Defaults on corporate FDs leave investors in lurch

Even when Hiren Sagar was a class 10 student in Mumbai, he had learnt at first-hand the intricacies of investing in fixed deposits issued by companies.

“In Mumbai, a lot of people invest in them,” says Sagar, who is now 35 and lives in Bengaluru. “They offer 13-14 per cent annual interest rate — and we’re Gujaratis, so we’re always looking for better returns.”

His investments, made initially by his family on his behalf and then by himself, have always offered superior returns. Until now, that is. Seven companies — in whose FDs he invested between 2011 and 2013 — have not returned his money, some nearly two years after maturity. That’s ₹19.14 lakh of Sagar’s investments – counting principal and interest – in the lurch.

Sagar reckons there are thousands of investors like him across the country who have invested in the fixed deposits of companies that have defaulted on repayment of fixed deposits made by retail investors.

Companies such as Helios and Matheson Information Technology, Jaypee Infratech, Jaiprakash Associates, Valecha Engineering, Ansal Properties, Elder Pharmaceuticals, Zenith Birla, Unitech Ltd and Rasoya Proteins, which are among at least 16 companies that he knows of that raised over ₹12,000 crore in public deposits — and defaulted.

Corporate FDs typically offer a higher interest rate than banks because they come with higher investment risk. Under the Companies Act 1956, these instruments didn’t require a credit rating, so investors did not know just how much risk they were taking.

When the revised Act of 2013 was passed, companies that had raised money through such deposits had to comply with the new requirements (on credit rating, minimum networth, additional safeguards) or return money to investors within a year.

This may have led to a cash crunch with these companies, who until then, were rolling over their deposits: that is, repaying investors on matured deposits from out of new deposits the companies were taking in.

Mumbai-based homemaker Shashikala Rajpurkar, 82, has invested nearly ₹22 lakh in such public deposits over the years, the bulk of which – about ₹15 lakh – was in Helios & Matheson.

Such investment practices show up a lack of investor awareness about the merits of diversification, but Rajpurkar may have been lulled into a false sense of security by Helios & Matheson’s responsiveness earlier.

“They used to be regular with their payments, but now they don’t even pick up their phones. We’re just making fools of ourselves by going to the courts,” she says.

All of the 16 companies that Sagar listed used to be, and some still are, public, though some, like Helios & Matheson, are in the process of winding down. In some cases (Elder Pharmaceuticals, Plethico Pharma), trading in their public shares has been suspended. Some of their past annual reports mention public deposits; others don’t even record it.

The companies have not responded to their investors’ pleas. In fact, BusinessLine’s attempts to reach them were fruitless.

Associations of investors have taken some of the companies to local courts and to benches of the National Company Law Tribunal, without avail. The Ministry of Corporate Affairs, which regulates these instruments, has not been helpful either.

To an emailed query from BusinessLine , a Ministry official said, “There may be investigations/inquiries launched against some or all of the companies mentioned... in your mail. The Companies Act, 2013 also contain specific provisions for treatment of deposits raised under the previous Companies Act.”

In Delhi, 32-year-old Nagarjun Sharma’s parents invested close to ₹14 lakh in public deposits of Unitech Ltd, Jaiprakash Associates and Jaypee Infratech in 2013. Now, he’s scrambling to get their money back.

“Unitech has shut down its office in Udyog Vihar; now it belongs to another company called Unitech Power. I wasn’t allowed to meet the management,” he says

Besides non-banking finance companies, not many others raise public deposits because of the higher interest payouts.

“Typically, these deposits are more ‘sticky’ (that is, they come with a high rate of renewal) and offer lower refinancing risks, especially for established groups,” says Rakesh Valecha, Senior Director and Head – Credit and Market Research, India Ratings and Research. Even so, there weren’t many such instruments.

“The new guidelines under the Companies Act, which made ratings mandatory, resulted in a marginal increase in the need for ratings. Existing FD borrowers either redeemed their FDs or capped their borrowings through this route,” he added.

While the new rules keep fraudulent companies out of this space, investors who put down their money in the past have been left in the lurch.

“The risk-return paradigm requires investors to be aware of the risks and issuers to provide higher disclosures for investors to understand the risk,” Valecha said.

Thousands of investors, who have put down lakhs of rupees, are now paying a high price for neglecting that first principle of investing wisdom.

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