Written by Dirshi Shah and Shubham Mangla

On October 1, 2025, the Reserve Bank of India (“RBI”) released a Statement on Developmental and Regulatory Policies (“SDR”), a strategic overview of India’s dynamic financial regulatory landscape. It provides a clear vision to build a resilient, dynamic, and globally integrated economic framework for India.  

RBI’s plan is built on four foundational pillars. Firstly, in order to strengthen the banking sector’s resilience, the stance of the banks has to be proactive rather than reactive while addressing credit risk. Secondly, it seeks to enhance the ease of doing business by improving access to capital by liberalising bank lending for capital market activities and acquisition financing. Thirdly, by deepening India’s global integration through internationalisation of the rupee through simplified compliance for small-value exporters, expanded investment options for Special Rupee Vostro Account holders, and facilitation of INR-denominated lending to neighbouring countries. Finally, it renews the focus on consumer protection and financial inclusion through a stronger Internal Ombudsman mechanism where an independent apex body would be formed to review the complaints that are rejected by the banks with the power to grant compensation to the affected consumers.

While each of these areas warrants independent analysis, two specific proposals stand out for their immediate and profound impact on corporate finance and foreign investment: (a) the overhaul of the External Commercial Borrowing (“ECB”) framework and (b) the simplification of rules governing foreign entities establishing a presence in India.

A Deep Dive into the New Frameworks for Foreign Capital

The relevance of the SDR can be understood by examining the detailed draft regulations proposed by RBI, which were released in the context of FEMA and ECB. These proposed drafts show the openness and India’s approach to flexibility and inclusion of foreign capital.

1. External Commercial Borrowings

The Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (“2018 Regulations”), are considered  to be restrictive in nature, considering factors such as the definition of an eligible borrower, which is narrow, caps on borrowing cost, and the firm end-use stipulation.

On October 3, 2025, the RBI published the Draft Amendment – Foreign Exchange Management (Borrowing and Lending) (Fourth Amendment) Regulations, 2025 (“Draft FEM Regulations”). These seek to dismantle legacy constraints and reposition the ECB framework as a more flexible financing tool for Indian corporates and attract foreign investments.

The Draft FEM Regulations deregulate the determination of the interest rates by incorporating market-determined pricing. Instead of a one-size-fits-all cap of 450 bps under the 2018 Regulations, Indian borrowers will now be able to negotiate interest rates based on their specific credit profile and prevailing global market conditions. This will aid in genuine price discovery, allowing highly rated Indian firms to command more competitive pricing than was previously possible under the restrictive all-in-cost ceiling.

Complementing this is the widening of the eligible borrower and recognised lender base that can raise and provide foreign currency debt. Under paragraph 5 of Schedule I of the 2018 Regulations, the scope of ‘eligible borrowers’ was restricted to entities permitted under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, which limited the scope of lenders to be from Financial Action Task Force or International Organization of Securities Commissions compliant nations only, with sectoral limitations and higher compliance barriers. The Draft FEM Regulations allow a broader range of Indian entities and persons resident outside India to become a lender, making the market more open and competitive.

The borrowing caps too have been rationalised. Previously, under paragraph 8 of Schedule I of the 2018 Regulations, borrowing limits were set at fixed annual caps, and ECBs could only be raised to a specified maximum for most sectors, regardless of a company’s financial strength. While the Draft FEM Regulations’ limits are calculated as the higher of USD 1 billion or up to 300% of the borrower’s net worth, this change will open the space for more innovative financing structures and partnerships with global private credit funds and specialised financial institutions.

Further, the Draft FEM Regulations rationalise the borrowing limits and simplify the end-use restrictions. Under paragraphs 4 & 7 of the 2018 Regulations, the minimum maturities were more rigid, with prescribed limits. This shift towards linking borrowing limits to a borrower’s financial strength, rather than blanket caps, gives forward a more rational approach.

