On the back of a strong response from its earlier issue of Lower Tier II Bonds, the State Bank of India (SBI), country's largest public sector bank has announced yet another issue of "SBI Lower Tier II Bonds (Series 3 and Series 4)".
In its maiden issue in October 2010 (Rs 1,000 crore), the offering received an overwhelming response from the investors as it was oversubscribed 17 times on the first day itself forcing the bank to curtail subscription and finally the issue was overbought 20 times.
This time total issue size of the bond is aggregating to Rs 2,000 crore and this includes a green shoe option of another Rs 1,000 crore. It means that in case of an over-subscription by the public over Rs 1,000, the bank will retain the excess application amount to maximum limit of Rs 1,000 crore. Over and above this, the bank also has the option to retain all the over-subscription by Retail Applicants upto the Residual Shelf Limit for this Tranche 1 Issue which is Rs 10,000 crore.
The issue opens for subscription on February 21, 2011, and is available for application till February 28, 2011, where allotments would be made on a "first come first serve basis". 50% of the issue size is reserved for retail investors, 25% for HNI (High Networth Investors) and 25% for NII (National Institutional Investors)/Corporate/QIBs (Qualified Institutional Buyers).
The other details as may be required by you are:
Lower Tier II Bonds (First Tranche)
(Source: Application form of SBI lower tier II bonds. & Personal FN Research)
Note:
- In case the unit are not allotted, interest @ 4% p.a. & 7% p.a. will be paid to non-allottees and allottees respectively.
- The interest on the application money shall be payable from the third working day following the date of receipt of the Application Form excluding the date of receipt of such Application Form and shall be payable until one day prior to the Deemed Date of Allotment.
- PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.
The yield which you will enjoy provided the call option is not exercised by the bank is as under:
(Source: Application form of SBI lower tier II bonds & Personal FN Research)
Well, after reading the details of the bonds (as provided above), there may be still some more questions popping up, which are answered hereunder:
- Will I get any tax benefit if I invest in these bonds?
No, these bonds do not entitle you to any tax benefit nor are these any "infrastructure bonds", which make you eligible for an additional tax deduction under section 80 CCF.
- What is the Tax Treatment of interest on these Bonds? Are these Bonds Tax Free?
No, the interests on these bonds are not tax free – they are chargeable to tax. The interest income will be taxed under "income from other sources", and will be brought to tax at the respective income tax rates you fall under.
The Tax Deduction at Source (TDS) will not take place as these bonds are issued a demat form and are listed on the exchange.
- Can a minor apply to these bonds?
Yes, a minor can apply for these bonds, but only through a guardian.
- Can one apply in joint names?
Yes, one may apply in a joint name. However, the demat accounts will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account.
- Who will get the interest in case of joint application?
In case of joint application, interest will be accounted to the first holder only.
- My demat account is in joint name, but I want to apply is a single name?
In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
- If I'm an NRI can I invest in these bonds?
No, NRIs are not eligible to invest in these bonds.
- Is there a lock-in period while investing?
Yes, an investor is subject to a minimum lock-in period as per the tenure of bond applicable for series 3 and 4. However, if buyback option is executed then the buyback period would constitute to be the lock-in period.
- In whose favour the cheque is to be made?
Cheques has to be made in the favour of "SBI Bonds Public Issue 2011 (Tranche 1) – Escrow Account"
So you may ask is it worth investing?
Fundamentals of SBI
If we look at the fundamental of SBI, at present they appear quite robust. The bank has a market share of around 17% in both advances as well as deposits during the month of December 2010. The group had consolidated deposits and advances of Rs 8.79 trillion and Rs 5.73 trillion, respectively, as on December 31, 2010. It has strong brand image and a pan-India presence, with a wide reach in rural and semi-urban areas.
Apart from banking, the SBI Group also has a significant presence in other segments such as investment banking, financial services and insurance. The CASA (Current Account and Saving Account) deposits of the bank stands at 27.17% for the nine months ended April 2010 – December 2010. However, the group's cost of deposits stands at 5.20% for the same period.
An assessment of the gross NPA (Non-Performing Assets) reveals that SBI has higher gross NPAs (3.17% as on December 31, 2010).
However according to estimations made by CRISIL, SBI's profitability is likely to improve in the medium-term, with the improvement interest spreads supported by sustained high level of CASA deposits, and benefits arising due to operational efficiency supported by wide branch network. In the long-term this may lead to adequate internal accruals for the bank.
OUR VIEW:
In our opinion investing in SBI lower tier II bonds is a valuable investment proposition, if one is not specifically looking at a tax saving benefit. The post-tax yield is quite competitive under both the options – series 3 and series 4. But in our opinion series 4 is more rewarding due to the longer tenure which it carries (enabling it to provide greater yield), however to opt for the same or not should be guided by your willingness to park your money for a longer tenure.
Overall we believe that the safety of your investment would be well protected.
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