Main Note - [Foreign Investment in India (Various Routes)](Foreign%20Investment%20in%20India%20(Various%20Routes).md)
## Borrowing and Lending transactions
1. These are transactions between persons resident in India and and a person resident outside India
2. Regulations - [FEM (Borrowing and Lending) Regulations, 2018](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441&Mode=0), dated December 17, 2018 (as amended from time to time)
1. Supersession:
1. [FEM (Borrowing and lending in rupees) Regulations, 2000](RBI_Regulations_20000503_FEM%20(Borrowing%20and%20lending%20in%20rupees)%20Regulations,%202000.pdf), dated May 3, 2000 as amended from time to time
2. [FEM (Borrowing or lending in foreign exchange) Regulations, 2000](RBI_Regulations_20000503_FEM%20(Borrowing%20or%20lending%20in%20foreign%20exchange)%20Regulations,%202000.pdf), dated May 3, 2000, as amended from time to time
3. Regulation 21 of [Notification No. FEMA. 120/RB-2004 dated July 7, 2004](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2126) as amended from time to time
3. It can be categorised into:
1. By Person Resident India
1. Foreign Exchange
1. Borrowing from outside India in Foreign Exchange by a Person Resident in India:
1. Borrowing by an Authorised Dealer or its branch outside India
2. Borrowing by Persons other than Authorised Dealers
1. Eligible resident entities may raise **ECB** from outside India
2. Lending in Foreign Exchange by a Person Resident in India
They are called foreign currency denominated ECL
1. Lending by an Authorised Dealer in India or its branch outside India
2. Lending by persons other than Authorised Dealer
2. Indian Rupee
1. Borrowing in Indian Rupees by a Person Resident in India:
1. Borrowing by an Authorised Dealer
2. Borrowing by persons other than Authorised Dealer
1. Eligible resident entities may raise Rupee denominated **ECB** from outside India
2. Lending in Indian Rupees by a Person Resident in India:
1. Lending by an Authorised Dealer
2. Lending by persons other than Authorised Dealer
3. Master Direction – [Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10191)
2. By Persons resident outside India
1. Borrowing and lending (in Rupees) by persons resident outside India
3. Continuation of loan in the event of change in the residential status of the lender/borrower:
**Here we only discuss about ECB and Trade Credits**
## ECB
External commercial borrowings, also known as ECB, by corporates is another option for foreign investors looking to invest in debt instruments in India. So it is not an equity funding.
1. External Commercial Borrowings (ECBs) are two-party loan contracts denominated in rupee or foreign currency and initiated by the domestic borrowers.
2. It includes:
1. Bank Loans;
2. Floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments-Optionally/Non-Convertible/Partially);
3. Trade credits beyond 3 years;
4. FCCBs - Foreign Currency Convertible Bonds;
5. FCEBs - Foreign Currency Exchangeable Bonds;
6. Financial Lease.
3. Forms of borrowing - FEM (Borrowing and Lending) Regulations, 2018 *(or the latest)*
4. Currency of borrowing - FEM (Borrowing and Lending) Regulations, 2018 *(or the latest)*
5. ==It can either be Indian Rupee (INR) or foreign-currency (FCY) denominated debt.==
6. The minimum average maturity period (when in tranches or just minimum maturity period) is 3 years, but some categories of borrowings have 1 year. _So a short-term loan by a corporate is not an ECB._
7. Here's the [difference](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510#:~:text=2.1.-,ECB%20Framework,-%3A%20The%20framework) between the two.
8. *It is only issued by corporates, and to facilitate the import of capital goods, modernization, rupee expenditures on local capital goods, overseas acquisitions, new projects and re-financing of existing debt* (Acharya 2021).
9. As of July 2025, India has never issued a foreign-currency sovereign bonds.
1. *Must Read* - [Issuance of Sovereign Bonds in Foreign Currency](https://subhashchandragarg.blogspot.com/2019/11/economic-financial-and-governance.html#:~:text=Issuance%20of%20Sovereign%20Bonds%20in%20Foreign%20Currency)
10. The legal framework for this is issued by the RBI.
11. The various provisions/laws in respect of these two types (ECBs and Trade Credit-TC)) of borrowing are included in the following two regulations framed under FEMA:
1. It is regulated by the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 notified vide [Notification No. FEMA 3(R)/2018-RB dated December 17, 2018](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441&Mode=0)
1. [Master Direction](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10191) – Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin
2. 1. Foreign Exchange Management (Guarantees) [[Department of Regulation (DoR)]], 2000, notified vide [Notification No. FEMA 8/2000-RB dated May 03, 2000](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=162&Mode=0), as amended from time to time.
3. All the instructions issued in respect of External Commercial Borrowings and Trade Credits have been compiled in this ==Master Direction - [External Commercial Borrowings, Trade Credits and Structured Obligations](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510)
4. RBI also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999, about the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents with a view to implementing the regulations framed.
12. July 1999 - The first comprehensive guidelines on External Commercial Borrowing (ECB) were issued by Government. It has been liberalised over time.
13. ECB/TC can be raised either under the automatic route or under the approval route.
1. Under the approval route, the prospective borrowers are required to send their requests to the Reserve Bank through their AD Banks for examination.
14. **Limit:** In 2022, RBI had doubled the borrowing limit for ECBs availed under the automatic route to _USD 1.5 billion or equivalent._
15. **Focus of the ECB framework:**
The approach to external commercial borrowings has been one of prudence.
1. The focus is that the ECBs need to be allocated, as it were, to their most productive use so that the ECB do not excessively expand the external liability of the economy.
2. The regime allows medium to long-term debt (minimum tenor of 3 years) to mitigate rollover risk and/or borrowing in Rupees so that currency risk is not borne by the borrowers,
3. It discourages borrowing by those who do not have any natural hedge by way of foreign currency earnings or earnings linked to the exchange rate
4. It has all-in-cost-ceiling to a tool to address the adverse selection problem (prevent poor quality borrowers from accessing risky foreign currency loans), subject to an overall aggregate limit on foreign currency liability, and for limited end use.
5. It aims at encouraging borrowings from long-term lenders/investors like sovereign wealth funds, insurance companies and pension funds.
