A Study of amendments brought by the FEMA (Borrowing and Lending) (First Amendment)Regulations, 2026 – [Notification No. FEMA 3(R)(5)/2026-RB dated February 09, 2026]
I. Introduction: What are External Commercial Borrowings?
India is one of the fastest-growing major economies in the world, and its infrastructureand real estate sectors require enormous capital infusion year after year. Domestic sourcesof financing like banks, NBFCs, housing finance companies though significant, often fallshort of the sheer scale of demand of capital. This is where External CommercialBorrowings, commonly known as ECBs, can step in as an important and structuredavenue for raising capital from across the borders.
In its simplest sense, an External Commercial Borrowing (ECB) is a loan or borrowingraised by a person or entity resident in India from a lender located outside India for thepurpose of utilising it in a business in accordance with the framework allowed under theForeign Exchange Management Act, 1999 (FEMA).
ECBs are governed in India under FEMA, and the regulations framed thereunder. Theprimary regulation is the Foreign Exchange Management (Borrowing and Lending)Regulations, 2018, notified vide Notification No. FEMA 3(R)/2018-RB dated December 17,2018, as amended from time to time (hereinafter referred to as the “Principal Regulations”or “the Regulations”). These Regulations are framed by the Reserve Bank of India (RBI) inexercise of the powers conferred by the FEMA.
The ECB framework provided in the Regulations prescribes a comprehensive set of rulesincluding: who can borrow (eligible borrowers), from whom (recognised lenders), in whatcurrency, in what form, for what minimum tenure (minimum average maturity period), atwhat interest rates, for what purposes, and subject to what reporting and compliancerequirements. The framework is designed to attract foreign capital while ensuringmacroeconomic stability and preventing speculative or unproductive use of such funds.
To get a sense of the scale: as per data published by the Reserve Bank of India, Indianborrowers raised approximately USD 5,33,46,57,416.06 (approximately USD 533.46 1
million) through ECBs and FCCBs in the single month of January 2026 alone. This figureunderscores how ECB has become a mainstream and critical source of financing for theIndian Businesses.
Against this backdrop, the recent amendment to the Principal Regulations, specifically theFEMA (Borrowing and Lending) (First Amendment) Regulations, 2026 notified onFebruary 09, 2026 and effective from February 16, 2026, is significant, especially for the realestate and construction-development sector. This article examines the journey of ECBpolicy for the real estate construction-development sector: where it stood and what the lawnow says after the 2026 amendment. Regulations prior to the amendment are referred to as
1 https://www.rbi.org.in/Scripts/ECBUserView.aspx?Id=268an unamended Principal Regulations. The updated regulations are referred to as theupdated Principal Regulations.
II. The Construction-Development Activity and ECB: The Elephant in the Room
Real estate overall including construction-development occupy a unique position inIndia’s economic landscape. The sector is one of the largest employers in the country andhas massive contributions to industries such as cement, steel, paints, tiles, furniture, andancillary services. Yet, notwithstanding this economic significance, real estate hastraditionally been treated with considerable caution under foreign exchange regulations.
This caution is not without reason. Real estate lending can often be speculative, prone toasset price inflation, and susceptible to money laundering risks. Unregulated inflows offoreign capital into real estate can create bubbles, distort prices, and ultimately harm theeconomy. For these reasons, regulatory framework in India tend to ring-fence real estatefrom certain categories of forex capital flows.
Under the ECB framework, “real estate activity” or “real estate business” has historicallybeen placed on the list of restricted end-uses. This means that a borrower raising ECBcannot deploy those funds in the real estate activity.
The data tells a compelling story. From the publicly available RBI database on ECBs, it isapparent that in January 2026, out of the USD 533.46 million raised by Indian borrowersthrough ECBs/FCCBs, not a single deal was reported from the real estate constructiondevelopment sector. The dominant reason for this absence of ECB funding in real estatedevelopment appears to have been the policy restrictions.
This creates a paradox: a capital-hungry sector is cut off from a potentially significantsource of long-tenor, competitively priced international capital, while being heavily relianton expensive domestic borrowings. Developers, particularly those undertaking large-scaleprojects, have long argued that the restriction creates unnecessary financing bottlenecks.
