Edelweiss has been at the forefront of the structured products market in India for the past five years and has a 38.4% share of the INR6.5bn (US€100m) total outstanding volume in the market year to date, a track record that was recognised by SRP with an award for being the Best Private Banking Solution at the Asia-Pacific Structured Products and Derivatives Awards 2015, which took place on September 22, in Hong Kong.
SRP spoke to Vivek Sharma (pictured), head of South East Asia and Middle East-global asset management and former head of structured products & investment advisory, about structured products usage in India and the need to lift restrictions on eligible assets to boost the supply side and bring more competition to the market.
How would you rate Edelweiss's performance in India’s structured products market this year?
Our performance this year has been very robust. For the last few years we have been growing at almost 20% to 25% year on year in terms of annual sales. This year we are already at last year's level in terms of our YTD sales and we have already improved on our previous year's performance. Investor sentiment about the market has helped and demand continues to be encouraging.
What distribution channels are driving sales of structured products in India?
From a product perspective the HNWI segment is driving most of the activity although the corporate and institutional segment is also involved in this market. We believe that as the market develops demand from the corporate and institutional segment will increase and will help to further grow the market. Most products are concentrated around yield-based offerings or simple participation-linked ideas around equities. As a significant player, we have seen year-on-year growth of around 25% in sales, but the industry could benefit from higher client awareness and flexibility on offering products using varied underlyings, as is the norm globally. Having said that, we definitely see this product category becoming more and more important in client portfolios owing to the strong risk return benefit provided by this asset class.
Why are principal-protected market-linked debentures (PP-MLDs) the product of choice for issuers and investors in India?
The dominance of the capital-protected element is based on two factors. From a client perspective, capital protection is something that appeals to a wide segment of investors in India that do not want to risk their capital. Also, the high interest rate environment in India provides a good backdrop to create interesting products with good potential returns with capital protection. Regulatory guidelines and tax benefits around capital-protected products are also enabling this segment to drive most of the activity in the structured products market.
The Indian structured products market has seen a number of foreign issuers come and go. What are the reasons for this?
Most investment banks involved in the structured products market globally (Citi, Barclays, Macquarie, Deutsche, UBS, Credit Suisse) have been active in India at some point, but the HNWI segment got saturated and most of these providers had challenges from a distribution perspective. However, the interest and awareness around this product category has increased and there is some indication that demand for structured products is also increasing. We believe that as investors become more comfortable with this product category and experience good investment performance, we will also see more interesting products in the market. Once the Indian regulator provides a comprehensive set of guidelines and expands the eligible assets that can be used as underlyings for structured products, we will see an increase from the supply side as well.
Is the lack of a regulatory framework covering structured products jeopardising the growth of this market?
We believe regulation could play a significant role in pushing the development of the market. We have an existing framework that could be improved to promote activity in this market. A few years ago, the regulator came out with a set of guidelines relating to structured products that provide some clarity around the distribution of structured products which are sold primarily through wealth management industry in India. These rules are a positive step because they recognise structured products as a product category but there are still a number of restrictions that need to be lifted if we want to see the Indian market evolving in a meaningful way. Currently, there are guidelines on the minimum tenor and the minimum investment allowed in structured products. The restrictions also apply to the asset classes that can be deployed in these investments. There are also regulations governing issuance and distribution of such products which impact widespread marketing and distribution of structured products. The market is mainly dominated by equity-linked products with a marginal amount of products linked to fixed income strategies. We believe that once currencies and commodities are allowed to be used to construct structured investments the market will benefit.
All tables and charts were supplied by the Securities and Exchange Board of India (SEBI).
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