6. A discriminatory regime channelling flow into the priority sectors with few “end uses” like real estate, capital market, equity not being permitted.
7. There is also a risk of adverse selection problem which can lead to ECBs for borrowers with high risk and speculative projects.
8. Still ECB by corporates is more open than portfolio flows.
9. ==Further relaxation in ECB depends upon the need for capital inflows as well as the investment needs, particularly for those in the infrastructure sector and those having forex earning capabilities to service ECBs.==
10. The limit of hedging for resident individuals, firms and companies based on simple declarations without documentation is USD 100 million.
16. **NCDs:**
1. ==***GRAY AREA**==* - Investment into NCDs by non-residents (other than FPIs) can be done through PIS scheme, and are considered an ECB.
1. References here:
1. Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, read with
1. [Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510), dated March 26, 2019
2. [FEM (Debt Instruments) Regulations, 2019](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12099&Mode=0), dated October 17, 2019, read with
1. [Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12765)
2. ECB framework does not apply to FPI investments in NCDs. They cannot use their FPI registration or FPI-linked bank accounts to fund an ECB. FPIs can invest either through General or VRR route.
3. Also, NCD investments in India through the FPI route ==gives greater flexibility and fewer restrictions than== subscribing to the same NCDs as a "recognised non-resident entity" under the ECB framework.
17. ECB regime has evolved in response to the investment needs of the economy as well as that of specific priority sectors and in the process has perhaps become more discretionary than necessary. The guiding principle ought to be [(Padmanabhan, G, 2015)](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=956) that no socially useful venture goes un-financed and at the same time ensuring that burgeoning foreign currency debt does not pose stability problems. This is easier said than done.
**A brief history:**
18. 2004-05:
1. [January 31, 2004](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=1457) - Revised ECB guidelines with ECB accessible by two routes, viz., (i) Automatic Route and (ii) Approval Route, was issued.
19. 2005-06:
1. [April 25, 2005](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=2212) - NGOs engaged in micro finance activities were permitted to raise ECB.
2. [August 1, 2005](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2402)- External Commercial Borrowings (ECB) was liberalised/modified.
20. 2011-12:
1. [September 23, 2011](RBI_Notification_20110923_External%20Commercial%20Borrowings%20(ECB)%20for%20the%20Infrastructure%20Sector–%20Liberalisation.pdf) - The guidelines were further liberalized, ==payment of existing Rupee loans was made a permissible end-use for ECB for the first time==, but only for companies in infrastructure sector, subject to conditions
2. [December 29, 2011](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=6907) - The guidelines for hedging arrangement for ECBs denominated in Indian Rupees extended by non-resident (foreign) equity-holders was issued.
21. 2012-13:
1. [April 20, 2012](RBI_Notification_20120420_External%20Commercial%20Borrowings%20(ECB)%20Policy%20–%20Liberalisation%20and%20Rationalisation.pdf) - Indian companies in the **power sector** will be allowed to utilise 40 per cent of the fresh ECB raised towards refinancing of the Rupee loan/s availed by them from the domestic banking system, under the approval route, subject to the condition that at least 60 per cent of the fresh ECB proposed to be raised should be utilised for fresh capital expenditure for infrastructure project(s), and other conditions mentioned in the [Sept 23, 2011](RBI_Notification_20110923_External%20Commercial%20Borrowings%20(ECB)%20for%20the%20Infrastructure%20Sector–%20Liberalisation.pdf) circular.
2. [April 24, 2012](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=7162&Mode=0) - RBI allowed External Commercial Borrowings (ECB) to be raised by airline companies for working capital as a permissible end-use, under the approval route, subject to certain conditions.
3. [June 25, 2012](RBI_Notification_20120625_External%20Commercial%20Borrowings%20(ECB)%20–%20Repayment%20of%20Rupee%20loans.pdf) - ==Framework for ECB (after infra in Sept-2011 and power sector in April-2012) ==*(only for manufacturing and infra sector)* for repayment of outstanding rupee loans, and towards capital expenditure) under the approval route was allowed, along with [other measures](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=26714) for further liberalisation of capital account transactions was further relaxed/modified.
4. [Dec 17, 2012](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=7757&Mode=0) - keeping in view the announcement made in the Union Budget for the Year 2012-13, it has been decided to allow ECB for low cost affordable housing projects as a permissible end-use, under the approval route.
22. 2013-14:
1. [June 24, 2013](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=8053) - ECB policy for the low cost affordable housing projects was modified.
2. [June 25, 2013](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=8059) - Scheme of raising ECB for working capital for Civil Aviation Sector was extended till December 31, 2013.
3. [September 18, 2013](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8434)- The definition of Infrastructure Sector under the policy was liberalised.
4. [March 26, 2014](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=8792&Mode=0) - Scheme of raising ECB for working capital for Civil Aviation Sector was extended till March 31, 2015.
23. 2014-15:
1. [July 28, 2014](https://rbi.org.in/scripts/NotificationUser.aspx?Id=9139&Mode=0) - The all-in-cost ceiling announced on [March 30, 2012](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=7101&Mode=0)was extended till December 31, 2014.
2. ==[September 3, 2014](https://rbi.org.in/scripts/NotificationUser.aspx?Id=9210) - ECBs denominated in INR could be raised through a loan from all [recognised](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=2212) non-resident ECB lenders.==
3. [November 21, 2014](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=9346) - ECB borrowers were allowed to park ECB proceeds (both under the automatic and approval routes) in term deposits with AD Category- I banks in India.
4. [January 23, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=9511) - The existing procedure for rescheduling / restructuring of ECBs was simplified.
5. [March 03, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=9583) - The all-in-cost ceiling announced on [March 30, 2012](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=7101&Mode=0)was extended till till March 31, 2015.
24. 2015-16:
1. [May 21, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=9731) - lenders were allowed to enter into swap transactions with their overseas bank which shall, in turn, enter into a back-to-back swap transaction with any AD Cat-I bank in India. Earlier, recognised non-resident ECB lenders had to mobilise Indian Rupees through a swap undertaken with an AD Cat-I bank in India.
2. [June 11, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=9782) - Scheme of raising ECB for working capital for Civil Aviation Sector was extended til March 31, 2016.
