How to Structure Cross-Border Borrowing and Lending Transactions Under FEMA 2026 Regulations

Cross-border borrowing and lending is a critical component of India's foreign exchange regulatory framework. For companies seeking to raise capital from overseas sources, External Commercial Borrowings (ECBs) offer a viable and often cost-effective alternative to domestic financing. However, these transactions are governed by a comprehensive set of regulations under the Foreign Exchange Management Act, 1999 (FEMA). The Reserve Bank of India (RBI) recently introduced significant changes to this framework through the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, which came into effect on February 16, 2026. This guide provides a step-by-step walkthrough for structuring cross-border borrowing and lending transactions under the updated regulatory framework, covering eligibility, pricing, maturity requirements, end-use restrictions, and compliance obligations.

Overview of the 2026 Amendment

The RBI issued Notification No. FEMA 3(R)(5)/2026-RB dated February 9, 2026, amending the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. The amended regulations became effective on February 16, 2026. These changes represent a substantial overhaul of the ECB framework, introducing greater flexibility in certain areas while tightening compliance requirements in others. The amendments reflect the RBI's intent to align India's cross-border borrowing regime more closely with global market practices while maintaining robust safeguards against foreign exchange risk.

Key changes introduced by the 2026 amendment include:

• Removal of all-in-cost ceiling restrictions for ECBs

• Revised and broadened eligibility criteria for borrowers

• Codification of end-use restrictions under Regulation 3A

• Enhanced reporting mechanisms and introduction of the "untraceable borrowers" designation

• Express provisions addressing ECBs by entities undergoing the Corporate Insolvency Resolution Process (CIRP)

Who Can Borrow? Eligible Borrowers Under the 2026 Framework

Under the amended regulations, any person resident in India (other than an individual) who is incorporated, established, or registered under any Central or State Act is eligible to raise ECBs. This broad definition encompasses companies incorporated under the Companies Act, limited liability partnerships (LLPs), statutory bodies, and other entities formed under Indian law. The deliberate exclusion of individuals ensures that ECBs remain a corporate financing tool rather than a personal borrowing mechanism.

There are two important nuances that borrowers must be aware of:

• Entities undergoing CIRP: Entities undergoing the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016, may raise ECBs, but only if such borrowing is expressly permitted under the approved resolution plan or has been authorised by the Committee of Creditors. This is a welcome clarification, as the 2018 regulations were silent on this point.

• Entities with pending FEMA investigations: Entities facing pending investigations under FEMA are not automatically disqualified from raising ECBs. However, they are required to make full disclosure of the pending investigation to the AD Category I bank and the lender at the time of raising the ECB. Failure to disclose may result in regulatory consequences.

Recognised Lenders: Who Can Lend?

The 2026 framework recognises three categories of eligible lenders for cross-border lending transactions:

• A person resident outside India

• A branch located outside India of an entity regulated by the RBI

• A financial institution established or operating in an International Financial Services Centre (IFSC), such as GIFT City in Gujarat

The inclusion of IFSC-based financial institutions as recognised lenders is a significant development. It is designed to bolster the role of India's IFSCs as global financial hubs and provide borrowers with an additional, domestically accessible source of foreign currency financing. Lenders in all three categories must comply with applicable anti-money laundering (AML) and know-your-customer (KYC) requirements as prescribed by the RBI.

All-in-Cost Ceiling: A Key Liberalisation

One of the most significant changes introduced by the 2026 amendment is the removal of restrictions on the all-in-cost ceiling for ECBs. Under the previous framework, the RBI prescribed specific benchmarks (such as SOFR plus a fixed spread) as the maximum permissible cost of borrowing. The 2026 regulations eliminate this cap entirely, allowing borrowers and lenders to negotiate pricing based on prevailing market conditions, the creditworthiness of the borrower, and mutually agreed commercial terms.

