Tracking debentures gain momentum as RBI relaxes overseas borrowing rules

On February 16, 2026, the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 were notified into force by the Reserve Bank of India. This is a substantive overhaul of the framework for raising debt capital from abroad for Indian residents. 

While a lot has been discussed about the new framework, there are three standout changes worth a quick recap. First, the eligible borrower definition has been broadened. 

The old framework tethered ECB eligibility to the borrower’s ability to receive FDI (excluding companies in restricted sectors, InvITs and REITs), the new regime is thrown open to all entities.

Second, and most consequentially for tax-efficient debt structures, the new framework abandons the prescriptive all-in-cost ceiling which capped interest payments at c.5% spread to a benchmark rate, regardless of the financial condition of the borrower or the security. The new cost of borrowing can be set ‘in line with prevailing market conditions.’ For instruments whose return profile does not map neatly onto a spread over a benchmark — such as variable, performance-linked, or premium-heavy structures — this is a fundamental shift.

Third, the new Regulation 3A(1)(g) permits ECB proceeds to be used for strategic acquisition of listed or unlisted securities, if the transaction involves acquisition of ‘control’ in accordance with the relevant law. Together, these three changes create a structural opening that did not previously exist.

The Tracking Debenture Structure

A potential new straightforward structure can be implemented using the liberalized ECB regime – tracking debentures. Securities which track the value of specific assets or projects within an entity have served as an important instrument for providing a tax-efficient way of implementing customized investment thesis, managing risk, reducing investment complexity, and avoiding holding company structures which can be tax inefficient for shareholders. 

For instance, if a listed company wants to develop a new business vertical within the same entity, co-investors for the specific vertical can be issued tracking securities without having to pay for shareholding in the entire company– which can have challenges around disclosures, insider trading, pricing, etc.

There are other applications of tracking securities as well. For instance, funds with a specific investment thesis and requirements may find themselves unable to hold stock in a company that carries out multiple businesses. Tracking securities can help such investors tailor the exposure to the specific parts of the business they are interested in backing.   

Even where equity investment through the FDI route works, FEMA pricing guidelines impose fair market value requirements on entry and exit, hindering flexibility in pricing deals based on commercial realities. Particularly, funds with a performance-linked return thesis – which typically have the appetite to invest in moonshot projects – pricing constrained by a DCF or comparable transaction methodology adds meaningful unpredictability.

Tracking debentures under the ECB route were earlier not possible due to the cap on returns (all-in-cost ceiling), which prevented delivering equity-like returns on debt instruments. The only other alternative was to implement these under the FPI-VRR route, however, that required the foreign investor to register with SEBI as a FPI with independent reporting and compliance requirements. 

The tracking NCD structure sidesteps all of this. Using the new ECB route, an Indian company can raise funds against the issue of Non-Convertible Debentures. The changes to the ECB regulations now allow returns on such NCDs to be uncapped. 

The NCDs can be structured such that the coupon (nil coupon for equity-like risk allocation) and redemption premium deliver returns tied to the performance of the underlying project / business vertical for which the investment is made. Further, unlike equity holdings – where redemption through buybacks and capital reduction is restricted and (in the case of capital reduction) requires lengthy court approvals – NCDs can be redeemed on contractually agreed terms. This eliminates the need for using sub-optimal workarounds such as put/call options which introduce additional complexity. 

Structuring Considerations

Two pressure points deserve attention in a tracking NCD structure. First, even though returns can be structured in the form of equity, the nature of the instrument remains debt (i.e., the principal is protected). For pureplay equity transactions (where risk on principal amount is borne by the investor) therefore, this route still has limited utility.   

Second, given the nascent stage of such structures, a redemption premium designed too closely to mirror equity-linked returns could attract scrutiny from a FEMA / tax standpoint applying substance-over-form analysis. To mitigate this risk, premium should reference identifiable operational parameters like EBITDA, revenues, traffic volumes, etc., rather than simply tracking distributable profits or shareholder returns.

Conclusion

The 2026 ECB Amendment Regulations have created genuine space for innovation and liberalized a fundraising route for more cost-effective capital from abroad. For foreign investors and Indian companies that have long sought a structurally clean route to achieve high returns in India, the new ECB framework is worth a second look.

The author Prashant Khurana is a transactional lawyer advising on cross-border M&A, private equity, and strategic investment into India. Dhananjay Sahai is a New Delhi-based disputes lawyer whose practice sits at the intersection of commercial litigation, international arbitration, regulatory enforcement, and white-collar defence.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.