3. [June 11, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=9781) - scheme of raising ECB for low cost affordable housing projects extended for the financial year 2015-16.
4. [September 23, 2015](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=3076) - Draft framework on External Commercial Borrowings (ECB) was issued.
5. ==[November 30, 2015](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10153&Mode=0) - External Commercial Borrowings (ECB) framework was revised.==
1. ECB cases coming under the approval route were required to be considered by an Empowered Committee set up by the Reserve Bank based on the parameters stated therein.
6. ==[March 30, 2016](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=10314) - External Commercial Borrowings (ECB) framework was revised.==
25. 2016-17:
1. [April 13, 2016](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10350) - Rules for issuances of Rupee denominated bonds overseas were modified.
2. [June 30, 2016](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=10472) - It was decided, with a view to rationalize and expedite the process of giving approval, that ECB proposals (cases under the approval route) received in the Reserve Bank only above a certain threshold limit (re-fixed from time to time) be placed before the Empowered Committee.
3. [October 20, 2016](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=10652) - RBI delegateD the powers to designated AD Category-I banks to approve requests from borrowers for extension of matured but unpaid ECB, subject to certain conditions.
4. [October 27, 2016](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10667) - In the [Fourth Bi-monthly Monetary Policy Statement for the year 2016-17 released on October 04, 2016](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38224), announcement was made permitting Startup enterprises to access loans under ECB framework. RBI permitted AD Category-I banks to allow Startups to raise ECB and put in place a framework for same.
5. [November 07, 2016](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10682) - Clarifications on hedging was issued.
6. [February 16, 2017](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10865) - RBI permitted Multilateral and Regional Financial Institutions where India is a member country, to invest in the Rupee denominated bonds overseas.
26. 2017-18:
1. [June 7, 2017](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10994) - Restrictions on issuance of Masala bonds (rupee denominated bonds issued abroad) were brought in by raising the minimum maturity period for issuances over and above US$ 50 million to five years and for those below US$ 50 million to three years.
27. 2018-19:
1. [April 27, 2018](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11267) - A cap on the all-in-cost ceiling was also put in place. ^957210
2. [September 17, 2018](https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1546434®=3&lang=2) - Govt. announced tax exemption (that is reduction from 5% to 0%) to interest income on specified offshore/overseas rupee-denominated bonds (Masala Bonds).
3. [September 19, 2018](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11375) - Indian banks were allowed to participate as arrangers/underwriters/market makers/traders in RDBs issued overseas subject to applicable prudential norms.
4. [December 17, 2018](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441&Mode=0) - The regulations governing all types of borrowing and lending transactions between a person resident in India and a person resident outside India, both in foreign currency and Indian Rupee, were consolidated and the Revised Regulation called the [Foreign Exchange Management (Borrowing and Lending) Regulations, 2018](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441) was notified by the Government of India.
5. ==[January 16, 2019](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=46031) - External Commercial Borrowings (ECB) framework was revised.==
1. After the new regulations was notified, the RBI also decided to rationalise the extant framework for ECB and Rupee denominated bonds to further improve the ease of doing business.
2. The four-tiered structure was replaced.
3. Tracks I and II (under the existing framework) were merged as “Foreign Currency denominated ECB”
4. ==Track III (Rupee Denominated ECBs) and Rupee-denominated bonds overseas (RDBs/Masala Bonds) framework were combined as "Rupee Denominated ECB".==
5. ECB proceeds could not be utilised for repayment of domestic Rupee loans, except when the ECB is availed from a Foreign Equity Holder as defined in the aforesaid framework.
![[RBI_Image_20190116_New Policy Framework for External Commercial Borrowings (ECB).png|550]]
<sub>Source - Annual Report of the RBI 2018-2019</sub>
6. [February 27, 2019](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11472)
1. The end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process (CIRP) were relaxed and they were allowed to raise ECBs from the recognised lenders, except the branches/ overseas subsidiaries of Indian banks, for repayment of Rupee term loans of the target company under the approval route.
7. [March 26, 2019](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510) -
1. ECB proceeds could not be utilised for working capital purposes, general corporate purposes and repayment of Rupee loans except when the ECB is availed from foreign equity holder for a minimum average maturity period of 5 years.
2. Further, on-lending for these activities out of ECB proceeds is also prohibited.
28. 2019-20
1. [July 30, 2019](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=11636) - End-use Provisions were rationalised.
29. 2021-22
1. [April 07, 2021](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12070) - Relaxation in the period of parking of un-utilised ECB proceeds in term deposits was announced.
2. [December 08, 2021](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12204) - Changes due to LIBOR transition was notified.
30. 2022-23
1. [August 1, 2022](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=12366) - Announced on July 6, 2022, liberalisation measures on ECB policy were operationalised
1. In mid-2022, the Indian Rupee was facing aggressive depreciation pressure against a surging US Dollar. To quickly draw foreign currency into the country, the RBI temporarily doubled the ECB automatic route borrowing limit from USD 750 million to USD 1.5 billion per financial year and raised the all-in-cost ceiling by 100 basis points. Because it was a temporary shock absorber, the RBI chose not to extend it into 2023.
31. 2023-24
1. [Jun 26, 2023](https://rbi.org.in/scripts/FAQView.aspx?Id=120) - FAQs on External Commercial Borrowings (ECB) and Trade Credits was updated.
32. [Feb 9, 2026](RBI_Notification_20260209_Foreign%20Exchange%20Management%20(Borrowing%20and%20Lending)%20(First%20Amendment)%20Regulations,%202026.pdf) - Effective from Feb 16, 2026, RBI notified FEM (Borrowing and Lending) (First Amendment) Regulations, 2026 and rationalised the ECB framework by expansion of eligible borrower and recognised lender base, rationalisation of borrowing limits and restrictions on average maturity period, removal of restrictions on the cost of borrowing for ECBs, review of end-use restrictions and simplification of reporting requirements
1. The per-borrower limit under the automatic route was raised to the higher of USD 1 billion in outstanding borrowings or 300% of the borrower's net worth (up from the previous uniform USD 750 million cap)
2. [Feb 16, 2026](RBI_Press%20Release_20260216_Foreign%20Exchange%20Management%20(Borrowing%20and%20Lending)%20(First%20Amendment)%20Regulations,%202026.pdf) - It contains bank's responses on major comments.
