INTRODUCTION

The Indian Ministry of Finance, in the Union Budget of 2008-2009, highlighted the need to develop a market-based system of classifying market instruments based on their complexity levels. Following this announcement, India Ratings and Research (Ind-Ra) introduced Complexity Indicators for market instruments. Ind-Ra believes the introduction of Complexity Indicators will increase the overall level of risk awareness of market participants, mainly by providing the investor community with an opinion on the relative complexity of a market instrument.

 

Complexity Indicator Scale

India Ratings's complexity indicators are an opinion on the relative complexity of a broad category of instruments expressed on an ordinal scale of 'Low Complexity', 'Moderate Complexity' and 'High Complexity' using the definitions below:

Low Complexity: An instrument where the relationship between the inherent risk factors and intrinsic return characteristics is straightforward.

Moderate Complexity: An instrument where the relationship between the inherent risk factors and intrinsic return characteristics is less straightforward, given the presence of certain contingency features.

High Complexity: An instrument where the relationship between the numerous interdependent risk factors and intrinsic return characteristics is highly involved requiring forward-looking analysis and projections.

 

Complexity Indicators For Indian Market Instruments

Ind-Ra’s complexity indicators cover a broad category of Indian corporate, bank, financial, insurance, municipal and other public finance instruments as well as structured finance securities. The agency’s complexity indicators will be updated as and when new credit instrument categories are introduced.

 

CORPORATES

Instrument Complexity Rationale
Commercial Paper Low Straightforward risk-return characteristics.
Fixed Deposits Low Straightforward risk-return characteristics.
Non Convertible Debentures Low Straightforward risk-return characteristics.
Preferred Shares Low Straightforward risk-return characteristics.
Bank loans (short & long term facilities) Low Straightforward risk-return characteristics.
Guarantees Moderate Nature and scope of guarantee can vary.
Stand by letters of credit Moderate Nature and scope of stand by letter can vary.

BANKS & FINANCIAL INSTITUTIONS

Instrument Complexity Rationale
Certificate of Deposit Low Straightforward risk-return characteristics.
Fixed Deposits Low Straightforward risk-return characteristics.
Non Convertible Debentures Low Straightforward risk-return characteristics.
Preferred Shares Low Straightforward risk-return characteristics.
Bank loans (short & long term facilities) Low Straightforward risk-return characteristics.
Guarantees Moderate Nature and scope of guarantee can vary.
Stand by letters of credit Moderate Nature and scope of stand by letter can vary.
Hybrid Instruments (AT1) High Perpetual instrument with built in loss absorbing features such ascoupon discretion
Principal protected market linked debentures (PP-MLD) High The rating is an ordinal assessment of the underlying credit risk of the instrument and does not factor in the market risk that investors in such instruments will assume.

STRUCTURED FINANCE

Instrument Complexity Rationale
Single Loan Sell Down Pass Through Certificates Moderate Repackaging of a corporate loan. Option features can vary.
Partial Guarantee Bonds High Nature and scope of guarantee can vary.
Asset Backed Securities High Portfolio level collateral and cash flow analysis.
Residential Mortgage Backed Securities High Portfolio level collateral and cash flow analysis.
Non Performing Asset Security Receipts High Portfolio level collateral and cash flow analysis.

PUBLIC FINANCE, INFRASTRUCTURE & PROJECT FINANCE

Instrument Complexity Rationale
Municipal bonds Low Straightforward risk-return characteristics.
Project Finance loans Moderate SPV structure backed by a single asset.
Credit enhanced state owned corporations or municipal bonds Moderate Structured payments with government guarantees.

DERIVATIVES

Instrument Complexity Rationale
All derivative instruments High Value of the derivative instrument is based on the value of an underlying asset.

Disclaimers


India Ratings's Complexity Indicators are based on the information and documents provided to us. Complexity Indicators are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. Complexity Indicators do not comment on the adequacy of market price, the suitability of any investment, loan or security for a particular investor (including without limitation, any accounting and/or regulatory treatment), or the tax-exempt nature or taxability of payments made in respect of any investment, loan or security. India Ratings is not your advisor, nor is India Ratings providing to you or any other party any financial advice, or any legal, auditing, accounting, appraisal, valuation or actuarial services. A Complexity Indicator should not be viewed as a replacement for such advice or services.