Thursday, October 14, 2010

SBI Bonds - 9.5% Interest Rate - Recommendation

Overview:
State Bank of India (SBI), India’s largest lender, is selling bonds worth Rs 500 crore to retail and institutional investors with an option to retain oversubscription for another Rs 500 crore. The Rs 1,000 crore proposed to be raised will be part of the bank’s lower Tier-II bonds, which will help it enhance its capital adequacy ratio. The issue will be opening from October 18 to October 25, 2010, with an option to close earlier and /or to extend up to a period as may be determined by ECCB.
Interest Rate - Return:
The issue offers investors two options – Series 1, having a maturity of 10 years with a coupon of 9.25% paid annually. It will have a call option after five years and one day with 0.5% additional for the balance period of the bonds, in case the call option is not exercised by SBI.

In case of Series 2, which will have a maturity of 15 years, it will provide a coupon of 9.5% annually. It will have a call option after 10 years and one day with 0.5% additional step-up after 10 years if the call option is not exercised. This means that in case the call option is not exercised by SBI, the coupon on bonds shall be increased by 0.50% for the balance period of the bonds.

Minimum Investment:
Rs 10,000.

Rating:
Triple A

Tax Implication:
There will not be any TDS since the bonds are listed on NSE and will be compulsorily issued in dematerialised form, so investors without demat a/c will not be eligible. The interest received on these bonds will be treated as income from other sources and shall form a part of the total income of the assessee in that financial year in which they are received. There are no tax benefits for investing in these bonds.

Who can Invest:
Resident Indian individuals, HUF, partnership firms, corporates, banks, financial institutions, insurance companies, mutual funds, provident/superannuation/ gratuity/ pension fund, private/public religious / charitable trust, co-operative society can invest in these bonds.
Recommendation:
We would highly recommend this bond to investors. This has a good return and a highly rated and safe bond. This is definately better than many fixed deposits out in the market, both from banks and company fixed deposits. This should definately form part of investor's portfolio. If SBI does not call the bonds after 5 years, investors will get 0.5% more return for the rest of the period of the bonds.

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