Corporate fixed deposits — like bank FDs — have emerged as a very popular investment option amongst retail investors as they give not only assured returns, but also higher returns than those provided by bank FDs. However, they also carry higher risks which should not be ignored. If as an investor you are willing to invest in corporate fixed deposits, then you should keep the following things in mind.
If a company wishes to raise a public deposit, then it is compulsory to attach a statutory auditors certificate in the circular or advertisements meant to raise deposits. The Ministry of Corporate Affairs has made it mandatory. The auditor shall check several things like whether the company has accepted deposits in the past. If it has, did it repay the principal and the interest on time? If there was a default then did the company make the default good? Finally, if five years have elapsed since the date of making good the default?
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The auditors also report about the default in the Company Auditor Report Order (CARO), which is a part of the annual audit report. The companies are required to follow the provisions of the Companies Act relating to the acceptance of deposits.
Retail investors opt for corporate fixed deposits because they offer better interest rates than bank fixed deposits. However, many corporates have defaulted in the past. Many small investors who invest in these deposits do not have the wherewithal to check whether a corporation has defaulted in the past. After making it mandatory to reveal the true picture of the past performance, the rights and interest of investors can be protected.
Financial planners suggest opting for established names when investing in a corporate deposit. The credit rating of the company should be checked before investing. If the company has issued other debt instruments like debentures, then that must also be checked. One can think of consulting SEBI-registered investment advisors before opting for a company to invest in.
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Also, investors shall not enter into a long tenure public deposits. As investors, you should not opt for a rollover when these fixed deposits come up to go for a renewal.
If you have been investing for quite a while and are aware of the mechanism of financial statements like balance sheets and profit and loss, then you should inspect them before investing. Important ratios like debt-to-equity ratio, interest coverage ratios, acid test ratios should be looked for. The debt-equity ratio tells about the ratio of debt in the capital structure. Interest coverage ratio measures the ability of the company to meet its interest payments. It is calculated by dividing the earnings before interest and taxes of a company by the interest expenses for a definite period of time.
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Moreover, the industrial performance and companies performance also impact its ability to honour its debt obligation. Stay tuned to the sectoral performances and do a research on the well being of the company.