Regulations 1 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.
Regulation 3 starts from a closed door: a person resident in India may not borrow or lend in foreign exchange, and may not borrow or lend in rupees with a person resident outside India, unless the Act, the Rules or the Regulations allow it. Regulation 2 defines the words used everywhere else, and regulation 3A lists the end-uses where borrowed funds cannot be put.
These are 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. Regulation 3 prohibits borrowing and lending across the border except as the Act, Rules or Regulations provide. Regulation 2 now carries a full definitions clause, and regulation 3A bars funds borrowed under the Regulations from chit funds, Nidhi companies, real estate business and the other end-uses listed. Breaching the end-use list takes the borrowing outside the permission.
Which text this article reads
This article reads the consolidated page of the Reserve Bank, headed "Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (Amended up to February 16, 2026)". Regulations 2 and 3A were put in by the notification printed on that page as No. FEMA 3(R)(5)/2026-RB dated February 09, 2026, with effect from February 16, 2026. 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section 6(3) as omitted, and section 47(3) keeps earlier Reserve Bank regulations in force until they are amended or rescinded. Read the two Act articles here: section 6 on capital account transactions and sections 47 and 48 on Reserve Bank regulations.
The preamble also says the Regulations come "in supersession of" three earlier texts: Notification No. FEMA. 3/2000-RB, Notification No. FEMA. 4/2000-RB and Regulation 21 of Notification No. FEMA. 120/RB-2004. They are made "for borrowing and lending between a person resident in India and a person resident outside India". Amendments and circulars after February 16, 2026 should be checked before you act. For the filing side of an ECB, see our ECB reporting service.
Regulation 1: title and commencement
Regulation 1 gives the short title and says the Regulations came into force from the date of their publication in the Official Gazette. Nothing else turns on it.
Regulation 3: the prohibition and its exception
Regulation 3 says that, save as otherwise provided in the Act, Rules or Regulations made under it:
- no person resident in India shall borrow or lend in foreign exchange from or to a person resident in or outside India; and
- no person resident in India shall borrow in rupees from, or lend in rupees to, a person resident outside India.
The proviso lets the Reserve Bank, for sufficient reasons, permit a resident to borrow or lend in foreign exchange with a person resident in or outside India, or to borrow or lend rupees with a person resident outside India. So the default is "no", and permission has to come either from a later regulation or Schedule, or from the Reserve Bank's own permission.
The Explanation says use of a credit card in India by a person resident outside India, or outside India by a person resident in India, is not deemed borrowing or lending in rupees or foreign exchange.
Regulation 2: defined terms that matter
Regulation 2(1) is a long clause. Some definitions are worth knowing before you read the Schedules.
| Term | What regulation 2(1) says |
|---|---|
| External commercial borrowing (ECB) | Borrowing by an eligible borrower from a recognised lender in accordance with Schedule I |
| External commercial lending (ECL) | Lending by a person resident in India to a person resident outside India in accordance with Schedule III |
| Trade credit (TC) | Credit extended by the overseas supplier or financial institution for permissible imports into India; includes suppliers' credit and buyers' credit |
| Indian Entity | A company under the Companies Act, 2013, a body corporate established in India under a Central or State Act, or a Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 |
| Benchmark rate | A widely accepted interbank rate or Alternative Reference Rate of 6-month tenor for the currency of borrowing, for foreign currency ECB or trade credit; for rupee ECB or trade credit, the prevailing yield of the Government of India security of corresponding maturity |
| Cost of borrowing | 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 |
| Designated AD Category I Bank | The AD Category I bank the borrower designates for reporting and monitoring of ECB and trade credit |
| Real estate business | Purchase, sale or lease of land or immovable property to earn profit, excluding the purposes listed in clause (ab) |
Other definitions cover "arm's length basis", "control", "net worth", "related party", "relative", "financial sector regulator", "Industrial Park", "infrastructure sector" and "transferable development rights". The last uses the meaning in the Permissible Capital Account Transactions Regulations, 2000. Clause (ab) carves out of "real estate business" six purposes, including industrial parks, integrated townships and SEZ construction and development, infrastructure-sector activity, construction-development projects, commercial or residential property for the borrower's own use, and real estate broking services.
