In a first of its kind initiative credit rating agency CRISIL has launched Complexity Levels, the classification of which is aimed at instructing investors. The capital market instruments would be classified as simple, complex, highly complex based voluntarily by CRISIL, as a public service initiative.
Apart from categorizing instruments in general, CRISIL would also give the Complexity Levels for all the instruments they rate under the rating rationale, said Roopa Kudva, managing director & CEO, CRISIL. "We will also start organizing the ratings chart on our website by Complexity Levels," said Kudva.
Speaking at the launch, finance minister P Chidambaram said financial products must be simple in a market where they are not widely and easily understood. "There is no need to sell complex products. Sell only such products that are required for the economy," he said, reiterating an idea he had mooted in his budget presentation.
Chidambaram had said in his budget speech that “the development of a market-based system for classifying financial instruments based on their complexity and implicit risks."
To begin with CRISIL has initiated coverage on 77 instrument types of which 21 are simple, 27 complex and 29 highly complex. For instance it has classified corporate bond with a fixed interest rate as simple, whereas it has put a bond with floating rate and put and call options as highly complex.
Among mutual fund products it has put gilt funds, plain equity funds, balance funds as simple and floating rate funds as complex and capital protected fund and art funds as highly complex.
The parameters for classification are the ease of calculation of payout and the returns, clarity on timing of cash flows, number of counterparties involved in the transaction and the familiarity of market participants with the instrument.
Complexity Levels apart from educating the investors is also intended to help marketers to sell the products appropriately to the right class of investors.
"Deciding the target segment for each product, and directing selling efforts accordingly. It helps address the problem of mis-selling," said Kudva in her presentation.