ECB Rules: How Foreign Parents Can Lend to Indian Subsidiaries

Why Foreign Parent Lending Through ECBs Matters

When a foreign parent company sets up a wholly owned subsidiary or joint venture in India, one of the most critical decisions is how to fund the Indian entity. While equity infusion through Foreign Direct Investment (FDI) is the most common route, debt funding through External Commercial Borrowings (ECBs) offers significant advantages: interest payments are tax-deductible for the Indian subsidiary, the parent retains seniority in capital structure, and profits can be repatriated as interest payments rather than dividends — often at lower withholding tax rates under applicable DTAAs.

This article is part of our Complete Guide to FEMA Compliance for Foreign Companies in India. Here we focus specifically on how foreign parent companies can lend to their Indian subsidiaries using the External Commercial Borrowings (ECB) framework, which underwent a major overhaul in February 2026.

The Reserve Bank of India (RBI) issued the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, on 16 February 2026, consolidating and modernizing provisions that were previously scattered across the FEMA (Borrowing and Lending) Regulations 2018, the Master Direction on ECBs 2019, and numerous circulars and FAQs. This is the most significant liberalization of India's ECB regime in over a decade.

Who Can Borrow: Eligible Indian Entities

Under the 2026 framework, any person resident in India incorporated, established, or registered under a Central or State Act can raise ECBs. This includes:

• Private limited companies (including wholly owned subsidiaries of foreign companies)
• Limited Liability Partnerships (LLPs) — now expressly clarified as eligible, resolving a long-standing ambiguity
• Public limited companies
• Entities under Corporate Insolvency Resolution Process (CIRP) — if the resolution plan permits ECB borrowing
• Entities under restructuring — if expressly authorized

Individuals resident in India remain excluded. Importantly, FDI eligibility is no longer a prerequisite — an entity need not be eligible for FDI to raise ECBs, a significant change from the earlier framework.

A Critical Clarification for Foreign Subsidiaries

A wholly owned subsidiary or majority-owned subsidiary of a foreign company in India is an Indian-incorporated entity and is fully eligible to borrow through ECBs from its foreign parent. The subsidiary's status as a foreign-owned entity does not restrict its ECB eligibility.

Who Can Lend: Recognized Lenders Under 2026 Rules

The 2026 amendments dramatically expanded the universe of recognized lenders. Under the new framework, ECBs can be raised from:

1. Any person resident outside India — including individuals, which was previously restricted. This means a foreign parent company, whether a corporation, partnership, or even an individual promoter, can lend to the Indian subsidiary.
2. Overseas branches of RBI-regulated entities — branches of Indian banks operating abroad can extend INR-denominated ECBs.
3. IFSC-based financial institutions — entities established in India's International Financial Services Centres (such as GIFT City) qualify as recognized lenders.

Foreign Equity Holder as Lender

The regulations specifically recognize foreign equity holders as eligible lenders. A foreign equity holder qualifies if it:

• Directly holds 25% or more equity in the Indian borrower, OR
• Indirectly holds 51% or more equity in the Indian borrower, OR
• Is a group company sharing a common overseas parent with the Indian borrower

The equity must not be divested during the life of the ECB loan. This provision is tailor-made for foreign parent company lending to Indian subsidiaries and provides clear regulatory authority for such transactions.

Removal of FATF/IOSCO Compliance Requirement

Previously, lenders had to be resident in jurisdictions compliant with FATF (Financial Action Task Force) or IOSCO (International Organisation of Securities Commissions) standards. The 2026 amendments have removed this requirement entirely, meaning parent companies from any jurisdiction worldwide can now lend to their Indian subsidiaries.

Borrowing Limits: How Much Can the Indian Subsidiary Borrow?

The 2026 framework introduces a dual-threshold borrowing limit under the automatic route (no RBI approval required):

This represents a substantial increase from the earlier limit. For a newly incorporated Indian subsidiary with limited net worth, the USD 1 billion ceiling effectively governs — meaning even a small subsidiary can potentially raise very large ECBs under the automatic route.

Manufacturing Sector Flexibility

Manufacturing companies enjoy additional flexibility: they can raise ECBs with a Minimum Average Maturity Period (MAMP) between 1 and 3 years, subject to an aggregate outstanding cap of USD 150 million under such shorter-tenor borrowings. This is particularly useful for working capital financing from the parent company.

