Corporate Fixed Deposit

There are many investors who are very much impressed by the Corporate fixed deposits and feel like they are as good as Bank Fixed deposits, but one has to understand that if company deposits offer higher interest rates, It is bound to be more riskier than normal Fixed Deposits offered by Banks. Most of the investors think that Company fixed deposits are safe just because the company which is offering these Deposits are very famous one’s and very big in Size. But that is not true! every time. These too contain the risk as these carry high interest rates.

Definition

Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates  offered are generally higher than Bank interest rates and can be in range from 9%-16% . Higher the interest rates offered higher are the risks involved.

Need of these deposits?

When companies have cash crunch and require money, they can offer deposits at attractive rate of interest to common public, one of the reasons for this can be that they do not want to raise the additional capital by issuing shares.  Corporate Deposits are governed as per Section 58A of Companies Act, 1956 however these are “unsecured” loans.

Risk Associated

There are two main risks associated with Corporate Deposits, they are:

A) Default Risk: These Company deposits carry a risk called Default Risk, which means, at maturity they might not be able to return your maturity amount and default in the payment. It can happen that company is out of cash at that time or does not have sufficient money in their hand to pay back , this can happen for many reasons like their business might not be going good that time or because of recession

B) Unsecured Deposits: Bank Deposits are secured by RBI up to 1 lac rupees per branch, which means that if bank does not return you the money or goes bankrupt, RBI will pay you up to 1 lac of deposits. There is no such Insurance on Company Deposits, hence they are totally unsecured

Guideline by Company Act, 1956

These deposits are governed by sec. 58 A and for small depositors by Sec.58AA of Companies Act, 1956  also there are rules which governed these deposits known as  Companies (Acceptance of Deposits Amendment) Rules, 1997

These define procedure of acceptance of deposits as well as repayment of deposits and interest. Incase default in repayment of either interest or principal amount there are certain penalty and prosecution as well.

Guideline by RBI

RBI issues master circulars to regulate deposits in current there are two masters circular exist which explains about deposits. These are “Guidelines for Issue of Commercial Paper” the other one is “Guidelines for Issue of Certificates of Deposit”

Guidelines by SEBI

SEBI has issued guideline regarding vide circulars and regulations to the issuance and repayment of deposits as well as listing. These regulations are “SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE AND LISTING OF

DEBT SECURITIES REGULATIONS”, as amended time to time 

Credit Rating

Now the question is in which companies deposit is good from the point of view of prospective of an investor. For that we just need to know about the type of credit rating in India we go according to the rating done by CRISIL or CARE or ICRA .

To invest in Corporate deposits the rating should be  at least “AA+” or more than that. As this rating indicates that comp any is able to meet its financial commitments strongly.

 

Let’s Sum Up

The deposit placed by investors with companies for a fixed term carrying a prescribed rate of interest is called Company Fixed Deposit. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilised, are governed by the Companies Act under Section 58A. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.