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The Reserve Bank of India (RBI)’s move to regulate the time gap on issuance of debentures by non-banking financial companies (NBFCs) has created some confusion for the Rs 12,000 crore structured product market.
The central bank had on June 27 come out with a note asking NBFCs to space out their debenture issuances by at least six months. This resulted in a halt in the launch of such products as it put restrictions on NBFCs who issue debentures for the structured product space, according to wealth management officials.
“We had plans to come out with a structured product issuance, but shelved the same following the RBI’s notification. All structured products would have been impacted by the circular,” said one person with a foreign wealth management firm.
RBI subsequently came out with a clarification on July 2, saying it was deferring its earlier move. “A decision on the appropriate minimum time gap would be taken by the Bank in due course,” it said.
But this hasn’t completely eased concerns.
“They have simply postponed the decision on that matter. We don’t know if they will actually make it three months or something like that,” said a senior official with a domestic wealth management firm.
The head of wealth management at another Indian wealth manager also said no clear indication of the final guidelines had been communicated to the NBFCs as of yet. “They will reconsider it… NBFCs have made a representation to the central bank on the issue… We don’t know yet what form the final regulation will take,” said the person.
Structured products are debentures generally sold by wealth management firms to high networth individuals. They offer returns linked to the movement of an asset class like equity. For example, a debenture’s returns may track the National Stock Exchange’s Nifty index. Industry insiders say RBI’s circular last Thursday would have severely limited their issuance. To be sure, RBI’s intention seems to have been to curb retail exposure to such securities.
The circular noted that NBFCs raised capital through issuing debentures either by public issue or private placement. In the case of public issue of such securities, institutions and retail investors can participate. Private placement, on the other hand, may involve institutional investors.
“It has, however, been observed that NBFCs have lately been raising resources from the retail public on a large scale, through private placement, especially by issue of debentures,” said the RBI notification.
The central bank has subsequently asked NBFCs (including those coming out with debentures for the purpose of issuing structured products) to provide a detailed plan for how often they plan to come out with such issuances.
“NBFCs, in the meantime, are advised to put in place before the close of business on September 30, 2013, a board approved policy for resource planning which, inter-alia, should cover the planning horizon and the periodicity of private placement,” it said in the July 2 note.
Meanwhile, if RBI does go ahead with its earlier decision to take a six-month gap, the structured product market could take a significant hit, say experts.
“It’s likely that the issuers will try to space out their issues to avoid hitting the market all at the same time. Overall, the impact could be 30 per cent though it’s probable that it could be higher,” said the person.
The India Wealth Report released by Karvy Private Wealth in November 2012 stated the assets in structured products in the form of equity-linked debentures are Rs 12,000 crore. Another Rs 150 crore is in debentures linked to the price of gold, according to the report.
STRUCTURED CHAOS
- RBI said last week there should be at least six months gap between NBFC issuance of debentures
- Structured products are based on debentures issued by NBFCs
- Move could cut the Rs 12,000-crore market by around a third
- Issuers had discussions with RBI on the problem
- RBI came out with a clarification dated July 2, deferring the change
- Issuers look to clarity in final guidelines
