes form part of the RBI’s continued effort to modernise India’s External Commercial Borrowing (ECB) framework and align it with global financial standards and domestic prudential norms under the Foreign Exchange Management Act, 1999.

These amendments were issued via Notification No. FEMA 3(R)(5)/2026-RB, dated February 9, 2026, and came into force upon publication in the Official Gazette on February 16, 2026. The revised framework consolidates definitions, strengthens end-use monitoring, rationalizes borrowing limits, and lays down clear norms for borrower compliance.

According to the RBI, these reforms were shaped by feedback received from stakeholders on the draft regulations released in October 2025, reflecting the central bank’s consultative approach to foreign exchange management policy.

Key Highlights of the 2026 Amendment

1. Expanded Definitions and Structural Clarity

Regulation 2 of the 2018 

framework has been completely substituted, introducing new definitions for key terms such as arm’s length basis, benchmark rate, and control. This change ensures consistency with the Companies Act, 2013 and the Foreign Exchange Management (Deposit) Regulations, 2016.

The updated definitions also bridge interpretational gaps that previously existed around related-party transactions, authorised dealers, and pricing benchmarks for both foreign-currency and rupee-denominated borrowings.

2. Introduction of Regulation 3A – End-Use Restrictions

One of the most significant reforms is the insertion of Regulation 3A, codifying a comprehensive list of prohibited end-uses for borrowed funds. Borrowers can no longer utilise ECB proceeds for:

  • Chit fund or Nidhi company investments
  • Real estate business (with defined exceptions for affordable housing and infrastructure development)
  • Agricultural or plantation activities (excluding specified value-chain infrastructure)
  • Trading in Transferable Development Rights (TDRs)
  • Acquisition of equity instruments in the capital market (except for strategic M&A or restructuring transactions approved by competent authorities)
  • Repayment of restricted domestic loans

This codification eliminates the interpretational ambiguity that had arisen under earlier RBI circulars concerning “grey-area” uses of foreign borrowings, such as refinancing stressed loans or funding acquisitions via layered structures.

3. Overhauled Schedule I – The New ECB Framework

Schedule I, which governs External Commercial Borrowings, has been comprehensively substituted. The new ECB framework now consolidates provisions relating to eligibility, proceeds utilization, security creation, refinancing, conversion into non-debt instruments, debt servicing, and reporting.

The salient provisions include:

  • Maturity: Minimum Average Maturity Period (MAMP) of three years, with shorter maturity (1–3 years) allowed for manufacturing sector borrowers up to USD 150 million. Shorter-tenor ECBs must comply with trade credit cost ceilings.
  • Borrowing Limits: Eligible borrowers may now raise ECBs up to the higher of
    (a) USD 1 billion, or
    (b) 300% of their net worth.
    This replaces the earlier fragmented threshold approach based on sectoral exceptions.
  • Currency Flexibility: ECBs can be raised in foreign currency or INR, broadening the funding base for Indian corporates.
  • Conversion Provisions: Borrowings can be converted into equity or other non-debt instruments in line with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, thus facilitating smoother debt-equity restructuring.
  • Security and Guarantees: Explicit permission is now included for both domestic and cross-border guarantees, subject to RBI guidelines and compliance with FEMA provisions.

4. Strengthened Compliance, Reporting, and Transparency

The RBI has formalised processes for borrower classification and compliance monitoring. Borrowers are now required to report ECB transactions using updated Forms ECB 1 and ECB 2 through their designated Authorised Dealer (AD) Category I banks.

Moreover, the new framework creates a mechanism to flag “untraceable borrowers”—entities that fail to meet ongoing reporting or KYC obligations. These will now be treated as non-compliant, improving systemic risk tracking and investor confidence.

5. Alignment with Prudential and Corporate Restructuring Norms

The amended framework closely aligns ECB treatment with India’s growing prudential and restructuring ecosystem. Specific clarifications have been made regarding:

  • Refinancing of existing ECBs or stressed domestic loans.
  • Handling of call/put options — which cannot be exercised before MAMP completion.
  • Treatment of debt arising out of corporate actions (e.g., mergers, demergers, business restructurings).

This harmonisation ensures that foreign borrowings and subsequent restructuring or conversion events comply seamlessly with both RBI’s foreign exchange rules and the Companies Act provisions governing mergers or restructuring.

Practical Implications for Businesses

1. Greater Borrowing Flexibility:

Corporates, especially in manufacturing and infrastructure, now have wider access to foreign debt under a harmonised limit structure—potentially encouraging cost-efficient offshore financing.

2. Improved Ease of Compliance:

Streamlined definitions, simplified reporting norms, and clarity on qualifying end-uses reduce compliance risks for borrowers and lenders alike.

3. Strengthened Regulatory Oversight:

The RBI’s introduction of a “report-and-track” approach to untraceable borrowers enhances financial transparency, mitigating money-laundering and misuse risks.

4. Enhanced Market Confidence:

By codifying previous circulars into one cohesive regulation, the RBI has improved predictability for foreign lenders, investors, and credit agencies evaluating Indian exposure.

Author: Navya Saxena, Associate