AS | Ankit Sarawagi|Founder, CFOmatrix·September 2026·9 min read | FEMA & FDI |
Your US parent is ready to wire the Indian subsidiary a few hundred thousand dollars to fund the next two quarters. It feels like an inter-company advance, so you plan to book it as a loan and move on. Under FEMA, that transfer is almost certainly an External Commercial Borrowing, with its own registration, its own cost limits, and a monthly return you have to file for years.
An External Commercial Borrowing (ECB) is how an Indian company borrows from a foreign lender, and one of the most common cases is a foreign parent lending to its Indian subsidiary. Get the structure right and it is a clean, low-cost source of funding. Get it wrong and you have an unregistered foreign loan sitting on your balance sheet, a FEMA breach the day it lands. This guide covers what an ECB is, who can borrow and lend, the automatic versus approval route, the all-in-cost ceiling and minimum maturity, end-use restrictions, the Loan Registration Number (LRN) you take before drawdown, and the monthly ECB-2 return.
- What it is
- A loan by an eligible Indian entity from a foreign lender, including a foreign parent or group company.
- Two routes
- Automatic route (fits all parameters, no RBI approval) or approval route (outside parameters, needs RBI).
- Before drawdown
- File Form ECB via your AD bank to get a Loan Registration Number (LRN).
- Monthly filing
- ECB-2 return through the AD bank, within 7 working days of month end, every month.
- Guardrails
- All-in-cost ceiling, minimum average maturity and end-use restrictions all apply.
1 What is an External Commercial Borrowing?
An External Commercial Borrowing is a loan raised by an eligible Indian resident entity from a recognised lender outside India, denominated in a freely convertible foreign currency or in Indian rupees. It is the FEMA framework that governs how an Indian company takes on foreign debt, as opposed to foreign equity (FDI). ECBs cover ordinary term loans, buyers’ credit and suppliers’ credit, foreign-currency convertible bonds, and, crucially for a venture-backed startup, a loan from a foreign group company.
The single most important point for founders: when your foreign parent lends money to its Indian subsidiary, that loan is typically an ECB. A foreign equity holder counts as a recognised lender, so the group loan is not an informal advance you can wire in and clean up later. It has to fit the ECB framework, be registered before drawdown, and be reported every month. Treating it as a plain inter-company loan is one of the most common FEMA mistakes a foreign-owned startup makes.
The RBI’s ECB framework sets five things you have to satisfy at once:
- Eligible borrower: is your entity allowed to raise an ECB.
- Recognised lender: is the party lending to you a permitted lender.
- All-in-cost ceiling: is the total cost of the loan within the cap.
- Minimum average maturity: is the loan long enough.
- End-use: is the money going to a permitted use, and away from the prohibited list.
2 Eligible borrowers and recognised lenders
Not everyone can raise an ECB, and not everyone can lend one. The framework works off two lists that have to line up.
Eligible borrowers
Broadly, entities eligible to receive FDI can raise ECBs, along with certain other specified entities. For a normal private-limited startup that has taken foreign investment, the company itself is generally an eligible borrower. Some sectors and entity types have their own carve-outs, so this is always worth confirming with your AD bank for your specific case.
Recognised lenders
The lender has to be resident in a country that observes the relevant financial-action standards. Recognised lenders include:
- International banks and recognised financial institutions.
- Multilateral and regional financial institutions where India is a member.
- Foreign branches or subsidiaries of Indian banks (for foreign-currency ECBs).
- Foreign equity holders of the borrower, which is what makes a parent-to-subsidiary loan an ECB.
3 Automatic route vs approval route
Like FDI, an ECB comes in through one of two doors. Which one depends entirely on whether your loan fits inside the standard parameters.
| Route | When it applies |
|---|---|
| Automatic route | The ECB fits all the framework parameters, eligible borrower, recognised lender, within the all-in-cost ceiling, meets the minimum average maturity, permitted end-use and within the borrowing limit. No prior RBI approval; you work through your AD bank and register for the LRN. |
| Approval route | The proposal falls outside one or more standard parameters. The AD bank routes the case to the RBI, and the borrowing can only proceed once the RBI grants specific approval. |
Most startup ECBs, including a straightforward loan from a foreign parent on normal terms, are designed to sit within the automatic route. You only fall into the approval route when something is non-standard, for example an unusually long or short structure, a higher cost, or a use that needs a specific relaxation. The design goal is almost always to stay automatic.
4 All-in-cost, maturity and end-use
These three guardrails are what keep an ECB on the automatic route. They also change from time to time, so treat the specifics below as the shape of the rules and confirm the current numbers with your AD bank before you sign.
All-in-cost ceiling
The all-in-cost is not just the coupon. It bundles the interest, other fees, and expenses in foreign currency or rupees, over the reference benchmark, and it is capped. You cannot dress up a high return to the parent as fees; the total cost has to sit under the ceiling. Withholding tax is excluded from the all-in-cost.
