Tuesday, February 15, 2011

SBI Retail Bonds 2011 offers close to 10% interest rate

Overview:
State Bank of India is coming out with retail bond again in 2011. After the success of retail bonds in 2010, SBI has decided to sell bonds in 2011 to retail investors offering returns of 9.75% on 10 year bond and 9.95% on 15 year bonds. The issue will open for subscription on 21st February, 2011 and will close on 28th February, 2011.

SBI's 2010 retail bond issue had offered a much lower return but still was a huge success with the bonds being sold out on the first day. Successful investors got an opportunity to make listing gains as well as the bonds were listed at a 5% premium on listing.

The return on 2011 retail bond is even better but the listing gains would be depended on the public demand. Not surprisingly, prices of SBI's 2010 retail bonds fell marginally on Monday, but the securities continue to trade at a significant premium over the issue price.

SBI has announced that its central board has approved raising funds through the issue of subordinated debt (lower tier II bonds). It has approved selling bonds worth Rs 1,000 crore, with an option to retain oversubscription of up to Rs 1,000 crore. In case of retail demand, SBI can retain the oversubscription beyond Rs 2,000 crore up to Rs 10,000 crore.

For 2011 SBI retail bond, there are different rates for retail and non-retail investors. Non-retail investors, who include institutions and high net-worth individuals who invest in bulk, will receive 9.3% for 10 years and 9.45% for 15 years. The bank also has an option to pre pay investors in the 10 year bonds after 5 years and in the 15 year bonds after 10 years.

Although the size of the issue is minuscule compared to the bank`s balance sheet, the issue is part of an ongoing programme to develop a market for long-term resources. The bank presently funds all its long-term loans, which include home loans and loans to the infrastructure sector, through core savings deposits and medium-term deposits. The long-term bonds will enable the bank to match some of its long-term fixed liabilities.

Minimum Investment:

Rs 10,000

Rating:
Triple A

Tax Implication:
There will not be any TDS since the bonds are listed on BSE 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 recommend these bonds to investors. There are few banks offering 9.5% interest rate on fixed deposits. However, they are offering this only for 1-3 year period. Investors are assured liquidity through the listing of these bonds. We believe the issue will get over subscribed like the 2010 SBI retail bond because the interest rate is very attractive.