& Principal-Protected Market Linked Debentures

Structured notes & PP-MLDs market: Reflection of revival

Share of borrowing via structured notes surged for the first time since June-10
The financial year 2013-14 and 1st quarter 2014-2015 has been the toughest period for the
structured notes market. The frequent changes in regulatory landscape (RBI guidelines on private
placement & New Companies Act) and lacklustre equity market have severely impacted the
issuances of structured notes. The share of structured notes in outstanding corporate debt
borrowings fell at its record low level in 1QFY15, however it surged for the first time in last 18
quarters led by new governments economic development agenda, signs of improving economic
Special Feature Structured Notes

activity and resultant buoyancy in equity market. The outstanding structured notes market
reported 44% of yoy growth in 2QFY15.
Table1: Share of structured notes in total Table2: borrowing via structured notes surged
Outstanding Corporate Debt (% of total) post witnessing record low level in June-14
100% 0.9%

0.8% 0.8%
4.4%
4.4%
4.6%

98%
4.7%
4.8%

4.8%
5.0%
5.0%

5.3%
5.4%

5.4%
5.8%
5.9%
6.4%
6.7%

6.9%
7.2%
7.3%

0.7%
96%
1.7%

0.6%
2.4%
1.9%
1.9%

2.6%
1.8%

94%
1.9%

2.7%
1.9%
2.5%
2.3%

1.9%
2.0%

0.5%
2.6%

92%
3.1%

0.4%
3.2%

0.4%
Sep-10 88.2% 3.8%
4.8%

93.6%
93.1%
93.1%

92.9%
92.8%

90%
92.5%

92.5%
92.3%

92.1%
92.0%
91.9%
91.8%
91.7%

0.3%
90.3%
89.4%
88.9%

88%
Jun-10 87.7%

0.2%
86% 0.1%
Sep-11

Sep-12

Sep-13

Sep-14
Jun-11

Jun-12

Jun-13

Jun-14
Mar-11

Mar-12

Mar-13

Mar-14
Dec-10

Dec-11

Dec-12

Dec-13

0.0%
Dec-10

Dec-11

Dec-12

Dec-13
Sep-10

Sep-11

Sep-12

Sep-13

Sep-14
Jun-10

Jun-11

Jun-12

Jun-13

Jun-14
Mar-11

Mar-12

Mar-13

Mar-14
Fixed Rate Floating Rate Structured Notes Others

Source: SEBI Source: SEBI

December 15, 2014

Weak market sentiment (until the formation of new government), uncertain regulatory
environment and competitive return of debt products/fixed deposits continued to weigh down the
new issuance during June2010-June2014. After SEBIs circular on rating and valuation of PP-MLDs in
Sep-2011, few lead issuers almost exited the market (as they have not issued even a single structure
in last 2 years). Nevertheless, in July 2013, Reserve Bank of India (RBI) introduced stringent
guidelines on NBFCs private placement of NCDs by increasing the minimum investment amount
(from Rs. 10,00,000 to Rs. 25,00,000) and strict adherence of board approved policy for resource
planning.
Again under the New Companies Act, requirement of higher debenture redemption reserve, and
restriction on concurrent issuance of multiple structures further impacted the market sentiment
and made the market almost numb for 2-3 months. Thereafter some more issuers in the market
stopped issuing new structures. This impacted the total asset under management (AUM) of the
structured notes segment as the outstanding structured notes market fell to record low level in
1QFY15.

Structured notes & PP-MLD market: Reflection of revival 1

Special FeatureStructured Notes
& Principal-Protected Market Linked Debentures

However, formation of new government with economic development agenda, resultant buoyancy in equity
market and improvement in overall economic activity has again established the investors confidence in
structured notes and resulted into highest new issuance in 2QFY15 in last 17 quarters. Also, changes with
respect to treatment of taxation on debt funds, as per union budget 2014-15, augured well for this market.
As per the union budget 2014-15, finance ministry proposed the long term capital gain (LTCG) tax @ 20%
with indexation on all non-equity oriented funds and increased holding period (from 12 months to 36
months) for debt funds to avail LTCG benefit. However, capital protected products are listed on the
exchange and attract only 10% tax if they are sold/matured after 12 months. In light of this and benefit of
market participation, structured notes with a >12 month maturity period is expected to gain preference
compared to Fixed Maturity Plans (FMPs) which are popular among manufacturing companys
treasury/investment department (Refer table 6).
Table3: O/s structured notes at 14 quarter high on.. Table4: ...improved new issuances
7,000 1,025 3,500 500
3,083
6,000 950 2,828
6,298

