Equity-linked debentures make a comeback

The use of structured products that protect a downside while allowing for participation in a rising market has made a decisive comeback.

Improved sentiment about equity markets and increased accessibility has contributed to the rise in the use of such products, said experts.

An equity-linked debenture invests part of the capital in debt and the remaining is linked to the equity markets through a basket of stocks or an index. The debt portion of the instrument ensures the capital is protected, while the equity portion allows for participation in the event of an upside.

The issuer of the note usually covers the equity payout liability by purchasing an identical option.

On the flip side, the product is not very liquid since they are not easily traded and hence usually results in money being locked in for its duration.

“The product had gained popularity in 2006 and 2007 and then faded with the crash in 2008.  They have currently caught on as a means of participating in equity while maintaining some capital protection,” said Hrishikesh Parandekar, chief executive officer at Karvy Private Wealth.

Equity-linked debentures fall in two categories — principal protected and non-principal protected. In the former, only the interest component is linked to stock market movements. In the latter, the principal too is linked to the market.

The total assets in these products has reached Rs15,000 crore, according to figures with Karvy Private Wealth.

“The volumes which had been seen in the pre-Lehman days took a beating. But over the last one years, they have generically picked up.

There is more demand for Index linked debentures eather than those which are linked to a basket of stocks,” said Rajesh Iyer - head products and research at Kotak Wealth Management.

Nipun Mehta, executive director and head of SG Private Banking India feels that demand tends to wary with volatility. “There is a decent amount of traction for these products. When volatility falls, a more definitive view can be taken on future direction which leads to a greater number of people opting for equity linked debentures,” he said.

The participation has also increased with the product gradually becoming more accessible. Many are available at a  unit price of Rs1 lakh and sold through Portfolio Management Services Route as well as the Mutual Fund route.

“It has become a more retail product than purely one for high networth individuals,” said Rajesh Iyer.

Karvy, Kotak, Citigroup, Deutsche Bank, Barclays are among those that offer equity-linked debentures, say sources.