To augment its Tier II capital State bank of India is coming out with a micro issue of Rs. 500 crores. I am deliberately calling this a micro issue, because there is a huge appetite for such coupon rates (9.2% to 9.5%) from such a great borrower (a AAA rating through the life of the bond is a given).

Why SBI would come out with such a small issue (with the attendant costs) beats me. They could have easily collected more than Rs. 5000 crores with a bond issue like this. Now having given you the background, let me speculate:

– they are testing the waters for a bigger issue.

– they are likely to tap the market at various points in time in the future and treat this like a tap.

– so the next issue could be for Rs. 500 crores, but at 8.5% or at 9.75%

– they are signaling an increasing interest rate scenario so RBI may not have allowed a bigger issue

– they may at the same time issue instructions to accept FDs from senior citizens at 9.25%

Personally if you ask me whether you should invest in a scheme like this, my answer is :Well, it depends.

The issue will be a big hit, ’cause this is like Sovereign debt and the retail application can be a deluge (they need only 10,000 forms for full subscription :)). Allotment is on a first come first serve basis so there will be a rush on day one itself. Including the green shoe they are likely to keep Rs. 1000 crores – so make that 20k forms.

Personally I like liquid debt instruments with a cap gain instead of interest. It is a lovely product even for senior citizens. Most of the ‘retail’ applications will be for Rs. 5 lakhs, and the issue will be oversubscribed on day 1 itself.

Personally I like the issue (though over all my requirement of debt instruments is not too high) so will apply for my mother and wife for sure..but perhaps not much more. I like a bond with a current yield of 9.5% + a possibility of further appreciation. Also at the current index if a few people feel ‘satisfied’ with their equity performance you could shift some money to this nice issue.

I will personally buy it when it lists – maybe paying a higher price and getting a lower yield. However if interest rates change, i may be a loser. I like the Earnings-Price-Ratio of this bond and looks better than the YTM of the bond. What say?

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  1. Dear Sir,
    SBI bonds are not available in cumulative option . I am thinking of investing the interest amount in diversified mutual fund such as HDFC Top 200 . What r ur comments/suggestions?

  2. We love IPOs that is all. Look at the hysteria that merchant bankers, brokers, fund managers are creating about the Coal India IPO. They did the same when NHPC IPO came. Available 12% cheaper than IPO price. Pick up NHPC instead of Coal India :). But the noise creators cannot make money na?

  3. Hello Sir,

    I have been reading your blog since quite some time. i really like it. I want to know about how can i apply for these SBI bonds for my father who is retiring now as a investment option other than FD. I and my father both have demat account but i am not able to subscribe it through icicidirect website. can you please guide on how can this be done.? thanks in advance. Atul

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