In the past, India has been cautious about regulations governing foreign currency borrowing. Given the infrastructure and investment deficit, the new government has taken bold steps to encourage external commercial borrowings (ECBs), i.e. foreign currency borrowing by companies in India.

Some of the key changes in the Master Circular on External Commercial Borrowings and Trade Credits, issued by the Reserve Bank of India (RBI) on 1 July, are analysed below.

General corporate purposes

The funding of Indian subsidiaries has been one of the primary issues faced by foreign companies. Due to the earlier restrictions on the end use of ECB funds, foreign equity shareholders mostly opted for the route of injecting funds in the form of expensive equity, which did not provide any clarity over immediate returns.

On 4 September 2013, the RBI gave an initial respite by suggesting that a foreign shareholder holding at least 25% of the Indian subsidiary directly would be able to provide a loan (ECB) under the approval route, which allows the funds to be used for general corporate purposes.

Subsequently, through a circular dated 16 May 2014, the RBI has allowed direct foreign equity shareholders of Indian companies in the manufacturing, infrastructure, hotels, hospitals and software sectors to provide loans (ECBs) for general corporate purposes, which includes for working capital purposes. This would be available with the approval of the authorized dealer bank, subject to: (a) the direct foreign equity shareholder being a 25% shareholder; (b) the ECB not being used for prohibited purposes; and (c) the principal repayments to start after seven years from the date of disbursement. The same is available to all eligible borrowers for all other sectors with approval from the RBI.

Further, the above-mentioned May circular permitted companies in the manufacturing, infrastructure, hotels, hospitals and software sectors and those in training activities (but not educational institutes), research and development activities and companies supporting the infrastructure sector to obtain ECBs from direct and indirect equity holders with an approval from the authorized dealer bank.

Accordingly, foreign equity holders can now provide loans for working capital purposes and charge interest up to Libor plus 500 basis points, which is significantly higher than the loan pricing in most international markets. If the RBI can speed up the process of obtaining the loan registration number, which is required prior to disbursement, it will add teeth to the above easing.

Repayment of rupee loans

Previously, ECBs could be obtained in certain situations for refinancing rupee loans. A lot of the foreign branches/subsidiaries of Indian banks provided such ECBs, which amounted to a rollover of the loan within the Indian banking system. On 22 April 2014, the RBI issued a circular stipulating that overseas branches or subsidiaries of Indian banks would no longer be permitted to provide ECBs to be used for repayment of rupee loans since the risk remains with the Indian banking system. This is an example of the RBI’s active efforts to plug all possibilities of “evergreening”.

The above-mentioned April circular directs banks to ensure that any form of guarantee, letter of comfort or standby letter of credit on behalf of overseas joint ventures, wholly owned subsidiaries or wholly owned stepdown subsidiaries of Indian companies is to be provided only in connection with the ordinary course of overseas business.


The scope of “infrastructure sector” has been broadened to include energy, communication, transport, water and sanitation, mining, exploration and refining, and social and commercial infrastructure. Further, infrastructure finance companies have been permitted to use ECBs for on-lending to the infrastructure sector and asset finance companies for financing import of  infrastructure equipment for leasing to infrastructure projects subject to mandatory hedging of a certain percentage of their exposure. Holding companies and core investment companies falling under the RBI’s purview are permitted to raise ECBs for special purpose vehicles undertaking infrastructure projects.

It is clear from the above changes, and from the measures to facilitate long-term funding by banks to the infrastructure sector announced by the finance minister in his recent budget speech, that the government seeks to  take all possible steps to provide maximum funds to the infrastructure sector. Further, the RBI intends to encourage entities to procure foreign currency loans from entities outside India, while remaining mindful that such funds should only be used for bona fide and permitted purposes. 

Disclaimer: This article was first published in the July/August 2014 issue of the India Business Law Journal magazine. It has been authored by Jeet Sen Gupta, who is a Partner, Deep Roy, who is an Associate Partner and Megha Agarwal, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at, or for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.