Corporate Fixed Deposits: An Introduction

We all are familiar with Fixed Deposits (FDs) as a saving instrument. To recollect, a fixed deposit is a type of account where a bank pays a specific rate of interest for keeping funds with it for a particular period. Bank FDs are offered by state banks and registered private banks. Bank FDs serve as a favourite type of investment for those with long term goals and wanting an assurance of a guaranteed return. However, one major drawback of a bank FD is its low interest rate.  Corporate FDs come into the picture here.

What is a Corporate FD?

A company fixed deposit (CFD} is a term deposit which is held over fixed period at fixed rates of interest. In other words like Banks, companies also accept money from the general public for a fixed tenure at a prescribed interest rate. These are called corporate Fixed Deposits.  The types of companies which offer fixed deposits include

1. Financial Institutions
2. Non-Banking Finance Companies
3. Manufacturing Companies
4. Housing Finance Companies
5. Government Companies

The Reserve Bank of India has specified guidelines for the above companies to offer FDs. However RBI does not guarantee any of the transactions made by the investor with the companies.

Features of Company Fixed Deposits

1. Term: Since the performance and rating of the company is uncertain, the CFDs usually have shorter tenures. According to RBI regulations, the CFDs cannot have tenure of less than 12 months or more than 5 years.
2. Interest Rates: Interest rates on the CFDs are higher than the FDs of the regular banks. As such they are an attractive investment option.  Interest rates vary according to the duration of the deposit. The interest rates of CFDs is usually 50-100 bps higher than the bank FDs. The interest rates of the FDs of the most of the banks is in the range of 6-7 percent for 1 to 10 year tenures. This can be compared to 8 to 9 percent interest rates on most of the CFDs offered by NBFCs. Interest rates are also higher for senior citizens.
3. The minimum deposit may vary across tenures and companies. A higher interest rate can be obtained for some deposits for a specific tenure.
4. Based on the mode of payment of interest CFDs can be classified into cumulative and non-cumulative types. In the case of cumulative CFDs interest is accumulated along with the principal and the entire amount is paid at the end of the term, so no interest is paid during the tenure of the FD. Interest is paid can choose half-yearly, quarterly or monthly depending on the investor’s choice in the case of non-cumulative CFD.
5. Company FDs are non-transferable which means that there is no fear of the FD receipt getting stolen.
6. Companies offering CFDs are rated by rating agencies like CRISIL and ICRA. A better rating implies more security of the capital invested, hence a rating of AAA will mean high creditworthiness of the company and low risk involved with the deposits. So CFDs which are better rated are preferred. A company with a low rating usually offers a high interest rate to make-up for the default risk.
7. Premature Withdrawals: Usually after a lock-in period of 3 months, premature withdrawals, i.e., withdrawing the amount before the end of the tenure of the FD, are permitted in the CFDs. There is however a penalty which varies from institution to institution depending on the tenure and amount invested.

8. Tax deducted at source. i.e. TDS, is applied to a company’s FD if the interest crosses Rs. 5000. This can be compared to a bank FD, where the tax is only deducted if the interest earned crosses Rs. 10,000.