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Research:
Resurgent India Bonds





Introduction
This is our mandatory section on the Resurgent India Bonds. We felt the need to put up this section because some visitors asked us about the features of the bonds. So here goes:
Issuer State Bank of India, India's largest bank
Tenor of Bonds 5 years
Target Investors NRIs and OCBs (Overseas Corporate Bodies). "OCBs, for the purpose of the offer for RIBs mean any institution, association or body, whether incorporated or not, established under the laws of a country outside India wherein any Non-Resident Indian(s) has/have an interest." Implication - even non-NRIs can invest in these bonds if they rope in an NRI and he puts up even a 1% stake.
Objective of Issue To raise resources for investing in India's infrastructure
Issue Opens On 5th August, 1998
Issue closes on 24th August, 1998



Interest Rates etc.
Currency Minimum Subscription Coupon Rates Comparable Govt Bond Ylds (3rd Aug '98) Comparable CD/ Corporate Debt Ylds (3rd Aug, '98)
US Dollar USD 2,000/- (and in multiples of 1000 thereafter) 7.75% p.a. 5.460% 6.22%
Sterling Pound GBP 1,000/- (and in multiples of 500 thereafter) 8.00% 6.154% 6.75%
Deutschemark DEM 3,000/- (and in multiples of 1000 thereafter) 6.25% 4.340%  

It is evident from the above table that SBI and the Government of India are willing to pay top prices in order to attract investors.



Features of the Bonds
Liquidity
  • Freely transferable among NRIs and OCBs
  • Premature redemption allowed after 6 months into non-repatriable Rupees
  • Can be placed as collateral for obtaining bank loans (upto 90% of bond amount) in either Rupees or in Foreign Currency (RBI permission required for the latter)
Interest Period
  • Either half-yearly
  • Or Cumulative at maturity, with half yearly compounding
Forex Risk for the Investor
None. Principal and Interest to be repaid in the currency of subscription.
Tax Benefits
  • No Wealth Tax
  • No Gift Tax
  • No Income tax on Interest Income in India
  • Above benefits available to donees and tranferees as well.



Does it make sense for an NRI to invest in these RIBs?
At zero Currency Risk and near zero Credit Risk, the Bonds offer much higher coupons than otherwise available on comparable instruments. So, if an NRI is looking for a Fixed Income investment, the RIBs certainly look attractive.

For someone with greater risk appetite, we would think the Indian equity market would present a better opportunity, but then, that's another story.

For those NRIs who plan to come back over the next 5 years and would be looking to get their investment back in Rupees, the history of Rupee depreciation would suggest that they might end up with a lot more Rupees for their Dollars than currently available.

Again, it is another matter that we hold the view that the Rupee is not on a one way street to eternal depreciation and that it is a structural long term Buy. But then, we are yet to be proven right. In the meanwhile, if the NRI looks at history, it makes sense for him to put in Dollars and take out many more Rupees tomorrow.

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