Continuous volatility in the stock markets coupled with bad macro-economic data, high inflation numbers and unclear government policies have forced many investors to shift their investments from equity to fixed income instruments like tax-free bonds, non-convertible debentures (NCDs), bank fixed deposits and company fixed deposits. Whereas bank fixed deposits barely manage to beat inflation, some investors always remain on the lookout for higher returns from company fixed deposits.
A few days ago, one of the readers, Vimal Raj, put up a query regarding fixed deposit offering from Hawkins. Here is the quote Vimal Raj left under Suggest a Topic:
â€œIn today’s ET, I read that Hawkins is open for Fixed deposit. Is it worth to invest in? And why they are offering fixed deposit rather than bonds?â€
Here is my effort to make the readers know some of the details about company fixed deposits and what you should be looking for before making an investment.
Not all companies can accept public deposits. Government companies, manufacturing companies, housing finance companies (HFCs), financial institutions and non-banking financial companies (NBFCs) registered under the Companies Act 1956, have been authorized to offer fixed deposits. Whereas bank fixed deposits are covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures repayment of Rs. 1 lakh in case of any default by a bank, but there is no such guarantee for company deposits.
However, if any company including an NBFC or HFC defaults in repayment of deposit, the investor can approach Company Law Board (CLB) or consumer forum or file a civil suit in a court of law to recover the deposits.
Who regulates company fixed deposits?
|Housing Finance Companies||NHB||www.nhb.org.in|
Factors that investors should be looking for before investing in company fixed deposits:
Credit Rating: It goes without saying that safety of the principal amount is the most important factor that any investor would consider before seeking a higher return. It will take you 10 years to recover your principal amount if you risk your investment with a company likely to default but offering 12.5% return vis-a-vis a financially sound company offering 10% return.
Reserve Bank of India (RBI) and National Housing Bank (NHB) have made it mandatory for NBFCs and HFCs such as HDFC, Shriram Transport Finance etc. to have at least ‘A’ rating to be eligible to accept public deposits. Whereas HDFC deposits have been rated â€˜FAAAâ€™ by CRISIL and â€˜MAAAâ€™ by ICRA, ICRA has granted a rating of â€˜MAAâ€™ to Canfin Homes for securing these deposits. As per CRISIL, â€˜AAAâ€™ rating implies that the company has the highest credit quality and the lowest credit risk. All the companies which get their fixed deposits rated by the rating agencies are required to clearly display the given rating on their application forms.
Credit risk is the biggest risk for fixed deposit investors. Investors should not get too greedy for high interest rates while looking to invest in fixed income instruments rather they should focus on 4 Câ€™s of credit analysis – capacity, collateral, covenants and character of the issuer.
Capacity is the ability of a borrower to repay its obligations. Investors should primarily focus on the financial condition and past track record of the company before committing their hard earned money into these deposits.
Collateral represents assets that the company pledges as an alternate repayment source against the deposits. I have no idea which companies in India offer collateral while accepting public deposits for the safety of investorsâ€™ money. If any reader has an idea about any such company then please let me know.
Covenants are the terms and conditions of the lending agreements. Covenants are essentially restrictions on the company to ensure its financial position remains under check and help minimise the risk to the depositors.
Character refers to the credit history of the borrower. It is very important to check how efficient the management of the company is and how prompt the company is towards the payment of periodic interest, maturity proceeds and issuing investment certificates. You must ask your financial advisor or the servicing agent all these things before deciding the company to invest. My personal experience with HDFC was quite satisfactory whereas it was not very good with Jaiprakash Associates and Unitech.
Financials: Securing a rating is not mandatory for non-finance companies. So, in their case, the investors need to check their balance sheets, profit & loss accounts and cash-flow statements in order to understand how the company would generate the money to make the interest payments and principal repayments.
Rate of Return: Presently, the maximum rate of interest any company can offer is 12.5%. Observing the returns these companies are offering at present suggests that in most of the cases the safer the deposits are, the lower the returns will be but it is not always the case. It is natural to consider the term deposits offered by the government organizations to be the safest, probably that is why their returns are also lower. The investors need to make a balance between the risks and the returns.
