corporate deposits

What are Corporate Deposits?

  • Fixed deposit products are alluring investment products for retail investors due to two important factors:
  • The term of the investment is fixed
  • The interest rate is fixed.
  • Typically, banks are the biggest issuers of fixed deposit products in India. Since banks inherently have the trust of their customers, and since they already have the customer's money, investors find it easy to choose them.

However, there are other institutions that offer similar deposit products to investors - these are companies that are not registered as banks. They could be involved in a variety of businesses and may require capital for running their businesses. When they do, they issue deposit certificates to investors of different tenures at fixed interest rates.

  • Typically, the interest rate offered by corporate fixed deposits are higher than the ones offered by banks. For this reason, investors choose to include corporate fixed deposits in their deposits portfolio.
  • A common misconception is that company fixed deposits are not wise investment choices when the deposit rates offered by the banking institutions are "high". On the contrary, wisely chosen company fixed deposit products should always have a place in an investor's debt portfolio.
  • The reason for this is simple - interest rates should not be considered in isolation. Rather, they should be considered in relation to the prevailing inflation rate or the rate at which the rupee is losing value in the market. An astute investor will observe two things - one, whatever be the ongoing annual inflation rate is, the deposit rates offered by institutions are a notch (a couple of percentage points) lower than that and two, the average company deposit offers a slightly better rate than the bank fixed deposit for a comparable term. Putting the two together, an investor will always know that the company fixed deposit gives an interest rate that is closer to the current rate of inflation at a point in time compared to a similar bank FD product.

Of course, the key is, as in all things in life, moderation. The company deposits give a slightly higher interest rate because there is a slightly higher risk associated with them. The "credit risk" associated with a company fixed deposit should be factored into while making a decision on where to invest.

The simple thumb rules to keep in mind are the following: 1. Spread your investments - an investor has a choice between PSU banks, private banks and companies when it comes to deposit options. Simply, divide your deposit portfolio into three equal parts for these categories. 2. Choose your companies wisely - no un-rated companies regardless of how high a rate they offer, and preferably chose companies that are part of a larger group so the risk is mitigated. And finally, 3. Choose the company deposits for the part of the portfolio that has the shortest tenure - say 1-2 years.

With this approach, an investor will have the potential to make a good risk-adjusted return from their deposit portfolio.

Positives of Company FDs

Banks curently offer nine to 9.5 per cent on three-year FDs. After adjusting for tax, the returns are 6.5 to 8.8 per cent depending on the individual's income tax slab. For many, this is a meagre return. Someone who is ready to take risks can explore company FDs and NCDs. At12.5 per cent interest posttax returns from these would be 9.2 to 11.9 per cent depending on the tax slab. This means a company FD offering 12.5 per cent is giving 2.7 to 3.1 percentage points more post-tax returns than a bank FD offering 9.5 per cent.

The interest on both company FDs and NCDs does not fl uctuate and hence the two can be a regular source of income. Company FDs offer the option of receiving interest either at regular intervals or at the end of the maturity period. The interest is compounded monthly or quarterly. The tenure of company FDs can be as short as six months and as long as 10 years. NCDs have similar maturity periods. Bank FDs also have several tenures, some as short as 14 days and some as long as 10 years.

The mathematics of return clearly favours company FDs and NCDs. But should you invest your money purely on this criterion? As with any other investment option, the risk of losing money should be a key consideration as well.

Regulating Public Deposits

The public deposits are regulated by the provisions of the Companies Act and the Companies (Acceptance of Deposit) Rules,1975. According to them, the following amounts are not included in the expression 'deposits':-

  • Any amount received from the Central Government or a State Government, local authority, foreign Government, any foreign citizen or authority or any other source whose repayment is guaranteed by the Central Government or a State Government
  • Any amount received as a loan from any banking company, State Bank of India or its subsidiaries, a nationalised bank or co-operative bank
  • Any amount received as a loan from any of the notified financial institutions
  • Any amount received by a company from any other company
  • Any amount received from an employee of the company by way of security deposit
  • Any amount received by way of security or as an advance from any purchasing, selling or other agents in the course of or for the purposes of the business of the company
  • Any amount received by way of subscriptions to any shares, stock, bonds or debenture pending the allotment of such shares, etc., and calls in advance on shares
  • Any amount received in trust or any amount in transit
  • Any amount received from directors of the company or from its shareholders by a private company
  • Any amount of unsecured loans brought in by the promoters in pursuance of stipulations of financial institutions or loans provided by the promoters themselves and/or by their relatives but not by their friends and business associates.

Under the Companies Act and the rules framed thereunder, the invitation and acceptance of deposits by companies is subjected to the following conditions:-

  • Companies are not permitted to raise unlimited amounts of fund through public deposits. The aggregate of all outstanding deposits cannot exceed certain prescribed percentage of the paid up capital and free reserves of the company.
  • Invitations of deposits by a company can be made only by means of an advertisement specifying the financial position, management structure and other particulars relating to a company. A company which has defaulted in repayment of deposit or interest thereon is prohibited from inviting deposits.
  • The depositors shall fill the application form supplied by the company. The company in return issues a deposit receipt which is an acknowledgement of debt by the company. The terms and conditions of the deposit are printed on the back of the receipt. The company shall Maintain a register of deposits containing the prescribed particulars and file returns of deposits duly certified by their auditor with a Registrar on or before 30th June of every year.
  • The interest to be allowed on such deposits by the company must be in accordance with the rate fixed by the Government. The rate of interest on deposits also varies depending upon the period of deposit and the reputation of the company.

The Companies (Amendment) Act,2000 has inserted certain new sections, in order to protect the interests of small depositors. The expression 'small depositor' means ''a depositor who has deposited (in a financial year) a sum not exceeding twenty thousand rupees in a company and includes his successors, nominees and legal representatives". In case of any default by the company in paying back to them, it shall inform the Company Law Board within sixty days from the date of default. The Company Law Board will then direct the company to repay to small depositors within a period of thirty days from the date of receipt of intimation of default. On failure to comply with the orders of the Board, the company and its directors shall be punishable with imprisonment and payment of daily fine during the period in which such non-compliance continues. However, if such a defaulting company wants to invite deposits from small depositors, it shall state the complete nature of default in all its future advertisements and application form.

Besides, the Reserve Bank of India issues directives from time to time for regulating public deposits. These are aimed at safeguarding the interest of the public and to give them a feeling of security in investing in the public deposits. These regulations pertain to:-

  • The ratio of deposits to the paid-up capital and free reserves of the company
  • The maximum duration of the deposits
  • Obligation to invest a specified percentage of the deposit in a current or other account with a scheduled bank free from any charge or lien, or in approved securities which shall be used only for the repayment of deposits
  • The filing of periodical returns with the RBI, giving the required information about public deposits/loans as well as furnishing of certain specified information on its financial position and working.