This liberalisation is expected to have several positive effects:

• It will attract a wider pool of international lenders, including those who were previously deterred by the cost ceiling constraints

• Borrowers with lower credit ratings or higher risk profiles will find it easier to access foreign capital on commercially negotiated terms

• India's ECB framework will align more closely with international borrowing practices, where cost is determined by market dynamics rather than regulatory prescription

Minimum Average Maturity Period (MAMP)

The 2026 regulations retain the concept of a Minimum Average Maturity Period (MAMP) for ECBs. The general MAMP remains at 3 years. However, the amended framework introduces an important relaxation for the manufacturing sector: borrowers engaged in manufacturing activities may raise ECBs with a shorter maturity period of 1 to 3 years, subject to an aggregate cap of USD 150 million per financial year.

Key points to note regarding MAMP:

• The 3-year general MAMP applies to all sectors unless a specific exception is available under the regulations

• Manufacturing sector borrowers seeking the shorter maturity must demonstrate that the end-use of the ECB is directly linked to manufacturing activities

• Prepayment of an ECB before the expiry of the MAMP is subject to RBI guidelines and may require prior approval depending on the amount and timing

End-Use Restrictions Under Regulation 3A

Regulation 3A of the amended framework codifies the prohibited end-uses for ECB proceeds. This codification replaces the earlier approach of addressing end-use restrictions through separate RBI circulars, providing greater clarity and legal certainty. Understanding these restrictions is essential for structuring any cross-border borrowing transaction, as non-compliance can result in penalties under FEMA.

Prohibited End-Uses

• Investment in real estate activities (excluding construction and development of industrial parks, integrated townships, and affordable housing projects approved under government schemes)

• Agricultural or plantation activities

• Trading in the domestic capital market or investment in capital market instruments

• Use of ECB proceeds for acquiring shares in Indian companies, except as permitted under specific RBI circulars

• On-lending to other entities for purposes that are themselves prohibited under the regulations

Carve-Outs and Exceptions

• Non-Banking Financial Companies (NBFCs) and housing finance companies may use ECB proceeds for on-lending, subject to compliance with their respective sectoral regulations

• Infrastructure companies with long-term project financing needs may apply for specific RBI approval for end-uses not expressly covered under the general framework

Hedging Requirements

The 2026 regulations continue to emphasise the importance of managing foreign exchange risk. Borrowers raising ECBs denominated in foreign currency are expected to hedge a portion of their exposure, particularly where the ECB is being used for purposes that generate revenue in Indian rupees (and therefore lack a natural hedge). The specific hedging requirements are prescribed by the RBI through periodic circulars and may vary depending on the nature and tenure of the ECB.

Key considerations when addressing hedging obligations:

• Infrastructure borrowers with revenue streams in foreign currency (constituting a natural hedge) may seek exemptions from mandatory hedging requirements

• The hedging ratio and instruments used must be reported to the AD Category I bank as part of ongoing compliance

• Commonly used hedging instruments include forward contracts, options, and cross-currency swaps

• The cost of hedging should be factored into the overall cost-benefit analysis when comparing an ECB with domestic borrowing alternatives

Reporting Obligations: Form ECB 1 and Form ECB 2

Compliance with reporting requirements is a critical aspect of the ECB framework. The 2026 regulations mandate two key reporting forms, both of which must be filed through an Authorised Dealer (AD) Category I bank.

Form ECB 1 is the initial registration form, filed at the time of raising the ECB. It captures essential details including the identity of the borrower and lender, the loan amount, currency denomination, maturity period, all-in-cost, and the proposed end-use of the funds.

Form ECB 2 is the periodic reporting form, filed on a monthly basis. It provides updated information on drawdowns, repayments, outstanding balances, and any changes to the terms originally reported in Form ECB 1.

A significant new feature of the 2026 framework is the "untraceable borrowers" mechanism. If an entity fails to comply with reporting requirements or KYC norms, the RBI may designate it as an "untraceable borrower." This designation carries serious consequences:

• Suspension of the entity's ability to raise further ECBs

• Enhanced scrutiny by the AD Category I bank on all foreign exchange transactions

• Potential enforcement action and penalties under FEMA

Comparison with the Previous Framework (2018 Regulations)

Understanding how the 2026 amendments differ from the 2018 regulations is essential for practitioners who have been working under the earlier framework. The following comparison highlights the key differences:

• All-in-cost ceiling: The 2018 regulations prescribed a benchmark-linked ceiling (such as SOFR plus a fixed spread). The 2026 regulations remove this ceiling entirely, allowing market-driven pricing.