### Advantages of foreign-currency denominated debt
1. For borrowing in foreign currency, the options are bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease.
1. Foreign currency Convertible Bonds (FCCBs) - They are bonds denominated in foreign currency with an embedded option that allows conversion into equity at a fixed (decided at time of issuance) price or they are redeemed at a premium.
2. Thus it is a hybrid (a mix of equity and debt) instrument.
3. _1993_: The scheme was started in 1993 to allow the Indian corporate sector to access global capital markets through issue of FCCBs or equity shares under the Global Depository Receipt Mechanism (GDR) and American Depository Receipt Mechanism (ADR).
4. They are attractive when FCCBs are attractive when buyers expect share price to rise, issuer wants lower coupon cost and is comfortable taking future equity dilution risk.
5. FCCBs gained popularity between 2005-2008 as a source of low-interest debt compared to bank loans, and the strong equity markets that made the conversion option attractive to investors.
2. **Advantages:** First, usually, debt is cheaper than equity.
3. Secondly, one can borrow in low-interest rate currency and reduce the overall cost by leaving the liability un-hedged.
4. If a firm has a foreign currency revenue stream it is optimal for it to borrow in foreign currency as well so that its balance sheet does not carry any currency risk.
5. Also, the interest rates had remained low for a long period in the west after 2008 crisis.
6. It is easier for most of the EMDEs to borrow in foreign currency than in local currency.
1. ==In economics, the term ‘original sin’ of excessive foreign currency borrowings by domestic entities, particularly the sovereign, coined by Barry Eichengreen and others, has been used to describe the inability of countries to borrow abroad in their own currency which lies at the heart of currency crisis and financial fragility.==
2. As Krugman points out, :....Beyond that, however, even if a sudden loss of confidence does take place, countries that have their own currencies and borrow in those currencies are simply not vulnerable to the kind of crisis so widely envisaged. So countries like Britain, the United States, or Japan (that borrow in their own currency) will never have such a crisis.
3. India is also an ‘original sinner’ of contracting debt only in a foreign currency.
7. **Overseas Rupee-Debt:**
1. Of late, given the fact that India is seen as a growth hub of the future, the interest of foreign investors has turned to rupee-denominated Indian sovereign and more important, corporate debt such as [[Foreign Investment in India (Various Routes)#Masala Bonds|Masala Bonds]].
### Risks of foreign-currency debt:
1. **Indiscriminate Borrowing**
1. Debt contracts can lead to build up of excessive leverage and thus significant risks at the firm and more importantly at the systemic level. History stands witness to this proposition
2. The currency crisis in Latin America between 1982-1989, known as [Latin American Debt Crisis of the 1980s](https://www.federalreservehistory.org/essays/latin-american-debt-crisis1980s), as well as in the Far East ([Asian Financial Crisis of 1997-98](https://www.federalreservehistory.org/essays/asian-financial-crisis)) had, in addition to other problems, implosive and indiscriminate foreign currency borrowing at the heart.
1. The East-Asian countries adopted a conscious policy of export-led growth stimulated by real depreciation of their currencies.
2. It was only much later, when capital inflows became strong, after 1992 that their currencies appreciated in real terms.
3. This currency overvaluation, declining exports, overheated real estate and stock markets and the fragile banking system *had fueled intense foreign currency speculation*, as the market participants felt that the natural course of the currency was to depreciate.
4. Given the huge short-term borrowings, the fund managers started exiting the economy with the first sign of trouble, leading to a de facto devaluation of the Thai baht.
2. **Interest rate risk**
1. The interest rates are particularly sensitive to monetary policy settings for the currency of issuance.
2. Even the widening interest rate differential (after the sudden stop or reversal of capital flows) in favour of EMDEs during the periods of tightening of monetary policy by the Federal Reserve and other major central banks may not resume the capital flows, reducing the issuances hereby proving [importance of external interest rates](https://www.imf.org/en/blogs/articles/2024/09/05/fed-rate-cuts-may-help-revive-bond-flows-to-emerging-developing-economies) for this type of capital flows.
3. **Exchange-Rate Risk:**
1. If a firm has a foreign currency revenue stream it is optimal for it to borrow in foreign currency as well so that its balance sheet does not carry any currency risk.
2. If the bulk amount borrowed by domestic corporates for longer tenors with most of the revenues are in Rupees, there is limited or no natural hedges and it can lead to currency mismatches.
3. Unhedged foreign currency liability poses a currency risk in case exchange rate encounters sudden depreciation pressure. It could also lead to severe distress to corporates and other stake-holders like banks in form of large credit loss, aggregate to systemic stability risks,
4. Panic to cover the exposure in event of sharp adverse movements in currencies could destabilize the forex market.
5. Thus hedging helps corporates to convert uncertain future cash flows to certain ones so that they can optimise business decisions based on predictable revenues and costs.
6. The financing banks factor the risk of unhedged exposures in their credit assessment framework. But the issue here is do domestic lenders assess this risk and price it appropriately while granting various facilities, especially in an environment of low pick up in credit growth? Hence the regulatory prescription for incremental provisioning and capital requirements has been introduced for bank exposures to firms with unhedged foreign currency liability.
7. Hedging is not mandatory for all ECB borrowers except in case of infrastructure companies.
1. **But why do borrowers leave their exposure unhedged/Challenges in hedging?** ^931ee1
1. <span style="background-color:#FDF6F6;">A primary concern that regulators expressed about the rise in ECB issuance is that borrowers were leaving the resulting foreign currency exposure unhedged [[GoI_Report_20150225_Sahoo Committee Report on Foreign Currency Borrowing_The Report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets (Phase II, Part II- Foreign Currency Borrowing).pdf|(Sahoo Committee Report on Foreign Currency Borrowings, DEA, Ministry of Finance, February 2015)]].</span> [^2]
2. **Cost-** In countries with relatively higher inflation and therefore higher interest rates, foreign currency borrowing in low-interest currencies appears attractive.
