Review of SBI Bonds Issue 2011

Posted By: Investment
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State Bank of India is out with yet another issue of long term bonds under the series of Lower Tier II Bonds. The bank had already issued Series 1 and Series 2 of this bond in October last year. This time around, the “Tranche" Issue(or in simple words, a part of the earlier issue) offers Series 3 and Series 4, each aggregating to a size of Rs. 10,000 million, with an option to retain over-subscription of another Rs. 10,000 million.

Issue Date

Issue opens: February 21, 2011

Issue closes: February 28, 2011

Nature of Bonds

These investments are long term in nature, with tenure of 10 and 15 years.

Objective of the Issue

Proceeds from the issue are proposed to augment the banks capital base, and support its growth strategy.

Key Features

1) Who Can Apply

Issue is open to Resident Indians only. Minors through the guardianship of Resident Indians, HUFs through Karta, Partnership firms, Financial Institutions, Private/ Public Religious/Charitable Trust, Co-op could also invest in these bonds. NRIs and OCBs are excluded.

2) Face Value and Minimum Application

The bonds come with a face value of Rs.10, 000. Minimum application that should be made is for Rs 10,000 and in multiples of Rs. 10,000 thereafter. Trading could be done in lots of one bond.

3) Credit Rating for the Bond

CARE has rated the bonds as “AAA" and CRISIL has rated it “AAA/Stable". This rating of the bond indicates highest safety and stability of returns.

4) Bond Series Available and Maturity

There are two series options for investors in this issue; Series 3 with a maturity of 10 years and Series 4 with a maturity of 15 years. The Bonds bear an attractive interest rate of 9.75% p.a. for 10 year bond & 9.95% p.a. for 15 year bond for retail investors. Non retail investors would receive 9.30% and 9.45% for 10 year and 15 year tenure, respectively. Interest payment would be done annually, through various modes of payment available.

5) Issuance and Trading of the Bonds

The bonds are compulsorily issued in dematerialised form and have been proposed to be listed on the BSE as well as the NSE, for trading.

6) Allotment of Bonds

Allotment of Bonds would be purely on first come first served basis based on the date of application. Interest on any refund of subscription amount will be paid @ 7% p.a. on the amount refunded to allottees and @ 4% p.a. on the amount refunded to non-allottees.

7) Call and Put Option on the Bonds

The bonds have a call option at the end of 5 years for the 10 year bond & end of 10 years for the 15 year bond. There is no put option available for the bonds.

Reasons Why You Should Invest In This Bond

No TDS shall be deducted on the interest received as these bonds are issued compulsorily in Demat mode and shall be listed on BSE & NSE.
If you are looking for a steady attractive interest rate, this could be a good option.
High credit rating indicating highest degree of safety with regard to timely payment of interest and principal on the instrument.

What You Would Not Get From This Bond

There is no tax benefit for investing in these Bonds. Also The interest received on these bonds shall be treated as income from other sources and shall form part of the total income of the assessee in that financial year in which they are received.
The bonds are not redeemable at the option of the Bondholders or without the prior consent of RBI. So you would need to wait till maturity or exercise trading options.
The bonds are capital instruments and not deposits of the bank and hence, they can't be used as collateral for any loan made by the bank.
The bond is not covered by Deposit Insurance similar to banks' fixed deposits where investments up to Rs. 1 lakh are secured.

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