Company Deposits

World of Finance by M.Vijaya Sai

With the macro environment being tippy these days markets worldwide are behaving very volatile. In this situation how can one position safe and be assured good returns. This can be tackled skilfully through various investment product’s. One of those products is Company Deposits or Company Fixed Deposits.

One famous quote tells us -"The reason saving comes before investing is that you need to have seed before you can sow it in anticipation of a harvest." truly one need to save well, as your money should turn out to be a good yielding crop with high return. How can we make it happen?

We know banks tend to give lower rate of return on our regular savings account. While the Gold reaching tall peaks making it not affordable for common man. Investing in equity market and mutual funds seems to be very risky because of high volatility. Further, although Fixed deposit's give good return they have long lock in period attached which helps you in tax saving.

So here is a solution for those who are looking for relatively shorter investment horizon than bank fixed deposits and which give you fair returns as Fixed Deposit earns for you they are none other than Company Deposits.

What are they?

Company fixed deposits are normal fixed deposits offered by Companies. They constitute the debt portion of the company. The interest rates  offered are generally higher than Bank interest rates and can be in range from 8%-15% . As investment rule states that higher the interest rate higher is the risk reward. 

Why do companies need these deposits?

When companies have liquidity problem and require money, they can offer deposits at attractive rate of interest to common public, one of the reasons could be that company doesn't want to raise the additional capital by issuing shares.  Company Deposits are governed as per Section 58A of Companies Act, however these are treated as “unsecured” loans. In case if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.

Things to consider before you opt for CD's.

Why is that interest from Company Fixed Deposit higher than Banks?
Company Fixed Deposits have always offered interest which is 2-3% higher than Bank Deposit rate,because they have to pay higher interest to banks for borrowing money.

How are interest payments made ?

Interest is paid on monthly/quarterly/half yearly/yearly basis or on maturity, and is sent either through cheque or through ECS basis.

Is TDS deducted on the interest from Company Fixed Deposits ?
TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in a financial year.


How to consider right company deposit scheme ? 

1. Ignore the unrated and underrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies. For NBFCs, RBI has made it mandatory to have an 'A' rating to be eligible to accept public deposits. One should go further and look at only AA or AAA schemes.(Be clear with what rantings represent).
2. Within a given rating grade, choose the company with a better fundamentals and performance.
3. Once you decide on a company, choose the schemes that have given a better return. Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields. It also gives you a lump-sum amount at one go.
4. It is better to make shorter deposit of around 1 year to 3 years. This way, you can not only keep a watch on the company's rating and servicing of CD's, but also have your money back in case of an emergency.
5. Check on the servicing standards of the company. You should not invest in companies that care little about investor services, like promptly sending interest warrants or the principal cheque.
6. Take help of Financial Planner / Investment Adviser for advice in all your transactions. Do not bypass and invest directly.

Which companies can accept a deposits ?
Companies registered under the Companies Act 1956, such as:

·         Manufacturing Companies.
·         Non-Banking Finance Companies.
·         Housing Finance Companies.
·         Financial Institutions.
·         Government Companies.

Upto what limits can a company accept deposit ?
A Non-Banking Non-Finance Company(Manufacturing Company) can accept deposits subject to following limits.

·         Upto 10% of the aggregate of paid-up share capital and free reserves if the deposits are from shareholders or guaranteed by the directors.

·         Otherwise upto 25% of the aggregate of paid-up share capital and free reserves.

A Non-Banking Finance Company can accept deposits upto following limits:

·         An Equipment Leasing Company can accept four times of its net owned fund.

·         A Loan or Investment Company can accept deposit upto one and half time of its net owned funds.

What is the duration of the deposit ?
Company Fixed Deposits can be accepted by a Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Companies can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.

Companies where you should not invest

·         Companies that offer interest higher than 15%.

·         Companies that are not paying regular dividends to the shareholders.

·         Companies whose Balance Sheet shows losses.

·         Companies that are below investment grade (A) or less rating.

·         Pvt limited Companies and Partnership firms as its very difficult to judge their performance.

More points to Consider

·         Generally Corporate fixed deposits come for least tenure of 6 months .

·         No Income  is deducted at source if the interest income is up to Rs 5,000 in one financial year.

·         It would be wise to check company performance and movement in share prices half-yearly at least . This is for a review .

·         Companies generally provide a very high commission to brokers in order to push their Fixed Deposits.

Should I invest in Corporate Fixed Deposits?

Be aware risk- reward balance, based on your risk baring ability you should wisely choose the investment option. Some companies which offer Fixed Deposits are very established and are highly reputed, however you can’t take it at face value and ignore the risks involved. If you want to park money for short-term and are comfortable with the risks which come with company fixed deposits, these Corporate fixed deposits can be a good products for you. The point here is awareness. It’s not recommended that you put a big sum in same company. If you want to invest 2 lakhs in company fixed deposits, then better invest 1 lakh in 2 different company, as famous quote says "Don't keep all eggs in one basket"  that means you should diversify your risk to some extent. Also if you are investing for some very important requirement, then better settles with Bank Fixed Deposits and not Corporate deposits, it’s better to settle with 2-3% less returns then take unnecessary risk. Here are some words of caution while choosing Company deposits. 

CLICK HERE TO DOWNLOAD THE LIST OF COMPANIES OFFERING Company Fixed Deposits and Interest rates and ratings against them.
- Happy Investing.