Corporate Fixed Deposit
Basic Architecture
Investors can invest in fixed deposits with either Banks or with the Companies. Like Banks, fixed deposits can be placed with companies for a fixed term carrying a prescribed rate of interest. The companies that accept these deposits can be financial institutions or manufacturing companies. The deposits mobilised are governed by the Companies Act under Section 58A.
Rate of Interest
This class of investment is popular among risk-averse investors and retired citizens who lives on regular income. The rate of interest is better than a bank fixed deposit. Corporate deposits are basically unsecured loans that do not guarantee anything to the investor in case of a default. It is because of this risk that these deposits come with higher interest rates compared with bank FDs. And it is the higher interest rate that attracts many retail investors, especially senior citizens, to company deposits. The deposit rates are generally 50-100 bps higher that well-established bank FDs; senior citizens can earn 25-40 bps more than the normal rates on offer.
Risk & Rating
It is important to do risk assessment of these companies before investing. These instruments are also been graded by independent credit rating agencies. The agencies assign rating to a deposit after a comprehensive analysis of business risk, financial risk, management quality and ability to service debt. Rating agencies like CRISIL, CARE, ICRA, Brickwork rate deposits of companies. If a deposit is not rated, it may mean that the company issuing it did not request a rating company for a rating - which is not a good indication as far as safety evaluation is concerned. The ratings are interpreted as follows:
|
Rating |
Denotes |
Description |
|
AAA |
Highest Safety |
This rating denotes highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. |
|
AA |
High Safety |
This rating denotes high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. |
|
A |
Adequate Safety |
This rating denotes adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. |
|
BBB |
Moderate Safety |
This rating denotes moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. |
|
BB |
Moderate Risk |
This rating denotes moderate risk of default regarding timely servicing of financial obligations. |
|
B |
High Risk |
This rating denotes high risk of default regarding timely servicing of financial obligations. |
|
C |
Very High Risk |
This rating denotes very high risk of default regarding timely servicing of financial obligations. |
|
D |
Default |
This rating denotes default or are expected to be in default soon. |
Premature Withdrawal
You can withdraw before the end of the tenure of the FD by paying a penalty. The penalty amount will vary between different institutions and it will depend on the tenure and the amount you have invested.
Taxation
The interest is taxed at normal slab rates on annual basis. According to Income Tax law, tax will be deducted at source (TDS) @ 10% on the interest earned from FD if it exceeds Rs 5,000 per annum. In case your income doesn’t cross basic exemption tax limit, then you can avoid TDS by submitting Form 15G (Form 15H for senior citizens) to the company.
"Selecting a company deposit requires the same kind of research and due diligence as is required while selecting a stock. Along with the credit rating, you need to look at factors like fundamentals of the company and its management. Only if they are sound should you put your money into a company deposit.”