Structured note sales decline 73% on disclosure rules

Structured note sales in India dropped at more than twice the global pace in the first half after issuers balked at new regulations aimed at limiting risk and investors avoided securities linked to falling stocks.

Offerings declined 73 per cent to Rs 588 crore ($106 million) from the first half last year, the lowest in at least two years, according to the most recent figures from the Securities and Exchange Board of India. Worldwide sales of the notes, which offer customized bets linked to stocks, currencies, commodities and interest rates, fell 31 per cent to $61.8 billion in the same period, according to data compiled by Bloomberg.

“Issuance has slowed down because issuers were grappling with the new requirements,” said Rajesh Iyer, Mumbai-based head of products and research at Kotak Wealth Management, which provides financial advice for 30 per cent of India’s 100 richest families, according to its website. “Private banks and intermediaries that have budgeted for structured notes will feel the pressure.” Sales were “slightly better” in July and August, he said.

India introduced rules for structured notes in November, joining regulators globally in increasing scrutiny of complex investments after billions of dollars of losses from derivatives trading during the financial crisis. With more than 90 per cent of the securities in India linked to equities, wealthy people who are the biggest buyers of the products also shunned the market after the benchmark BSE India Sensitive Index of stocks slipped 16 per cent from its peak in 2010.

The Securities and Exchange Board of India on November 1 began requiring sellers to publish daily valuations of the notes through independent agencies and make investors aware that their bets may not be hedged and the principal not always protected.