In the unamended Principal Regulations as they stood before the amendments, theproblem was not only the restriction. It was the fundamental ambiguity in drafting of theregulations. It is to the situation prior to amendments, that we now turn.
III. The Law Prior to the 2026 Amendment
A. The Restriction on End-Uses
Real Estate Activity has always been a restricted end use for ECB. The unamendedPrincipal Regulations (the old framework), as it existed prior to the 2026 amendment,contained a list of restricted end-uses which also included “Real Estate Activity”. Thatmeans ECB was not allowed to be raised for “Real Estate Activity”.
Even under the updated Principal Regulations (the new framework), as per Regulation 3A(which was inserted with effect from February 16, 2026, as the new Regulation 3A), thefunds borrowed from outside India are not be utilised for certain end uses specifiedtherein. Real Estate Business continues to be one of those restricted end use where fundsborrowed from outside India cannot be utilised. Both the frameworks define the term “Real Estate Activity”. That means the activitiesfalling in the definition of Real Estate Activity as provided in the regulations are restrictedend uses. Activities not falling in the definition of Real Estate Activity as defined in theregulations are open for ECB utilisation even though such activity constitutes real estatebusiness in general parlance.
Liberalisation has been introduced by amending the definition of “Real Estate Activity”substantially. In the following paragraphs, changes in the definition of “Real EstateActivity” affecting policy on utilisation of ECB in construction-development work arediscussed.
B. The Old Definition of “Real Estate Activity”
The pre-amendment definition of “Real Estate Activity” as contained in the old Regulation2(xii), of the unamended Principal Regulations read as under:
“”Real Estate Activity” means any activity involving own or leased property for buying, sellingand renting of commercial and residential properties or land and also includes activities either on afee or contract basis assigning real estate agents for intermediating in buying, selling, letting ormanaging real estate. However, this would not include development of integrated township,purchase/long term leasing of industrial land as part of new project/modernisation or expansion ofexisting units or any activity under ‘infrastructure sub-sectors’ as given in the HarmonisedMaster List of Infrastructure sub-sectors approved by the Government of India vide notification F.No. 13/06/2009-INF, as amended/updated from time to time.”
Let us break down the definition:
First, the positive limb – What does “Real Estate Activity” means? – The Inclusions””Real Estate Activity” means any activity involving own or leased property for buying, sellingand renting of commercial and residential properties or land and also includes activities either on afee or contract basis assigning real estate agents for intermediating in buying, selling, letting ormanaging real estate…..”
The inclusion centred around activities involving “buying, selling and renting” ofproperties, and the inclusion of activities of “real estate agents intermediating in buying,selling, letting or managing real estate.” These are, unmistakably, activities of a trading,brokerage, or intermediary nature. The definition was drafted with the lens of propertytrading, buying and selling land or built-up space as a commercial activity in itself.Second, the specific exclusions:
“”Real Estate Activity” means……..………. However, this would not include development ofintegrated township, purchase/long term leasing of industrial land as part of new project/
modernisation or expansion of existing units or any activity under ‘infrastructure sub-sectors’ asgiven in the Harmonised Master List of Infrastructure sub-sectors approved by the Government ofIndia vide notification F. No. 13/06/2009-INF, as amended/updated from time to time.”
The definition carved out three categories from the restriction — (i) development ofintegrated township, (ii) purchase/long term leasing of industrial land for new projects/
modernisation, and (iii) infrastructure sub-sectors. Some definitions provides specific meaning to the term with specific exclusions. In suchdefinitions, anything which falls in the specific exclusions will clearly be outside the scopeof the definition. Obviously, anything beyond the assigned meaning would be outside thescope of the definition regardless of whether it is part of specific exclusion or not. Thedefinition of “Real Estate Activity” prior to the February 2026 amendment was similarlydrafted. However, it had general meaning, specific inclusions and specific exclusions. Thatgave scope to a confusion when there is a particular activity which is neither part of theinclusions nor the exclusions. In that terrain, conflicting views were possible. Let usunderstand it by evaluating if construction of commercial/residential premises(construction-development) was a “Real Estate Activity” and hence a restricted end useunder the unamended Principal Regulations.