1. Hedging has a cost. It is the price an agent pays to convert an uncertainty to a certainty. Thus, there may be a tendency to remain unhedged and leave events in the lap of gods. Should the market conditions turn hostile, there is a mad scramble to cut loss which exacerbates the market further.
2. In ideal market conditions, there should not be arbitrage opportunity, that is the costs of a hedged foreign currency borrowing must be equal to the onshore domestic currency borrowing.
3. But, given the imperfections in Indian markets, cost of the former is likely to exceed the latter.
3. **Complacency:**
1. Too much stability breeds complacency. Stability is trap as even if there are no external crisis, adjustments also happen in value of a currency due to inflation and interest differentials, which may not happen in a smooth and gradual manner. Thus any stability over an extended period of time could be a harbinger of volatility.
2. And if there's volatility, there is also expectation of active volatility management by the Reserve Bank.
3. A one way trend in currency rates have also prompted corporates to leave their foreign exchange exposures (and generate profits if the currency moved favourably).
4. But the danger with the perpetuation of the low volatility exchange rate regime is that when the eventual adjustment does take place it will be sharp. [^2]
4. **Accounting Comfort-** Unhedged exposures also have a comfort drawn from accounting accommodation
5. **Non-availability (Lack of Liquidity) of long term forwards in onshore markets (and then lack of offshore markets):**
1. The forward market which is mainly confined up-to one year with the share of forwards beyond 1-year remains very small.
2. Non-availability of liquid long term forwards has often made hedging difficult, especially for exporters and corporates availing of external commercial borrowings.
3. They have to resort to rolling over the short term forward contracts matching with the tenors of their underlying receivables/payables.
1. However, this concern can be negated practically by rolling over a short-term (say one year) contract till the maturity of the exposure which basically replaces the volatility risk of the spot exchange rate (when unhedged) with the volatility risk of forward premia which is confined to a far narrower range, *as final price at time of maturity (when short-term forwards are rolled-over) = initial spot price + sum of forward premia.*
2. In other words, roll-overs pose price risk depending upon the magnitude of difference. in exchange rate (Spot$_2$) at the time of roll-over over previous forward price (Forward$_1$). Thus effective rate after roll-over = Forward$_2$ + (Forward$_1$ – Spot$_2$)
4. As you know, the development of long term forward market greatly depends on the extent of development of interest rate markets at the shorter end of the curve. A liquid term money market facilitates development of credible term benchmark rates that help development of long term swap markets. The long term interest rates guide the pricing of the long term forward contracts.
5. More on **[[Forex Markets#2. Forwards|forwards]]**
6. ==There are also few other **[[Forex Markets#^bb6edc|challenges]]**.==
7. The Sahoo Committee report, identifies two primary reasons (Acharya, Siddharth, 2020) why companies might not hedge their exposure post issuance:
1. first, the local derivatives market is illiquid and firms lack access to offshore markets;
2. and second, they imagine an implicit guarantee from the RBI that it wont let the currency depreciate outside a narrow band 17.
8. Hence, borrowers leave their exposure unhedged, which also explains the attractiveness of and rush for foreign currency borrowing.
9. The hedge ratio for ECBs/FCCBs was just about 34 per cent in FY 2013-14 [^3]
2. **Now is mandatory hedging the most appropriate policy?**
1. This high cost of linear hedging products like forwards and swaps may will explode if all foreign currency borrowers seek mandated hedges. This is because we do not have a market that can support hedging by all foreign currency borrowers.
2. The high cost of hedging may not incentivize any foreign currency borrowing at all.
3. And if hedging is to include options and option-based structures, how effective will the hedging be then, given the borrowers’ incentive to minimise the cost of hedging?
4. There are also other practical difficulties, though to mandate compulsory hedging by all foreign currency borrowers.
1. First, a central authority mandating how an entrepreneur should manage the risk smacks of a regression to the command and control economy.
2. Second, hedging is essentially transfer or parcelling of risk. Where are we transferring the risk in this case? To the banks’ books? Faulty mechanism design can create perverse incentives and lead to inefficient outcomes.
3. These are questions that need to be reflected upon.
3. A saner approach would perhaps be to ==create an atmosphere and incentives for recognition of risk and to make available a wide range of hedging instruments.==
8. **Roll-over risk**
1. The increasing use of bond route for overseas borrowings exposes the domestic borrowers to greater roll-over risk.
9. **But why RBI has to worry about the external deficits and debt, and the risk of defaults, that are the result of decisions of the private sector?** [^4]
1. - Industrial economies can access foreign liquidity at negligible risk spreads.
2. Emerging economies, however, face higher risk premia.
3. Large net external borrowings by some domestic entities can increase the perceived country risk, raising borrowing costs for all.
4. Defaults and the consequent loss of market access can trigger an exchange rate overshooting and capital flight, causing severe macroeconomic stress. This can be worsened if there are even external debts due for maturity.
5. While domestic liquidity can be created almost without limit, foreign currency liquidity is inherently constrained.
6. *Policy response*: one approach to internalise such externalities is to impose a tax or regulatory control on foreign borrowing to discourage excessive exposure.
10. ==A short note on [[FCCB Crisis - 2008-12|2009-12 FCCB crisis]].==
11. As a contradiction, long-term investors were not allowed by India to invest in ECBs until 2015.
12. <span style="background-color:#F0FFFF;"> Dr. Viral Acharya has argued that large amounts of rupee-denominated government debt carry risks for India that are comparable in nature to those typically associated with foreign-currency debt.</span>
> [!tip] [Is India ready for full Capital Account Convertibility? by G Padmanabhan, 2015](RBI_Speeches_20150518_Is%20India%20ready%20for%20full%20Capital%20Account%20Convertibility?.pdf)
> It is true that the ECB regime has evolved in response to the investment needs of the economy as well as that of specific priority sectors and in the process has perhaps become more discretionary than necessary. There is a need to consolidate the regime. The guiding principle ought to be that no socially useful venture goes unfinanced and at the same time ensuring that burgeoning foreign currency debt does not pose stability problems. This is easier said than done.
### Masala Bonds (Rupee-denominated bonds overseas/offshore Rupee bonds):
1. They are rupee-denominated plain vanilla bonds (a type of debt securities) issued overseas abroad in countries like London, Singapore, etc. (by eligible resident entities to recognised non-resident entities).
