RBI notifies transition to its benchmark rates for overseas borrowings

Background

With the imminent discontinuation of the publication of the London Interbank Offered Rate (LIBOR) by the end of 2021 for most currencies, the Reserve Bank of India (RBI) by its circular dated 8 December 2021 (Circular) amended the RBI’s Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations dated 26 March 2019 (ECB Master Directions) to provide for a risk free benchmark rate as an alternative to the LIBOR (which has been used since inception for majority foreign currency borrowings).

LIBOR has been a preferred benchmark rate for the syndicated loan markets and as a pricing source by financial markets globally and in India for a wide array of financial instruments including loans and derivative products. In view of the cessation of publication of LIBOR, the RBI in August 2020 had indicated to all the banks and the financial institutions to frame a board-approved plan, outlining an assessment of exposures linked to the LIBOR and the steps to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of the Alternative Reference Rates (ARR) and putting in place a framework to mitigate risks arising from such exposures on account of transitional issues including valuation and contractual clauses.

The amendments to the ECB Master Directions introduced by the Circular are as follows:

Comments

The amendments to the ECB Master Directions provide much-needed clarity to the financial institutions, hedge providers and borrowers on the new applicable alternative reference rates for external commercial borrowings and encourage them to use any widely accepted ARRs as soon as practicable in lieu of the cessation of LIBOR from December 2021. The amendments provide a framework to the financial institutions for a smooth transition ensuring that the risks arising from such exposures on account of transitional issues including valuation and contractual clauses are mitigated well in time. The market participants have already migrated to alternate benchmark rates depending on the currency of lending including the Secured Overnight Financing Rate (SOFR), Sterling Overnight Indexed Average (SONIA), Swiss Average Overnight (SARON) for Swiss Francs, Tokyo Overnight Average Rate (TONAR) and have been including fallback provisions by way of amendments. It will be interesting to watch the development of other reliable benchmark rates that will provide much needed stability to international trade now that LIBOR will be discontinued.

-     Manisha Shroff (Partner), Rolwine Alva (Partner), Savni Tewari (Senior Associate) & Akshansh Sharma (Associate)

For any queries please contact: editors@khaitanco.com ​​​​​​​