Regulation 3A: where borrowed funds cannot go
Regulation 3A(1) says funds borrowed in terms of the Regulations shall not be used in India for:
- chit funds;
- a Nidhi company;
- real estate business and construction of farmhouses (with two conditions below);
- agriculture and animal husbandry, except floriculture, horticulture and cultivation of vegetables and mushrooms under controlled conditions, development and production of seeds and planting material, animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture, and services related to agro and allied sectors;
- plantation, except tea, coffee, rubber, cardamom, palm oil tree and olive oil tree plantation;
- trading in Transferrable Development Rights (TDR);
- transacting in listed or unlisted securities, except by an Indian entity for corporate actions such as merger, demerger, amalgamation, arrangement or acquisition of control under the laws the clause names;
- repayment of a domestic rupee loan availed for a restricted end-use or classified as a non-performing asset under the applicable prudential norms; and
- on-lending for any purpose for which funds cannot be borrowed and used under the regulation.
For the real estate item, regulation 3A(1)(c) adds that a borrower for a construction-development project may sell plots only after developing trunk infrastructure (roads, water supply, street lighting, drainage and sewerage). For industrial parks it requires a minimum of 10 units, no single unit occupying more than 50 percent of the allocable area, and not less than 66 percent of the total allocable area for industrial activity. The securities exception carries an Explanation: borrowing under it is for strategic purposes only, meaning those driven by the core objective of creating long-term value through potential synergies, rather than short-term gains.
A worked example
Suppose Meridian Components Private Limited, an invented company, raises a foreign currency loan under Schedule I and plans to use part of it to buy listed shares of a supplier in the open market for a quick return. Regulation 3A(1)(g) lists transacting in listed or unlisted securities as a barred end-use. The exception is for corporate actions such as a merger or acquisition of control, and the Explanation requires a strategic purpose. A short-term gain does not qualify. If the same company instead used the loan to acquire control of that supplier under the SEBI takeover regulations named in the clause, the exception could apply, subject to its terms.
What the Regulations leave to later regulations
Regulation 3 only closes the door. Regulations 4 to 9 and Schedules I to III open specific doors: borrowing in foreign exchange (regulation 4), lending in foreign exchange (regulation 5), borrowing in rupees (regulation 6), lending in rupees (regulation 7), repo and reverse repo by persons resident outside India (regulation 7-A), continuation of loans when residential status changes (regulation 8), and old borrowings (regulation 9, which the page prints with no heading). Schedule I is the ECB framework, Schedule II is trade credit for imports, and Schedule III is lending to borrowers outside India. Annex I illustrates average maturity. The sibling articles take them in turn: borrowing in foreign exchange, lending in foreign exchange, and Schedule I eligibility, limit and maturity.
Practical points
- Treat regulation 3A as a list you check on the loan sanction date and again before each drawdown use.
- Clause (g) and its Explanation make the board note on strategic purpose worth keeping.
- The definition of "Designated Authorised Dealer (AD) Category I Bank" ties to reporting; see our guide to ECB under FEMA.
- The page prints "Transferrable" in regulation 3A(1)(f) where the definition says "transferable"; it is a spelling variation and is quoted here as printed.
Need help with borrowing and lending under FEMA?
If your company is planning an ECB and wants the end-use list, the Schedule and the reporting steps checked together, our team can review the proposal against the text. See our ECB reporting service for how the file is built.
Key takeaways
- Regulation 3 prohibits borrowing and lending across the border unless the Act, Rules or Regulations allow it; the Reserve Bank may permit for sufficient reasons.
- Regulation 2 is a full definitions clause, substituted with effect from February 16, 2026.
- Regulation 3A bars chit funds, Nidhi companies, real estate business, most agriculture and plantation, TDR trading, securities transactions (with a corporate-action exception) and certain loan repayments.
- Industrial-park and construction-development borrowings carry the extra conditions in regulation 3A(1)(c).
- Check later amendments and circulars before relying on this reading.
Read next
- Borrowing in foreign exchange by residents: regulation 4
- Lending in foreign exchange: regulation 5 and Schedule III
- ECB eligible borrowers and lenders
- ECB under FEMA: an overview
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.