Mumbai: Enthused by the phenomenal gain in the Sensex, India’s benchmark stock index, in the past six months, equity-linked structured products are making a comeback.

Foreign banks such as Morgan Stanley, Citigroup Inc., Barclays Bank Plc, Merrill Lynch and Co. Inc. (now Bank of America Merrill Lynch), Standard Chartered Plc and Deutsche Bank AG are traditionally active in this segment.

The most popular structured products in India are index-linked debentures that combine the low risk profile of a debt product and the high returns of equities. A major portion of the money is invested in fixed-income instruments, such as bonds, while the rest is deployed in complex option strategies and leveraged bets to produce very high returns.

Such products were popular among high networth individuals, or HNIs, in 2007, when the Indian equity market was in a firm bull grip. They are marketed by third-party distributors and wealth-management firms. The appetite for these products is back among HNIs, with at least two entities issuing these products in September and more in the offing.

“The market for structured products started picking up from the last week of August as many investors felt that they lost out on the quick run-up in the market in the preceding months," said Ajay Bagga, head, private wealth management, Deutsche Bank, India.

The bear phase that continued till March has made investors change their approach from that in 2007. “Investors have adopted a safety-first approach and they are looking at transparency and clarity on their investments," said Bagga. “ of the PMS (portfolio management services) providers has recently launched a product that offers a minimum return with a combination of participation component in a market uptrend." Deutsche Bank’s wealth management arm is distributing this.

Though the Sensex has been on the rise, monthly volumes in these products are still below 2007 levels. The total outstanding in structured products stood at Rs1,200-1,300 crore at the end of 2007. Bagga said that the monthly average volume in the industry now stands at Rs35-40 crore against Rs100-200 crore during 2007.

After the stock market crash, distributors tried to sell such products in the garb of “capital protection plans" last year, but there were not too many takers. The volumes became almost nil at the end of 2008, and remained very low till the end of the first quarter.

Morgan Stanley Wealth Management Ltd executive director Himanshu Bhagat said many of these issues are happening in small tranches of $5-10 million (Rs23.3-46.5 crore).

Barclays Bank has recently structured a note for clients of Religare Macquarie Private Wealth Management Ltd. Vikas Agnihotri, CEO, Religare Macquarie Private Wealth, claimed to have successfully marketed a Nifty-linked note in September and he may bring another issue soon.

Dinesh Advani, head, third-party distribution, Motilal Oswal Financial Services Ltd, is also seeing increasing interest in such products. “Recently, one issuer raised about Rs15 crore. Demand is coming back. People want the returns but are concerned about capital."

Till 2007, the minimum investment size used to be Rs25 lakh. The threshold limit was brought down in 2008, when the market started tumbling and HNIs turned risk-averse. According to estimates by consulting firm Celent, the number of households in India with wealth of $100,000 or more is expected to swell beyond 720,000 by 2012.

Broadly, two types of structured products are available— with and without capital protection—and their tenures vary between 24 months and 36 months. In the capital-protected model, post-tax returns are typically 7-12%. There is no range for returns and risk for the other product, where no capital protection is offered.

At the height of bull run in 2007, most investors bought 36-month paper. So, they could not encash their investments when the markets started falling in 2008. The Sensex, which rose to its lifetime high of 20,873.33 in January 2008, slipped to 8,160.40 in March.

Bagga said most of this paper will mature between December and March. “Those investments will get their principal amount back or get marginally positive returns, as the markets fell during 2008." The Sensex lost 200.88 points on Friday to close at 16,642.66.

For now, investors prefer to park money in products with shorter maturities of 12-18 months, as they offer a quick exit and better call on market liquidity.

“We have issued quite a few (Nifty-linked notes). Given the volatility, investors are looking for capital protection and some participation in the market. People are open if the structures are simple and transparent," said Bhagat.

Indeed, the rising market has brought back investor interest in these products but it is still early days yet. Agnihotri said the key is to explain to the investor what he is getting into. “When you are marketing a structured product, it is very important for customers to know and understand the nature of the product. In addition to the usual risks involved in any market product, there is a knowledge risk."

In 2008, the Indian banking regulator had said PMS should be conducted entirely at the customer’s risk, without guaranteeing, either directly or indirectly, a predetermined return. “There should be a functional separation of trading and back-office functions relating to banks’ own investment accounts, PMS clients’ accounts and other constituents’ (including brokers’) accounts. Further, PMS clients accounts should be subjected to a separate audit by external auditors," it had said.