2. Apart from this, ECB in Indian Rupees (INR denominated ECB) could be raised through other [instruments](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510#:~:text=FCY%20denominated%20ECB-,INR%20denominated%20ECB,-i)
3. ==So INR-denominated ECB can be:==
1. Rupee-denominated borrowings from non-residents, which may be raised onshore or offshore in form of Loans (including bank loans), Floating / fixed rate notes, bonds, debentures, Preference shares (non-convertible), Trade credits beyond 3 years, Financial leases
1. But ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).
2. Foreign currency loans given domestically by AD Category I banks out of the proceeds of FCNR (B) deposits do not come under the ECB framework.
2. Rupee-denominated plain vanilla bonds issued overseas (Masala Bonds), and typically listed on London Stock Exchange (LSE).
3. *Before March 26, 2019*
1. a loan from all recognised/eligible non-resident ECB lenders (like foreign banks), where they have mobilised the Indian Rupees through swaps/outright sale undertaken with an AD-I bank in India in terms of [specified guidelines](https://rbi.org.in/scripts/NotificationUser.aspx?Id=9210) *(since September 3, 2014)*,
2. or from their [foreign equity holders](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=6733) (*since September 23, 2011)* with hedging governed by [these provisions](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=6907).
4. They are also called overseas/offshore rupee bonds.
5. Here the exchange rate risk is borne not by the Indian issuer but the overseas investor (a non-resident).
6. It also increases [[Internationalisation of INR OPEN|internationalisation of INR]].
7. *[Master Direction](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510) - External Commercial Borrowings, Trade Credits and Structured* Obligations.
8. A brief history: ^3ef3d5
1. Approached by the International Finance Corporation [(IFC)](https://www.ifc.org/en/about), a member of the World Bank Group, and recognizing that there are keen offshore investors with Indian interest which can be tapped, RBI permitted Rupee-linked bond to be floated abroad for US$ one billion and proceeds invested in Indian assets.
2. So the first Masala _Bond (on pilot basis) was_ issued in October 2013 by the IFC, an arm of World Bank, for infrastructure projects in India.
3. Because of the non-convertibility of the Rupee on the capital account, RBI had been averse to the idea of Rupee-denominated bonds in overseas markets.
4. Such an instrument, to replicate a Rupee-pay-off ([Khan H R, April 2014](RBI_Speeches_20140421_Regulating%20Capital%20Account-%20Some%20Thoughts.pdf#page=6&selection=153,0,153,18)), will need an onshore Indian asset and further, the investor will require access to the onshore derivative market to hedge their currency risk. Both of these were restricted.
5. ADB has also been issuing rupee denominated debt abroad to fund projects in India. It eliminates currency risk for ADB.
6. 2015-16:
1. [September 29, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10049) - The framework for issuance of Rupee denominated bonds overseas was issued
1. In the [Fourth Bi-monthly Policy Statement for the year 2015-16](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=35087), dated September 29, 2015, RBI had permitted Indian corporates that are eligible to raise external commercial borrowings (ECB) to issue Rupee denominated bonds overseas but within the ceiling of FPI investments in Corporate debt (rupee-denominated debt instruments, fixed in rupee terms) .
2. Thus Corporate debt limit for FPIs was re-defined as the Combined Corporate debt limit (CCDL) for FPI, which would include all foreign investments in Rupee denominated bonds issued both onshore *(that is FPI investments in rupee corporate debt securities)* and overseas (offshore rupee bonds) by Indian corporates.
1. ==In other words, CCDL = FPI investments in rupee corporate debt securities + Rupee bonds issued overseas==
2. Here “Corporate debt securities” shall include all instruments specified in sub-paragraph – A of paragraph 1 of Schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019, other than Government securities and municipal bonds as specified at clause (a) and clause (k) of that sub-paragraph, as amended from time to time.
3. So the Masala Bonds were reckoned both under Combined Corporate Debt Limit (CCDL) for FPI and External Commercial Borrowings (ECBs).
4. Thus the overall limit was to be announced/fixed in Rupee terms.
3. But these investments were [not treated as FPI investments](https://www.sebi.gov.in/legal/circulars/aug-2016/foreign-investment-in-rupee-denominated-bonds-issued-overseas-by-indian-corporates_32932.html), and were not under the purview of the SEBI (Foreign Portfolio Investor), Regulations, 2014 (replaced by [SEBI (Foreign Portfolio Investors) Regulations, 2019) on September 23, 2019](https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=3&smid=0)).
4. Thus non-resident investors (from a FATF compliant jurisdiction) could buy Masala bonds without registration as FPI, which drove the demand for these bonds.
2. [October 29, 2015](https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=130043®=3&lang=2) - Govt. clarified that the Offshore rupee-denominated bonds will attract a withholding tax of 5%, and gains arising in case of appreciation of rupee against the foreign currency, between the date of Issue and the date of redemption against the foreign currency in which the investment is made would be exempted from capital gains tax.
1. Legislative amendment in this regard were made through the Finance Bill, 2016.
*Earlier*
2. March 16, 2012 - As announced in the [Union Budget 2012-13](https://www.indiabudget.gov.in/budget2012-2013/ub2012-13/bh/bh1.pdf), effective from July 1, 2012 the withholding tax on interest income to a non-resident investor on borrowings under a loan agreement or by way of issue of long-term infrastructure bonds by certain companies (in the infrastructure sector) that comply with External Commercial Borrowings (ECB) regulations was reduced to 5% from 20%.
3. [May 20, 2013](https://dea.gov.in/files/press_release_documents/Rational_WHT_21052013.pdf) - Lower with-holding tax (5% instead of 20%) in respect of interest income was also extended to foreign investment made in bonds issued by Indian companies and Government securities.
7. 2016-17
1. [April 13, 2016](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10350) - Rules for issuances of these bonds were modified.
2. [May 2013](https://dea.gov.in/files/press_release_documents/Rational_WHT_21052013.pdf) - Lower with-holding tax (5% instead of 20%) in respect of interest income was also extended to investment made in bonds issued by Indian companies and Government securities.