Minimum average maturity
An ECB has to be genuine medium-to-long-term money, so a minimum average maturity period (MAMP) applies, commonly three years for general corporate purposes, with different maturities for specific categories and end-uses. A loan you intend to repay in a few months is not a valid ECB. Prepayment is possible but must respect the maturity condition.
End-use restrictions
ECB money is allowed for genuine business needs but is fenced off from a prohibited list. Typical prohibited end-uses include:
- Investment in real estate or purchase of land (other than permitted uses).
- Investment in the capital market.
- On-lending to others, except where specifically permitted.
- Repayment of rupee loans, except in specific permitted situations.
For a startup, the usual permitted uses, working capital, general corporate purposes and capital expenditure, are exactly what a parent loan tends to fund, but you must record the end-use and stay within it. Using ECB proceeds for a prohibited purpose is a breach even if every other parameter is met.
5 Form ECB, the LRN, and the monthly ECB-2
The reporting for an ECB runs in two stages: register once, then report every month. Both go through your AD bank.
Two details catch founders out. First, the LRN comes before the money: you register the loan and get the number, and only then can you draw it down. Second, the ECB-2 is monthly and continuous: it is due within 7 working days of the end of each month, and you file it for every month once the LRN exists, even a month with no drawdown and no repayment, right up to full repayment. A dormant ECB still generates twelve returns a year.
Brewly Inc, a Delaware parent, wants to fund its Indian subsidiary Brewly India Pvt Ltd with US $400,000 for working capital and product development. Because Brewly Inc is a foreign equity holder, the loan is an ECB, not a simple inter-company advance. Brewly checks the parameters: recognised lender (the parent), automatic route, cost within the all-in-cost ceiling, a maturity of five years (above the minimum), and end-use limited to working capital and general corporate purposes, all permitted. It files Form ECB through its AD bank and receives an LRN before drawing any funds.
Once the LRN is issued, Brewly India draws the US $400,000 in two tranches. From the month of the first drawdown, it files the ECB-2 return within 7 working days of each month end through its AD bank, quoting the LRN, showing drawdowns, interest and the outstanding balance. In a quiet month with no movement it still files a nil-movement ECB-2. When the loan is repaid in year five, it files the final ECB-2 reflecting closure, and only then does the monthly obligation end.
6 ECB vs convertible instruments: debt or equity?
Founders frequently blur the line between an ECB (debt) and foreign equity. Under FEMA the test is how the instrument converts:
- Compulsorily convertible instruments, equity shares, CCPS and CCDs, are treated as FDI capital instruments and reported via FC-GPR on the FIRMS portal.
- Optionally convertible or redeemable instruments are treated as debt, and therefore fall under the ECB framework, not FDI.
This matters because the instrument you pick decides which regime you are in. An optionally convertible note from a foreign investor is an ECB and must follow the LRN and ECB-2 route; a US-style SAFE is not a permitted instrument under FEMA at all and is usually restructured as CCPS or CCDs. Get the classification wrong and you either miss the ECB filings or misreport equity as debt. Our guide to convertible instruments under FEMA (CCPS and CCDs) walks through the choice in detail.
7 Your ECB checklist
- Confirm your entity is an eligible borrower and the lender is a recognised lender (a foreign parent qualifies as a foreign equity holder).
- Check the loan fits the automatic route: all-in-cost within the ceiling, at or above the minimum average maturity, and a permitted end-use.
- Map and document the end-use, and confirm it avoids the prohibited list.
- Pass the board and shareholder resolutions and finalise the loan agreement.
- File Form ECB through your AD bank and obtain the Loan Registration Number (LRN) before any drawdown.
- Draw the funds through the AD bank against the LRN, and keep the inward-remittance advice.
- File the ECB-2 return every month, within 7 working days of month end, including nil-movement months, until full repayment.
- If a deadline was missed, regularise it promptly through the LSF or compounding, and keep every challan.
Not sure which FEMA filings your startup owes?
Use our free FEMA / FDI Filing Checker: tell us how foreign money came in, an ECB, FDI, an ODI or a downstream investment, and get the exact forms and due dates you need to file, from Form ECB and ECB-2 to FC-GPR and the FLA return.
Check my FEMA filings8 FAQs
What is an External Commercial Borrowing (ECB)?
Is a loan from a foreign parent company to its Indian subsidiary an ECB?
What is the difference between the automatic route and the approval route for ECB?
What is Form ECB and the Loan Registration Number (LRN)?
What is the ECB-2 return and when is it due?
Related guides & tools
FEMA & FDI compliance for startups (pillar guide) →
Convertible instruments under FEMA: CCPS and CCDs →
FEMA Late Submission Fee and compounding →
FEMA / FDI Filing Checker (free tool) →
AS | Founder, CFOmatrix | Finance Strategy & Compliance CFOmatrix helps Indian startups build finance, tax and compliance functions that stand up to investor due diligence, from process and controls to the filings and the numbers behind them. |
Disclaimer: This article is general information as of September 2026 and is not legal or professional advice. FEMA, the RBI ECB framework, the all-in-cost ceiling, maturity periods, end-use rules and reporting forms can change. Confirm your specific obligations with your AD bank and a qualified professional before borrowing.