SBI bonds good for those with long-term

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Madhu T,ET Bureau,Feb 19, 2011, 10.32pm IST
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 State Bank Of India|

 SBI

MUMBAI: After the huge success it saw in its first issue in October 2010, the State Bank of
India has come up with its second tranche of retail bonds. The size of the issue is Rs 1,000 crore,
with an option to retain an extra Rs 1,000 crore. Allotment of these bonds will be done on afirst-
come-first serve basis, based on the date of the application. The issue opens on February 21 and
closes on February 28.

THE PRODUCT

The bonds are available in two series with diverse maturities: Series 3 will have a maturity of 10
years, with an interest of 9.75% for retail investors and 9.3% for high net worth investors (HNIs)
and qualified institutional buyers (QIBs). Series 4 will have a maturity of 15 years, with an
interest rate of 9.5% for retail investors and 9.45% for HNIs and QIBs. The face value of each
bond is Rs 10,000 and one can apply for a minimum of one bond. The maximum size of
application under the retail category is Rs 5 lakh and 50% of the issue size is reserved for retail
applicants while the balance 25% is for HNIs and 25% for QIBs, respectively. These bonds are
not secured and don't have any lock-in. The bonds will be available only in the demat mode and
it will be listed on the BSE and the NSE. While Series 3 bonds have a tenor of 10 years with a
call option by SBI after five years, series 4 bonds have a tenure of 15 years with a call option
after 10 years. The bonds are not redeemable at the option of the bondholder or without the prior
consent of the central bank.

WHO SHOULD APPLY

Investors with a long-term view, seeking periodic returns from debt products with strong safety
of principal and high liquidity, could consider these bonds. Currently, bank fixed deposits pay
anywhere between 8.5% and 9% per annum for a 10-year fixed deposit. SBI bonds are paying
about 100 basis points higher to retail investors. The issue is rated 'AAA' by Crisil and CARE,
which indicates the highest safety. The previous issue of SBI bonds closed on the first day was
oversubscribed about 17 times on the first day. Distributors expect this issue to get a good
response too, and hence, investors interested in the issue should apply early.

WHY NOT TO APPLY

In case investors want to sell the bonds mid-way, the only way out would be the stock exchange.
Bond prices could fluctuate with interest rates. So, if interest rates move upward, bond prices
could go lower and you could suffer a capital loss. Similarly, if interest rates move downward,
bond prices could move up and you could have a capital appreciation. There is also no put option
available to investors, and in case the call option is not exercised, there is no step-up coupon rate.
There are no tax benefits available and the income received shall be treated as income from other
sources and taxed accordingly.

New Delhi: Sam Pitroda, Advisor to Prime Minister on Public Information, Infrastructure and
Innovations, presenting the AIMA Life Time Achievement Award to Tata Group Chairman Ratan Tata
during a ceremony in New Delhi on march 22 Tuesday2011. AIMA President Gautam Thapar and SBI
Chairman O P Bhatt (R) look on. PTI