The RBI’s draft FEMA amendment for 2025 targets greater transparency, stricter fund usage rules, and refined reporting norms for cross-border borrowing by Indian entities.
Aiming for Simpler, Safer Overseas Borrowing
The Reserve Bank of India (RBI) has issued a draft amendment to the Foreign Exchange Management Act (FEMA) regulations, proposing sweeping changes to India’s cross-border borrowing rules.
- Titled Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025, the draft updates the 2018 framework.
- The focus: enhancing transparency, tightening end-use norms, and improving compliance in line with modern financial standards.
- Stakeholders are invited to provide feedback before the rules are finalized and notified in the official gazette.
Key Definitions Get Clarity
To reduce ambiguity in interpretation and execution, the RBI has updated definitions across several core terms:
- Terms such as External Commercial Borrowings (ECB), External Commercial Lending (ECL), Recognised Lenders, Authorised Dealers, and Benchmark Rates have been clarified and standardized.
- New definitions also better specify cost of borrowing and net worth, helping companies and banks align with consistent compliance criteria.
These refinements will help both borrowers and regulators clearly interpret eligibility, scope, and obligations under FEMA.
Restrictions on Fund Utilisation
To curb misuse and ensure productive deployment of overseas funds, the amendment introduces strict limitations on end-use:
- Prohibited areas include:
- Chit funds and Nidhi companies
- Agricultural/plantation activities not allowed under foreign investment rules
- Real estate businesses, including farmhouses
- Trading in Transferable Development Rights (TDRs)
- On-lending outside authorised channels
- Investment in securities is permitted only if:
- It relates to approved mergers or acquisitions
- It supports overseas investments
- It involves primary market instruments intended for on-lending to eligible borrowers
These measures align with the RBI’s goal to minimize risk exposure and ensure external debt supports economic growth rather than speculative ventures.
Revamped ECB Framework: Eligibility and Limits
A key section of the amendment is a reworked ECB policy under Schedule I:
- Eligible Borrowers:
- Must be registered entities in India (excluding individuals).
- Firms under insolvency or restructuring can raise ECB if allowed under a resolution plan.
- Borrowers under regulatory investigation must disclose the same to their authorised dealer (AD) banks.
- Recognised Lenders:
- Include non-resident entities and overseas/IFSC branches of RBI-regulated banks.
- Currency Flexibility:
- ECBs can be raised in foreign currency or Indian rupees, subject to conversion norms.
- Borrowing Limits:
- Set at the higher of $1 billion or 300% of net worth.
- Financial sector entities regulated by Indian authorities are exempt from these caps.
- Instruments Included:
- Instruments like foreign currency convertible/exchangeable bonds remain part of the ECB ecosystem.
Security, Conversion & Refinancing Rules
The amendment outlines how entities can secure, convert, or refinance borrowings:
- Asset Security:
- Security may be provided in favour of overseas lenders under specified safeguards.
- Refinancing:
- Permitted without increasing cost or maturity beyond original terms.
- Conversion to Equity:
- Allowed with lender consent and in full compliance with FEMA’s equity investment rules.
- Loan Modifications:
- Require lender approval and adherence to updated reporting norms.
Tighter Reporting and Compliance
Reporting requirements have been significantly reinforced to ensure regulatory oversight:
- Borrowers must:
- Obtain a Loan Registration Number (LRN) via Form ECB.
- Report drawdowns and repayments through Form ECB 2.
- Submit revised forms for any changes in loan structure or terms.
- Late submissions may incur penalty fees, incentivizing timely compliance and enabling better monitoring of cross-border capital flows.