C. The Two Conflicting Views
The ambiguity gave rise to two opposite schools of thought regarding whetherconstruction-development activity other than integrated townships and infrastructure —fell within the definition of “Real Estate Activity” and were therefore restricted end useunder the old ECB framework.
View 1 — Construction and Development is NOT Restricted: The first school arguedthat the general meaning assigned in definition of “Real Estate Activity” was entirelyfocused on trading-type activities: buying, selling, and renting. This view held that thedefinition, by its very nature and structure, captured only the market-side activities ofdealing in properties and not the act of constructing or developing them. A builder whoconstructs residential apartments is not, in the primary sense, engaged in “buying, sellingand renting” but he is engaged in the creation of a built environment. When the activitydoes not fall in the assigned meaning itself, it should be considered outside the scope ofthe definition regardless of whether it forms part of specific exclusions. The definition didnot expressly include construction and development of residential or commercialproperties, and therefore, such activities should not be treated as restricted end-uses.
View 2 — Construction and Development IS Restricted: The second school took a morecautious, purposive approach. It argued that while the definition was drafted in thelanguage of trading activities, its purpose was clearly to restrict foreign borrowings fromentering the real estate sector broadly. Activity of construction-development did not findthe place in the exclusions from the definition of Real Estate Activity. If the legislature hadintended to exclude construction and development in general (other than the specificallycarved-out categories), it would have said so. The fact that only “integrated township”development was carved out as an exception from the definition of “Real Estate Activity”strongly implied that other forms of construction-development — standalone residentialprojects, commercial complexes, mixed-use developments — were intended to remainrestricted. Silence (nether covering construction-development in the inclusions to thedefinition of “Real Estate Activity” nor in the exclusions to the definition of “Real EstateActivity”), meant it is to be treated as “Real Estate Activity” for the purpose of ECBframework and hence restricted, not permitted.
D. Conservative View – A General Practice
FEMA, being a policy law, it is always advisable to interpret it in a manner so that theconclusion aligns with the policy of the regulators. Also, by adopting a view which doesnot align with the policy of the regulators, though backed by plain reading interpretation,situation may get exposed to the risk of unbearable enforcement actions. Hence, in practice, conservative approach is the most suited one while interpreting FEMA. Thedebate was not merely academic. It had direct and significant commercial consequences.Developers in general received cautious legal advice, stayed away from ECB forconstruction projects, limiting their financing options but remained away fromenforcement risk.
In the absence of a definitive regulatory clarification or judicial pronouncement, theuncertainty persisted for years.
IV. The Law After the 2026 Amendment: Clarity at Last
A. A New Architecture for the Definition
The FEMA (Borrowing and Lending) (First Amendment) Regulations, 2026 introducedsweeping changes to the Principal Regulations, effective February 16, 2026. Among themost significant changes was the complete substitution of the definitions clause — oldRegulation 2 was replaced in its entirety with a new, comprehensive set of definitions.
Crucially, the old concept of “Real Estate Activity” has been replaced with a new and farmore precise concept: “real estate business.” The new definition, as contained in Regulation2(1)(ab) of the amended Principal Regulations, reads as follows:
“real estate business” means purchase, sale or lease of land or immovable property with a view toearning profit from there and does not include purchase, sale and lease (not amounting to transfer)of land or immovable property for the following purposes:
(i) construction and development of industrial parks, integrated townships and SEZ;
(ii) development of new industrial project, modernisation and expansion of existing units;
(iii) any activity under ‘infrastructure sector’;
(iv) construction-development project;
(v) commercial or residential properties for own use of the borrower;
(vi) real estate broking services.
