Schedule I explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Paragraphs 7 to 12 of Schedule I deal with what an external commercial borrowing (ECB) may cost, where the money must land, what security may be given, and how an existing ECB may be refinanced. They follow the eligibility and maturity paragraphs in the Schedule as substituted from February 16, 2026.
This is Schedule I of the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (Notification No. FEMA.3(R)/2018-RB, December 17, 2018), as per the text on the Reserve Bank's site, amended up to February 16, 2026. The cost of borrowing must be in line with prevailing market conditions, and an ECB with average maturity under three years is held to the trade credit cost ceiling. Drawdown is allowed only after a Loan Registration Number is obtained through the designated AD Category I bank. Security may be a charge on assets or a guarantee, but entities regulated by the Reserve Bank cannot issue any type of guarantee.
Authority and what changed
The Regulations rest on the Foreign Exchange Management Act, 1999. Their preamble cites "clauses (a), (d) and (e) of Sub-Section (3) of Section 6, sub-section (2) of Section 47". The Act text now prints section 6(3) as omitted, and section 47(3) keeps earlier Reserve Bank regulations in force until amended or rescinded. See the Act articles on section 6 and sections 47 and 48.
Schedule I was substituted with effect from February 16, 2026 by Notification No. FEMA 3(R)(5)/2026-RB dated February 09, 2026. The earlier Schedule, which the page prints only in its footnotes, is not read here. Paragraphs 1 to 6 are in our previous article. If you are preparing an ECB and the filings behind it, our ECB reporting service is built for that.
Paragraphs 7 to 9: cost and arm's length
| Paragraph | What it says |
|---|---|
| 7(1) | The cost of borrowing shall be in line with prevailing market conditions |
| 7(2) | For eligible ECBs with average maturity under three years, the cost of borrowing shall comply with the cost ceiling specified for Trade Credit under the Regulations; for fixed rate loans, the floating rate plus spread of the corresponding swap shall not be more than the ceiling |
| 8 | Prepayment charges or penal interest for default or breach of covenants shall be in line with prevailing market conditions |
| 9 | ECB from a related party shall be carried out on an arm's length basis |
Regulation 2(1)(g) defines "cost of borrowing" as the rate of interest, other fees, expenses, charges, guarantee fees and export credit agency charges, whether paid in foreign or Indian currency, but not commitment fees and statutory taxes payable in India. Regulation 2(1)(b) defines "arm's length basis" as a transaction between two related parties conducted as if they were unrelated, so that there is no conflict of interest.
The ceiling that paragraph 7(2) points to is in Schedule II, paragraph 6, which prints for foreign exchange trade credit "the maximum spread over the benchmark of 6-month LIBOR or applicable benchmark for the respective currency ... 250 basis points per annum or as prescribed by the Reserve Bank". The page still prints "6-month LIBOR" there, while regulation 2(1)(e) defines the benchmark rate as a widely accepted interbank rate or Alternative Reference Rate of 6-month tenor. The slip is flagged here and not corrected. Our article on trade credit under Schedule II reads the whole paragraph. Under Schedule I, then, there is no spread printed for ECB of three years or more: the test is market conditions.
Paragraph 10: receipt of ECB proceeds
- Loan Registration Number. The borrower shall draw down only after obtaining the Loan Registration Number (LRN) from the Reserve Bank through the designated AD Category I bank.
- Rupee spending. Proceeds meant for a permitted rupee expenditure in India shall be credited to an INR account held in India with the designated AD Category I bank by the end of the succeeding month from the date of receipt. Pending utilisation, they may be invested in an unencumbered fixed deposit of tenor up to one year with that bank.
- Foreign currency spending. Proceeds meant for a permitted foreign currency expenditure may be credited to an FCY account held in India with the designated bank, or to one held outside India, in terms of the Foreign Currency Accounts Regulations, 2015. Pending utilisation, funds may be invested outside India in an unencumbered fixed deposit of tenor up to one year or an unencumbered debt instrument with original maturity up to one year.
Paragraph 11: security
Paragraph 11(1) says ECBs may be secured by (a) a charge on immovable, movable, financial and intangible assets (including intellectual property rights) in favour of the non-resident lender or security trustee, and (b) a guarantee in favour of the lender or security trustee in accordance with the Foreign Exchange Management (Guarantees) Regulations, 2026. Conditions under 11(2):
- the borrowing agreement contains a clause requiring the borrower to give such security;
- a "no objection certificate" from existing lenders in India is obtained before a charge on an encumbered asset; and
- creation of a charge is not a permission for the overseas lender or trustee to acquire the asset in India.
Under 11(3), entities regulated by the Reserve Bank shall not provide (issue) any type of guarantee. Under 11(4), on enforcement the lender's claim is restricted to the outstanding claim against the ECB; transfer of any asset must follow the Act and its Rules, Regulations and Directions, and encumbered moveable assets may be taken out of the country subject to a no objection certificate from existing lenders in India, if any. Where the lender's acquisition of the asset is not permitted, the sale proceeds on transfer to a resident may be remitted to the lender to extinguish the outstanding claim. For the guarantee regime itself, see the Guarantees Regulations overview.
Paragraph 12: refinancing
An eligible borrower may refinance an existing ECB, in part or full, by a fresh ECB, provided the refinancing does not result in a failure to meet the MAMP requirement applicable to the original borrowing (weighted outstanding maturity in case of multiple borrowings). Paragraph 6(4)(c) separately says MAMP need not be met in a refinance under the Regulations.
Example
Kestrel Pumps Limited, an invented company, signs an ECB agreement with an overseas bank. It cannot draw before the designated AD Category I bank obtains the LRN. When the USD tranche arrives, the company plans to spend part on imported machinery abroad and part on payroll in India. The foreign-currency part may sit in an FCY account; the rupee part must be credited to the INR account with the designated bank by the end of the following month. If the lender asks for a charge on the plant, the company needs a clause in the agreement and a no objection certificate from its existing Indian lender before creating it, and the charge does not let the overseas lender acquire the plant.
The ECB reporting forms for these events are in paragraph 16, covered in the last article of this Schedule I series. Amendments and circulars after February 16, 2026 should be checked.
Need help with ECB documentation?
An ECB agreement that gets the security clause, the account for proceeds and the refinancing test wrong can be hard to repair after drawdown. Our ECB reporting team reviews the term sheet and the borrower-side steps with the designated bank in mind.
Key takeaways
- Cost must be in line with prevailing market conditions; ECB with average maturity under three years is held to the trade credit ceiling.
- The LRN must be obtained before drawdown, through the designated AD Category I bank.
- Rupee proceeds go to an INR account in India by the end of the succeeding month from receipt; pending use, up to one year fixed deposits or debt instruments are allowed as paragraph 10 states.
- Security can be a charge on assets or a guarantee; Reserve Bank regulated entities cannot issue guarantees.
- Refinancing must not break the MAMP condition of the original borrowing.
Read next
- ECB eligible borrowers, limit and maturity: Schedule I paragraphs 1 to 6
- ECB conversion, change of terms and reporting: paragraphs 13 to 16
- Trade credit for imports: Schedule II
- ECB all-in-cost ceiling and pricing
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.