SBI Bond Gray Market Premium and Annualized Returns

by Manshu on February 23, 2011

in Fixed Deposits

Business Standard reports that the recent SBI bond issue is getting gray market premiums, which is a first for any bond issue!

Brokers are giving up to Rs. 320 to retail investors to apply for bonds on their behalf as the brokers expect good listing gains, and though popular for IPOs – this is the first time listing gains and gray market premiums are being seriously taken for a bond issue.

I feel that this is quite ridiculous, and will have the effect of crowding out real retail investors, and create a crazy short term mentality even for bond issues that is detrimental to long term wealth building for the small investor, but I’m sure this trend is going to catch up in the days to come.

It’s very hard to resist easy money and quick gains – no matter how small they are.

In this case you get to make Rs. 320 risk free on Rs. 10,000 which is fine if you are interested in that kind of a gain, but please don’t say that you get an annualized return of 76% because you really can’t annualize this return.

It makes sense to calculate annualized returns when you know that you can execute such risk free transactions throughout the year and get a return that is at least close to the 76% number, if not exactly that.

But in this case you just have this one transaction where you see you can make Rs. 320 on Rs. 10,000 so there’s not a lot of sense of calculating that return on an annualized basis except perhaps to boast to others.

This becomes even worse with IPO listing gains because you make 3% here 5% there, but then get stuck in that one issue that falls badly and wipes out all your previous gains. Just take a look at my earlier post on IPO performance in 2010 to see how many of them listed below their issue price or for just a tiny listing gain to get a sense of what I’m saying here.

Ultimately you have to be true to yourself and evaluate an investment based on what you are really getting out of it, or else it will cloud your judgment, and paint a rosy picture and make pennies look like gold dust.

{ 9 comments… read them below or add one }

krish February 24, 2011 at 6:48 am

Manshu,

Apologies for asking an unrelated question here, but wanted to know something. I received stating that my IDFC Infra Bond – Tranche II will be credited to my demat account. Now, I use ICICIDirect for trading. How do I see the demat status of this bond here? I checked the “demat allocation” tab, but only the stocks that I’ve purchased before are listed there…

Can you help me know how to check one’s demat account balance for equities/bonds etc.?

Reply

Manshu February 24, 2011 at 10:00 am

Try one of these two options and you should see them:

A)
1. Log in to http://www.icicidirect.com.
2. Click on FD/Savings.
3. Click on hyper link FD/Savings Demat balance.

B)
ICICI Bank account -> Demat -> Holdings section

Also, there is a shiny new forum here on OneMint where you can ask any question. You can see the big buttons on either sidebar and link on top as well. It’s just been there a week or so, so not many people know about it yet.

Reply

krish February 25, 2011 at 6:48 am

Thanks a lot Manshu. I could see it in FD/Savings tab, although there’s no name for the instrument given, just no. of bonds and date of maturity.

Reply

Manshu February 25, 2011 at 5:09 pm

Okay good – so at least you see it there.

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Salar February 24, 2011 at 9:26 pm

Hi Manshu,

SBI response has been lackluster so far from retail point of view this time. I fail to understand why the same issue in Oct’10 was subscribed 20 times and this one is moving very slowly! (Even with a high coupon of 9.75%). !!

Salar

Reply

Manshu February 25, 2011 at 5:21 pm

I think there are 3 reasons at play here – first is there are a few alternatives in the form of bank fixed deposits that are quite close to this rate even if not matching the tenure.

Second is that people are busy in infra bonds because of the tax season, and then I feel that some people are bullish about interest rates, and are following the same line of reasoning that you state above.

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Neel March 16, 2011 at 2:28 am

Another reason is that this was a big issue. A factor of 2 comes in there. I think last one had 500 cr reserved for retail, this one 1000 cr!

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Manshu March 16, 2011 at 5:26 pm

In the end it didn’t turn out all that bad did it now.

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Salar February 24, 2011 at 9:35 pm

And talking about grey market, it has always thrived in equity but am hearing about it for the first time in debt!. If interest rates would moderate then why would SBI be stupid enough to issue a high coupon bond? Am sure their are very bullish about interest rates…

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