Stock market regulator sSEBI has made it mandatory to appoint a SEBI approved credit rating agency for valuing structured products and market linked debentures.

SEBI has said that the valuation of structured products would be put up once a week on the websites of the issuer and the rating agency. Issuers are also expected to provide the value to investors on request free of cost.

The cost incurred for valuation shall be disclosed in the offer document of the structured product, said SEBI.

SEBI’s guidelines on listing of structured products said that the product should contain an underlying principal component in the form of debt securities where the returns are linked to market returns on other underlying securities or indices.

Securities which do not promise the return of principal amount in full (capital protection) on maturity would not be considered a debt instrument and cannot be issued and listed, said SEBI.

SEBI said that issuers should have a minimum net worth of Rs 100 crore and subscribers should subscribe to a minimum of Rs 10 lakhs irrespective of the face value of the security.

Issuers were free to set their face value, said SEBI. (For example, a subscriber must subscribe to at least 100 securities with a face value of Rs 10000 each, or 200 securities with a face value of Rs 5000.)

Additional Disclosures

SEBI also said that the offer document should specify a detailed scenario analysis of the security’s value under rising, stable and falling market conditions.

The offer document should also reveal risks regarding mathematical models used to create the security and credit risk of the issuer said SEBI.

SEBI also mandated that returns should be shown on an annualised basis. The historical and latest valuation of the security should also be disclosed.

SEBI said that the offer document should disclose the commissions being paid to distributors and also the conditions for premature redemption.

Structured products are securities combining the features of plain vanilla debt securities and exchange traded derivatives. They offer market-linked returns generated through exposures to exchange traded derivatives linked to equity markets. Hence they are also called equity linked debentures which are usually of two types – principal-protected and principal non-protected.

Principal protected instruments guarantee the return of principal amount in full even if the market linked return is negative, while principal non protected instruments do not give such a guarantee and the principal amount erodes to the extent of negative returns.

SALE to Retail Investors

SEBI said that only SEBI registered intermediaries would be allowed to sell the product to retail investors. SEBI directed that intermediaries should ensure that the retail investor understands the product and its suitability to hhis risk profile.

Intermediaries have been asked to compulsorily provide offer documents, information on valuation of the product, and guidance on exit loads, exit options and liquidity support provided (by either the issuer or the secondary) so that he can exit.

SEBI has directed exchanges to put processes in place, publicise the circular, and amend their bye-laws, rules and regulations.

Merchant bankers and credit rating agencies have been asked to comply.(The Hindu)