Corporate Fixed Deposits

• Is It Safe To Invest In Corporate Fixed Deposits
• Corporate Fd Rates In India
• Best Corporate Fixed Deposits In India
• Corporate Fixed Deposits

POSTED BY ON May 28, 2018 COMMENTS (15)

Do you think corporate fixed deposits are as safe as bank Fixed Deposits? Has come agent convinced you that you will get 2-3% higher returns from corporate fixed deposits without any risk?

If that’s the case, you need to be educated a little more about corporate fixed deposits. I will talk about 5 major things every investor should know before they put their hard-earned money in corporate fixed deposits.

What are Corporate Fixed Deposits?

$prxqw 5v 5dwh ri,qwhuhvw s d $prxqw 5v 5dwh ri,qwhuhvw s d $prxqw 5v 5dwh ri,qwhuhvw s d $prxqw 5v 5dwh ri,qwhuhvw s d. How to choose a good Corporate Fixed Deposit scheme? Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies. Within a given rating grade, choose the company with a better reputation. Once you decide on a company. Corporate deposits or company fixed deposits are term deposits wherein you put your money for a fixed tenure at a fixed rate of interest. They are offered by non-banking financial companies (NBFCs). Company Fixed Deposit is the amount deposited by investors for a fixed period of time with a company which offers a fixed rate of return. These deposits are accepted by manufacturing companies. Company fixed deposits are better than bank fixed deposits as they offer interest rates, which are significantly higher than bank fixed deposit interest rates.

Corporate Fixed Deposits are deposits that are issued by private and public companies, which work very much like bank fixed deposits. There is an interest rate offered and there is a maturity duration for the company deposit. You can either opt for a cumulative option (where your interest is added in deposits) or you can opt for a non-cumulative option, where you are paid the interest after every fixed duration.

A lot of agents get a good commission for selling these corporate fixed deposits to their clients. Nothing bad in that as such, but you need to be clear about some important and critical points related to company fixed deposits.

Let’s start…

Higher the return, higher the chances of Default

In almost all cases, the corporate fixed deposits offer quite higher returns compared to a bank deposit. If bank deposits rates are 7 %, you will see that company deposits floating in markets are providing your returns in the range of 8-14%.

Always ask the basic question – “Why is a company providing higher returns?”

The logic is very simple, a company needs money for expansion or for some project and to fund that project, they can either take a loan from a bank or raise money from other measures and for that they will have to pay very high interest.

So they float corporate fixed deposits where normal investors like you and me can invest in their deposits and earn higher returns.

But, because you get higher returns, there is also high risk involved in corporate deposits. You never know how the company will do in the next few months or years. You never know how the project of a company turns out and if it’s going to make a profit or loss.

In short, after a few years, when its time for maturity – what will happen if the company’s financial health is not good? Will they repay the money on time? Will they repay the money at all?

In one of the recent examples, a lot of investors had put their money in DSK group fixed deposits

A lot of senior citizens are lured into parking their hard-earned money into many shady fixed deposits offered by small or medium-sized company fixed deposits by showing them high returns.

Below is a heart breaking case study of a 78 yr old person who had put all his gratuity and PF money into DSK Kulkarni FD (a very big real estate group in Maharashtra). When his FD maturity came, he was told that he should renew it for another 6 months as its tough to repay right now. The video below is in Marathi, but you will understand some words and will be able to make out what is being said!

So please understand that when you are investing in corporate fixed deposits, there are good chances that if it’s offering very high returns, there is a lot of risks involved in that. You cant get higher return just like that.

Many big companies also offer corporate fixed deposits, but then the interest offered is quite lower and looks reasonable. However the risk is still there unlike a bank FD.

Is It Safe To Invest In Corporate Fixed Deposits

Every company fixed deposits are rated by agencies like ICRA, Crisil, CARE etc and they give a rating to the FD. These ratings are a measure of the company’s ability to pay the interest as well as principal to its investors. A high rating means no or very low probability of default.

Corporate FD’s are not regulated by banking rules

Note that unlike bank fixed deposits, corporate fixed deposits are not regulated directly by RBI regulations. All the deposits under corporate deposits are governed by provisions of 73 to 76A of the Companies Act 2013 (erstwhile section 58-A of The Companies Act 1956).

If the company is not paying you on time, you cant do much in that other than following up with the company. However, Fixed Deposits of Corporates are secured borrowing, so in case of winding up of business, secured borrowings are given preference over equity shareholders in terms of repayment.

Some important points related to Corporate Fixed Deposits

• TDS is deducted @10% if the yearly interest is more than Rs 5,000
• Premature closure of company FD is not possible for 3-6 months
• Pre-closure of company FD is not a straight forward process, it’s cumbersome and involves too many documents

Still, want to invest in Corporate Fixed Deposit?

If you still want to go ahead and invest in a company fixed deposits, please take care of the following points.

