In order to raise funds, corporates have increased interest rates on the fixed deposits (FDs) offered by them. Many of them have raised the FD rates by 50 basis points and this has lured investors to park funds with the company fixed deposits.
The attractive interest rates and state of stock markets have been inviting more and more investors towards the company FDs. Many companies including Tata Motors, HDFC, Jaiprakash Industries and Hudco are currently offering interest rates ranging between 9% and 12%, depending on the maturity.
Most of the companies are currently raising funds through the FD window. Bajaj Capital's CEO, Anil Chopra says, "There are no firms that compile data on the total money raised through companies' fixed deposit schemes, but guesstimate is that the amount would double to around Rs 5,000 crore in 2008-09 as compared to 2007-08."
"Company FDs became popular following the crash in equity markets. The demand began in mid-2008. The trend is similar to bank FDs that were offering higher interest rates," he added.
Corporates that raise funds through fixed deposits are categorized into three groups named as manufacturing, non-banking finance and housing finance companies.
According to the norms manufacturing companies can raise funds up to 25% of their net worth where as non-banking finance companies (NBFCs) and housing finance companies (HFCs) are allowed to raise 1-3 times and 10 times of their net worth respectively. NBFCs and HFCs have the flexibility of raising higher amount of money from the public if they have a better credit rating.
Industry advisors suggest investors to see the tax implication on FDs. "Don't go by the rates, see how much you would earn after paying the taxes. For example, if you are in the higher tax bracket, your interest income would be charged at 30%. That would mean that you would earn around 8.5% even though the interest rate is 12%. Company FDs work best for people in the lower income bracket," says an investment advisor.
Moreover the advisors suggest that one should consider the credit rating, which is mandatory for NBFCs and HFCs, while investing his funds. "A lower-rated company may offer higher rates, but you should remember the risk involved in it. A lower-rated company can actually default on payment, including repaying the amount," says an investment consultant.