The massive response to the State Bank of India?s bond issue and the relative success of the Coal India equity float show that it is good pricing that makes investors line up. SBI?s lower Tier II retail bond issue was over-subscribed by 17 times within the first two days. It also sent a clear message that retail investors are looking at debt paper anew. Despite CIL?s good showing, the stand out story is the SBI bond issue, thanks to the high interest rate?9.25% on 10-year bonds, 125 basis points more than government bonds, and 9.5% on 15-year bonds?indicates the pent-up demand for debt papers, which will prompt other banks to come up with similar priced issues. The Rs 500-crore issue, consisting of face value of Rs 10,000 has an option to retain over-subscription up to Rs 500 crore. The lower Tier II bonds will help the bank to increase its capital adequacy ratio and meet its long-term cash needs. Of course, the strong brand name of the largest lender did incentivise investors to queue up to deposit physical applications, ensuring all investors got an equal opportunity to apply for the bonds. The allotment will be on first-come first-served basis. Retail investors are chasing high-yielding bonds to beat the soaring inflation that is leading to negative real income from bank deposits as they pay less than the headline rate. Interestingly, retail investors are also looking at a longer tenure to park their monies as the proposed Direct Taxes Code, which is likely to be implemented from April 1, 2012, incentivises long-term savings. Such long-term investments will help channel funds into the financial sector and aid the country?s growth process.
The SBI issue has a lesson for several infrastructure companies that floated tax-saving long-term bonds, but earned a lukewarm response. The pricing was obviously not right. There could also be a seasonal effect as these tax-saving instruments sell best in the fourth quarter, when investors and salary earners seek tax shelters. In any case, with interest rates poised to rise and other companies, including LIC, likely to tap the market, the competition among bond issuers can only get tougher. The Public Provident Fund offering about 8% and other small savings schemes offering interest rates between 6% and 8% is an indication of the rates investors are seeking on bonds from companies with credible track records. It is obvious the funds generated from the large-scale redemption of equity-linked mutual funds as well as profit-booking from equities are moving into debt for guaranteed returns.