Explanation:(a) Construction-development projects includes development of townships, constructionof residential/commercial premises, roads or bridges, hotels, resorts, hospitals,educational institutions, recreational facilities, city and regional level infrastructure,townships;
(b) Transfer, in relation to real estate business includes,-(i) the sale, exchange or relinquishment of the asset; or(ii) the extinguishment of any rights therein; or(iii) the compulsory acquisition thereof under any law; or (iv) any transaction involving the allowing of the possession of any immovable property t obe taken or retained in part performance of a contract of the nature referred to in section53A of the Transfer of Property Act, 1882 (4 of 1882); or(v) any transaction, by acquiring capital instruments in a company or by way of anyagreement or any arrangement or in any other manner whatsoever, which has the effect oftransferring, or enabling the enjoyment of, any immovable property.”
Alongside this, a new Regulation 3A has been inserted, which codifies the restriction onend-uses. Regulation 3A(1)(c) retains the restriction on “real estate business” andconstruction of farmhouses as restricted end-uses. However, this restriction must now beread against the new definition of “real estate business” and this is where the liberalisationlies.
B. Dissecting the New Definition: What Has Changed for Construction-Development?
The new definition of “real estate business” is architecturally different from the olddefinition of “Real Estate Activity” in several important respects.
First — The Positive Limb is Clarified: The new definition’s positive limb is refreshinglyprecise: real estate business means “purchase, sale or lease of land or immovable propertywith a view to earning profit therefrom.” This makes clear that the restriction targetsprofit-motivated dealing in land and immovable property — i.e., trading activity. The olddefinition’s reference to real estate agent activities has been restructured and clarified.
Second — Construction-Development Projects are Expressly Excluded: The most criticalchange is in clause (iv) of the exclusion list. For the first time, “construction-developmentproject” is expressly carved out of the definition of “real estate business.” The Explanationfurther clarifies that construction-development projects include the development oftownships, construction of residential and commercial premises, roads and bridges, hotels,resorts, hospitals, educational institutions, recreational facilities, city and regional levelinfrastructure. This is an expansive and explicit carve-out that directly addresses andresolves the old controversy.
Third — Own Use Properties are Excluded: Clause (v) now specifically excludescommercial or residential properties acquired for the borrower’s own use from thedefinition of real estate business. This addresses another grey area. A borrower raisingECB to construct or acquire a facility for its own operations was arguably caught in the oldframework’s vague net.
Fourth — Real Estate Broking Services are Excluded: Clause (vi) excludes real estatebroking services from the definition. Interestingly, the old definition had included realestate agent activities as part of the definition of “Real Estate Activity.” The new frameworkflips this. The broking services are now expressly outside the restriction and hence apermissible end use for ECB.
C. How the Controversy around construction-development is Resolved
Under the new framework, the logical flow is as follows:
Step 1: Real Estate Business is a prohibited end use under Regulation 3A of updatedPrincipal Regulations.
Step 2: ”Real estate business” means profit-motivated purchase, sale, or lease of land/
immovable property.Step 3: Construction-development projects are expressly excluded from this definition.
Step 4: Therefore, ECB proceeds cannot be utilised for real estate business (in the restrictedsense), but can be utilised for construction-development projects (which are outside thedefinition of real estate business).
This four-step logic completely buries all the controversies. The controversy thatpractitioners, developers, and compliance professionals wrestled with for years has beenlaid to rest by the 2026 amendment. ECB for construction-development is now a clearlypermissible end-use under the Regulations.
V. Good News for Real Estate — But Subject to the Revised ECB Framework
A. The Welcome Signal
The 2026 amendment sends a clear and positive signal to the real estate and constructiondevelopment sector: the doors of the ECB market are now open. Developers undertakingconstruction-development projects, be it residential townships, commercial complexes,hotels, hospitals, or educational institutions, can now explore ECB as a financing avenuewithout the cloud of regulatory ambiguity that previously hung over such transactions.
This is significant for multiple reasons. ECB typically offers borrowers access to longertenor financing compared to domestic bank loans. International capital markets can alsooffer competitive pricing, particularly for creditworthy borrowers with established trackrecords. For large-scale construction-development projects that require long-gestationfinancing, ECB could be a game changer.
