SBI Bonds Issue

Click here to read about the latest bond issue which will open on February 21st 2011.

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. This is the second big bond issue this month with the IDFC issue still running.

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.

How do these SBI Retail Bonds compare with fixed deposits?

Quite favorably because of the higher interest rate and option of listing on NSE. People are expecting these retail bonds to over-subscribe, so let’s see how it goes.

These were some important points about the SBI retail bonds that’ll help you make a decision whether they are right for you or not. If you have any other questions, please leave a comment, and I’ll try to answer them.

Click here to read about the latest bond issue which will open on February 21st 2011.

94 thoughts on “SBI Bonds Issue”

  1. Hii ..

    I want to know listing date of SBI bonds. Any idea when it will be listed on exchange? What is regulatory timeline for listing such bond. I know that HDFC warrents are traded on NSE exchange. Any idea, wht time HDFC warrent took to listed from date of allotment/issuance.

    Thanks in advace

      1. Your answer has surprised me..
        It was mentioned that bond will be listed on NSE stk exch.. but I have checked the NSE’s bhav copy and didnt find SBI Bonds in it. Can you please help me in selling these bonds and how I will be able to enter bond market considering that bond selling will require different platform than normal NSE/BSE items?


  2. I have a query…….

    I have a SBI bond which I have won in a competition. It was for ten years, now as it has matured how do I WITHDRAW IT ?

    1. Whether TDS will be deducted on interest amt if it exceeds Rs. 2500/- as per Sec 193A if i m retaing the bond?

  3. Tanks for all your interactive discussion… again it would be great if you can tell me once again – In simple words…what should I do with SBI Bonds…..should I redeem after listing? or should wait for 5 year? or wait for 10 year?

    1. I’d say wait for the listing first Ravi, and then see how much it is trading for. That will be a better time to think about selling or holding.

  4. @Bala,

    Thanks again for your response! You have obviously given this good thought. I’d also think about how much inflation eats into the amount you get after maturity.

    In the sense that with SBI Bonds you get some interest payment every year which you can re-invest at a rate (probably lesser than 9.25%, maybe a 50 – 100 basis points lesser), so you have that cash flow coming in every year, which has a certain present value.

    On the other hand you get a lump-sum from the Kisan Vikas Patra scheme after about 8 and a half years, but what’s the present value of that?

    Given the high rates of inflation this is something to think about; how do the two cash flows compare?

    I am just thinking aloud here, and you’ve brought in an excellent point to this discussion which I hadn’t thought about earlier.

    1. @Manshu

      This is really getting exiting!!, well inflation is really a very good thought, but thats the reallity of life and the way banks and lenders make money isn’t it.

      As per data average inflation rate of india for last 40 years is around 8%, so if we consider that the next 10 years will tread along the same line, actual return when adjusted for inflation is around 1.25% for SBI bond and 0.5% cumulative interest.

      Given your idea that we will invest the interest money every year into a different deposit scheme, the rate of interest when adjusted to inflation will only be between 50 to 100 basis point, again simple interest. ( I am making a big assumption that when inflation increases interest rate increases and vice versa).

      My God, Now i am starting to think even if investing in a long term fixed deposits makes any sense. 🙂

      1. 🙂 I know what you mean…..we can’t miss the forest for the trees though, we must take what is on offer, evaluate it to the best of our ability and then see if it suits our need just the way you have done. Good discussion Bala, I enjoyed it. Thank you for your views.

        1. That is exactly why equities trump all other investment classes in the long-term, as they are the direct beneficiaries of inflation.
          Inflation comes from the price increases of companies’ products, and hence the companies always have inflation-adjusted returns in the long-term.

          For bonds, even according to economic theory, their long-term yields will equal Inflation + Risk premium. As gilts and FDs have very little risk, their risk premiums are also very less.

  5. Hi, ICICI direct has a notice saying this bond can’t be subscribed online. Can you tell me how can I subscribe for this, thanks.