What Counts Toward the Limit

Non-fund-based credit facilities (such as guarantees) and mandatory convertible securities (like compulsorily convertible debentures) do not count toward the ECB borrowing limits. This creates additional headroom for structuring.

Minimum Average Maturity Period (MAMP)

The 2026 framework standardizes the MAMP at 3 years for all ECBs, replacing the earlier multi-tier structure that had different MAMPs for different purposes and amounts. This simplification is a welcome change for structuring parent-subsidiary loans.

Exceptions to the 3-Year MAMP

• Manufacturing companies: Can borrow with MAMP between 1 and 3 years (up to USD 150 million outstanding)
• Conversion to equity: MAMP requirement is waived when the ECB is converted into equity
• Refinancing: MAMP is waived for refinancing of existing ECBs
• Corporate restructuring: MAMP is waived during mergers, demergers, or amalgamations
• Debt waiver: MAMP requirement does not apply when the lender waives the debt

For a foreign parent lending to its Indian subsidiary, the 3-year MAMP means the loan must have a weighted average maturity of at least 3 years. This can be structured with bullet repayment at maturity, equal installments, or any other amortization schedule — as long as the weighted average works out to 3 years or more.

All-in-Cost: The End of Regulated Pricing

One of the most significant changes in the 2026 framework is the removal of the all-in-cost ceiling. Under the earlier regime, the all-in-cost of an ECB was capped at a benchmark rate (such as SOFR or the applicable currency benchmark) plus a fixed spread. This ceiling has been entirely eliminated.

New Pricing Rules

• Unrelated party ECBs: The cost of borrowing is market-determined, with no regulatory ceiling.
• Related party ECBs (including parent-subsidiary loans): The cost must be at arm's length — meaning at fair market rates, not artificially favorable or unfavorable. This aligns with transfer pricing requirements under the Income Tax Act.
• ECBs with maturity under 3 years (manufacturing sector): Must comply with the trade credit cost ceiling.

Transfer Pricing Implications

For parent-subsidiary ECBs, the arm's length requirement means the interest rate must be benchmarked against comparable loans between unrelated parties. Factors considered include:

• The credit rating of the Indian borrower (or a proxy if unrated)
• Loan tenor and repayment structure
• Currency denomination
• Security and guarantee arrangements
• Prevailing market rates for comparable ECBs

A transfer pricing study documenting the arm's length nature of the interest rate is strongly recommended. Indian tax authorities routinely scrutinize related-party ECB interest rates during transfer pricing audits.

End-Use Restrictions: What the Money Can Be Used For

The 2026 regulations establish a negative list of prohibited end-uses, meaning ECB proceeds can be used for any purpose not specifically prohibited.

Permitted End-Uses (Non-Exhaustive)

• Capital expenditure (plant, machinery, equipment)
• Working capital requirements
• General corporate purposes
• Acquisition financing (including acquisition of control in target companies — a new addition)
• On-lending by eligible financial institutions
• Specific real estate projects (industrial parks, Special Economic Zones)
• Refinancing of existing ECBs

Prohibited End-Uses

• Chit fund or Nidhi company activities
• General real estate business and farmhouse construction
• Agriculture and animal husbandry (with exceptions for seeds, pisciculture, and controlled-environment cultivation)
• Plantations (except tea, coffee, rubber, cardamom, palm oil, and olive oil)
• Trading in Transferable Development Rights (TDRs)
• Speculative securities transactions (except for corporate restructuring and acquisition of control)
• Repayment of domestic INR loans that originally funded prohibited purposes or are classified as Non-Performing Assets (NPAs)
• On-lending for prohibited purposes

For most foreign parent companies funding their Indian subsidiaries, these restrictions are unlikely to be an issue — standard business operations, capex, and working capital are all permitted.

Reporting and Compliance Requirements

Form ECB-1: Loan Registration

Before the first drawdown, the Indian borrower must file Form ECB-1 through its Authorized Dealer (AD) Category-I bank. This form captures the loan terms and conditions and is submitted for issuance of a Loan Registration Number (LRN). No drawdown is permitted without an LRN.

