The market for structured retail products in India has been quiet over recent months, but this will soon change, according to Siddhartha Rastogi (pictured), director, Ambit Private Wealth.
"The market for structured products is growing and, at least in the Asia-Pacific region, we will witness an increase of about 15% to 20% over the next few years," said Rastogi. His bullish outlook if premised on rising global interest rates while interest rates in South East Asia and in Japan remain low. "Structured products are the only way you can try and eventually increase your yield without taking that much risk," said Rastogi. "That's why, if issuers are innovative, more and more investors will demand structured products," he added.
The last time the Securities and Exchange Board of India (Sebi) took a stance was about 10 years ago, when it allowed Nifty-linked debentures to be issued, according to Rastogi. These capital protected structures were allowed to be listed on exchange, to create more liquidity. However, in the recent months "there hasn't been any significant change in terms of structuring of retail products or any other specific structuring with Sebi or the Reserve Bank of India (RBI)," said Rastogi.
He is optimistic that the market for structured products will experience a fast development in the next two to three years. "The single determinant is education," he said. "Education is what caused the growth of the equity markets in Asia, for example. Organisations focusing on the structures can educate a large number of clients, which will eventually lead to an increased interest in these products," said Rastogi. While technology provides more and better opportunities to investors, initial learning is manual, according to Rastogi. "Technology can handle both risk management and innovation, but not the learning part," he said.
The Indian investor prefers longer dated structures, with liquidity, according to Rastogi. "They prefer structures that are in ranges beyond 36 months: 36 to 38, 36 to 40, and 36 to 42 months, for instance," he said. These investors are generally inclined towards structures linked to the local Nifty or Sensex benchmarks. "We have seen limited - at least in India - issuance of structures which are stock, commodity or currency specific, though a basket of stocks used to be favoured in the offshore market," said Rastogi. "Those structures are prevalent where ADRs or GDRs are issued.
"Short-term structures, which are very popular in Singapore and Hong Kong, are the product type most notably missing from the Indian scene," said Rastogi. "These include fixed-income structures, with the underlying being interest rate or currency swaps with durations of between three and six months [because of] no or high cost leverage and adverse taxation on structures which have a term of less than a year although listed with capital protection," said Rastogi.
Regarding the recent listing of dual listed companies on the Singapore Exchange (SGX), Rastogi said that some Indian investors who have accounts in Singapore under the liberalised foreign remittance scheme, which allows them to remit US$250,000 outside India, have participated in those structures. "The Indian regulator needs to become open to offering new structures, and more education is necessary as well. Therefore, I see a long way before the market in India adopts and starts offering these structures," he said.
Ambit is working on the development of fixed-income digital instruments, which are "nothing but capital protected digital structures," according to Rastogi. "These are fairly simple, fixed-income instruments that enhance yield and improve taxation for investors," he said.
Further, he explained that Ambit does not have any major plans to expand its business beyond fixed-income structures, since it "believes that, on a standalone basis, equities can deliver far higher returns with owning good underlyings," said Rastogi. "There is no need to enhance the risk profile by leveraging the structure or getting into equity-linked structures." Since interest rates in India and Southeast Asia are decreasing, there is a huge demand for debt structures, according to Rastogi. "This is the main reason Ambit has been manufacturing this kind of fixed-income digital structure," he said.
"We prefer simple and transparent structures to complex ones, [because the education is easier]" said Rastogi. "If they make money, they are repeat clients for life; if they lose money, they know the way the calculation is done," he said. "The more transparency, homogenous and value added in terms of the education you bring to the clients, the more satisfied they will be, and the instruments you provide will stay in their portfolios throughout," said Rastogi. "On the other hand, if you take a complex structure which clients do not clearly understand; whether they make money or not, they will always be suspicious of the manufacturer or the service provider."
Rastogi compares the regionalisation of the market to what is happening in the world of media. "You always tend to buy local news, don't you?" he said. "The structured products market remains quite localised, because people tend to invest in instruments they are fully aware of, which implies products that are available in their region and about which they have enough knowledge and information." For instance, investors in Asia would be more interested in stocks listed on the local stock market rather than those of Apple or Amazon. "More and more, people want to make sure that they primarily invest in what they understand," he said.
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