  6. Hello I have 4 queries

    1. How does this bond compare with Kisan vikas Patra which doubles the amount invested in 8 years and 7 month.
    2. Can you please help if there is an option for interest re-investment.
    3. Is the interest offered is compound interest??
    4. If in the future the interest rate increases ( which looks like is likely to happen) will the bond value on NSE decrease and hence negate the advantage of NSE listing.

    Kindly loooking forward for your advice so than can make a decision on subscription.

    1. 1. Looks like the Vikas Patra has an interest rate of about 8.5% so that’ s lower than the yield on the SBI bond, however the SBI bonds don’t allow you to re-invest the interest so that’s something to think about.

      2. As far as I can tell, they are going to pay out the interest in April every year and there doesn’t seem to be an option of re-investment.

      3. If they’re going to pay off the interest every year then your principal is going to remain the same.

      4. Bond prices and interest rates are inversely proportional so what you say will take place, however listing on NSE provides liquidity, and you can hold the bonds till maturity to get the 9.25 or 9.5% yield.

      In that sense, listing is doing what it is meant to do – i.e. provide liquidity, so movement of bond prices is a feature not a bug 🙂

      1. Thanks a lot Manshu,

        That was helpful, I did a little calculation and found that to have the same yield like kisan vikas patra the bond interest rate should be around 12% per annum. i.e. With 8.25% compound annulay kisan viaks patra gives me around 12% return.

        I think i will skip the bond as i can afford to leave the money in locked position for few years.

        Many thanks again

        1. Thanks for responding Bala. I appreciate it. Also, how did you arrive at the 12% figure?

          Something that gives you about 8.5% compounded annually will double in 8 and a half years, so shouldn’t the equivalent bond yield be 8.5% compounded annually, not 12%.

          Can you please tell me what I am missing and where is the 12% coming from?

          1. Oh!! sorry Manshu,

            What i meant to say is to obtain an equivalent of 8.5% compound interest over eight and half years, we should have 12% normal interest rate over the same period.

            For eg. Rs100 invested for 8.5% compound interest for ten years will be Rs226, but same amount with 12% of simple interest over 10 years will only Rs220. Thats what i wanted to explain.

            Because i am looking at long term this bond yield will not be a wise decision if i decide to leave the bond for maturity.

            any help 🙂

  7. Hi, can anyone tell me one answer.
    as per detail given, this bonds will be traded in stock exchanges after 5 years. i am not aware about SBI but other bond holder has provided features like buyback after 5 years (like in IDFC, & L & T in series 3 and 4 bonds which are paying less intertest), so can series 1 and 2 holders can sell their bonds in stock market after listing? (those having 10 yrs maturity)
    In a simple language, after 5 yrs can we trade our bonds on BSE or NSE if we have any one of series bonds? or multiple bonds with each series?
    If we can trade than the buyback features will be useless.
    I want to have some clarity on this. as not a single site is providing clarity on this part.

    1. Not after 5 years, this bond should list within a few months, and then trade based on demand and supply. The interest rates and price of bonds are inversely proportional so the price will be determined based on interest rate movements.

      The point is that having a bond that is listed on the market allows you to sell it off if you so choose even before the maturity and thus provide additional liquidity. This enhances liquidity, doesn’t make it useless. Provides you one more option to exit.

    2. sbi bond will be traded as soon as allotment process completed.not after 5 years as it is not a tax saving instrument. only tax saving bonds like idfc,l&t traded after 5 year lock in period completed. in future fm may reduce lock in period as he accumulate reserve by selling psu

      1. Guys, news say that SBI bonds listed at a 5% premium. I do not find SBI bonds anywhere on the NSE site.

        Btw, HDFC coming up with their bonds on 26th November.

  8. Where can I get the application forms for this issue?
    Can these bonds be applied online? if yes, someone please indiate how ?

  9. I understand the retail category applicants can apply for max. Rs 5 lakh. Now if I apply for Rs 5 Lakh on the 1st day , will I qualify for the first come first serve rule to be followed for allotment.

