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SBI Will Sell Bonds at 9.95%

State Bank of India has a new bond issue out (Shelf Prospectus).

Size: Upto 10,000 crores from retail, but official issue size is 2,000 crores.
Listed: Yes, on the NSE/BSE.
Interest rates:

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9.95% for retail on the 15 year bonds, and 9.75% for retail on the 10 years.

Call Option: SBI has the right to buy back the bonds and pay you back the face value of the bonds. The call option is after five years for the 10 year bonds and, after ten for the 15 year bonds.

Tax Deducted at Source: Yes, before annual interest payments.

NRIs, Overseas Corporates, PIOs: Cannot apply.

What about tax: Tax is payable on the interest in full – i.e. the interest gets added to your income. That will pull the net yield down. You can choose to buy and sell on the exchange between interest payments, but the profit is added to your income (as short term capital gain).

What do I think?

This is a great issue for someone looking for a locked fixed income instrument for a long time. Given that fixed deposits are now yielding 10% you may want to think twice, but the 15 year lock-in is fantastic. Sure, they have a call option, but that will only impact the market value of the bond in later years, if interest rates are lower. (Different discussion)

But the cynical me is thinking – why is SBI doing this? They don’t need to. They’re really smart people. Let me reiterate that. SBI has extremely smart people. If they could have offered a lower rate, they would have. That means this is actually a low rate compared to what they expect rates to go to. Meaning, there will be more rate hikes, and the 9.95% that looks good now, won’t look so great if you can get, say, 12% outside. (Don’t tell me 12% is out of reach, please. Even 10% was out of reach a couple of years ago) So that’s the risk – the feeling of regret if rates go up to 12% – in fact, you will think of it as a "loss" because the market value of the bonds will be below par, in that case. But if you have a different view on interest rates or can swallow such regret, go ahead.

The full prospectus and application forms etc. will be available shortly. More info then.

  • Anonymous says:

    >why cant they have zero-coupon bonds which can be shown as long term capital gains (provided held for >1 yr), that would be tax friendly I believe, but SBI choose the other way.

    Any idea why SBI has done that?

  • Deepak Shenoy says:

    >Anon: Simple reason: the government doesn't like your not paying tax 🙂 You can't issue zero coupon bonds without such approval – and such approval won't happen.

  • Shailendra Bisht says:

    >Hi Deepak,

    I beleive the demand for this will be very high and thus it will provide an Equity IPO type trading opportunity.Looks to me a good opportunity to make some listing gain.What do you say?

  • Deepak Shenoy says:

    >Shailender: Yeah, from the last one's response it might just be! 5% listing gain was there last time, I don't know how much this time, will depend on demand…

  • Anonymous says:

    >A request:
    Debt: FMP Funds

    In case the link above doesn't work, the link is to the "Debt: FMP" category of debt mutual funds on ValueResearchOnline.

    I'm looking for more information on these "interval" debt funds which apparently allow transactions only say once a quarter (or some interval). It looks like it would be interesting to analyze when is a good time to enter into these. At the moment, I was looking around for basic intro to these products and since I have come to depend on your site for my personal finance needs, I wanted to make a request to analyze/introduce these for your readers (i.e.; if it piques your interest)?

  • Px says:

    >Ur thinking what i had thought when sbi came out with the first bond issue in the recent past…
    if my memory serves me right india has seen an interest rate of 16% given by ifci millionare bonds and icici bonds … mafatlal had a higher coupon ..in the congress borrow and dole heydeys and maybe history might just repeat itself, now that we have a party that wants power at any cost at the centre

  • Px says:

    >More importantly can i buy the bonds online or one has to fill forms ?
    do u know any site that allows online purchase?

  • Sujit says:

    >HI Deepak,
    Sorry to digress a bit. Here;s my query,
    I have applied for IDFC Inf Bond using my demat account. The issue closed on 4th Feb. What I am unable to figure out is when will I know about the allotment, and do they send a physical certificate to me? So that I can use it to claim tax exemption.

    Thanks in advance.
    Regards
    Sujit

  • px says:

    >Sujit ur bank records and allotment advice from idfc should suffice