SBI Retail Bonds

SBI is coming with new bond series which is going to open on  February 21, 2011 and close date is February 28 2011.

Interest Rate on the SBI Retail Bonds: For retail investors these bonds will pay out 9.75% for the 10 years series, and 9.95% for the 15 years series.

Your money does get locked in with the SBI bonds since this is not like a fixed deposit that you can break at your will. If you go for the 10 years tenure then it will be redeemed at the end of 10 years.

SBI has the option of redeeming them at the end of 5 years and 10 years as well (more on that later), but they will only do so if the interest rates are lower at that point in time, so in that sense – keep in mind that you are committing to the redemption time period.

SBI Bonds will list on the stock exchange

These bonds are going to list on the stock exchange so you will have the option to sell them in the secondary market even if you can’t redeem them.

Keep in mind though that bond prices move about in the secondary market, so this is not the same as redemption because the prices will depend on the demand and supply plus the interest rates at that time.

Minimum and Maximum Application

The face value of one bond is Rs. 10,000 and that’s the minimum investment for the retail investor. The maximum application amount for the retail investor is Rs. 500,000.

Compulsorily in Dematerialized form

These bonds will not be issued in physical form, so you will need a demat account in order to apply for these bonds. Since this is a short point I’ll add that for the 3 of you who care these are unsecured bonds, but are rated AAA by CRISIL.

SBI Bond Tier 2

SBI Retail Bonds are the latest offering from SBI which is coming up with a bond issue that opens on 18th October and closes on 25th October. 

A lot of people will be comparing the SBI bond issue to the IDFC one, so let me say upfront that they’re quite different in one key aspect which is the tax savings. The IDFC bond issue was an infrastructure bond under Section 80CCF, and could get your taxable income reduced by up to Rs. 20,000.

The SBI retail bonds are not covered under this, so you won’t get any 80CCF benefits. Now let’s look at some of its main features.

Interest rate on SBI Bonds

There are two series of SBI Bonds – Series 1 Lower Tier II Bonds gets you an interest rate of 9.25%, and has a tenor of 10 years, and the Series 2 Lower Tier II Bond has an interest rate of 9.50%, and a tenor of 15 years.

This compares quite favorably to the fixed deposit rates SBI offers as the SBI fixed deposit interest rates for 5 – 8 years is 7.50%, and more than 8 years is 7.75%. These bonds are not covered under deposit insurance since they are not fixed deposits, and are not redeemable at the option of the bondholders.

There is a call option or redemption with SBI according to which they can redeem the series 1 bonds after 5 years, and series 2 bonds after 10 years. If they don’t do that then the interest rate will rise by 0.50%.

Demat account is compulsory for investing in SBI Bonds

You need a demat account to invest in these SBI bonds, and your bonds will be held in dematerialized form. If you don’t have a demat account and wish to invest in them then you will have to open a demat account fairly quickly.

Tax implications of the SBI Retail Bond

SBI Retail Bonds are different from the IDFC bonds in the sense that they are not covered under section 80 CCF, so there won’t be any reduction from your taxable income because of investment in this bond.

The interest from these bonds will be treated as income that gets added to your other income and you will pay tax on it accordingly.

SBI Bonds to be listed on NSE

These bonds will be listed on the NSE, and as far as I could understand you will be able to freely trade the bonds even within the 5 year period. So you could hold the bond till maturity or sell it on the exchange if a market develops for it. The prospectus states that all formalities to list the bond will be completed within 30 days of date of closure, so the bonds will be listed on the exchange to buy and sell fairly soon.

When will the interest be paid on the SBI bonds?

The interest on both the series of SBI bonds will be paid out on April 2 of every year.

What is the minimum application size on the SBI bond?

The minimum amount you need to invest in these bonds is Rs. 10,000, you can subscribe in multiples of Rs. 10,000 after that.