State Bank of India (SBI), country’s largest public sector bank has announced the issue of “SBI Lower Tier II Bonds”. The issue size of the bond is aggregating to Rs 1,000 crore, and has a green shoe option of Rs 500 crore. It means that in case of an over-subscription above Rs 500 crore by the public, the bank will retain the excess application amount to maximum limit of Rs 1,000 crore.
The issue opens for subscription on October 18, 2010, and is available for application October 23, 2010 (Earlier October 25, 2010), and the 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 by SBI
(Source: Application form of SBI lower tier II bonds. & PersonalFN Research)
Note:
- *In case if the bank fails to exercise the call option a step-up coupon rate (i.e. coupon rate as applicable under respective series plus 0.50%) will be paid. The step-up option will be exercised only once during the whole life of the instrument in conjunction with the call option.
- In case the unit are not allotted, interest @ 4% p.a. & 6% p.a. will be paid to non-allottees and allottees respectively.
- 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 & PersonalFN 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 1 and 2.
- How does one exit after the lock-in period?
After the lock-in period, the investor may exit either through the secondary market or through the call option (buyback), as specified under the respective series of the bonds.
- In whose favour the cheque is to be made?
Cheques has to be made in the favour of “SBI Bonds Public Issue – 2010 – 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 25% in both advances as well as deposits. The group had consolidated deposits and advances of Rs 11.16 trillion and Rs 8.70 trillion, respectively, as on March 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 42.7% of the group’s total deposits as against the industry average of around 35%. However, the group’s cost of deposits at 5.74% for FY 2010, is marginally higher than the industry average because of sizable proportion of high-cost deposits raised by SBI in 2008-09. Moreover, the SBI group has a large capital base as displayed by its Tier I capital base of Rs 812.16 billion (Tier I capital adequacy ratio of 9.28% as on March 31, 2010).
An assessment of the gross NPA (Non-Performing Assets) reveals that SBI has a higher gross NPAs (2.7% of its total advances as on March 31, 2010), when compared to its industry average of 2.4%.
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 will be a prudent move, if one is not specifically looking at a tax saving benefit. The yield (post tax implication) is quite luring under both the options. However, if you fall under the highest tax bracket (i.e. 30%), then it would be more prudent to go with “series 2”, as it offers a higher yield.
The overall safety of your investment is well protected.
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