Corporate fixed deposit
Company Fixed Deposits or Corporate Fixed Deposits are deposits accepted by non-banking financial companies. As a fixed-income investment option, they are similar to bank FDs in that they have fixed tenures and interest rates. Company fixed deposits, however, offer higher rates of interest, in general, than bank deposits. Interest rates on these products currently range between 9% and 16%. Company FDs come under the purview of the Companies Act of 1956 U/S 58A. Corporate FD schemes with a credit rating ‘AAA’ or ‘AA’ are considered to be very safe i.e. the risk of default is very low.
Explanation
Under company FD schemes, customers deposit a certain amount of money with a company for a fixed period of time in return for a fixed rate of interest. This interest rate remains unchanged until the end of the holding period i.e. until maturity. On maturity, customers receive returns in the form of principal and the interest earned thereon.
Deposit periods can vary between 6 months and 7 years. Deposit certificates are issued by companies to deposit-holders that state vital details of their holdings under a particular scheme e.g. tenure, interest rate, maturity date etc. These are akin to bank FD certificates.
Traditionally, banks have been the go-to institutions for fixed deposits in the country. However, with increased financial awareness, investors’ portfolios are now being diversified to include corporate fixed deposits. One of the main reasons for this is the higher interest rates offered by companies on their FD schemes vis-à-vis banks.
There are a number of non-banking companies offering FD schemes in India. Private or state-owned institutions that can accept fixed deposits, from the public or its members, are Non-banking financial or non-financial companies i.e. NBFCs or manufacturing companies or Housing Finance Companies (HFCs). Companies usually raise funds through deposits in order to meet capital requirement needs, as an alternative to equity issues.
Taxability
Interest earned on corporate FDs is taxable. Tax is deducted at source if total interest earned in a financial year is over Rs.5,000.
Credit Rating
Unlike fixed deposits offered by banks, corporate FDs are not guaranteed in case of default. In order to assess the risk of depositing funds with a particular institution, credit rating agencies like CRISIL and ICRA rate companies and their FD schemes. A triple or double-A rating i.e. ‘AAA’ or ‘AA’, indicates a high level of safety and stability. NBFCS must be ‘A’ rated at the very least in order to accept public deposits. Unrated companies are risky options and generally avoided by investors. Credit ratings may change depending on a company’s performance and financial situation.
Interest on company FDs
Interest is calculated based on the amount deposited i.e. the principal. Company FDs usually offer the option of compounding interest at varying frequencies viz. monthly, quarterly, semi-annually or annually. Alternatively, interest earned can be paid-out to deposit-holders (at similar frequencies); usually through direct transfers to customers’ bank accounts or through cheques or demand drafts. Interest rates differ across companies and schemes. Some schemes offer special rates to senior citizens and company employees.