SBI experiments with Rs1,000-crore retail bond issue
Moneylife Digital Team 15 October 2010

The country's largest lender aims to tap the retail market through an
attractively-priced bond issue for the first time; plans to create a secondary market for the same to enable further such issues 

 
India's largest public sector bank State Bank of India (SBI) is trying to gauge the feasibility of availing another funding avenue. The bank today announced the public issue of Lower Tier-II Bonds worth Rs500 crore, with an option to retain oversubscription upto Rs500 crore for issuing additional bonds aggregating to a sum of Rs1,000 crore for resident applicants. The bond issue is SBI's first foray into the retail bond market and is part of the bank's strategy to develop another avenue of funding by creating a secondary market around the same.

The issue has been priced rather attractively for a bank which can otherwise access funds at a much lower cost without breaking sweat. Available in two series having maturity of 10 years and 15 years respectively, the issue offers a coupon rate of 9.25% and 9.5% respectively on the same. This is in sharp contrast to the bank's retail deposits which attract rates substantially lower at 7.5%.

SBI chairman OP Bhatt stated categorically that the pricing was purely based on the fact that the bank was coming out with such an issue for the very first time. The current upward bias in interest rates also was a factor behind the pricing, Mr Bhatt said. Commenting on the reason for bringing out such a product, he said, "We want the option of having this market available on tap. We wish to create a secondary market around this avenue, which will allow price discovery to take place."

Depending on the investor response to this issue, SBI will take a call on bringing out more such issues, even on a quarterly basis. Although the stated objective of the issue is to shore up the capital adequacy ratio (CAR) of the lender, it is not the most compelling factor. The chairman pointed out that the bank was looking at the option to avoid a long term liquidity mismatch. "We felt there is a need for having specific long term liquidity in our portfolio," said Mr Bhatt.

The bonds are proposed to be listed on the National Stock Exchange (NSE), where investors will trade freely in the open market. The retail portion forms 50% of the issue size while the balance is being offered to high net-worth individuals (HNIs) and qualified institutional buyers (QIBs). The bonds are to be issued compulsorily in a dematerialised form.

With a minimum application size of Rs10,000, these bonds will be allocated on a 'first-come-first-serve' basis. The issue will be open for subscription from 18 October 2010 and will close on 25 October 2010. The bank has an option to call back the bonds after 5 years and 1 day for the 10-year bonds and 10 years and 1 day for the 15-year bonds. If the bank does not exercise this option, the investor will be offered the coupon rate plus an additional 0.5% on the bonds. 

Comments
mcaggarwal
1 decade ago
It may be cleared that what will be the matured value/amount of bond of Rs.10000/- after ten years ?Also what will be the income tax rebate ?
ArrayArray
Free Helpline
Legal Credit
Feedback