3. July 14, 2016 - HDFC was the first Indian company to issue masala bonds, and had raised Rs 3,000 crore.
4. July 21, 2016. - HDFC listed (on LSE) world’s first Masala bond by an Indian corporate.
5. [[MCA_20160803_Issuance of rupee bonds to overseas investors.pdf|August 3, 2016]] - The Ministry of Corporate Affairs (MCA) clarified that the provisions of Chapter III of the Companies Act. 2013 (Act) and rule 18 of Companies (Share Capital and Debenture) Rules, 2014 would not apply to issue of rupee denominated bonds issued overseas in accordance with the ECB Policy framework.
6. August 4, 2016 - NTPC issued green masala bonds, and raised Rs 2,000 crore to finance renewable power projects.
7. [September 2016](https://www.londonstockexchange.com/discover/news-and-insights/worlds-largest-corporate-masala-bond-starts-trading-on-london-stock-exchange) - British Columbia issues world’s first Masala bond by a foreign government entity
8. [February 16, 2017](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10865) - RBI permitted Multilateral and Regional Financial Institutions where India is a member country, to invest in the Rupee denominated bonds overseas.
9. August 29, 2016 - [Box V.1-Masala Bonds](RBI_Annual%20Report_2016.pdf#page=82&selection=70,0,71,12) in RBI's Annual Report 2016
10. ==August 31, 2016 - *Press Note on [Masala Bonds](https://www.cgihamburg.gov.in/pdf/press/Masala_Bonds_pst_080916.pdf) by PP&R Division, Ministry of External Affairs*==
11. [November 3, 2016](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=10675) - RBI permitted banks to issue Rupee Denominated Bonds overseas for their capital requirements and for financing infrastructure and affordable housing. It was first proposed on [August 25, 2016](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=37875), inter alia, measures for development of Fixed Income and Currency Markets in India.
8. 2017-18:
1. [June 7, 2017](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10994) - Restrictions on issuance of Masala bonds (rupee denominated bonds issued abroad) were brought in by raising the minimum maturity period for issuances over and above US$ 50 million to five years and for those below US$ 50 million to three years.
1. Eligible Indian entities proposing to issue Masala Bonds were required to approach Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai
2. [September 22, 2017](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11127) - With effect from October 3, 2017, Masala bonds were no longer a part of the limit for FPI investments in corporate bonds (Combined Corporate debt limit (CCDL) for FPI), but part of the ECBs, and would be monitored accordingly.
1. So Combined Corporate debt limit (CCDL) for FPI [was renamed](https://www.sebi.gov.in/legal/circulars/sep-2017/foreign-portfolio-investment-in-corporate-debt-securities_36129.html) as the Corporate Debt Investment Limits (CDIL) for FPIs.
2. became the limit for FPI investments in corporate bonds *(onshore)*.
3. This freed up more space (which was added in two quarters) for investments by FPIs in onshore corporate bonds.
9. Timeline continued [[ECB (Borrowings in Rupee and FCY)#^957210|here]]
10. **Process of Issuance**
1. Eligible Indian entities proposing to issue Masala Bonds were required to approach Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. *(since June 7, 2017)*
11. Given the experience of the FCCB crisis of 2008-12, a need was felt to appropriately incentivise the move away from foreign currency debts to Rupee debts even as the position in respect of overall indebtedness in prudentially managed.
12. *search keyword* - Issuance of Rupee Denominated Bonds.
13. Bond issuance overseas in rupees, is difficult when compared to onshore issuance of bonds in rupees
>[Box V.1-Masala Bonds](RBI_Annual%20Report_2016.pdf#page=82&selection=70,0,71,12) in RBI's Annual Report 2016, dated August 29, 2016
>[Box I: Masala Bonds](RBI_Monthly_Bulletin_Article_20171211_Anatomy%20of%20India’s%20External%20Debt-Assessment%20of%20Key%20Trends.pdf#page=9&selection=112,0,113,12) in the article "Anatomy of India’s External Debt: Assessment of Key Trends" in RBI-Bulletin Dec-2017.
### FCEBs - Foreign Currency Exchangeable Bonds
1. Feb 15, 2008 - The Government of India, Ministry of Finance, Department of Economic Affairs notified the "Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008".
2. [Sept 23, 2008](RBI_Notification_20080923_Issue%20of%20Foreign%20Currency%20Exchangeable%20Bonds%20Scheme,%202008.pdf) - RBI operationalised the FCEB scheme
### Summary - Types of ECB (in terms of currency)
1. ECB can be foreign-currency (FCY) or INR-denominated debt.
1. FCY-denominated ECB or ECB in foreign currency (FCY)
2. INR-denominated ECB
1. Rupee-denominated borrowings from non-residents, which may be **raised onshore or offshore** in form of Loans (including bank loans), Floating / fixed rate notes, bonds, debentures, Preference shares (non-convertible), Trade credits beyond 3 years, Financial leases
1. But ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors
2. Foreign currency loans given domestically by AD Category I banks out of the proceeds of FCNR (B) deposits do not come under the ECB framework.
2. Plain vanilla Rupee-denominated bonds issued overseas (Masala Bonds), and typically listed on London Stock Exchange (LSE).
3. *Earlier (Before March 26, 2019)-* In case of Rupee denominated ECB, the eligible non-resident lender (Track III), other than foreign equity holders, was required to mobilise Indian Rupees through swaps/outright sale undertaken through an AD Category I bank in India.
### ECBs vs FPI
1. FPI in debt does not have requirement like all-in costs, minimum average maturity period and end use restrictions.
1. Short-term debt cannot be issued under ECB as there minimum maturity requirements. There are no short-term investment limits for FPIs in corporate debt and minimum residual maturity for a new investment is only a year.
2. ECB route has all-in cost ceilings. FCY cap is higher than that of INR.Thus borrowers with lower credit rating cannot issue debt under ECB, that is debt at higher rates.