    1. That’s a good point. The bond is reserved 50% for retail, 25% for HNI and 25% for Corporates etc. If one category is left under-subscribed then their quota will be allocated to Retail, HNI and Corporate in that order.

      If there is over-subscription – then from the applications received on the day of over-subscription – preference will be given to Series 2 Lower Tier II Bonds on a first come first serve basis, and balance will be allotted on pro-rata basis to Series 1 Lower Tier II bonds.

      The relevant part is in page 160, 161 in the prospectus under Basis of Allotment, Issue structure for those of you interested in reading through it. And if anyone else has heard any different then let’s hear it.

  10. On listed NCDs no TDS will be dedcuted. Just imagine someone sells out NCD just before interest payout and gets full amount and buyer will pay the TDS. (not logical/Fair)

  11. Hi , please check the prospectus , it clearly states that tds is applicable over the interest amount of Rs. 2500 , and will deduct in same manner as in case of fixed deposit

    1. Its written on sbi site in news that no TDs will be deducted, then how are you tellling that TDS will be deducted

      1. Read the prospectus & which news are u talking about ? Please tell me i would like to check it out too

          1. Monu, Sauarabh, Where are you guys reading this in the prospectus? Which section or page number is it in? I didn’t find this upon searching for it, so can you please help me out here. What I found was the same as what Arun said in a comment yesterday, which is that no TDS will be deducted.

  12. Whether the Bond will list at a premium because as per Bond Valuation theory Bond Value is a function of interest rate. So they are offering 9.5% which is 2% higher than the rate offered on FDs by Banks so we will get 2% higher for 10 years, which if we discount it @7.5% we will see its present value comes to around Rs 14 per 100. So I expect the bond to list @ 14% premium. So can anyone advise me whether I am write or wrong, because I have never invested in Nonds before.

    1. Hi Monu,

      Your basic logic is correct. However FD are covered under deposit insurance while these bonds are not and this makes bonds more risky thus coupon rate has to be higher. In my opinion you will not get more than 2-3% listing gain on these bonds. Same happened with Sriram Transport NCDs (new ones) in May.


      1. Dont compare with Shriram (risk levels differ). Companies in SBI league should not offer more than 8-8.5%. So the 7-12% listing premium is for sure within the 10-15yr schemes.

        1. I agree Sumanth that risk level is different in SBI and Shriram but Shriram coupon rate was 10+. 8/8.5% one can get in 5 Yr FD which is insured. Hence 9.25/9.5 is not too high. I will be surprised if we get more than 2% listing gain.


          1. Bond theory states use comparable discounting rate. Shriram is not comparable to SBIN – due to risk levels. Shriram will have a discounting rate ~10 – note blue chips were raising money at 13-14% also a year back.
            Am not sure how much SBI gives in deposits – but simple bond tenets – longer the life of the bond more impact on price & so with the the coupon> discounting rate: both in this case.

    2. Hi Monu

      You’ re almost there. SBI bonds will definitely list at a premium……My guess is a premium of 10% at least.


    3. i agree with u,tata capital ncd quote with 10 to 14% premium.and i feel tata cap and sbi or in same some what inferior to sbi

  13. i want to know if i leave the bond amount inthe demat a/c&withdraw after 1-year or 2-yrs wihout opting for interest payment will there be any appreciation in the amount.where will sbi invest the bond amt?in the market?kindly answer.

    1. Well, the interest will be paid out to you, so I don’t think you can opt out of getting it. Since the bond is going to trade on NSE, you can sell it there and the price you get should ideally reflect the unearned interest payments.

      The bond issue is to strengthen the Tier II capital of SBI, and I read that the amount is small (for SBI) because they are experimenting with bonds that can be listed in NSE. I really do not know where they’re going to invest that money.

  14. Hello,

    Can these bonds can be kept as security against a loan taken? Or is that solely at the discretion of the loan disbursing bank?

    Thanks in advance

    1. The terms of the issue in the prospectus state that the bank shall not grant any loans against these bonds. Here is what it says:

      In accordance with the RBI guidelines applicable to the Bank, it shall not grant loans against the security of the Bonds.

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