2,800 2,479 400

5,719

5,000 875
5,566
5,344

5,146
5,005

4,953
4,765

4,000 800 2,100 1,972 300

4,381

1,742
4,118
4,068
4,067

3,982
3,924
3,891

3,849
3,798

3,647

3,000 725

2,000 650
1,400 200

1,000 575
700 100
- 500
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15

- -
FY11 FY12 FY13 FY14 1HFY15
O/s Amount (Rs. Crore) - LHS No. of Instruments - RHS Issues Amount (Rs. Crores) - LHS No. of Issues - RHS
Source: SEBI Source: SEBI

Our interaction with wealth managers and product distributors suggest that post a massive and sustained
drive of investment towards debt products in last 4 years, investors have started showing increased
interest towards structured notes in order to diversify portfolio and gain from upsides in the market. CARE
observes a pick up in the amount of new issuance post June 2014, primarily driven by strong appetite
among investors and better underlying performance.
Table5: Positive market/investment sentiment Table6: Falling AUM of FMPs (Rs. Crore)
29000 8900 175,000
27000 8200
173,276

170,000
170,711

170,563
170,257

25000 7500
168,553

165,000
23000 6800

21000 6100 160,000

19000 5400 155,000

156,869

154,692

17000 4700
153,161

150,000
15000 4000
145,000
2-Sep-11

2-Sep-12

2-Sep-13

2-Sep-14
2-Jul-11

2-Jul-12

2-Jul-13

2-Jul-14
2-Mar-12

2-Mar-13

2-Mar-14
2-Nov-11
2-Jan-12

2-Nov-12
2-Jan-13

2-Nov-13
2-Jan-14
2-May-11

2-May-12

2-May-13

2-May-14

140,000
Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
S&P BSE Sensex - LHS CNX Nifty - RHS

Source: NSE & BSE Source: AMFI

Structured notes & PP-MLD market: Reflection of revival 2

 Special FeatureStructured Notes
& Principal-Protected Market Linked Debentures

New issuances of structured notes to reach record level (> Rs. 4,000 crore) in FY15e
Our channel check suggests that structured note segment is expected to report strong growth during
2HFY15e and FY16e on account of certainty with respect to stable regulatory policies, improving economic
scenario (falling inflation, better GDP growth and better investment sentiment), expectation of rate cuts
and buoyancy in equity market. Nevertheless, the structured notes market is expected to witness a sharp
revival in 2HFY15 on account of higher new issuance in 2HFY15 and lower redemption due to
comparatively lesser amount of structures issued during FY11 and FY12. CARE estimates the new issuances
of structured notes to be in the range of 4,000 to 5,000 crore in FY15; the highest in last 4 years.
Table7: Structured notes market statistics
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14
Opening No. of Instruments Outstanding 634 653 680 729 880 817 880 900 878 876 891 881 898 910 905 895 904 878
Opening Outstanding Amount (Rs. Crore) 6,456 6,298 5,566 5,344 5,005 5,146 4,953 4,765 4,381 4,067 4,068 3,798 3,891 3,924 3,982 4,118 3,849 3,647
Issue During the No. of Issues 83 82 109 93 154 155 104 59 79 105 109 138 126 104 90 105 72 142
Quarter Issues Amount (Rs. Crore) 580 437 753 1,313 839 824 504 313 275 471 355 641 505 728 841 424 377 2,452
Redemption During the Number of Redemptions 137 198 251 162 156 120 131 58 119 143 193 241 177 184 188 165 212 217
Quarter Redeemption Amount - (Rs. Crore) 722 1,189 1,160 969 610 891 707 292 603 488 622 564 502 653 746 681 631 473
No. of Instruments Outstanding 653 680 711 729 817 880 900 878 876 891 881 898 910 905 895 904 878 918
Net Outstanding Amount (Rs. Crore) 6,298 5,566 5,344 5,005 5,146 4,953 4,765 4,381 4,067 4,068 3,798 3,891 3,924 3,982 4,118 3,849 3,647 5,719
Source: SEBI

Monthly issuance of PP-MLDs at 36 month high (Since Oct-2011)

The total issuances of principal-protected market linked debentures (PP-MLDs) improved to 54 in
September 2014 with the average maturity of 2.50 years v/s. 21 issuances in September 2013 with average
maturity of 2.27 years. The issuances in September 2014 were primarily driven by Reliance Capital,
Edelweiss, Karvy and Citicorp. CARE finds that ~815 PP-MLDs have been issued in the market during Oct
2011-September 2014. In September 2014, Reliance led the issuances with 23 term sheets, followed by
Edelweiss with 17, Citicorp with 12 and Karvy with 2 term sheets (refer table 10). As of now, we find that
only Edelweiss, Reliance, Karvy, India Infoline and Citi have been active out of 14 well known issuers (refer
table-9). In FY14, Edelweiss emerged as the lead issuer of PP-MLD market amounting for Rs. 460 crore,
followed by Reliance Capital with issuances worth Rs. 350 crore. Nevertheless, in 1HFY15 also, Edelweiss
continued to be the leader with issuances worth ~Rs. 400 crore (refer table-11).

