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More on SBI Bond Issue

SBI Announces Rs 500 crore Bond Issue

 

In order to enhance its capital adequacy ratio (CAR), State Bank of India  is all set to float tier II bonds worth Rs 500 crore for retail and institutional investors. The bank has the option to retain oversubscription of up to Rs 500 crore, or a total subscription of Rs 1,000 crore. The bank intends to deploy the proceeds of the issue to augment its capital base and fund its growth.

The issue will open on October 18 and will remain available for subscription till October 25, 2010.

 

According to Vijay Bhushan, chief executive of Bharat Bhushan & Company, "It will be a well received issue and will be a good option for conservative investors. Some of its positive aspects are that it will attract no tax deducted at source (TDS), offers liquidity as the bonds will be listed, and will quote at a premium if interest rates fall. Moreover, the upper limit of Rs 5 lakh for retail applications will act as a trigger for retail participation."

 

The issue offers investors two options. Series 1 bonds have a tenure of 10 years and offer a coupon rate of 9.25 per cent annually. These bonds will have a call option after five years and one day. The call option gives SBI the right (but not the obligation) to recall the bonds by paying off the investors. In case SBI does not exercise the call option after this duration, the coupon rate will be enhanced by 50 basis points.

 

In case of Series 2 bonds, which will have a tenure of 15 years, investors will be offered a coupon rate of 9.5 per cent annually. These bonds will have a call option after 10 years and one day. The coupon rate will be enhanced by 50 basis points in case the call option is not exercised.

 

The minimum amount that you will have to invest in these bonds is Rs 10,000. These bonds will be listed on the National Stock Exchange and will hence provide some liquidity to investors.
 
Since the bonds have a call option after five years and 10 years, investors have a chance to earn a higher rate of interest (0.5 per cent) if the bank does not exercise the call option.
 

In case of over subscription, preference will be given to Series 2 Tier II bonds which may be a disappointing feature because it is very unlikely that investors will be willing to opt for Series 2 bonds which have a longer tenure of 15 years as compared to the 10-year tenure of Series 1 bonds.

No tax benefit is available on these bonds.

 

 

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