SBI offers up to 9.5% in planned 1,000 crore bonds

India’s largest lender SBI 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 (CAR).

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 step-up after five years, in case the call option is not exercised by SBI. Similarly, 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 tenor of the bonds. The minimum investment in these bonds is Rs 10,000.

According to Arvind Konar, head of fixed income, Almondz Global Securities , “SBI is offering the bonds at very attractive rates to investors. We expect an oversubscription , considering the attractive rate at which it has priced the issue” He added that SBI was offering a higher return to retail investors as given its triple A rating, it can raise funds at around 8.6-8 .65%.

Investment bankers are also optimistic after the success of bond issues by earlier issuers , including Tata Capital, which is quoting at a premium in the secondary market .

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. 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.

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.

Analysts feel that the interest rate is very attractive and due to adequate safety of the issue, it is expected to get good response . “Investors should allocate some portion of their investment portfolio in these bonds as the returns are much better than any other similar instrument. Also, it comes with high safety and has chances of higher interest rates in case of non-exercise of call option by the bank.

Since these bonds have a call option after five years and 10 years, if the bank fails to exercise the call option, the investor gains further as the interest rate will go up by 0.5%,” says Bajaj Capital chief operating officer Harish Sabharwal.