Table8: PP-MLDs monthly issuances Table9: Issuer-wise no. of term sheets (Apr-11 to Sep-14)
56 3.45 350 332

48 3.10 300

250 233
40 2.75
200
32 2.40
149
54

150
24 2.05
41

100
38

36
34

16 1.70
32
31

31
30

30
28
28

28
27

26

26

50 29
24

26 19
21
21
20

19

10
18

8 1.35 6 5 4 4 1 1 1
15

14
12
10

0
9

0 1.00
Nomura
Karvy
Citicorp

Barclays
Edelweiss

DSP Merill Lynch

Religare

Kotak
Macquarie

IIFL

Morgan Stanley

Credit Suisse
Reliance Capital

Motilal Oswal
Dec-12

Dec-13
Oct-12

Oct-13
Aug-12

Aug-13

Aug-14
Apr-13

Apr-14
Nov-12

Jan-13

Nov-13

Jan-14
Sep-12

Feb-13

Sep-13

Feb-14

Sep-14
May-13

May-14
Jun-13

Jun-14
Jul-12

Jul-13

Jul-14
Mar-13

Mar-14

No. of issuances - LHS Avg maturity of issuances (yrs) - RHS

Source: Indias Credit Rating Agencies websites Source: Indias Credit Rating Agencies websites

Structured notes & PP-MLD market: Reflection of revival 3

 Special FeatureStructured Notes
& Principal-Protected Market Linked Debentures

CARE observes that during sluggish/volatile equity market, certain type of PP-MLDs such as range accruals
and golden cushion became favourite among investors. During FY14 (high volatility in the stock markets and
elevated fixed income yields) binary and digital structures witnessed increased interest of investors. These
are linked to fixed coupon and give some participation in equities to generate further upside. These
structures yield an alpha over other fixed income products. During 1HFY15, the PP-MLD market witnessed 6
structures with other than nifty underlying i.e. Bank Nifty (issued by Edelweiss), stock (issued by Reliance
Capital) and S & P 500 (issued by Citicorp). However, structures with Nifty underlying continue to have more
acceptability among investors as against gold or specific stocks as Nifty is more diversified and liquid.

Table10: Issuances improved significantly during 2QFY15 Table11: Edelweiss emerged as lead issuer
24 5.0
4.6
4.5
20 4.0
4.0
3.5
16 3.5
2.9
3.0

Rs. Billions
12 2.4
2.5
8 2.0
1.5
4 1.0
1.0
0 0.5 0.3
0.1 0.1
Dec-12

Dec-13
Oct-12

Oct-13
Aug-12

Aug-13

Aug-14
Apr-13

Apr-14

0.0
Nov-12

Jan-13

Nov-13

Jan-14
Sep-12

Feb-13

Sep-13

Feb-14

Sep-14
May-13

May-14
Jun-13

Jun-14
Jul-12

Jul-13

Jul-14
Mar-13

Mar-14

0.0
FY14 1HFY15
Reliance Capital Edelweiss Citi Corp Macquarie Edelweiss Reliance Citicorp Macquarie Karvy

Source: Indias Credit Rating Agencies websites Source: Issuers term sheet disclosures on BSE/NSE

Robust equity market sentiments, expectation of falling interest rates in FY16e, changes in taxation
of debt fund and new government willingness to undertake structural reforms is expected to augur
well for the structured notes market. CARE channel check suggests that the structured notes market
may witness entry of new issuers and revival of the overall market in FY16e. Also, market may
observe issuance of structures linked to new securities or asset classes (G-sec, sectoral indices,
commodities etc.) in FY16e.

Contact:
Ramadasu Bandaru Mukund Upadhyay
Group Head-Manager Dy. Manager
+91-22-6754 3402 +91-22-67543669
ramadasu.bandaru@careratings.com mukund.upadhyay@careratings.com
Disclaimer
This report is prepared by Credit Analysis & Research Limited [CARE]. Care has taken utmost care to ensure accuracy and objectivity while developing this
report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is
guaranteed. Care operates independently of ratings division and this report does not contain any confidential information obtained by ratings division,
which they may have obtained in the regular course of operations. The opinion expressed in this report cannot be compared to the rating assigned to the
company within this industry by the ratings division. The opinion expressed is also not a recommendation to buy, sell or hold an instrument.

Care is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report
and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report. This report is for the information of
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Structured notes & PP-MLD market: Reflection of revival 4