date: October 5, 2023


The economic development of a country is often dependent on a balance between domestic savings and foreign investment. In instances where the difference between domestic savings & internal investment requirements become prominent, and foreign direct investment inflows remain insufficient, a nation may resort to various sources of borrowing, both within their borders and beyond.  One crucial aspect of this borrowing strategy is external commercial borrowings (‘ECB’s) by the Indian companies, which constitute a crucial component of debt-driven capital flows.

The ECB, which represents financial inflows in the form of debt, play a vital role by providing funds to public sector undertakings and private companies. ECB offers an additional source of financial support, enabling these companies to start new projects, expand existing ones, and fill the financial gaps from domestic funding.

Earlier, ECBs were mainly used for importing capital goods, modernizing operations, project financing, local sourcing of capital goods etc.  Some companies also used to borrow for meeting miscellaneous needs such as buyback of Foreign Currency Convertible bonds (FCCBs), expansion activities, budget financing etc.  Recent trend shows that the Indian companies have shifted their focus from using ECBs for capital expenditures and project financing to using it for refinancing, working capital, lending, and general corporate needs.  Thus, the trend indicates that ECBs are not primarily used for capacity creation in the Indian economy.

In a notable development, the first quarter of the financial year 2023 -2024 (April to June) witnessed a remarkable increase in overseas borrowing by Indian companies.  According to data from the Reserve Bank of India (‘RBI’), Indian corporate entities raised $20.73 billion through ECBs during this period.  This surge in borrowing eclipsed previous records, with the highest quarterly fundraising observed in the fourth quarter of financial year 2020, where Indian domestic entities secured $18.97 billion ECBs.  It is important to highlight that the total overseas borrowing throughout the entire previous financial year 2022-2023 was $25.99 billion only.  This trend continued into the early part of second quarter of the 2023-2024 fiscal year. Further, in terms of India’s External Debt Report (2022-23) by Ministry of Finance, commercial borrowings remained the largest component of total India’s external debt.

The rise in ECBs by Indian companies reflects the evolving dynamics of the Indian business landscape. In this article, we will delve into the reasons behind the increasing popularity of ECBs among Indian companies and their implications.

Regulatory framework

ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

Over the passage of time, RBI has liberalized the ECBs related framework several times.  The most significant changes were introduced through the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 along with amendments to the ECB policy known as ‘New ECB Policy’ on 16 January 2019.  Additionally, on 30 July 2019, RBI has relaxed the strict restrictions on end-use of ECB.

The most notable development in New ECB Policy includes expanding the list of eligible borrowers, increasing the borrowing limits and extending the minimum maturity time period for specific types of borrowing. The new guidelines enable Indian entities to borrow more through the ECB route and with a longer time frame to repay.  The utilization of ECB proceeds is also permitted for general corporate purposes, working capital requirements, repayment of INR loans and for on-lending purposes, subject to certain limit and leverage requirements provided in the New ECB Policy.  However, the funds borrowed through ECB cannot be employed for the purposes of investing in real estate activities, investment in capital market, equity investment etc.

In order to ensure the credibility of the incoming funds, the ECB Policy categorise ‘eligible entities’ amongst the borrowers, and ‘recognized non-residents’ amongst potential lenders.

The list of ‘eligible borrowers’ includes all entities eligible to receive foreign direct investment (FDI). Additionally, port trusts, units in special economic zones (SEZ), SIDBI, EXIM Bank, registered entities engaged in microfinance activities, viz., registered not for profit companies, registered societies/ trusts/ cooperatives and non-government organizations can now avail ECB.

The New ECB Policy sets a minimum average maturity period (‘MAMP’) for ECBs to 3 (three) years. Call and put options, if applicable, cannot be exercised before completing minimum average maturity. However, for the specific categories mentioned below, the MAMP will be as prescribed therein:

S No. Category MAMP
1. ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year. 1 year
2. ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans. 5 years
3. ECB raised for working capital purposes or general corporate purposes;on-lending by NBFCs for working capital purposes or general corporate purposes. 10 years
4. ECB raised for repayment of Rupee loans availed domestically for capital expenditure;on-lending by NBFCs for the same purpose. 7 years
5. ECB raised for repayment of Rupee loans availed domestically for purposes other than capital expenditure;on-lending by NBFCs for the same purpose/ 10 years
for the categories mentioned at (2) to (5) – ECB cannot be raised from foreign branches / subsidiaries of Indian banks;the prescribed MAMP will have to be strictly complied with under all circumstances.

