Corporate deposits become less risky

Burnt your fingers investing in a corporate fixed deposit which saw a default? The new Companies Act, which has been notified recently, is remedying this.

To this end, companies other than banks and non-banking finance companies (NBFC) have to meet a set of conditions before they can collect deposits from the public.

Companies that have already taken deposits, but who don’t meet the criteria, should repay these within a year. So what are these new provisions? How do they help keep your money safe?

The first criterion is that only those companies with net worth (excluding share premium) of ₹100 crore or more and turnover above ₹500 crore can raise deposits from public. This weeds out companies that don’t have the financial stability to accept deposits, as well as smaller companies that aren’t really serious about meeting requirements.

The second, and most welcome, provision is that companies looking to raise public deposits need to get themselves compulsorily rated. Says Sai Venkateshwaran, Partner and Head - Accounting Advisory Services, KPMG, “The company is required to obtain rating on liquidity and ability to pay deposits on due date from a recognised credit rating agency. It is also required that this rating should be obtained for every year during the tenure of deposits.”

Such a rating denotes how risky a particular deposit is. Currently, it is not mandatory for companies other than NBFCs to get their fixed deposits rated. So investors tend to overlook risks and fall for the lure of high interest rates. For instance, Ind-Swift Laboratories had offered an interest rate of 12.5 per cent on a three-year fixed deposit and 10.5 per cent on a one-year deposit.

In September last year, the company defaulted. Over 3,000 investors got together and filed a case against the company.

The trouble with corporate fixed deposits is that they are usually unsecured – that is, they don’t have the backing of an asset. So when companies default, investors can’t ask for liquidation of company assets.

With the new Act, a company which is raising unsecured deposits has to explicitly state it in the offer document and all advertisements inviting deposits, says Harish K Vaid, Senior President Corporate Affairs and Company Secretary, JP Associates. Also, deposit insurance of up to ₹20,000 per deposit is mandatory. Vaid adds, “Every company needs to keep an amount equal to the FDs maturing in two years in a separate bank account, as against the earlier provision, which permitted deposit in liquid assets like FDs with banks.”

All companies that have collected deposits from the public and which do not satisfy the specified conditions are required to refund the deposits in one year’s time, or upon maturity, whichever is earlier.

The new Companies Act has specified penal provisions for companies that fail to comply with this rule, says Venkateshwaran. “For default in complying for repayment of the unpaid deposits or interest, the company is punishable with a fine which shall not be less than ₹1 crore. Every officer of the company who is in default shall be punishable with imprisonment, which may extend to seven years.”

All the refund money that may come now is likely to go into NBFC deposits, says Chopra. “People have already started looking for deposits of non-banking finance companies. NBFCs’ collection has already started going up,” he says.

With the new Companies Act, corporate deposit issues are likely to fall, say industry experts. NBFCs are a more secure option. These give interest rates of 8.5 per cent to 10.5 per cent and come with an AAA or AA+ rating.

According to Anil Chopra, CEO of Bajaj Capital, a distributor of financial products, the company has been informed by several players − including Jaiprakash Associates, JP Infratech, Surya Roshini, Ansal Housing and Unitech − that they have stopped accepting fresh deposits.

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