Faced with tough times, non-banking financial companies (NBFCs) are leaving no sources untapped for funds and are even willing to turn creative. Enter structured products, which have a willing investor in high net-worth individuals (HNIs).
Market-linked debentures have come back with a bang with issuance volume almost doubling in the current fiscal year. As the chart above shows, issuance of such debentures added up to ₹12,910 crore till date, far higher than the ₹7,365 crore issued in FY18.
These are structured debt instruments that give investors exposure to equities.
These products are designed to not only provide assured payback of the initial investment but also a return that could mimic the stock market or even outperform it.
Sensing that there are ready investors waiting to put money, NBFCs such as Aditya Birla Finance Ltd, Mahindra and Mahindra Financial Services Ltd, L&T Finance Holdings Ltd, and Tata Capital Financial Services Ltd have turned first-time issuers.
“For HNIs, this has been a popular product choice for many years now. There is principal protection and the return is linked to Nifty. The payoff is as high as 70-80% of Nifty gains," said Ajay Manglunia, head of fixed income of Edelweiss Financial Services Ltd.
The Edelweiss Group companies have been regular issuers of such debentures.
By design, market-linked debentures sound perfect but there are pitfalls.
For starters, these are complex structures and not every investor understands them. Notice the names of first-time issuers above. These are considered pristine credit and hence trusted by HNIs.
They may have fat pockets but HNIs won’t part with their cash for anyone just based on a decent rating.
Since credit has to be trustworthy, there aren’t that many market-linked debentures issued. The share of these structured debentures is minuscule, and at less than 1% of overall bond issuance.
This gives rise to the problem of liquidity, which forces investors to hold the debenture until maturity.
That said, CARE Ratings Ltd expects issuance to reach around ₹14,000 crore in FY19.
A bullish stock market and a fairly high interest rate regime are the perfect mix to lure HNIs to these products.
Still, smarting from the liquidity crunch triggered by defaulter Infrastructure Leasing and Financial Services Ltd last year, NBFCs do not want to let go of any opportunity to raise money.
For now, HNIs seem to have loosened their pockets for the respectable names among them.