Benefits of ECBs for Indian Companies

The Indian government has provided favourable regulatory framework for ECBs and made it easier for Indian companies to access the foreign funds. The RBI has periodically amended the ECB framework to encourage Indian companies to explore the ECBs route.  Benefits of ECBs include:

  • Access to lower interest rate: One of the reasons for increase in ECBs among Indian companies is access to lower interest rates as compared to domestic borrowings. ECBs are more cost-effective option for Indian companies to tap international financial markets, where interest rates are often more competitive. It also encourages Indian companies to seek ECBs as a means to reduce their borrowing costs and increase their profitability.
  • Longer tenures: ECBs typically offer longer tenures than domestic loans, allowing Indian companies to access funds for longer duration. The longer tenures also align with the requirements of infrastructure projects and capital-intensive ventures, where repayments are expected to be spread over several years.
  • Diversification of funding sources: By accessing international financial markets, Indian companies can reduce their dependence on domestic financing options, such as bank loans or equity capital. This diversification not only spreads risk but also provides companies with more flexibility in managing their debt portfolios.
  • Competitive Advantage: Companies with access to lower-cost ECBs may gain a competitive advantage in their respective industries. Lower financing costs can lead to improved pricing strategies, product development, and expansion opportunities, ultimately improving their market competitiveness.
  • Global expansion and acquisitions: As Indian companies look to expand their presence on the global stage, they often require significant capital to fund acquisitions and international ventures. ECBs provides a viable solution for financing such ventures. The ability to tap into international markets allows Indian companies to raise funds in foreign currencies, which can be helpful when acquiring overseas assets or conducting cross-border transactions.
  • No equity dilution: As the ECBs are straightforward nature as loans, they do not require equity participation.  This ensures that a company’s ownership of shares remains intact. Borrowers can secure funds without giving up control, as external debtors do not gain voting rights within the company.

Challenges with ECBs for Indian Companies

The tightening liquidity in the domestic economy, slow activity in the corporate bonds market, and the continued stress in the banking sector are pushing Indian companies to explore external sources of financing.  While ECBs offer several advantages to Indian companies, there are also certain disadvantages and risks associated with their increased use. 

  • Currency risk: One of the most significant disadvantages of ECBs is the exposure to currency risk. When Indian companies borrow in foreign currencies, they become vulnerable to exchange rate fluctuations. If the domestic currency depreciates against the borrowed currency, the repayment amount in Indian Rupees can significantly increase.  Over the past few years, the Indian Rupee has depreciated by about 3% (three percent) annually against the US dollar.  is no guarantee that exchange rates will not fluctuate even more in the future. Since these borrowings are in foreign currency, repayments (both principal and interest) must be made in foreign currency, which exposes companies to exchange rate risk and may involve hedging costs.
  • Interest rate risks: While ECBs can provide access to lower interest rates, they are still subject to interest rate fluctuations in international markets. Changes in global interest rates can affect the cost of servicing the ECB, potentially increasing the financial burden on the borrowing company.
  • Credit rating and reputation risk: Frequent use of ECBs can also impact a company’s credit rating and reputation. If a company accumulates a substantial amount of foreign debt, it might deter potential investors and creditors, making it more challenging to access both domestic and international financial markets. This could also lead to higher debt on the balance sheet of the company, thereby adversely affecting financial ratios.
  • Macroeconomic risk: Events like financial crises, geopolitical tensions, wars, or trade disputes can impact the availability and cost of ECBs. Indian companies that rely heavily on these borrowings may find themselves exposed to such global uncertainties.
  • Hedging costs: To mitigate currency risk, companies often employ hedging strategies, which can be expensive and complex. These costs can erode some of the interest rate advantages gained by using ECBs.
  • Legal and jurisdictional risks: ECBs might entail legal and jurisdictional risks associated with dealing with foreign lenders, including navigating complex international legal systems, dispute resolution, and adherence to foreign laws.


ECBs are among the most commonly available sources of funding for Indian companies. The increasing use of ECBs by Indian companies reflects their adaptability and willingness to explore innovative ways to meet their financing needs in an ever-changing business environment   Nonetheless, it goes without saying that companies must exercise caution with regard to the impact that the borrowing can have on their balance sheets, and exchange risks.  Companies availing ECB should perform a thorough risk assessment and cost-benefit analysis before deciding to rely on ECBs for their financing needs.

Written by Nidhi Arora (Partner) and Binny Chopra (Senior Associate)


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