Corporate fixed deposits are similar to banking FD?s, except that the money invested is with a company and not a bank. Deposits under corporate FD?s are governed by the Companies Act under Section 58A.However, these deposits are unsecured. Therefore, if the company defaults, the investor cannot sell the company to recover his/her capital. On the other hand, corporate FD?s apart from giving a superior interest rate than banks, also provide investors with a short-term deposit option with only a six month lock in period as well as the benefit of having no income tax deducted at source if the interest income is up to Rs 5,000 in one financial year. Investments can also be spread in more than one company, so that interest from one company does not exceed Rs 5,000.
TSR Darashaw Limited, a company which helps Tata and other corporates manage their fixed deposit accounts and interest payouts, told FE, ?Currently corporate fixed deposit rates for small companies are 11%, while big companies offer 10.5% interest. Banks on the other hand have lower interest rates of 6-7% and these rates can change easily. Corporate FD?s however do not change their rates during a six month to one year period, which provides stability to the investment. Tata Motors, Mahindra & Mahindra and Indian Hotels all offer corporate FD?s and are doing well. People usually invest in lakhs and not thousands in corporate FD?s. Tata Motors, post making a foray into these fixed deposits, have already collected more than 1 lakh applications.?
These deposits, while are not very large from a big company?s point of view, end up running more on a constant addition and exclusion of investors. The interest paid by the companies is usually on a half yearly basis. Tata Motors was authorised to raise up to Rs 1,931.48 crore from the public through fixed deposits and has already raised over Rs 700 crore. Majority of the companies who raise money via fixed deposits have quarterly interest payouts and the interest rates vary from 9-13% based on the options one chooses. With such large fixed deposit issues available in the market, mutual funds may lose out on investors who invest in their fixed income products, and give rise to competition within the fixed income market space.
Arindham Gosh, CEO, Mirae Asset, explains, ?Mutual funds as it is only have a small percentage of total deposits made in the country. The current 25% is very low and shows our level of under penetration. As far as preference for fixed deposits are concerned, Indian investors, by and large always preferred fixed returns.?
While most feel that corporate fixed deposits may take away a part of the mutual fund investment share, Gosh felt, ?This is an opportunity for mutual funds to tap into. There are investor segments that will prefer this investment class, and there is a chance that interest will gradually flow towards corporate FDs.”
Providing yet another contrarian view on corporate fixed deposits and their success was KVS Manian, group head, retail liabilities and branch banking, Kotak Mahindra Bank, who tells us, ?Historically, corporate fixed deposits thrive in an era of tight liquidity and high interest rates. The corporates try and disintermediate the wholesale markets and reach out to retail customers in such times and find that the retail rates are still viable for them. In the current scenario, when liquidity is very easy and good corporates can get money quite cheap from the wholesale markets, I do not see good corporates wanting to reach out to retail markets through their fixed deposit programmes, incurring a high cost of distribution. Having said that, corporate fixed deposit programmes have been in the market for several years now and will continue to be so. Investors need to ensure that they choose the quality of the corporate carefully and stick to AAA /AA rated corporates only. I do not see these programmes making any significant inroads in the deposit markets.?