Securities and Exchange Board of India (Sebi) chairman C B Bhave has come out strongly against market intermediaries that introduce inventive products, saying they were just methods of hiding high leverage.
At a financial seminar conducted by the Symbiosis Institute of Business Management, Bhave said that since leverage is dangerous and regulators try to regulate leverage, market intermediaries are persistently finding out methods of hiking leverage.
Bhave’s statement immediately followed the RBI’s worries regarding complicated structured products such as synthetic securitisation and credit derivatives. RBI plans to introduce these products only after reviewing their overseas experience and the risk management capacities of the Indian system.
He said that such products may help in making money during the good times but has got drastic significance if the things go wrong. It has the capacity to collapse the entire system, which was evident during the recent financial crisis as leading US banks had a leverage of 30-40 times.
As the temptation to leverage is high, it is tough to maintain discipline and during the bad times only those with the minimal leverage will survive, he said.
Some such popular structured products in India are Nifty-linked debentures, debt-linked notes, daily range accrual notes, look-backs and Maxof structures are meant for HNIs. The size of this market is approximately $2 billion.
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