Structured Notes on MCX Gold Index New Product Idea Anshum Bhambri - PowerPoint PPT Presentation

Structured Notes on MCX Gold Index New Product Idea Anshum Bhambri + 91 22 4088 0136 August 28, 2012 1 Tuesday, August 28, 2012

Table of Contents Why Gold ? Why Gold-linked Structured Products ? Product Idea Sample Termsheet August 28, 2012 2

Why Gold ? “Put forth thy hand, reach at the glorious gold” – William Shakespeare These words probably best describe India’s affection towards gold. It is a known fact that India as the largest consumer of gold in the world has a fascination for the metal in all its forms - jewellery, bars, coins, ETF’s and now structured notes. Down the generations, Indians have always appreciated gold as a safe haven and a liquid asset. Gold has usually provided scope for capital appreciation and at the same time lent stability to the portfolio Since the beginning of this year, in an effort to reduce the trade deficit, the Indian government has been trying to influence the imports of gold by increasing the customs duty and controlling the rates at which the customs duty at the time of imports has to be paid. While the government continues with its purpose, we should not lose sight of the fact that the demand for gold in India be paid. While the government continues with its purpose, we should not lose sight of the fact that the demand for gold in India is not going to reduce One of the ways to reduce the imports of gold and still meet the requirements of the market is to provide products whereby the gold held in private hands (estimated to be in excess of 18,000 tones of gold) can be brought into the mainstream. This will not only meet the requirements of the physical market but also provide liquidity to the owners of the metal and into the economy at large. Unfortunately, there is a dearth of opportunities for the holders of the metal to get liquidity against the metals owned. The large amounts of gold held in private hands and the increase in demand for investment products like coins, bars, ETF’s also indicates that the consumer appreciates the value of gold as an investment more than ever before highlighting the fact that the consumer is looking for investment products in gold – the requirement to hold the physical upfront may not be there August 28, 2012 3

Why Gold-linked Structured Products ? There is now a clear opportunity for structured products in India which can allow participation to all types of investors with the flexibility of having physical exposure and not necessarily holding the metal in physical form. Before we dwell further on this, we need to appreciate why there is a need for these products. The main reasons are: – Ability to enjoy the yield of the asset – Protection of capital – Comfort of being able to buy the asset in physical form as and when required; and – Comfort of being able to buy the asset in physical form as and when required; and – Ability to exit at ease. At present the two common products where one can invest without holding physical gold are ETF’s and gold future contracts. These products provide an opportunity in invest in gold but have their drawbacks as they do not provide capital protection August 28, 2012 4

Product Idea Theme We, at Quant Capital believe that gold is prone to downside weakness in the near to medium term. However, we are long term gold bulls on account of various macroeconomic scenarios that are likely to play out in the days to come. These include the unfolding of the European debt crisis; the devaluation of the US dollar on account of quantitative easing; slow growth and high inflation in the emerging economies and increasing demand for real assets in case there is a flight to safety To monetize our view, we are launching a 100% capital guaranteed structured product that is bullish on the MCX Gold Index. The tenor of the structured product is two years and it incorporates asianing (i.e. averaging feature) to ascertain the initial level and final level for the strategy To elaborate further, the initial level (or the entry point) of the strategy is fixed to the arithmetic average of the level of the MCX Gold Index on the first Friday of each of the first three months of the product. Thus, we can take advantage of our slightly bearish view on gold in the near term. In essence, the asianing feature over the first three months helps the investor to get the best entry point for his bullish strategy Moreover, the final level of the strategy is set to the arithmetic average of the closing level of the MCX Gold Index on the first Friday of each of the last three months of the strategy. Again, the asianing effect helps the investor to overcome the exposure to the digital risk that is prevalent on the final day August 28, 2012 5

Product Idea Payoff Definition The payoff profile of the structured product is – If Final Level > = Initial Level, The investor gets 100% of his capital back and a coupon of 28% at the end of two years If Final Level < Initial Level, The investor gets 100% of his capital back and a coupon equal to: The investor gets 100% of his capital back and a coupon equal to: 100% * MAX [ 0%, { 28% - 1.2 * (1 – Final Value/Initial Value) } ] Coupon under various scenarios - Final Level of MCX % of Initial Level Coupon Gold Index (INR) 30633 100% or Higher 28.00% 29101 95.0% 22.00% 27570 90.0% 16.00% 26038 85.0% 10.00% 24506 80.0% 4.00% 23485 76.7% 0.00% < 23485 Lower Only Principal back August 28, 2012 6

Product Idea Payoff Profile Scenario Analysis Quant Capital's Gold Product Long Position in MCX Gold Index 40.0% 30.0% 20.0% 10.0% 0.0% Return 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 130% -10.0% MCX Gold Index Final Value -20.0% -30.0% -40.0% -50.0% -60.0% August 28, 2012 7

Sample Termsheet Issuer XXX Tenor 24 months from Initial Valuation Date Face Value INR 100, 000/- (INR One Lakh Only) One Unit INR 100,000/- (INR One Lakh Only) Minimum Investment 10 unit Additional Purchase In multiples of 1 unit Issue Price 100% of Principal Amount 10 th September 2012 Issue Opening Date 30 th September 2012 Issue Closing Date 3 rd October 2012 Pay in Date 5 th October 2012 Initial Valuation Date (Deemed Date of Allotment) 3 rd October 2014 Final Valuation Date 17 th October 2014 Final Redemption Date / Maturity Date Reference Index Reference Index MCX Gold Index MCX Gold Index Calculation Agent Reliance Capital Limited, or any person duly appointed by the company Coupon Period From (and including) the Initial Valuation Date till (and including) the Final Valuation Date Coupon Payment Date Final Redemption Date Business Day Convention Modified Following 5 th October 2012 Initial Performance Observation Dates 2 nd November 2012 7 th December 2012 4 th August 2014 Final Performance Observation Dates 5 th September 2014 3 rd October 2014 Initial Value 1/3 * Sum of official closing levels of the Reference Index on the Initial Performance Observation Dates, as determined by the Calculation Agent Final Value 1/3 * Sum of official closing levels of the Reference Index on the Final Performance Observation Dates, as determined by the Calculation Agent August 28, 2012 8

Sample Termsheet (continued) Final Redemption Amount 100.00% of Principal Amount + Coupon Coupon A) If Final Value >= Initial Value, Principal Amount * 28% B) If Final Value < Initial Value, Principal Amount * Perf; where Perf = Max [0%, {28.00% - 1.2*(1-Final Value / Initial Value)}] Issuance Mode and Trading Mode Dematerialized mode Security Cover The Company shall maintain a minimum asset cover of 100% at all times Rating CARE PP-MLD AAA BY CREDIT ANALYSIS & RESEARCH LIMITED (“CARE”). Instruments with this rating are considered to have highest (“CARE”). Instruments with this rating are considered to have highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. Debenture Trustee IL&FS Trust Company Limited Depository MCX Upfront Fees 2% (inclusive of all taxes or statutory levies and no further taxes or statutory levies will be debited to Clients account. However, these fees are exclusive of transaction costs, if any) to be paid by the investor at the time of investment. Placement Fees Further, the Portfolio Manager will receive in the form of a placement fee or retain by way of discount a sum of up to 2% of the face value of each Non Convertible Debenture (NCD), which will be treated as fees in addition to the fees mentioned above. The maximum placement fees / discount that the Portfolio Manager can receive / retain out of the face value of each debenture will not exceed Rs.20,000/-. Such fee may at the discretion of the Portfolio Manager be passed on to the Introducers/Distributors August 28, 2012 9