3. There is an hedging requirement
2. ECBs can be used to pay off loans but only for manufacture / infrastructure sectors availed for capital expenditure
3. No registration for the lender like FPI or FVCI.
1. But the lending entity should be from an FATF or IOSCO compliant jurisdiction
4. Eligibility rules for the lender are simplified. There are no categories here.
5. Under any other offshore debt options in India (FVCI or FPI), the lender entity needs to be registered with SEBI as an FVCI or FPI. However, ECB permits unregistered entities to lend to Indian entities without registration, subject to the lending entity being from an FATF or IOSCO compliant jurisdiction.
6. Reporting in ECB process is relatively easier
7. All ECB must comply with minimum maturity requirements which are quite long. This generally rules out any short-term funding options under the ECB route.
8. The ECB route also has all-in cost ceilings imposed, which are not very attractive. [^1]
9. ECB requires no SEBI registration, and are governed by *RBI–FEMA (ECB framework), while FPI are SEBI-FEMA (FPI framework)*
## Trade Credits
1. [Trade Credits](Trade%20Credits.md)
## Data Releases
1. The data on [External Commercial Borrowings (ECB)](https://rbi.org.in/Scripts/ECBView.aspx) is released on monthly basis.
2. RBI Bulletin - External Commercial Borrowings (ECBs) – Registrations
3. RBI Bulletin - Standard Presentation of BoP in India as per BPM6 (US $ Million)
## Related Notes
1. [Trade Credits](Trade%20Credits.md)
## Act/Regulations/Master Directions
^3dfd63
Transactions on account of External Commercial Borrowings (ECB) and Trade Credit (TC) are governed by sub-section 2 of section 6 of the FEM Act (FEMA), 1999 (Act 42 of 1999). Various provisions in respect of these two types of borrowing are included in the following Regulations framed under FEMA: ^66f039
1. FEM (Borrowing and Lending) [Regulations](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441&Mode=0), 2018 (Dec 17, 2018)
**It replaces the following:**
1. FEM (Borrowing or lending in foreign exchange) [Regulations](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=157&Mode=0), 2000, as amended from time to time.
2. FEM (Borrowing and lending in rupees) [Regulations](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=158&Mode=0), 2000, as amended from time to time.
3. Regulation 21 of FEM (Transfer or Issue of Any Foreign Security) (Amendment) [Regulations](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2126), 2004, as amended from time to time.
2. **Master Directions**
1. March 26, 2019 - ==[Master Direction-External Commercial Borrowings, Trade Credits and Structured Obligations](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510) ==
It replaces the following:
1. [Master Direction](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10204) - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, dated January 1, 2016, as amended from time to time.
2. [Notifications/circulars](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510#APP:~:text=List%20of%20Notifications/Circulars%20which%20have%20been%20consolidated%20in%20this%20Master%20Direction) - List of underlying notifications/circulars which form the basis of the above Master Direction
2. [Master Direction](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10191) – Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin
3. FEM (Guarantees) [Regulations-Draft](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4703), 2025.
1. FEM (Guarantees) Regulations, 2000, as amended from time to time *(withdrawn)*
4. ==[FAQ](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=1999) on External Commercial Borrowings (ECB) and Trade Credits.==
## References
1. RBI. (June 30, 2009). Annual Report-2009. [pdf](RBI_Annual%20Report_2009.pdf)
2. DPIIT. [FDI Policy](https://dpiit.gov.in/foreign-direct-investment/foreign-direct-investment-policy). Ministry of Commerce & Industry, Government of India. Retrieved August 6, 2025.
3. ==Department of Economic Affairs, Ministry of Finance. (2015, February 25). *Sahoo Committee Report on Foreign Currency Borrowings-The Report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets (Phase II, Part II- Foreign Currency Borrowing)*. [[GoI_Report_20150225_Sahoo Committee Report on Foreign Currency Borrowing_The Report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets (Phase II, Part II- Foreign Currency Borrowing).pdf|pdf]]==
4. Viral V. Acharya, & Siddharth Vij. (2020, November). _Foreign currency borrowing of corporations as carry trades: Evidence from India_ (NBER Working Paper No. 28096). National Bureau of Economic Research. [Link](https://www.nber.org/papers/w28096) | [[Paper_202011_Viral V. Acharya, Siddharth Vij. (2020, November). _Foreign currency borrowing of corporations as carry trades- Evidence from India. National Bureau of Economic Research(NBER Working Paper No. 28096).pdf|pdf]]
5. Viral V. Acharya. (2017, December 14). _Global spillovers: Managing capital flows and forex reserves._ Keynote address at the NSE-NYU Conference on Indian Financial Markets, Mumbai, India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1051) | [[RBI_Speech_20171214_Global spillovers- Managing capital flows and forex reserves.pdf|pdf]]
6. Viral V. Acharya. (2020). *Fiscal Dominance – A Theory of Everything in India*. Indian Public Policy Review 2020, 1(2): 1-15. [[Paper_2020_Viral V Acharya.Fiscal Dominance – A Theory of Everything in India. Indian Public Policy Review 2020.pdf|pdf]]
7. Ranjeev. (January 21, 2022). *India’s External Commercial Borrowings: Determinants and Optimal Hedge Ratio*. RBI WPS (DEPR): 03/2022. [Link](https://rbi.org.in/scripts/PublicationsView.aspx?Id=20994)
8. August 29, 2016 - [Box V.1-Masala Bonds](RBI_Annual%20Report_2016.pdf#page=82&selection=70,0,71,12) in RBI's Annual Report 2016
9. [[Foreign Investment in India (Various Routes)#References|More References here]]
[^1]: Viral V. Acharya. (2017, December 14). _Global spillovers: Managing capital flows and forex reserves._ Keynote address at the NSE-NYU Conference on Indian Financial Markets, Mumbai, India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1051) | [[RBI_Speech_20171214_Global spillovers- Managing capital flows and forex reserves.pdf|pdf]]
[^2]: Viral V. Acharya, & Siddharth Vij. (2020, November). _Foreign currency borrowing of corporations as carry trades: Evidence from India_ (NBER Working Paper No. 28096). National Bureau of Economic Research. [Link](https://www.nber.org/papers/w28096) | [[Paper_202011_Viral V. Acharya, Siddharth Vij. (2020, November). _Foreign currency borrowing of corporations as carry trades- Evidence from India. National Bureau of Economic Research(NBER Working Paper No. 28096).pdf|pdf]]