INTRODUCTION

The Indian Ministry of Finance in its 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 has introduced Complexity Indicators for Indian Market Instruments. India Ratings believes that the introduction of Complexity Indicators will increase the overall level of risk awareness of market participants, particularly 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

India Ratings'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. India Ratings's complexity indicators will be updated as and when new credit instrument categories are introduced.

 

CORPORATES

InstrumentComplexityRationale
Commercial PaperLowStraightforward risk-return characteristics.
Fixed DepositsLowStraightforward risk-return characteristics.
Non Convertible DebenturesLowStraightforward risk-return characteristics.
Preferred SharesLowStraightforward risk-return characteristics.
Bank loans (short & long term facilities)LowStraightforward risk-return characteristics.
GuaranteesModerateNature and scope of guarantee can vary.
Stand by letters of creditModerateNature and scope of stand by letter can vary.

BANKS & FINANCIAL INSTITUTIONS

InstrumentComplexityRationale
Certificate of DepositLowStraightforward risk-return characteristics.
Fixed DepositsLowStraightforward risk-return characteristics.
Non Convertible DebenturesLowStraightforward risk-return characteristics.
Preferred SharesLowStraightforward risk-return characteristics.
Bank loans (short & long term facilities)LowStraightforward risk-return characteristics.
GuaranteesModerateNature and scope of guarantee can vary.
Stand by letters of creditModerateNature and scope of stand by letter can vary.
Hybrid Instruments (AT1)HighPerpetual instrument with built in loss absorbing features such ascoupon discretion
Principal protected market linked debentures (PP-MLD)HighThe 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

InstrumentComplexityRationale
Single Loan Sell Down Pass Through CertificatesModerateRepackaging of a corporate loan. Option features can vary.
Partial Guarantee BondsHighNature and scope of guarantee can vary.
Asset Backed SecuritiesHighPortfolio level collateral and cash flow analysis.
Residential Mortgage Backed SecuritiesHighPortfolio level collateral and cash flow analysis.
Non Performing Asset Security ReceiptsHighPortfolio level collateral and cash flow analysis.

PUBLIC FINANCE, INFRASTRUCTURE & PROJECT FINANCE

InstrumentComplexityRationale
Municipal bondsLowStraightforward risk-return characteristics.
Project Finance loansModerateSPV structure backed by a single asset.
Credit enhanced state owned corporations or municipal bondsModerateStructured payments with government guarantees.

DERIVATIVES

InstrumentComplexityRationale
All derivative instrumentsHighValue 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.