With Dalal Street flat and rates up, structured products fly

Deutsche has done it. So have DSP Merrill Lynch, Citi, Morgan Stanley, Nomura and RBS.

This financial year has seen a spate of non-convertible redeemable debenture issues from financial institutions, mostly foreign.

What gives?
“Interest rates are on the rise, which increases these returns and market volatility makes option pricing favourable. This could have led to the increase in the issuances,” Richa Karpe, director, investment, Altamount Capital Management said of the rush to raise funds through structured products.

Rajesh Cheruvu, head of investment strategy at RBS Private Banking, draws attention to the fact that over the last two quarters, the market has not gone anywhere, with the benchmark indices moving in a range.

“Also, on account of valuation discomfort currently, it is highly unlikely that there would be significant upside from these levels. Markets are likely to move in a band of 10% on either side in the near term,” he said.

“In such an environment, investors are looking for opportunities to make money without taking undue risk, which these structured products offer. There has been a lot of interest for these products of late,” said Cheruvu.

A structured product is typically a derivative, which bases its value on a combination of asset classes such as debt, equity or
even commodities and currencies, and is sold to high networth individuals by financial institutions.

In India, a typical structured product would be a combination of fixed income and equity derivatives —- the bulk of the capital invested in debt, in a bid to offer capital protection, and a small portion invested in equity derivatives to provide additional returns.

That’s precisely what the non-convertible redeemable debentures are. Typically, they invest 85% of their funds in debt and the rest in options. While many of the products are based on the Nifty, some are designed around specific large-cap names in the banking and technology sector.   

Foreign issuers dominate in this segment because they tend to receive higher ratings from agencies on account of better capitalisation, according to an expert.

Deutsche Investments India has made three separate listings this fiscal —- eleven bonds at the first instance, three in the next and eight in its latest listing on May 26. Among the others, RBS Financial Services (India) has made six separate listings, totalling eight bonds; Nomura Capital (India) has made four issues, totalling four bonds; Citicorp Finance (India) has listed three tranches, of eleven, seven, and six bonds respectively; Morgan Stanley India Capital came out with an issue of four bonds; and DSP Merrill Lynch Capital has also come out with two issues totalling three bonds.

The raft of issuances notwithstanding, experts believe India is a long way off developed markets such as the US in terms of structured products.

“The demand in India for structured products remains nascent compared to more developed markets,” said Swapnil Pawar, head - HNI (high networth individual) solutions, Karvy Private Wealth, which is a domestic issuer of structured products along with companies such as Edelweiss Capital.

Besides HNIs, such products are also bought by mutual funds and insurance companies looking to increase the returns on their holdings.