Introduction
Fixed Deposits in companies that earn a fixed rate
of return over a period of time are called Company
Fixed Deposits. Financial institutions and Non-Banking
Finance Companies (NBFCs) also accept such deposits.
Deposits thus mobilised are governed by the Companies
Act under Section 58A. These deposits are unsecured,
i.e., if the company defaults, the investor cannot
sell the documents to recover his capital, thus
making them a risky investment option.
»
High Interest.
» No deduction
of Income Tax at source up to Rs 5,000 p.a.
» Short-term
deposits.
» Lock-in
period is only 6 months.
» No Income
Tax is deducted at source if the interest income
is up to Rs 5,000 in one financial year
» Investment
can be spread in more than one company, so that
interest from one company does not exceed Rs. 5,000
»
Companies that pay a rate of interest higher than
14%
»
Companies that are not paying regular dividends
to their shareholders.
»
New companies belonging to first generation of promoters,
which are yet to prove their credit worthiness.
»
It is best to avoid private limited companies, and
partnership firms and other un-incorporated bodies.
Such companies are under no obligation to publish
their balance sheets working results and it is,
therefore, very difficult to judge their performance.
»
Companies
whose balance sheets show accumulated losses.
» Companies
with a poor liquidity position and below investment
grade rating.
There are many companies operating in the Company
Deposit market. Investors, however, have to be careful
while selecting a company for investing their hard
earned money. Following is a checklist for selecting
good companies:
The first thing to check out is the rating of
the deposit scheme. Investors should avoid those companies
that have below ‘A’ rating. In case of manufacturing
companies, it is not mandatory to get a rating. In
this case, investors should look at the background
of promotors and financial track record. In manufcturing
companies, reputation and size of industrial group
to which the company belongs are the key criteria
for safety and reliability.
The deposits should be spread over a large number
of companies engaged in different industries. This
way, you'll be able to diversify your risk among various
industries/companies. Try not to put more than 10%
of your total investments in one particular company.
Ideally, the investment should be for 1 to 3 years
depending upon the rate of interest.
The performance of the companies should be reviewed
at maturity. This will help you decide whether to
renew or reshuffle the deposit. A watch should also
be kept over these companies by checking their share
prices, annual reports and other details reported
in newspapers.
Manufacturing companies are permitted to mobilise
deposits as indicated below :
(a) Up to 25% of their
net worth from their public; and
(b) Up to 10% of their net worth from the share-holders
and others.
(Net worth means paid-up
capital plus free reserves, minus miscellaneous expenditure,
if any.)
