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Yogi Zone

Useful articles for your finance management by our team of experts

Company Fixed Deposits – Should I Invest?

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Mr. Vijay Parthian, 48, wants to invest Rs. 50,000/- in any instrument which will give him fixed reasonable returns over a period of time. After doing some research he has found out that there are few corporates which are offering fixed returns of up to 12% per year, much more than 9% offered by banks. At first, the yield looks lucrative. Should Mr. Vijay go for the tempting deal?

Let us understand how company fixed deposits fare as an investment product.

Why do companies issue fixed deposits?

Very simple. To raise capital for various purposes like repayment of existing high interest loans, business expansion, meeting working capital needs, etc.

Getting capital from public is a cheaper and easier option for corporate than seeking loans from banks and other financial institutions. Hence, companies come up with fixed deposit issues so that they can raise quick capital from the public at a cheaper cost as compared to bank loans.

What are the Risks associated with company fixed deposits?

Company fixed deposits are associated with default risk. Generally, company fixed deposits are unsecured i.e. they are not backed/insured by any form of physical security. This is contradictory to bank deposits where RBI (DICGC) insures deposits up to Rs. 1 lakh for every depositor incase the bank defaults. So, if a company runs into losses, is cash strapped or goes bankrupt it may not be able to return your principal and/or pay you the interest promised.

However, there are a few issues which are raised against secured assets of a company. These are somewhat less risky as compared to unsecured deposits.

How does one know how risky a fixed deposit issue is?

Before investing in any company fixed deposit, it is advised to check the credentials of the company and study its past performance in terms of its ability to meet its debt obligations.

Also, knowing the reasons why capital is being raised is a helpful lead e.g. If debt is being raised for business expansion then it’s a sign that company is on growth track. If debt is being raised simply to pay off existing high cost loans, then it may be a RED indicator.

Credit rating companies CRISIL /CARE etc come handy in this regards. They provide rating to issues based on various parameters. Depending on the final rating provided, one can get a fair idea how sound a company’s financials are.

Rating Scale for Fixed Deposits

FAAA
Highest Safety

Highest degree of safety regarding timely payment of interest and principal.

FAA
High Safety

Indicates high degree of safety regarding timely payment of interest and principal.

FA
Adequate Safety

Indicates satisfactory degree of safety regarding timely payment of interest and principal.

FB
Inadequate Safety

Indicates inadequate degree of safety regarding timely payment of interest and principal.

FC
High Risk

This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful.

FD
Default

This rating indicates that the fixed deposits are either in default or are expected to be in default upon maturity.

NM
Not Meaningful

Instruments rated ‘NM’ have factors liquidation, litigations etc present in them, which render the outstanding rating meaningless.

Note: CRISIL may apply ‘+’ (plus) or ‘-’ (minus) signs for ratings from FAA to FC to indicate the relative position within the rating category.

How they fare as compared to Bank Fixed Deposits?

Below is a brief comparison of Bank Fixed deposits and Company deposits:

Bank Fixed Deposits

Company Fixed Deposits

Rate of Interest

6%– 9%

9% – 13%

Credit Rating

NA

Applicable (but not for all issues)

Insurance

Yes. Deposits up to 1Lakh are insured by DICGC*

No

Liquidity

High

Medium. Early redemption is possible but may be cumbersome

Max Tenure

upto 10 years

Usually upto 5 years

Tax Implications

Tax Savings Fixed Deposits are available

No Tax Savings

TDS Limit

TDS is cut If interest exceeds Rs. 10,000/-

TDS is cut If interest exceeds

Rs. 5,000/-

 *All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the

DICGC (deposit insurance and credit Guarantee Corporation) for deposits up to Rs 1 Lakh

  Banks FD versus Corporate Fd

What should I look out for in case I wish to invest?

If you are interested in investing in Company FDs to make some extra money, do keep in mind these checks.

1. Rating of the Company:

Always invest in companies with high ratings. Anything below FAA should be avoided.

2. Interest Rates:

Generally companies with solid financials will offer its corporate deposits at 1.5 – 2% over the current market bank fixed deposit rates. Any company which is offering more than 3% over bank deposit rates should be looked upon with caution.

3. Company’s Financials:

Do a little research to check the financial health of the company, i.e. if it is meeting its interest obligations on existing debt, if any, or the company has any complaints on any of its previous fixed deposit issues.

Check if the company is allowed by RBI to raise public deposits. Not all companies are allowed by RBI to raise public deposits. Hence, it is worth a check if the corporate is allowed to raise capital by RBI. One can check this information here:

http://rbi.org.in/scripts/BS_NBFCList.aspx

Liquidity

Check the conditions in case one needs to break the fixed deposit pre-maturely. Generally, the rate of interest offered will be lower. However, it is worth checking if there are any other penalties.

Conclusion

For individuals who want to invest in fixed sources of income, bank fixed deposits offer highest form of safety albeit with lower returns. If one plans to invest in company fixed deposits he/she should not go for any company which has a rating lower than FAA.

Also, one can even think of investing in a debt based mutual fund which can offer higher, tax efficient returns as compared to bank deposit and are less risky as compared to company fixed deposits.

Happy Investing!!!

Disclaimer: The author has taken due care and caution to compile and analyze the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. The author does not accept any liability whatsoever arising from the use of any of the above content.

  • Divyesh

    Nice information. However, either am misreading or i believe the article should have more information on some links where we could check on how to invest in these companies / whom to approach etc..

    • Av Suresh

      Thank you, Divyesh. As I stated, Company fixed deposits are not available always. Companies issue notifications whenever they want to launch one in the market. They would specify the means to apply to these deposits. Generally, you can apply to company FDs either directly or through brokerages.

      • Divyesh

        Thanks Suresh but any pointers on what we should follow so we get notified/informed as and such these notifications come?

        • Av Suresh

          We just have to be updated through aggregator online portals like FundsIndia or financial newspapers.

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