The amendment also aligns India’s ECB policy with its broader economic objectives. TheGovernment of India has ambitious targets for housing, infrastructure, and commercialreal estate development. Allowing ECB into this space, in a structured and regulatedmanner, can help bridge the financing gap and catalyse faster project completion.
B. The Compliance Framework: No Free Lunch
However, and this must be stated clearly, the opening of ECB for constructiondevelopment projects does not mean unconstrained access to foreign capital. The ECBframework, as revised by the 2026 amendment, is comprehensive, detailed, and continuesto require strict compliance. Real estate developers looking to access ECB must navigatethis framework carefully.
The key compliance requirements under the revised ECB framework (as set out in theamended Schedule I to the updated Principal Regulations) include the following:
1. Eligible Borrower: Only persons resident in India (other than individuals) that areincorporated, established, or registered under a Central or State Act are eligibleborrowers. That included Partnership Firms but does not include proprietary concerns.Hence, legal formation in India must be such which fits in the definition of “eligibleborrower”.
2. Recognised Lender: ECB may be raised from (a) a person resident outside India, (b) abranch outside India of an entity whose lending business is regulated by the RBI, or (c) afinancial institution or its branch set up in an International Financial Services Centre(IFSC).
3. Minimum Average Maturity Period (MAMP): The revised Schedule I prescribes aminimum average maturity period of three years for ECBs. An eligible borrower in themanufacturing sector may raise ECBs with an average maturity between one and threeyears, subject to a cap of USD 150 million. Real estate developers being outside themanufacturing sector will need to ensure their ECBs meet the three-year MAMPrequirement. In other words, short term loans having average maturity below 3 yearsare not welcomed for construction-development work.
4. Borrowing Limit: An eligible borrower may raise ECB up to the higher of (a)outstanding ECB of up to USD 1 billion, or (b) total outstanding borrowing (external anddomestic) up to 300 percent of net worth as per the last audited standalone balancesheet. This is a welcome move. Generally, each real estate project is kept under a newSPV entity by the developers. Such SPV will be able to raise substantial funds even inabsence of substantial net-worth.
5. Cost of Borrowing: The cost of borrowing must be in line with prevailing marketconditions. Concept of Arm’s Length Principle is introduced for related partyborrowings.
6. Receipt of ECB Proceeds: The borrower may drawdown ECB only after obtaining aLoan Registration Number (LRN) from the RBI through the designated AD Category Ibank.
7. Security: ECBs may be secured by creation of charge on immovable assets, movableassets, financial assets, and intangible assets in favour of the non-resident lender orsecurity trustee, or by issuance of guarantees in accordance with the Foreign ExchangeManagement (Guarantees) Regulations, 2026. This will provide comfort to the foreignlenders as developers from India will be able to offer securities/mortgage. There arecertain other terms and conditions to be adhered to while offering the security.
8. Reporting Obligations: Comprehensive reporting obligations apply. Borrowers mustsubmit Form ECB 1 (for obtaining LRN and providing ECB details), Revised Form ECB1 (for changes in ECB parameters, within seven calendar days from the end of therelevant month), and Form ECB 2 (for reporting receipt of ECB proceeds and debtservicing, within seven calendar days from the end of the relevant month). Latesubmissions attract late submission fees.
The aforementioned checkpoints are those which are materially relevant to the topic ofdiscussion.
C. A Relatively Liberalised Framework
It is also worth noting that the revised ECB framework introduced by the 2026 amendmentis, by comparison to the older framework, relatively liberalised in several respects. The oldSchedule I contained more prescriptive all-in-cost ceilings (maximum spreads overbenchmark rates). The new Schedule I has moved towards a more market-alignedapproach for cost of borrowing and introduced more flexible provisions for security,refinancing, conversion, and change of parameters.
This liberalisation, combined with the definitional clarity on construction-developmentprojects, makes the 2026 amendment a watershed moment for the financing of India’s realestate sector.
Disclaimer: This article is prepared for informational and academic purposes only. It does notconstitute legal advice. Readers are advised to consult qualified legal counsel/consultants beforeundertaking any transaction based on the above