Companies are approaching investors directly through fixed deposit schemes that offer higher rates of return.
As the funds tap starts drying for India Inc, a slew of companies has started chasing small investors to raise working capital. Obviously, the lure is higher returns than those offered by banks. In the past one month, a host of companies have raised money directly from depositors.
These include United Spirits (a part of Vijay Mallaya’s UB group), Godrej Industries, UP-based Yash Papers, auto parts-maker Gabriel India and power generation equipment manufacturer Bharat Bijlee.
All these companies are accepting a minimum amount of Rs 5,000 - Rs 25,000. The interest aid out is 9 to12 per cent, depending on the tenure, which is between one and three years.
The returns on offer are also quite impressive. For instance, United Spirits is giving returns of 11 per cent for one year and 11.5 per cent for a three-year deposit. Gabriel India, on the other hand, is offering 12 per cent for a three-year deposit. “We are raising this money to meet our daily working capital needs,” says Maloy Gupta, manager, investor relations, United Spirits.
| THE OFFERS | |||
| Company Name | Int (1Yr) | Int (2Yr) | Int(3Yr) |
| MANUFACTURNG COMPANIES | |||
| ABT Industries | 12 | 12.00 | 12 |
| Jai Prakash Associates | 11 | 11.50 | 12 |
| Force Motors Ltd | 9 | 10.00 | 11 |
| Jagatjit Industries | 10 | 10.50 | 11 |
| Jai Prakash Associates | 11 | 11.50 | 12 |
| United Spirits (Mc Dowell Ltd) | 11 | 11.50 | -- |
| Surya Roshni Ltd. | 11 | 11.50 | 12 |
| Gabriel India Limited | -- | -- | 12 |
| FINANCE FIRMS | |||
| Shriram Transport Finance Corporation | 10.50 | 11.00 | 11.50 |
| HDFC Ltd | 10.55 | 10.55 | 10.55 |
| TNPFIDC | -- | -- | 10.47 |
| ICICI Home Finance | 10.50 | 10.50 | 10.75 |
| Sundaram BNP Paribas Home Finance | 9.80 | 10.40 | 10.90 |
| Source: Bluechip and Integrated Enterprise | |||
He also explained that companies borrow money from retail investors, either as fixed deposits (FDs) or cumulative deposits (CDs). In case of FDs, the interest is payable every quarter, whereas for CDs, the amount is paid back at the end of the tenure. “Rates are higher in cumulative deposits as companies get to use the entire amount and for a longer period," adds Gupta.
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There are many more companies that want to enter the market through this route. “Ceat Tyres and Mukand Engineering are discussing the rate of interest. We have asked them to give 1 per cent higher interest rate than the existing bank FDs,” says a distributor, who did not wish to be named. Banks, such as SBI, are offering 10.5 per cent interest rate for a 1,000-day FD.
According to J Kannan, director, BluechipInvestment Advisory, despite the higher cost of funds, it is still cheaper for companies to raise money from the retail investor. Banks are giving loans at around 14 per cent and more. Therefore, this route saves companies around 1-1.5 per cent, even after taking into account the cost of raising the money by paying brokerages around 0.25 to 0.5 per cent. V Krishnan, country head (mutual funds),
Integrated Enterprises, which is one of the largest distributors of such products, says that these deposits are better for the retail investor than fixed maturity plans (FMPs) being offered by mutual funds. In the case of an FMP, the investor knows only the indicative portfolio and indicative returns because funds are not allowed to guarantee returns, unlike banks.
On the other hand, the investor is very sure in case of a company FD because of the risk element. There have been cases in the past, when companies have defaulted and not paid back clients. “Company deposits are unsecured investments. There are always chances that the borrower may default. A thorough analysis of the company's profit and loss account and past track records needs to be done,” said Vishram Modak, a certified financial planner.
More significantly, it is important to be wary of companies that are willing to offer rates that are out of tune with the market reality. Kannan cautions against such companies that are offering returns of over 13 per cent in today’s market.
Only small investors should invest in company deposits. High networth individuals (HNIs), should stay away from such products because they are not tax-efficient. The interest income from company FDs is clubbed with investors’ income. So if you are in the 10 per cent tax bracket, the interest will attract tax in the same proportion.