Sebi's ISIN guidelines hit market for structured products in India

The Securities and Exchange Board of India’s (Sebi) guidelines in June last year, to restrict the issuance of International Securities Identification Numbers (ISINs), has dented the market for structured products in the country. 

Structured products came into limelight in 2007 and 2008, when equity valuations were at their peak. Products worth Rs 35 billion were reportedly issued in June and July 2008. The issuances were led by overseas brokerages such as Merrill Lynch, Deutsche and Barclays. 

Wealthy investors became wary of these products in the aftermath of the global financial crisis. However, there was another round of uptick a few years later. According to CARE Ratings, the Indian market-linked debenture, or structured products segment, reached a size of Rs 77 billion in FY17 against Rs 48 billion in FY16. 

The growth has since tapered off. Currently, only a handful of domestic entities such as Reliance Capital, Edelweiss and JM Financial are issuing these products to clients, said people in the know.  

The volume of structured product issuances has dried up. You can’t have more than five ISINs maturing in a financial year, and this restriction reduces the flexibility to do multiple issuances and tailor products to suit different needs, said a person who has tracked the market closely. 

He added that some issuers were navigating the regulatory hurdle by issuing products through various group companies. Each group entity is considered separate for the purpose of the ISIN ruling, which says that a maximum of 12 ISINs maturing per financial year are allowed for plain vanilla debt securities. 

Within the 12 ISINs, the issuer can issue both secured and unsecured debt securities. A maximum of five ISINs maturing per financial year are allowed only for structured products/market-linked debt securities. 

Though it is hard to quantify, the ISIN rule has impacted the number of structured products being issued, said another person associated with the wealth management industry. However, this person added, most issuers were conducting considerably larger issues. 

Some of the older structures are being reissued. For example, if it is a four-year structure and two years have elapsed, then within the same tranche the entity will issue fresh debentures with two-year maturities.

Structured products are used for risk optimisation in a portfolio. In India, structured products are mostly Nifty-linked and designed to offer capital protection.

These products are designed to facilitate highly customised risk-return objectives. They are hybrid investment instruments used to improve the return on a fixed income or an equity instrument. This is done by reducing the risk on the product by using a derivative instrument as an insurance on the downside. 

The layer of derivatives gives it the flexibility needed to blend with a portfolio and enhance its risk-to-return performance, while matching an investor’s objectives. 

The returns are linked to the performance of one or more underlying assets. Payoffs from these performance outcomes are contingent, in the sense that if the underlying assets return “x”, then the structured product pays out “y”.