Corporate Fixed Deposits

Investors can also consider depositing their money for a fixed term with companies. These fixed deposits which are considered as a part of the unsecured liabilities of the company, have a maximum maturity period of 3 years and carry a maximum rate of interest of 12.5% (earlier 14%). The public deposits accepted by the companies are governed by the provisions of the Companies (Acceptance of Deposits ) Rule, 1975. 

The important features of these regulations are:

1. Public Deposits cannot exceed 10% of the share capital plus free reserves

2. The maximum maturity period cannot exceed 3 year and the minimum maturity period cannot be less that 6 months.

3. No company with a net owned fund of less than Rs.1.00 crore shall invite public deposits.

4. The company inviting public deposits must disclose the prescribed information relaing to its financial performance and position

These guidelines apply with certain modifications to finance companies

The interest on public deposits is paid semi-annually on a cumulative or non cumulative basis. While the rate of interests offered on company deposits are attractive vis a vis bank deposits, it should be noted that there is no tax benefit on the interest income, nor, does the investment in CFD qualify for any tax rebate.

Besides, company deposits have a higher degree of default risk that bank deposits. For one thing, these deposits do not enjoy any risk cover form the Deposit Insurance Corporation like bank deposits. Further, these deposits are serviced and finally repaid from the earnings of the company which by nature are uncertain and fluctuate over time. To add to this, theses deposits are unsecured and rank pari passu with other unsecured liabilities for repayment in the event of liquidation. Therefore, the decision to invest in public deposits\ must be necessarily based on a thorough analysis of the financial stability and profitability of the company or on the credit rating provided by various rating agencies.