Any changes to the loan parameters — such as interest rate adjustment, maturity extension, or change in lender — must be reported through a revised Form ECB-1 within 7 calendar days of the month-end in which the change occurred.

Form ECB-2: Ongoing Reporting

Form ECB-2 captures receipt of ECB proceeds and debt servicing details. It must be filed within 7 calendar days of the month-end. This replaces the earlier monthly certification requirement, which has been eliminated.

Non-Reporting Consequences

The 2026 regulations have tightened the consequences for non-reporting. A borrower that fails to file for 4 consecutive quarters (previously 8 quarters) is classified as an "untraceable borrower," triggering enhanced regulatory scrutiny.

Copies of Loan Agreements

A notable simplification: copies of loan agreements are no longer required to be submitted to the RBI. The AD bank retains them for its records.

Hedging: No Longer Mandatory

The 2026 framework has eliminated mandatory hedging requirements. Previously, certain categories of borrowers (such as infrastructure finance companies) were required to hedge 70% of their foreign currency exposure. This is now left to the commercial judgment of the borrower.

However, for a foreign parent lending in a foreign currency (USD, EUR, GBP) to its Indian subsidiary that earns revenue in INR, hedging remains a prudent business decision. Currency fluctuations can significantly impact the effective cost of the loan. Common hedging instruments include forward contracts, options, and cross-currency swaps available through AD Category-I banks.

Step-by-Step Process: Foreign Parent Lending to Indian Subsidiary

1. Structure the loan: Determine the amount (within the USD 1 billion / 300% of net worth limit), currency, interest rate (arm's length), repayment schedule (ensuring 3-year MAMP), and permitted end-use.
2. Transfer pricing documentation: Prepare a benchmarking study for the interest rate. Obtain comparable loan data from databases such as Bloomberg, Refinitiv, or the RBI's ECB data.
3. Board resolution: The Indian subsidiary's board must pass a resolution approving the ECB, specifying the amount, tenor, rate, lender, and end-use.
4. Loan agreement: Execute a loan agreement between the foreign parent (lender) and the Indian subsidiary (borrower). The agreement must comply with FEMA requirements and specify all material terms.
5. File Form ECB-1: Submit through the AD Category-I bank for LRN issuance. No drawdown until LRN is obtained.
6. Drawdown and utilization: Receive funds in the designated foreign currency account. Utilize proceeds only for permitted end-uses.
7. Ongoing compliance: File Form ECB-2 within 7 days of month-end. Deduct withholding tax on interest payments under Section 195 / applicable DTAA rate. File Form 15CA/15CB for each interest remittance. Include ECB details in the FLA return (due by 15 July each year).
8. Repayment: Repay principal and interest as per schedule. File Form 15CA/15CB for each remittance. Update Form ECB-1 if any parameters change.

Tax Efficiency: Why ECBs Can Be Better Than Equity

For foreign parent companies, ECB lending to the Indian subsidiary offers several tax advantages over pure equity funding:

Thin Capitalization Rules (Section 94B)

India's thin capitalization rules under Section 94B limit the interest deduction on associated enterprise borrowings to 30% of EBITDA or INR 1 crore, whichever is higher. For parent-subsidiary ECBs, this means the Indian subsidiary cannot deduct interest exceeding 30% of its EBITDA. Excess interest can be carried forward for 8 assessment years. This is a critical constraint that must be factored into the debt-equity mix.

Key Takeaways

• The RBI's February 2026 ECB amendments are the most significant liberalization in over a decade — any person resident outside India (including individuals) can now lend to eligible Indian entities.
• Foreign equity holders with 25%+ direct or 51%+ indirect ownership are specifically recognized as eligible lenders, providing clear regulatory backing for parent-subsidiary loans.
• Borrowing limits have been raised to the higher of USD 1 billion or 300% of net worth under the automatic route, with no RBI approval required.
• The all-in-cost ceiling has been eliminated, but related-party ECBs must be at arm's length — prepare a transfer pricing study to defend the interest rate.
• The MAMP is standardized at 3 years (1-3 years for manufacturing, up to USD 150 million), and mandatory hedging has been eliminated.
• Compliance requires Form ECB-1 (before drawdown), Form ECB-2 (monthly), and proper withholding tax/Form 15CA-15CB filing on every interest payment.