SBI Bonds Good for Those with Long-Term View
But short-term investors should stay away as there is no put option, no step-up coupon rate unless you exercise call option
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 . 1,000 crore, with an option to retain an extra . 1,000 crore. Allotment of these bonds will be done on afirst-come-first serve basis, based on the date of the application. The is-sue opens on February 21 and closes on February 28.
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 . 10,000 and one can apply for a minimum of one bond. The maximum size of application under the retail category is . 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 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 RBI.
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.
Source : www.insuremagic.com