Indian structured products providers have welcomed the recent move by the Reserve Bank of India (RBI) allowing the sale of structured products by Indian banks via their offshore branches in selective jurisdictions, although market players await how this new development will pan out.
Vivek Sharma, head of structured products and investment advisory at Edelweiss, told SRP that the move from the regulator was a “healthy development” given the fact that the structured products industry in India is still evolving – with much of the issuance surrounding equity index and stocks – to some extent.
“We should expect regulators to become more open to newer underlyings and innovation as we learn from the experience of Indian banks distributing offshore structured products,” he said. “This move may also help in bringing new and cutting edge global ideas to the Indian landscape whiche until now has been dominated by a well-covered equity-linked debenture segment with the majority of payoffs readily available on the equity index front.”
Sharma added that under the new rules Indian banks will be exposed to global products and he expects Indian counterparts to improve product innovation standards for the industry.
Bhaveep Bhatt, head of portfolio management services at Birla Sun Life, however, pointed out that while the relaxation of rules might put local banks at an advantage for their offshore product issuance, no impact can be seen at this stage on the retail side in the form of capital-protected funds issued by banks.
“These products have been selling well not because of regulatory changes but [because of] the strong equity performance seen from March onwards after the government election,” he said.
Underlying pool
According to Sharma, the key challenges for domestic players remain the limited underlyings that issuers can offer in the form of market-linked debentures and the lack of an active secondary market for such products. These factors have significantly limited the exposure of such products in overall client portfolios.
Sharma also said that the only way to increase the depth of the Indian market is by introducing new asset classes in the underlying pool such as fixed income, commodity, inflation-linked notes and so on. “Another way the industry can benefit is on account of participation of non-resident Indian (NRI) investors in this product category,” he said. “This will allow the industry to broaden [its scope].”
Another source at ICICI Bank who wished to remain anonymous told SRP that banks expect more clarity of regulations coming out for the domestic market in relation to market-linked debentures.
“The easing of the regulatory norms by the RBI has given the opportunity for major banks with foreign operations to diversify their business and enhance income, and to help establish the country as an international financial hub amid regional competition,” she said. “ICICI Bank is well positioned to capitalise on new opportunities through the relaxed rules and has plans to increase the overseas presence of its structured product operations in a number of key countries such as Singapore, Dubai and the UK.”
Background
Last month the Indian central bank lifted the restriction on structured product sales by overseas branches of authorised Indian banks by allowing them to offer structured financial products such as bond derivatives to a number of jurisdictions outside India, as opposed to the domestic market where these instruments are not permitted to be sold to retail investors.
The new rules stipulate that foreign branches of Indian banks can only offer structured financial and derivative products which are not permitted in the home country to offshore clients in a limited number of established financial centres outside India, including New York, Singapore, Hong Kong, Frankfurt and Dubai.
The RBI also stressed the importance of adequate knowledge, disclosure and risk management capabilities for handling such products on the part of those entities who are planning to launch products via their foreign branches or subsidiaries.
The new revision marks a significant change in the existing framework introduced in 2008 which established restrictions on domestic institutions to offer complex derivative and structured products without the prior approval of the RBI. However the central bank strictly stated that banks must follow the host and home country regulations with respect to these products, whichever is more stringent, and should at all-time adopt the principle of suitability and appropriateness when advising and conducting sales abroad.
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