Issuers have stayed away from launching new principal-protected structured products after the capital market regulator changed the way these are valued.
In September last year, the Securities and Exchange Board of India (Sebi) made it mandatory for issuers of such products to appoint a third-party valuer from among credit rating agencies registered with the regulator. The valuer will have to publish the value of the securities on its website at least once a week and also provide it to the issuer.
Sebi told issuers to make the valuations available on their website, too, and to arrange to provide to an investor the value whenever asked for. An issuer will have to mention the cost incurred for valuation in the offer document and is not allowed to charge the investor for these services.
Sebi’s new norms have become applicable on all offer documents on which in-principle or final approval is sought from stock exchanges on or after November 1, 2011. Since then, not a single new principal-protected structured product has been launched, according to wealth management executives.
“Issuers need to upgrade their processes to implement the new valuation norms. Once they are fully equipped, they will come out with new structured products,” said a senior wealth management executive at a foreign firm. He expects a couple of issuers to launch such products in the coming weeks.
“Earlier, there was no compulsion on issuers to value structured products on a regular basis. There was also scope for misreporting,” said the chief executive of a wealth management division of a Mumbai-based brokerage. “Independent valuation will be very helpful to investors.”
A structured product is a pre-packaged strategy in which value is derived from the performance of various underlying assets such as equity indices, a basket of stocks, commodities, interest rates or currencies. In a principal-protected structured product, an investor gets back his principal amount at maturity, irrespective of the performance of the underlying asset, subject to the credit risk of the issuer.
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The structured products market in India is largely dominated by Nifty-linked and gold-based products. Barclays Capital, Citibank, JP Morgan, Deutsche Bank, JM Financial, Kotak Securities and Edelweiss Capital are the major issuers of structured products in India. The size of this market is estimated at Rs 7,000-8,000 crore. These products are listed on stock exchanges, but are hardly traded. Most investors hold these products till maturity.
A senior official at a leading credit rating agency, who declined to be identified, said his firm was ready with the valuation mechanism. “There hasn’t been any issuance of structured products in the last three months as the equity market is very volatile and funding requirements of issuers have come down. Once, there is a steady uptrend in the market, high net worth individuals will start looking at these products again,” he said.