Company FDs With High Rates May not be Your Best Investment Option

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Several companies such as Jaiprakash Associates, Allied Digital Services, Plethico Pharmaceuticals are offering 12-12.5% interest per annum for three year fixed deposits, a good 3.25-3.75% more than what is offered by banks like State Bank of India (SBI) or ICICI Bank. Despite the higher rates, many financial advisors are asking investors to be extremely selective and choosy while investing in company fixed deposits, as there have been many instances where companies have just not repaid the money or delayed payments. For example, Ankur Drugs, Asian Electronics and Birla Power have delayed repayments in the recent past. Ankur Drugs' capacity expansion plans got delayed due to funding issues, while labour problems crippled production at one of Birla Power's manufacturing facilities.

Since company fixed deposits are unsecured instruments, investors should be extremely careful before investing in them. As a benchmark, any company paying 2%, or 200 basis points, more than a bank deposit should be scrutinised thoroughly and risk-averse investors could simply skip them When choosing company deposits, invest in listed companies only as the financial information is available in the public domain. Check the industry in which it operates, promoters' track record, look out for pledged shares, and go for profitmaking companies with a track record of at least three years.

Why Do Cos Pay High Rates?

Many companies, especially the smaller ones, pay higher rates on their deposits to compensate investors for the higher risk taken. That is why you would see that a highly reputed or 'AAA'-rated company would pay relatively lower rates on its deposits than a lower-rated company. For example, reputed banks like SBI, ICICI Bank and HDFC Bank pay 8.75% for a three-year deposit.

Similarly, in the company fixed deposit space LIC Housing, an 'AAA'-rated company, pays 9.25% on its three-year deposit; Mahindra Finance, with an 'AAA' rating, pays 10% on its deposit of similar tenure. As compared to this, Allied Digital Services or Unitech pays 12.5%, while Plethico Pharmaceuticals pays 12% on three-year deposits.

 

Manufacturing companies do not need a rating, while NBFCs mandatorily need to get their fixed deposits rated. However, there are exceptions to this rule. There have been instances where even reputed companies pay higher interest rates, especially if they are in a hurry to fund an expansion project or finance a takeover. Very often companies pay high rates temporarily as they would want to complete projects which are stuck in between. However, investors ought to know the reason. For example, in 2008, even Tata Motors paid 11% for three-year fixed deposits to fund its JLR acquisition. That means investors should ask distributors and financial advisors for the reason for such high interest rates. If the reason is genuine and they are convinced with the financials of the company, then they should invest. For those who are risk-averse, simply skip these companies.

CHECK RATINGS AND FINANCIALS

Financial planners advise investors to stick to listed companies, as their quarterly results, annual reports and research reports are easily available in the public domain. In the case of NBFCs, go for companies which have 'AAA' or 'AA' rating only. He advises investors to invest in companies like HDFC, Mahindra Finance, LIC Housing, all of which carry 'AAA'-rating. All these companies have reputed promoters and are profit making and paying dividend for the past three years. As a rule, investors should avoid smaller or obscure companies with erratic financial performance. Investing in such companies just for higher interest could be very risky. In the recent past, companies like Ankur Drugs, Asian Electronics have delayed repayments to depositors. Both these companies have reported a loss for the financial years ending March 2011 and March 2012. Though deposit holders are fighting hard, getting the money back could be a long-drawn process. If you are a retired individual living on interest income, you could be badly hit. Given that the economy is going through a slowdown, investors should not be greedy. Avoid putting money in companies merely for an extra 1-2% higher interest.

CHECK FOR PLEDGED SHARES

Investors should also check for pledged shares data, which is available on the stock exchange website and disclosed every quarter. Avoid companies which have a very high percentage of the promoters holding pledged. Since stock prices are subject to price fluctuations, whenever a stock's price falls, the lender may ask for more margin money or stocks. If the promoter cannot pay cash or give additional shares as margin, the lender may ruthlessly sell the pledged shares to recover his losses. In such cases, the financial stability of a company as well as its business could suffer. For example, Unitech has 76% of promoter holding pledged as of December 2012, while Jyothi Structures has 67% of its promoters holding pledged.

Re Up 25 ps Against $

MUMBAI The rupee on Monday gained a hefty 25 paise to close at 54.56 against the dollar on sustained selling of the US currency by exporters amid weak global cues. However, consolidation in local equities and continued capital outflows capped the domestic currency's gains to some extent, forex dealers said. The rupee commenced a tad higher at 54.80 from its previous closing of 54.81 on Friday at the Interbank Foreign Exchange (Forex) market. It moved in a range of 54.54-54.84 before closing at 54.56, a rise of 25 paise, or 0.46 per cent. Rupee continued to trade strong for the second day against the dollar taking cues from the euro, which traded strong against the dollar. The dollar index was quoting down by 0.05 per cent against a basket of six major currencies. The yen weakened beyond 99 against the dollar for the first time since May 2009. "The Bank of Japan's plan for aggressive monetary easing was taken negatively by the investors, as a result yen traded weak and made new lows against major currencies.

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