Friday, September 26, 2014

Corporate FDs

Corporate FDs

 

Such FDs are especially popular with retirees as they often come with monthly income option

 

After a four-month lull, risk-averse investors, particularly pensioners, can once again park a slice of their savings in fixed deposit (FD) plans offered by manufacturing companies. Over a fortnight, companies like Gati, Prism Cement, Empire Industries have started accepting FDs from investors.

Along with others like Godrej Industries, Godrej Properties, Mahindra and Mahindra, Supreme Industries, these companies had stopped accepting and renewing fixed deposits since April 2014 -soon after the New Companies Act 2013 came into effect.

According to the re vised law, in order to raise money through FDs, a company has to get itself rated by a rating agency , pass a resolution at a general body meeting authorising the invitation of the invitation of such deposits, and provide for deposit insurance on these fixed deposits.
Due to such stringent rules and higher disclosures required for rating, not many companies were interested in raising money through this route.

Among the companies revisiting the market, Gati (with a rating of BBB+) will have an interest of 12% a year, Prism Cement (Ind TA-) 10.25% and Empire Industries (MA) 10.5%; all three FD plans have a 36-month tenure. Compared with these returns, a three-year FD with a nationalised bank like State Bank of India (SBI) will fetch 8.75% while non-convertible debentures will offer 10-12%.

In the absence of manufacturing company Ds since April, investors were putting money in FDs of banks and NBFCs like HDFC and Mahindra Finance and NCDs of ECL Finance, Shriram Transport Finance, Muthoot Finance as and when they tapped the primary market. Typically, many retired individuals and senior citizens look around for company FDs where the minimum investment amount is between `10,000 and . 25,000, with tenure of one, two and three years.

Many companies give a monthly income option which helps retirees meet their regular expenses. Also, investments are often split in the family across non-tax paying members to lower the tax incidence.

Though the interest rates are high by 2-3% as against bank deposits, distributors advise a degree of caution.
Check the rating of a company its financials and dividend paying track record before investing

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