• Eligible borrowers: The 2018 framework maintained a more restrictive list of eligible borrowers. The 2026 framework broadens eligibility to include any non-individual person resident in India who is incorporated, established, or registered under any Central or State Act.

• MAMP: Both frameworks maintain a 3-year general MAMP. The 2026 regulations introduce the manufacturing sector relaxation, permitting a shorter maturity of 1 to 3 years for up to USD 150 million per financial year.

• End-use restrictions: The 2018 regulations addressed end-use restrictions primarily through separate RBI circulars. The 2026 framework codifies these restrictions directly under Regulation 3A, providing greater legal certainty.

• Reporting: Both frameworks require Form ECB 1 and Form ECB 2. The 2026 regulations add the "untraceable borrowers" mechanism as an enforcement tool for non-compliance with reporting and KYC norms.

• CIRP borrowers: The 2018 regulations were silent on whether entities undergoing CIRP could raise ECBs. The 2026 regulations expressly address this, permitting such borrowing subject to resolution plan approval or Committee of Creditors authorisation.

Practical Tips for Structuring Cross-Border Transactions

Drawing on the regulatory framework outlined above, here are practical recommendations for entities looking to structure cross-border borrowing and lending transactions under the 2026 regulations:

• Conduct a thorough eligibility assessment before approaching potential lenders. Confirm that the borrower is incorporated, established, or registered under a Central or State Act and is not disqualified under any provision.

• Negotiate all-in-cost freely, but document the commercial rationale. While the cost ceiling has been removed, the AD Category I bank and the RBI may still seek justification for unusually high pricing.

• Ensure end-use compliance from the outset. Map the proposed use of funds against Regulation 3A before finalising the loan agreement. Any deviation after disbursement can trigger penalties.

• Factor in hedging costs when comparing ECB pricing with domestic borrowing alternatives. An ECB that appears cheaper before hedging may not be after accounting for the cost of forward cover or options.

• Engage your AD Category I bank early in the process. The AD bank plays a central role in ECB transactions, from filing Form ECB 1 to ongoing Form ECB 2 reporting. Early engagement helps identify potential issues before they become obstacles.

• Maintain meticulous records of all filings, drawdowns, repayments, and hedging transactions. The "untraceable borrowers" mechanism means that lapses in reporting can have severe consequences.

• For manufacturing sector borrowers, evaluate whether the shorter MAMP option (1 to 3 years, up to USD 150 million) is beneficial given the specific financing needs and repayment capacity of the business.

• If the borrower is undergoing CIRP or faces pending FEMA investigations, obtain specialised legal advice on disclosure requirements and ensure that all necessary approvals are documented before proceeding.

• Consider the IFSC route for lenders seeking a streamlined regulatory framework. Financial institutions operating in IFSCs such as GIFT City benefit from a distinct regulatory environment that may offer operational efficiencies.

• Build compliance checkpoints into the transaction timeline. From pre-signing due diligence through to post-disbursement reporting, a structured compliance calendar will help avoid missed deadlines and regulatory scrutiny.

Conclusion

The FEMA (Borrowing and Lending) (First Amendment) Regulations, 2026, represent a meaningful step toward liberalising India's cross-border borrowing and lending framework. By removing the all-in-cost ceiling, broadening borrower eligibility, and codifying end-use restrictions under Regulation 3A, the RBI has created a more transparent and market-friendly environment for ECB transactions. At the same time, the introduction of the "untraceable borrowers" mechanism and the enhanced reporting requirements signal that compliance remains a top priority.

Entities looking to raise or provide cross-border financing must approach these transactions with careful planning, robust documentation, and a clear understanding of the regulatory guardrails. Engaging experienced legal counsel, coordinating closely with your AD Category I bank, and building compliance into every stage of the transaction lifecycle are essential steps in ensuring a smooth and successful outcome.

For assistance with structuring cross-border borrowing and lending transactions or navigating FEMA compliance, contact Sansa Legal for a consultation with our regulatory advisory team.