Here is a list of the major company fixed deposits that are open to investors right now.
|EXIM Bank||CRISIL FAAA/ ICRA MAAA||9.25%||9.25%||9.25%||9%||+0.50%|
|HUDCO||FITCH TAA+/CARE AA+||9.40%||9.40%||9.40%||9%||+0.25%|
|Kerala Transport Development Finance||Kerala Govt Undertaking||10.25%||10.25%||10.25%||10%||+0.25%|
|Housing Finance Companies (HFCs)|
|NHB||CRISIL FAAA/ FITCH TAAA||9.50%||9.50%||9.25%||9.25%||+0.60%|
|Canfin Homes Ltd.||ICRA MAA||9.75%||9.75%||9.50%||8.50%||+0.50%|
|DHFL||CAREÂ AA+/ BWR FAAA||11%||10.50%||10.50%||10.50%||+0.50%|
|HDFC||CRISIL FAAA/ ICRA MAAA||9.25%||9.40%||9.50%||9.25%||+0.25%|
|PNB Housing Finance||CRISIL FAA+||9.50%||9.50%||9.75%||9.75%||+0.50%|
|LIC Housing Finance||CRISIL FAAA||9%||9.25%||9.50%||9.50%||+0.25%|
|Gruh Finance||CRISIL FAA+/ ICRA MAA+||9.25%||9.75%||9.50%||9.50%||+0.25%|
|Sundaram BNPP Home Finance||ICRA MAA+||9.25%||9.50%||9.50%||9.50%||+0.50%|
|Non-Banking Financial Institutions (NBFCs)|
|Sundaram Finance||ICRA MAAA||9.75%||9.50%||9.50%||N.A.||+0.50%|
|Mahindra Finance Samruddhi||CRISIL FAAA||9.25%||10%||10.25%||9.75%||+0.25%|
|Shriram Transport Unnati||CRISIL FAA+/ ICRA MAA+||9.25%||9.75%||10.75%||10.75%||+0.25%|
|Manufacturing Companies||6M||12M||24M||36M||Senior Citizens|
|J K Tyre & Industries(www.jktyre.com)||N.A.||9%||9.25%||9.50%||+0.50%|
|* Special Tenure FD Rates â€“ HUDCO â€“ 8.50% (84M), DHFL â€“ 10.75% (400 Days), HDFC – 9.75% (15M & 33M), PNB Housing Finance â€“ 9.50% (84M), LIC Housing Finance â€“ 9% (18M), Gruh Finance â€“ 9.50% (84M), Sundaram Finance â€“ 9.75% (18M), Mahindra Finance Samruddhi â€“ 9.75% (18M)|
Liquidity: As per deposit regulations, companies in India cannot accept demand deposits. A deposit which is immediately withdrawable on the depositorâ€™s demand is called a demand deposit. There is a lock-in period of 3 months during which the investors cannot ask for a withdrawal of their investment except in the event of the death of the depositor. If you go for a withdrawal between 3 months and 6 months of making the investment, no interest is paid. Thereafter there is a penalty of 1% if you go for a premature withdrawal.
As per the RBI and NHB regulations, minimum period of deposit cannot be shorter than 12 months and maximum period of deposit cannot be greater than 60 months in case of NBFCs and 84 months in case of HFCs. For manufacturing companies, the minimum period cannot be shorter than 6 months and the maximum period cannot be greater than 36 months.
Tax Implications: The interest income earned on a company deposit is taxable at the same tax slab as the investor is in and is added to the income under the head â€œIncome from Other Sourcesâ€. Tax will be deducted at source @ 10.30% whenever the interest income exceeds Rs. 5000 in a financial year, in accordance with section 194 A of the Income Tax Act, 1961.
Floating Rate Option: Suppose you take a floating rate home loan at 10.25% and after 6 months, the housing finance company announces an increase in its lending rate by 0.75%, the applicable rate on your home loan automatically becomes 11%. Have you ever heard of any bank or a company offering a similar benefit on your fixed deposit? I did not till the time I visited the website of EXIM Bank of India. This is a unique feature of the term deposit scheme offered by this bank. Suppose you do a fixed deposit of 36 months with the EXIM Bank at 9.25% and after 12 months the bank decides to increase the rate to 10% for the same maturity, the applicable rate on your deposit will automatically become 10% for the residual period of investment.
Moreover, if the existing rate on a deposit, say 9.25% (contracted based on original maturity at the time of placing deposit), is higher than the revised rate applicable for the residual tenor, say 8.50%, then the original higher rate of 9.25% would continue to apply.
Coming back to Vimal Rajâ€™s query, I could not find any details of the fixed deposit scheme offered by Hawkins Cookers Ltd. anywhere, not even on the companyâ€™s website and annual report. So, Iâ€™ll not be able to comment on that.
RBI may not be in a mood to cut the interest rates and concede against the spiraling inflation, but if we observe the recent actions taken by some of the big banks including SBI etc., returns on some of the fixed income instruments should soon begin their journey downwards. So, if you find these rates attractive enough to park your money from risk-return perspective then you should lock into these deposits soon before they start falling.
To be posted soon: â€œCompany Fixed Deposits – Should You Invest?â€