New Norms To Link Debt Limit to Companies’ Financial Strength

Mumbai: The Reserve Bank of India (RBI) has proposed a comprehensive overhaul of rules regarding external commercial borrowings (ECBs). The draft guidelines for 2025 mark the most significant restructuring since the framework established in December 2018. The new regulations will replace uniform caps with borrowing limits that are now tied to the financial strength of the borrower.

Companies will be allowed to raise up to $1 billion or 300% of their net worth, whichever amount is greater. In contrast, financial sector firms that are regulated by the RBI, Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority of India (Irdai), or the Pension Fund Regulatory and Development Authority (PFRDA) will not face any borrowing cap.

The draft guidelines also eliminate rigid borrowing cost frameworks, establishing interest rates based on market conditions and overseen by authorized dealer banks. Previously, companies were limited to raising up to $750 million annually, with a temporary ceiling of $1.5 billion allowed until December 2022.

Moreover, the new rules expand eligibility beyond firms that are open to foreign direct investment. Now, all resident entities incorporated under a Central or State Act, with the exception of individuals, can utilize this borrowing route.

Key Changes in the Revamp of Rules

  • Companies can now borrow $1 billion or 300% of their net worth, whichever is higher.
  • Financial sector firms regulated by RBI, Sebi, Irdai, or PFRDA face no borrowing cap.
  • The draft removes strict borrowing costs, allowing rates to be set according to market conditions under authorized dealer bank supervision.
  • Firms under insolvency or restructuring, or those under investigation, may still borrow funds, provided there is disclosure to their banks.
  • Eligibility for lenders has broadened to include any person residing abroad, along with offshore branches or International Financial Services Centres (IFSC) units of Indian regulated lenders.
  • Maturity rules remain unchanged at three years, although manufacturing companies are allowed to raise up to $50 million for tenors of one to three years.
  • Waivers have been introduced for equity conversion, and the previously existing ceiling of 450 basis points over benchmark rates has been eliminated for mergers, resolutions, or liquidations.

The draft also consolidates end-use rules, indicating that borrowed funds cannot be utilized for chit funds, Nidhi companies, farmhouses, plantation activities (unless permitted under FDI), transferable development rights, or securities trading. However, funds may be used for industrial land linked to projects, group on-lending by regulated entities, overseas investment, mergers and acquisitions, and primary issuances by non-financial firms.

Additionally, the draft tightens fund-flow rules, requiring that ECB proceeds be repatriated to India immediately unless earmarked for foreign currency expenditure. Until deployment, funds must be parked in fixed deposits with local banks, top-rated treasury bills, or deposits with highly-rated foreign banks.

Forex Reserves Shrink

Mumbai: India’s forex reserves have decreased by $2.3 billion to $700.2 billion during the week ending September 26, according to data released by the RBI on Friday. In the previous week, the reserves had also declined by $396 million, falling to $702.6 billion.

These adjustments reflect the evolving landscape of external borrowing and foreign exchange management in India as the RBI aims to enhance financial stability and support economic growth.

Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked...