Corporate Fixed Deposits

Simply put, Corporate Fixed Deposits are term deposits offered by Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and other corporate entities to raise funds directly from the public. Similar to a bank FD, an investor places a lump sum amount with the company for a predetermined period, and in return, receives a fixed rate of interest for the entire tenure. At maturity, the principal amount along with the accrued interest is repaid.

These deposits serve as a crucial avenue for companies to raise capital for their business operations, offering an alternative to traditional bank loans or equity issuance.

While sharing the fundamental concept of fixed returns, Corporate FDs differ from bank FDs in several key aspects:

1. Issuer:

   • Bank FDs: Issued by commercial banks regulated by the Reserve Bank of India (RBI).

   • Corporate FDs: Issued by NBFCs, HFCs, and other corporates, which are regulated by the RBI or the Ministry of Corporate Affairs (MCA) depending on their nature.

2. Interest Rates:

   • Corporate FDs typically offer higher interest rates compared to bank FDs. This is primarily to compensate investors for the slightly higher perceived risk and to attract capital.

   • Bank FDs generally offer comparatively lower interest rates due to their high level of regulation and perceived safety.

3. Safety and Insurance:

   • Bank FDs up to ₹5 lakh per depositor per bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This provides a significant safety net in case of a bank failure.

   • Corporate FDs are not covered by DICGC insurance. The safety of your investment in a Corporate FD largely depends on the financial health and creditworthiness of the issuing company.

4. Credit Rating:

   • For Corporate FDs, credit ratings issued by agencies like CRISIL, ICRA, and CARE are crucial indicators of the company's financial stability and its ability to meet its debt obligations. A higher rating (e.g., AAA, AA+) signifies lower risk.

   • While banks also have ratings, the DICGC insurance provides a baseline safety for bank FDs.

5. Tenure Flexibility:

   • Both types of FDs offer flexible tenures. However, Corporate FDs often have a common range of a few months to around 5 years, while bank FDs can sometimes extend to 10 years or more.

6. Premature Withdrawal:

   • Both generally allow premature withdrawal, but the terms and penalties can vary. Corporate FDs may have stricter conditions or higher penalties compared to bank FDs. Some corporate FDs might have a minimum lock-in period before any withdrawal is permitted.

1. • "Are Corporate FDs safe?" The safety of a Corporate FD hinges on the financial strength of the issuing company. While they are not insured by DICGC like bank FDs, investing in companies with strong credit ratings (e.g., AAA or AA+ from reputable agencies) significantly mitigates the risk of default. It is crucial to research the company's financial history, management, and credit rating before investing. Diversifying your investments across different highly-rated companies can also help manage risk.

   • "Why do Corporate FDs offer higher interest rates?" Companies offer higher interest rates on FDs to attract capital from the public. This is a common way for them to raise funds for expansion, operations, or other business needs. The higher rate reflects the slightly elevated risk compared to a bank, which has broader regulatory backing and deposit insurance.

   • "What are the tax implications?" Interest earned on Corporate Fixed Deposits is fully taxable as per your income tax slab rate. The interest income is added to your total income and reported under "Income from Other Sources" in your Income Tax Return (ITR). If the interest income exceeds ₹5,000 in a financial year, the issuing company will deduct Tax Deducted at Source (TDS) at a rate of 10%. If your PAN is not provided, a higher TDS rate may apply. Senior citizens may be eligible for certain deductions on interest income under Section 80TTB of the Income Tax Act, subject to specific conditions.

   • "Who can invest in Corporate FDs?" Individuals (both resident and Non-Resident Indians), Hindu Undivided Families (HUFs), partnership firms, companies, trusts, and societies can typically invest in Corporate FDs.

1. • Credit Rating: Always prioritize investing in Corporate FDs issued by companies with high credit ratings (AAA, AA+) from recognized agencies like CRISIL, ICRA, or CARE.

   • Company Background: Conduct due diligence on the company's management, financial track record, and industry standing.

   • Diversification: Do not put all your investment corpus into a single Corporate FD. Diversify across different companies and tenures to manage risk.

   • Liquidity Needs: Understand the premature withdrawal terms and penalties before committing, especially if you anticipate needing access to funds before maturity.

   • Tax Implications: Be aware of the tax treatment of the interest income and plan accordingly.

As a Practicing Company Secretary, our firm offers comprehensive services tailored to both corporate clients and individual investors navigating the landscape of Corporate Fixed Deposits: 

For Corporate Clients (Issuers of Corporate FDs):

We provide specialized compliance and advisory services to companies looking to raise capital through Corporate Fixed Deposits. Our expertise ensures adherence to all regulatory requirements:

• Regulatory Compliance: Guiding companies on the intricate provisions of the Companies Act, 2013, the Companies (Acceptance of Deposits) Rules, 2014, and relevant RBI guidelines (for NBFCs/HFCs) pertaining to the acceptance of public deposits.

• Documentation and Filings: Assisting in the preparation of all necessary documents, including the offer document (Circular or Advertisement), application forms, and ensuring timely and accurate filings with the Registrar of Companies (ROC) and other regulatory bodies.

• Corporate Governance: Advising on best practices in corporate governance to build investor confidence and ensure transparency in the issuance and management of Corporate FDs.

• Legal Advisory: Providing opinions and guidance on legal aspects related to deposit agreements, terms and conditions, and compliance with various corporate laws.

For Individual Investors (Looking to Invest in Corporate FDs):

While we do not solicit investments or act as a distributor for specific Corporate FDs, our firm empowers individual investors by offering professional guidance and due diligence support to help them make informed decisions:

• Due Diligence Support: Assisting individuals in conducting thorough due diligence on potential Corporate FD issuers. This involves analyzing the company's credit ratings, financial statements, repayment history, management background, and regulatory compliance status to assess the inherent risks.

• Risk Assessment and Suitability: Helping you understand the specific risks associated with different Corporate FDs and evaluating how these align with your individual risk appetite, investment horizon, and financial goals. We provide clarity on concepts like default risk, liquidity risk, and interest rate risk in the context of your personal financial situation.

• Information and Clarity: Providing clear and unbiased information about the terms and conditions, interest payout options, premature withdrawal clauses, and tax implications of various Corporate Fixed Deposits, enabling you to compare options effectively.

The decision to invest in Corporate Fixed Deposits requires careful consideration. Our role is to provide the necessary expertise and clarity, whether you are a corporate entity aiming for compliant capital raising or an individual investor seeking to prudently allocate your savings. By leveraging our knowledge of corporate law and governance, we aim to facilitate well-informed and secure financial engagements.