The transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates (“ARRs”) has seen various regulatory interventions and guidance. Regulators are aiming to absorb potential tremors in the financial market and its participants which may emanate from the discontinuance in publication of LIBOR. Treading on these footprints, on 8 December 2021, Shri Shaktikanta Das, Governor, Reserve Bank of India (“RBI”) announced revision of all-in-cost ceiling for external commercial borrowings (“ECBs”) and trade credits (“TCs”). The revision has been announced for new and existing foreign currency (“FCY”) ECBs and TCs.
The RBI, also on 08 December 2021, released a notification (“Notification”) to align and amend the existing ECB and TC framework under the master directions dated 26 March 2019 (“Master Directions”). The Master Directions prescribe the benchmark rates and maximum spread over the benchmark for calculating the all-in-cost ceilings for FCY and Rupee denominated ECBs and TCs. Under the Notification, RBI has redefined the benchmark rate for FCY ECBs and TCs, changed the all-in-cost ceiling for new FCY denominated ECBs and TCs and notified a one-time adjustment to all-in-cost ceiling for existing FCY denominated ECBs and TCs. The amendments made by the Notification are:
1. Redefining the benchmark rate: Instead of the 6-month LIBOR or interbank interest rate, benchmark rate would now refer to any widely accepted interbank rate or ARR of 6-month tenor applicable to the currency of borrowing.
2. Change in all-in-cost ceiling: RBI has increased the all-in-cost ceiling for new FCY ECBs and TCs by 50 basis points (“bps”) to 500 bps and 300 bps, respectively, over the benchmark rates.
3. One-time adjustment to existing ECBs and TCs: RBI has revised the all-in cost ceiling for existing FCY ECBs and TCs linked to LIBOR whose benchmarks are changed to ARRs, by 100 bps to 550 bps and 350 bps, respectively, over the benchmark rate.
There is no change to the benchmark rate in case of Rupee denominated ECBs and TCs which continue to be linked to the prevailing yield of the Government of India securities of corresponding maturity. Further, the all-in-cost ceiling for Rupee denominated ECBs and TCs has been maintained at 450 bps above the benchmark rate.
In a market fogged with uncertainty due to cessation of LIBOR, RBI has provided some clarity to financial institutions, borrowers, and market participants to hedge their risk in overseas borrowing and ensure a smooth transition, even if it has not indicated any specific ARR which it recommends adopting. The idea is to follow prevalent market practice as soon as practicable. With various backward-looking ARRs presently being adopted, it is yet to be seen, which ARR would be widely acceptable and replace the forward-looking LIBOR.