• Make sure that the company is paying regular dividends to its share holders
• The balance sheet of companies is showing profits at least for 3 yrs in a row
• Make sure its an at least a 5 yr of company
• Make sure they are offering realistic returns (2-3% more than a bank FD). Do not fall for those companies which are offering very very high returns
• Make sure these companies are listed on the stock exchange
• Make sure that they have got a high rating from CRISIL like (AAA or AA or A at least)

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In this article [show]

Investing in Corporate Fixed Deposits

Corporate Fd Rates In India

Not happy with the interest on bank fixed deposits? You’d prefer to invest in a fixed deposit with a company and earn the incremental 2-3% return. It must be noted that any financial instrument that has a higher expected return also comes with higher risks. It is important to understand all these risks and make sure they fit your profile before making the investment. In this article we will run you some of the important things to be taken care of before you lend your hard-earned money to a company.

What is a Corporate Fixed Deposit?

Corporate deposits work exactly like bank fixed deposits. The difference being that the bank deposits are issued by banks, whereas the corporate deposits are issued by companies – both public and private. You would lend money to the company for a decided tenure at a fixed rate of interest. The interest may be payable quarterly, semi-annually or annually (non-cumulative) or along with the principal amount at maturity (cumulative).

Understanding the Risks in a Corporate Fixed Deposit

Default Risk

One must understand that in case of bankruptcy of a company there is a hierarchy by which the creditors get paid the residual amount. The government dues, such as any taxes & fees are paid first. Of the leftover, secured loans (loans received against a collateral) are paid next. After this, unsecured loans are paid if there are any funds left.

Since corporate fixed deposits are unsecured in nature, they carry a higher interest rate. In other words, if the borrowing company is to default, you as a lender do not have any asset from the borrower which you can sell to make up your loss. It is because of this extra risk that they offer a higher interest rate.

Read Also: Loan Against Fixed Deposit (FD): Eligibility, Interest Rate, Documents, Online Process

There have been various instances in the last couple of years where companies have gone into a financial tailspin. Their financial health has deteriorated to a level, where they have not been able to repay the investors on maturity. One such case, where the investors could presumably lose a lot of money is Dewan Housing Finance Ltd. (DHFL).

Credit: LiveMint.com - spelling out the plight of retail FD investors

What’s worse is that the maximum investors in such FDs are individuals who need a regular fixed income, such as retired individuals. These are people who cannot afford to invest in riskier asset classes such as equity as their risk appetite is low.

Investment Security

One must also note that corporate fixed deposits are not regulated by RBI regulations. Instead these corporate deposits are governed by provisions 73 to 76A of the Companies Act, 2013. Which means they are not covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which guarantees up to Rs. 1 lakh (Rs. 5 lakhs from FY 2020-21) on deposits with banks.

Pre-Closure of Deposit

Most corporate fixed deposits do not permit pre-mature closure before 6 months. Even if they do allow this, normally the penalties involved are very high. Not only the penalties, the paperwork involved is tedious and cumbersome. On the other hand, in case of bank deposits, though there are penalties involved, they are generally lower, and the procedure is much simpler.

Credit Rating

Best Corporate Fixed Deposits In India

Even though the credit rating agencies have not done a great job in the previous few years, with AAA rated companies going into default, credit rating is always a good starting point. One could filter out any low rated companies.

Track Record of Company

It is always a good idea to study the company’s business and operations. One must make the effort to do some research regarding the fundamentals of the company and particularly check the debt levels that the company has. If the company has too much loan on its books, and most of its earnings is going to payment of interest, it should be a negative signal for the investor.

Corporate Fixed Deposits

Diversify your funds

As the age old saying goes – ‘Never put all your eggs in one basket’. Even if an investor does decide to invest in the fixed deposit of a company, one must be careful not too commit too big a fund into the company. God forbidding, even if the company is to default, your other investments can always bail you out.

Tax Deduction at Source

The company would deduct a 10% TDS on interests over Rs. 5,000 in a financial year. In case the investor falls in the nil or zero tax bracket, he must submit a duly completed Form 15H in duplicate every financial year to avoid TDS deduction.

Study the Application Form

The application form for a corporate fixed deposit generally contains fine prints regarding rules, such as penalties and permission for pre-mature withdrawal. Also, the company’s financials such as profits for the previous 3 years are printed on the application form.

Nominee Details

At the time of applying for a fixed deposit an investor must fill in the nominee details. In case of the unfortunate death of the applicant, it makes the process much easier for the nominee to claim the withdrawal receipts.

Conclusion

All-in-all, corporate fixed deposits are a good product to be able to get a better return than a bank fixed deposit. However, while investing one must take care of the points mentioned above. Corporate fixed deposits in stable companies is a good option for investors who have a low risk appetite and cannot bear or afford the volatility of an asset class like equity.

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