The 2018 Regulations had places rigid end-use restrictions on the companies which limited their flexibility to deploy capital efficiently for working capital, general corporate purposes, or refinancing domestic debt, resulting in procedural delays and compliance bottlenecks, thus a three-tier risk framework is introduced, which comprises of investment-grade (streamlined compliance), standard (baseline), and high-risk (enhanced monitoring and collateral), allowing for tailored supervisory focus.

Additionally, for exposures exceeding USD 500 million or 200% of net worth under scenarios including a 20% currency depreciation, a 200-bps interest-rate shock, and a 15% revenue contraction, mandatory stress testing must be conducted, which will ensure robust risk management.

Finally, in order to increase the transparency of the process quarterly disclosures covering drawdowns, sector allocation, maturities, hedging, and capital expenditure must be made which will enable informed oversight to the banks, with additional support from digital platforms empowered by AI alerts, predictive analytics, blockchain-secured transaction records, and API-enabled reporting streamlining compliance, facilitation of real-time risk assessment, and improve operational efficiency of the banks.

2. FEMA & Foreign Offices

On October 3, 2025, the RBI published Draft Foreign Exchange Management (Establishment in India of a branch or office) Regulations, 2025 (“Draft Establishment in India Regulations 2025”), which propose to simplify the process for foreign entities to establish an office in India, superseding the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 (“2016 Regulations”).

This change is a shift from a prescriptive, rule-based regime to a principle-based regime by providing broader objectives and outcomes, with the grant of operational freedom and flexibility to foreign entities and their Authorised Dealer (“AD”) banks instead of prescribing rigid checklists as under the 2016 Regulations.

The Draft Establishment in India Regulations 2025 expands the scope of power of the AD banks. The RBI approval mandated under the 2016 Regulation has now been delegated to AD banks except of cases specified in Regulation 4(b) of the Draft Establishment in India Regulations 2025. This will reduce turnaround times and create a single point of contact for foreign entities, reflecting the RBI’s confidence in the due diligence and risk management capabilities of AD banks by the central government, and increase the efficiency of the approval  process.

Under Regulation 4 of the 2016 Regulations, the mandatory net worth requirements of the parent company were set at USD 100,000 for five financial years and USD 50,000 for three financial years for branch or liaison offices, respectively, which is being relaxed by the  Draft Establishment in India Regulations 2025, making it easier for a broader spectrum of global companies, including startups and growth-stage firms, to set up offices in India. This will attract a more diverse range of foreign investment and expertise to India.

Finally, the framework simplifies and specifies the closure process for non-compliant or inactive offices, which was not laid down under the 2016 Regulations. Regulation 9 empowers the AD bank to serve a closure notice for failure to submit the Annual Activity Certificate for three consecutive years. This power was not available to them under the 2016 Regulations.

However, the Draft Establishment in India Regulations 2025 fails to make the regime comprehensive with alignment to the near-future business needs. Foreign entities often face confusion because there is no designated liaison office category for non-commercial services, such as  research. Compliance risks increase when there are no beneficial-ownership updates, sanction screening for control changes. This can be addressed by reinstating the liaison office category under the regime, together with ownership updates and sanctions re-screening by AD banks, as well as setting a transaction halt with bank monitoring, which will provide clarity, improved compliance, and controlled financial safeguards.

Conclusion

The RBI’s changes represent a significant shift in India’s interaction with the global capital market. The liberalisation of the ECB framework and the restructuring of the procedure for establishing foreign offices in India would strengthen its capital markets, attract various global investors, and provide domestic firms with higher levels of liquidity and strategic autonomy. At the same time, the multiple risk-based supervision, improved stress testing, and data-driven compliance framework indicate that liberalisation will be subject to rigorous control.

Effective implementation, however, will be critical. Refining operational clarity, particularly regarding liaison offices and ownership update duties, will assist in ensuring that ease of entry does not jeopardise openness or security. As a result, a call for amendments is issued to make the current draft more comprehensive to Indian markets, preparing them for future regime improvements.