The Corporate Fixed Deposits, as the name suggests are like any other Fixed deposits issued by the banks. It has also got some characteristics of fixed deposits with some restrictions. The Corporate Fixed Deposits are issued by the Public and Private Limited companies. It is governed by Section 73 of the Companies Act. It is also called Company Deposits. Bank Deposits are governed by the Banking Regulation Act.
WHY COMPANIES TAKE DEPOSITS:
The companies require funds for their business activities. Normally they take loans from banks. The interest rate on these loans is comparatively higher. To reduce interest cost, companies invite deposits from the general public. The interest on these deposits is generally 3-5% less than the interest on the loans taken from banks. This helps them in reducing the cost of production. Thereby keeping the cost of their products competitive in the market.
WHO CAN ISSUE CORPORATE FIXED DEPOSITS:
Financial companies and Non-Banking Financial Companies (NBFC) are allowed to take deposits from the public. But for Public and Private Limited companies the issuing of Corporate fixed Deposits is subject to the provisions of Section 73 to 76 of the Companies Act,2013.
A Public Company likely to take deposits from the public must have Net worth of Rs 100 Crs or Turnover of not less than Rs 500 Crs. The Company has to obtain shareholders’ consent through Special Resolution and the same has to be filed with the Registrar of Companies before accepting the deposits from Public.
CONDITIONS PRECEDENT TO OBTENTION OF DEPOSITS FROM PUBLIC:
The companies have to necessarily fulfil the following conditions before accepting deposits from the public:
1. Deposits shall not be repayable on demand.
2. The period of deposits shall not be less than 6 months. The company may accept the deposits for their short-term requirement for not less than 3 months. But such deposits should not exceed more than 10% of their paid-up share capital and free reserves.
3. Company has to issue an advertisement in a new paper in form-DPR-1 for inviting deposits from the public.
4. Company cannot accept the deposits from public exceeding 25% of its share capital and free reserves. In the case of Government companies limit is 35%.
5. Company shall obtain the Credit Rating from accredited agencies at the time of accepting the deposits and every year thereafter. The same shall be informed to the Registrar of companies in form-DPT-3.
6. Company shall maintain a Repayment Reserve Account and keep a minimum of 20% of the number of deposits maturing during the following financial year.
CREDIT RATING OF COMPANY:
One of the important conditions of accepting deposits from the public is the obtention of Credit Rating from the accredited agencies like CRISIL, ICRA, etc.
The Credit Rating is assigned based on the Net Owned Funds of the company and other financial parameters.
The following are the types of rating:
| RATING | IMPLICATION |
| AAA | Highest Safety |
| AA | Highest Safety-Low Credit Risk |
| A | Moderate Safety |
| BBB | Moderate Credit Risk |
| BB | Moderate Risk-Inadequate Safety |
| B | High risk of Default |
| C | Very high risk of defaulting |
| D | Indicate the possibility of default in future |
SALIENT FEATURES OF CORPORATE FIXED DEPOSITS:
The following are the salient features of the Corporate Fixed Deposits:
1.High Returns: The interest offered by the companies are comparatively higher than the interest offered by the banks.
2. Flexibility-It offers flexibility in tenure ranging from 6 months to 5 years. It also offers the payment of interest in Monthly, Quarterly and Half Yearly rests.
3. Safety-We could be assured of the safety of deposits by the credit risk assigned to the company issuing it.
4. Liquidity-Deposits can be withdrawn pre-maturely in case of need after the lock-in period is over. The lock-in period is as low as three months.
BANK DEPOSITS Vs CORPORATE DEPOSITS:
There is direct competition between bank deposits and corporate deposits. A comparison of both the deposits is furnished below:
| BANK DEPOSITS | CORPORATE DEPOSITS | |
| RATE OF INTEREST | AVERAGE | HIGH |
| TENURE | 7 DAYS TO 10 YEARS | 6 MONTHS TO 5 YEARS |
| MIN.AMOUNT | 1000 | 5000/10000 |
| SAFETY | HIGH | LOW |
| DICGC GUARANTEE | UPTO Rs 5 LACS | NOT AVAILABLE |
| LIQUIDITY | PRE-MATURE WITHDRAWAL ALLOWED WITH PENAL CUT | PRE-MATURE WITHDRAWAL ALLOWED AFTER LOCK-IN PERIOD |
| CREDIT RATING | N A | COMPULSORY |
Despite the high risk involved in Corporate Deposits, it has got its advantages. People do not want to put all eggs in one basket and prefer to invest a part of their savings in Corporate Fixed Deposits for high yield.
PRECAUTIONS TO BE TAKEN WHILE INVESTING IN CORPORATE FIXED DEPOSITS:
Despite inherent shortcomings of the Corporate Fixed Deposits, the credit rating has somewhat reduced the risk involved in it. The high rate of interest continues to make it an attractive investment option. There is no risk in parking a small portion of savings in it.
However, track record of the company about the following to be checked before investing in Corporate Fixed Deposits:
TRACK RECORD OF THE COMPANY:
A. Company should be authorized to accept the deposits as per Companies Act.
B. Company must be a minimum of 5 years old.
C. Company must be in profit for the last 3 years and dividend-paying.
D. Company must get a high credit rating at least AAA or AA.
E. Company should be offering realistic Interest on deposits.
F. Company should be listed on the Stock Exchange.
TAX IMPLICATION:
1. In Banks, there is a scheme for Tax Savings deposits which qualifies for the deduction under Section 80 C of Income Tax. There is no such scheme in Corporate Fixed Deposits.
2. In the case of Corporate Deposits, TDS @10% is deducted on interest paid above Rs 5000, whereas it is Rs 40000 in case of bank deposits.
3. Interest in both the deposits is taxable under income tax.