SBI to Raise Over $ 1Billion Selling Long Term Bonds To Retail Investors
India’s largest financial institution, the state owned State Bank of India (SBI) has decided it will raise Rs 5000 crore or US$ 1.04 billion by issuing Upper Tier 2 Bonds to retail investors. SBI Chairman OP Bhatt announced the fund raising to reporters in Guwahati adding that it would be the first time in Indian banking history that bank would issue Tier 2 Bonds to individuals.
Usually, banks sell Tier 2 bonds to institutional investors for raising capital to shore up their capital adequacy ratio. Mr. Bhatt said the bank was planning to raise around Rs 5,000 crore just over US$ 1 billion through the issuance of these longer term bonds. Over the next three months, between Rs 500-1,000 crore or US$ 100-200 million would be raised by retailing Tier 2 bonds. SBI said it would seek permission from SEBI, the Indian securities regulator for the bond floatation.
The long-term Tier 2 bond has a 15 year maturity. SBI said it would fix the coupon after comparing yields on similar tenured government securities or G-Secs.
Corporate bonds typically yield more than comparative benchmark G-Sec’s reflecting the increased risk of default that arises from a non government issuer. Though SBI is state owned, so its debt would be quasi government debt to begin with.
SBI said that it hopes that investors would benefit from the availability of this instrument which ensures a high degree of stability in comparison to other generally available instruments like normal bank or post office deposits or mutual funds and equities, the latter having performed exceptionally poorly this year.
“We have in principle decided to offer this instrument to retail investors. We are now preparing the offer document. With this, small investors will get a wider array of investment options,” Mr. Bhatt said.
The timing of the issue has yet to be determined, however. “We plan it before the end of this fiscal. But we need to time prudently,” Mr. Bhatt said.
Upper Tier 2 bonds have a longer maturity and a higher coupon compared to Lower Tier 2 bonds. They are also callable and subject to an interest rate reset. That is to say issuers have the option to call the bonds back at the end of the 10th year. At the end of the 10 years, if the call remains un-exercised, the issuer would then raise the coupon by 0.5 percentage points to improve the yield.
Mr. Bhatt said SBI plans to use its own network to market the bonds. The transaction cost for this exercise would be higher compared to a private placement with corporate investors. “But, our endeavour is to broaden the investor base,” he said.
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