Structured debt under RBI scanner
The Economic Times, November 18, 2009, Page 9
Sugata Ghosh MUMBAI
A NEW conservatism is sweeping the financial sector. After taking the fizz out of markets such as loan securitisation and currency derivatives, the Reserve Bank of India has turned its glare on equity linked debts—one of the hottest products among well-heeled investors and corporates.
The regulator has asked leading finance companies, bond houses and securities firms to disclose details on all structured debentures floated by them to raise money.
The move, the market feels, may be harbinger to a new set of dos and donts on these instruments whose returns may be linked to stock indices, individual shares, money market rates (like overnight index swaps) and even commodities.
Over Rs 15,000 crore of such structured debts are outstanding in the market. “Most of these instruments are unsecured...it’s possible that RBI is uncomfortable with such instruments, which investors may not fully understand and end up losing money,” said the chief dealer of a large Mumbai-based non-banking finance company that has received the RBI communique.
The most common among these structured debts was equity-linked debentures (ELDs), which were aggressively sold by securities arms of foreign and private banks and foreign NBFCs. A comparatively new debt instrument in the Indian financial market, ELDs came in two types: (a) principal protected, where the principal amount is fixed while the interest component is variable and linked to stock market movements; (b) the more risky variant is the non-principal protected instruments where the even the principal is linked to the market. The issuance of nonprotected ELDs stopped since rating agency Crisil announced two years ago that it was “reconsidering assigning ratings” to such debentures.
“The RBI wants to bring down the leverage by non-banking finance companies, which are allowed to raise unsecured debt, and bring down systemic risk. This is the customary conservatism on RBI’s part,” said a senior dealer of a local bond house.
Significantly, the RBI letter comes at a point when the Sensex has crossed 17,000 and an unbridled inflow of FII money has revived the old debate on the need to curb dollar inflow. “The low interest rate on bank deposits and poor return from short-term mutual funds may have increased the appetite for such instruments among many investors,” said treasurer of a foreign bank. “It’s also possible,” according to him, “that RBI wants to curb the back-to-back transactions that goes on in offshore markets against these issuances.” Foreign firms issuing ELDs in India often enter into reverse deals in markets like Singapore or Hong Kong to hedge their positions, and such transactions can make the local stock or currency market more volatile.
CLOSE WATCH
What is structured debt?
Debt that the lender has tailored specifically for the borrower. Structured debt often includes incentives and options for the borrower to do business with the lender. The most common among these structured debts was equity-linked debentures (ELDs)
How big is this market?
Over Rs 15,000 crore of such structured debts are outstanding in the market.
Why is RBI interested?
RBI may be uncomfortable with instruments that investors may not fully understand and end up losing money. RBI may also want to curb the back-to-back transactions that happen in offshore markets against these issuances.
The Economic Times, November 18, 2009, Page 9
Sugata Ghosh MUMBAI
A NEW conservatism is sweeping the financial sector. After taking the fizz out of markets such as loan securitisation and currency derivatives, the Reserve Bank of India has turned its glare on equity linked debts—one of the hottest products among well-heeled investors and corporates.
The regulator has asked leading finance companies, bond houses and securities firms to disclose details on all structured debentures floated by them to raise money.
The move, the market feels, may be harbinger to a new set of dos and donts on these instruments whose returns may be linked to stock indices, individual shares, money market rates (like overnight index swaps) and even commodities.
Over Rs 15,000 crore of such structured debts are outstanding in the market. “Most of these instruments are unsecured...it’s possible that RBI is uncomfortable with such instruments, which investors may not fully understand and end up losing money,” said the chief dealer of a large Mumbai-based non-banking finance company that has received the RBI communique.
The most common among these structured debts was equity-linked debentures (ELDs), which were aggressively sold by securities arms of foreign and private banks and foreign NBFCs. A comparatively new debt instrument in the Indian financial market, ELDs came in two types: (a) principal protected, where the principal amount is fixed while the interest component is variable and linked to stock market movements; (b) the more risky variant is the non-principal protected instruments where the even the principal is linked to the market. The issuance of nonprotected ELDs stopped since rating agency Crisil announced two years ago that it was “reconsidering assigning ratings” to such debentures.
“The RBI wants to bring down the leverage by non-banking finance companies, which are allowed to raise unsecured debt, and bring down systemic risk. This is the customary conservatism on RBI’s part,” said a senior dealer of a local bond house.
Significantly, the RBI letter comes at a point when the Sensex has crossed 17,000 and an unbridled inflow of FII money has revived the old debate on the need to curb dollar inflow. “The low interest rate on bank deposits and poor return from short-term mutual funds may have increased the appetite for such instruments among many investors,” said treasurer of a foreign bank. “It’s also possible,” according to him, “that RBI wants to curb the back-to-back transactions that goes on in offshore markets against these issuances.” Foreign firms issuing ELDs in India often enter into reverse deals in markets like Singapore or Hong Kong to hedge their positions, and such transactions can make the local stock or currency market more volatile.
CLOSE WATCH
What is structured debt?
Debt that the lender has tailored specifically for the borrower. Structured debt often includes incentives and options for the borrower to do business with the lender. The most common among these structured debts was equity-linked debentures (ELDs)
How big is this market?
Over Rs 15,000 crore of such structured debts are outstanding in the market.
Why is RBI interested?
RBI may be uncomfortable with instruments that investors may not fully understand and end up losing money. RBI may also want to curb the back-to-back transactions that happen in offshore markets against these issuances.
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