SBI Bonds – one more opportunity to invest in a good instrument, but you must be really fast to pick it up!

SBI is back again with its second long tenure bond issue.  It had raised Rs. 1,000 crores in October 2010 and is now contemplating raising another Rs 2,000 crores with an option to retain over-subscription in Retail Category.  The bonds are issued in two categories – Retail & Non-retail and are available for the tenure of 10 years and 15 years.  The details of the bond issue are:

Series	Series 3 (Tenure 10 Years)		Series 4 (Tenure 15 Years)
Categories	Non-retail	Retail	Non-retail	Retail
Interest Rate	9.30%	9.75%	9.45%	9.95%
Call Option*	After 5 years		After 10 years

 *option for SBI to redeem the bonds

Issue Open Date: 21^st February 2011

Issue Close Date: 28^th February 2011

The closing date is irrelevant since going by the response the earlier issue of SBI bond received; it is most likely to get oversubscribed by end of the first day.   Hence investors willing to invest in this instrument should ensure that they submit their application forms on the first day itself.

This brings us to the procedure for subscribing these bonds.  These bonds are not available for online subscription and one need to visit SBI branch to collect and submit the application form.  Demat account is mandatory and these bonds will be listed on stock exchanges.  Hence it provides liquidity if someone wants to sell the bonds before completion of the tenure.  

Interest earned is taxable and if the bonds are sold on stock exchange, then they are also liable for capital gain tax.

How does it compare with other investment options (for retail investors)?

Though these bonds are unsecured, it carries AAA rating by CRISIL and is issued by one of the most trusted bank of India.  Hence an investor can be reasonably assured of the investments.  There are very few comparable options available for such a long tenure.  The table below gives comparison with other investment alternatives available for retail investors.

	SBI Retail Bonds	Bank Fixed Deposits	PPF	Infrastructure Bonds
Tenure	10 & 15 Years	Max 10 Years	15 Years (extendable)	Max 10 Years
Coupon Rate	9.75% – 9.95%	9.25%*	8%	8% – 8.30%
Tax	Taxable	Taxable	Tax-Free	Taxable
Limits	Rs. 5,00,000	No Limits	Rs. 70,000 p.a.	No limit

 *Kotak Mahindra Bank 10 Year Fixed Deposit

As can be seen, there is dearth of options for a person looking to invest for 15 years, except for PPF and this long tenure makes SBI bonds attractive. The retail bonds score over all forms of investments, except for PPF.  However, in case of PPF, there is an upper limit of Rs. 70,000 p.a. whereas, one can invest up to Rs. 5,00,000 in SBI Bonds. 

 

Hence for an investor who has exhausted his PPF limit for the current year, these bonds provide good long term investment opportunities.

Are you planning to invest in SBI Retail Bonds?  Were you lucky to get allotment in the earlier SBI Bond Issue?  Do share your comments with other readers below.

Endnote:  In case you have not yet participated in the survey of planning your tax-related investments, you can do so by clicking here.  The survey closes on Sunday, 20^th February 2011.  Thanks.