Suitability and Appropriateness in India

Slowly and steadily, India is adopting global best practices (MiFID) surrounding Suitability and Appropriateness. Gone are the days when anyone could sell any investment product to any investors.

Take the following situation of a structured product sale, which is a SEBI guideline and law effective November 1, 2011.

1. ANYONE CAN SELL – Now only SEBI registered intermediary can sell structured products

2.SELL ANY PRODUCT – Now, only products suitable to a client, which are in accordance with his risk profile and those that are understood by the client can be sold

3. SELL TO ANY INVESTORS – Now structured products can only be sold to investors who are willing to put a minimum Rs 10lakh, thereby excluding the small retail investors.

So, as we can see, structured products primary issues are now heavily regulated and we are confident that there will be more guidelines around these instruments as industry gains more experiences. The wake up call was the series of Misselling frauds in Citibank and other firms.

In brief, the following are the mandatory guidelines for enhancement of disclosures with respect to Structured Products. The aim of the guidelines also is to incorporate Suitability and Appropriateness in some form in India. Globally, in the UK, MiFID is the main framework for Suitability and Appropriateness.

1. Applicable to structured products / Market Linked Debentures listed on Stock Exchange
2.‘Non Principal protected’ are not eligible for listing on stock exchange
3. Issuer to have minimum net worth of Rs 100cr
4. Ticket Size- No allotment / subscription less than Rs.10lakh in any issue
5. All commissions to be disclosed in offer document
6. Credit rating by any registered Credit Rating Agency shall bear a prefix ‘PP-MLD’ denoting Principal Protected Market Linked Debentures
7. Conditions for premature redemption shall be clearly disclosed in the offer document
8. Appointment of third party valuation agency mandatory - credit rating agency registered with SEBI
9. Minimum weekly valuation of SP by the agency
10. Latest and historical valuation for such securities shall be made available on the websites of the issuer AND of the valuer
11. Valuation cost to be disclosed in offer document

Riskpro has documented the September 2011 guidelines as summary and are available for download below.
SEBI Guidelines for Structured Products Disclosure and Other requirements

RISKPRO ADVISORY FOR SUITABILITY AND APPROPRIATENESS
Riskpro has a team of Banking experts who have significant experience in implementing a comprehensive framework to address Suitability & Appropriateness. To learn more about our offering, please email manoj.jain@riskpro.in

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