India investors look to whet appetite with equities

Indian bond investors are snapping up securities tied to the nation's equities

Indian bond investors scouring for bigger returns are snapping up securities tied to the nation’s equities.

Faced with bank deposit rates at multi-decade lows and a rally that has sent shares to records, investors may buy Rs 10,000 crore ($1.6 billion) of market-linked debentures in the year to March 2018, the most in at least five years, according to Credit Analysis and Research Ltd.

Sales of equity-linked debt securities have surged in the past year as banks slashed interest rates on deposits after being flooded with funds due to Prime Minister Narendra Modi’s cash clampdown. State Bank of India cut the one-year bulk deposit rate by 175 basis points to 4.25 per cent two weeks after the November 8 currency ban. With few good options left, flows into stocks have accelerated, sending the NSE Nifty 50 Index to an all-time high last week.

“Investors can make 7.5 per cent and a best effort of 9.5 or 10 per cent a year, enhancing return versus a fixed-income product,” said Vivek Sharma, Singapore-based senior vice-president for global asset management at Edelweiss Financial Services Ltd. “With rich valuations in Indian equities, these products will continue to be attractive. We expect 20 per cent to 30 per cent growth in the coming year.”

Demand for structured securities is rising as investors in many developed markets confront a new reality: Sub-zero interest rates. 

In Japan, retail investors drove sales of bonds tied to the Nikkei 225 Stock Average to the highest in at least three years in January, according to Societe Generale SA. Securities linked to the Euro Stoxx 50 dominate such offerings, making up 50 to 60 percent of the total equity-linked notes, the firm said.

In India, sales of market-linked bonds, which are typically tied to the Nifty gauge, climbed 70 percent to 83 billion rupees in the year ended March, said Mukund Upadhyay, manager at the Credit Analysis. Edelweiss was the most prolific issuer, with 359 offerings, followed by Reliance Industries Ltd., India’s second-most valuable company, with 172 products, data from the agency show.

“These products were popular in the private wealth space and institutions hardly had any exposure. Recently, corporates have begun to make allocations,” Sharma said.

Tax Efficient

Issuers of market-linked debentures invest a pre-determined part of the amount in debt to protect principal and the remainder in a stock index to give investors a slice of the equity-market based return. These principal protected bonds with maturity of more than one year are more tax efficient, attracting a lower rate of 10 percent on gains versus other securities, said Upadhyay.

“From a risk-return perspective market-linked debentures have been one of the best performing,” Edelweiss’s Sharma said. “They give people the option to lock in returns.”