"A parent-company loan to an India subsidiary needs no FEMA registration": what the ECB rules actually require

A foreign parent wiring a "shareholder loan" to its new Indian subsidiary without any RBI registration is the classic entry mistake. A loan from a foreign parent to its Indian subsidiary is ordinarily an External Commercial Borrowing: borrowing "by an eligible borrower from a recognised lender in accordance with Schedule I" to the Borrowing and Lending Regulations (FEMA 3(R)). Drawdown before registration is a contravention, not a paperwork delay.

Legal basis: Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (FEMA 3(R)), as substituted with effect from 16 February 2026 (Notification No. FEMA 3(R)(5)/2026-RB dated 9 February 2026); FEMA (Non-Debt Instruments) Rules, 2019, Rule 21 (equity pricing floor).

The ECB framework: registration before drawdown

The threshold rule is in the borrowing schedule itself: "An eligible borrower shall drawdown ECB only after obtaining the Loan Registration Number (LRN) from Reserve Bank through the designated AD Category I bank" (FEMA 3(R), Schedule I, para 10(1)). No LRN, no drawdown — the loan agreement, the inward remittance and the reporting all key off a registration that must already exist.

Reporting runs through the designated AD Category-I bank: Form ECB 1 "for providing details of the ECB and obtaining LRN," a revised Form ECB 1 for any change in reported parameters, and Form ECB 2 for receipt of proceeds and debt servicing — each revision and each event report "within seven calendar days from the end of the month" in which the change, receipt or servicing occurred (FEMA 3(R), Schedule I, reporting paragraph). Missed timelines can be regularised through late-submission fees under RBI's guidelines; a borrower that stops reporting altogether can be classified untraceable, with reports to RBI and the Directorate of Enforcement.

What ECB money may not touch

Regulation 3A ring-fences end-use. Borrowed funds "shall not be utilised for the following purposes in India": chit funds and Nidhi companies; real-estate business and farmhouse construction (with narrow construction-development and industrial-park carve-outs); agriculture and plantations (except specified controlled-condition activities); trading in transferable development rights; securities transactions except strategic corporate actions (mergers, acquisitions of control); repayment of domestic INR loans that were themselves for restricted end-uses or are NPAs; and on-lending for any of these (FEMA 3(R), Reg. 3A).

Two relief valves founders miss

Refinancing. An eligible borrower may refinance an existing ECB, in part or full, with a fresh ECB, "subject to the condition that refinancing doesn't result in failure to meet MAMP requirement applicable on the original borrowing" — the minimum average maturity period discipline (FEMA 3(R), Schedule I, para 12).

Conversion into equity. An ECB — including one matured but unpaid — "may be converted into a non-debt instrument, subject to compliance with the" NDI Rules, with lender consent and no additional conversion cost to the lender (FEMA 3(R), Schedule I). A parent loan that has served its purpose can become equity instead of being repaid.

The equity comparator

Foreign equity into the subsidiary follows the NDI Rules: shares issued to a non-resident must be at or above the certified fair value ("issued by such company to a person resident outside India shall not be less than" the methodology-certified valuation) (FEMA NDI Rules, r.21). There is no pre-allotment registration comparable to the LRN; the allotment itself is reported as the NDI Rules require. Compulsorily convertible instruments are equity under the NDI Rules, not ECB — classify the instrument before choosing the compliance track.

ECB versus equity: the structural matrix

The tax edge of debt is real only inside its limits: model thin-cap caps, carry-forward rules and withholding from the current statute rather than remembered figures.

Step-by-step: ECB from a foreign parent

• Classify the instrument. Optionally or non-convertible foreign-currency debt is ECB; compulsorily convertible instruments are equity. Get this wrong and the whole compliance track is wrong.
• Obtain the LRN before drawdown through the designated AD bank. Drawing before the LRN is a contravention of FEMA 3(R).
• Align the agreement with the registration — maturity, end-use and pricing terms must match the LRN application.
• Receive funds through the AD bank against the LRN and retain receipt evidence.
• File event reports within seven calendar days of month-end for drawdowns, servicing and any parameter change.
• Track end-use and maturity compliance with voucher-level evidence; no principal repayment in breach of maturity conditions.

For structure-specific advice, consult a Chartered Accountant and your AD bank before the first remittance.

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See Also

• Put options at an assured return in FDI deals: what FEMA's NDI Rules 2019 permit on exit
• Chinese LP in the fund stack: when land-border FDI needs government approval
• FDI deferred payment: 25% cap, 18‑month rule