10 things you must know before investing in company fixed deposits
Company fixed deposits (FDs) are a very popular investment option amongst senior citizen investors as they give them assured returns, which are generally 1% to 3% higher than the interest rates being offered by banks for similar periods.
There are many company fixed deposit schemes which have an option to pay interest at monthly or quarterly intervals, and investors find it quite attractive to supplement their regular income from pension etc. The target segment for the company fixed deposit schemes is senior citizens, housewives, individuals in zero or low tax bracket, charitable/religious trusts, among others.

However, while company fixed deposits continue to lure investors, they also carry some risks and, therefore, one needs to tread with caution while putting one's hard-earned money into such schemes. This is important particularly in view of the fact that many companies in recent years have been found delaying the payment of interest and principal on their FDs.

Therefore, no matter how lucrative a company FD is, the below-mentioned factors must be kept in mind before investing your surplus funds in a company fixed deposit scheme:

1. Unattractive Post-Tax Return

Company fixed deposits are tempting owing to the high rate of interest that they provide compared to the FDs offered by private and public sector banks. However, "if you fall in the 30% tax bracket, then post-tax returns from company FDs may not be attractive as the same may not beat the prevailing inflation. For such investors, debt mutual funds or tax-free bonds may be a better option," says Anil Chopra, Group CEO & Director, Bajaj Capital.

2) Investment Security

Corporate FDs are also not as secured as Bank FDs. Bank FDs, for instance, provide security up to the investment value of Rs 1 lakh, which is not the case with corporate FDs. "The investors' money will, therefore, be at risk if the company is facing bankruptcy. This is the primary reason for corporate FDs to have superior interest rates compared to bank FDs," says Nitin Vyakaranam, Founder and CEO, ArthaYantra, an online financial planning firm.

Experts say that technically, company fixed deposits are 'unsecured loans' and this fact must be clearly understood by investors. "Repayment of principal as well as payment of interest are not guaranteed, and in case of default/delay, investors have little recourse since company fixed deposit are unsecured by nature. Hence, credit ratings must be checked and preferably companies with AA or higher ratings must be selected for investing your hard-earned money," says Chopra.

One must remember that when one invests in an unrated or low-rated deposit, the risks are high.

3) Default Risk

Corporate fixed deposits carry a risk, called default risk. Such risk may occur in case of pre-mature withdrawal of deposits by the investors, which may lead the company to a cash-crunch situation. Besides, if a company is going through bad times, then it may not be able to return one's maturity amount and may default in the payment, as already has been seen in many cases.

For instance, even a company like Elder Pharma is said to have defaulted on its interest and maturity repayment recently, citing its inability to repay interest and principal amount to shareholders due to a liquidity crunch.

"A company may, for various reasons, face difficulty in making full or even part payment of interest of the principal investment. It is, therefore, very important for the investor to understand the liquidity situation of the company before they opt to invest in corporate FD schemes," observes Vyakaranam.

4) Regulations

Bank FDs are governed by the Banking Regulation Act, 1949, which is strictly in adherence with the RBI regulations, whereas fixed deposits mobilized by companies are governed by the provision of Section 58-A of the Companies Act 1956. According to the Companies Act, if the company is winding up, it should give first preference to the equity share holders in payments rather than the fixed deposit holders, which makes the corporate FDs risky.

5) Pre-Closure of Deposits

Most of the corporate fixed deposits do not allow pre-mature closure before 6 months. In case of withdrawal of the investment before maturity, the investor has to pay penalties. "The pre-closure procedure of corporate fixed deposits may also be tedious as it requires a lot of paper work. In the case of bank fixed deposits, however, the investors do have to pay penalties for the early withdrawal, but they are free to close the deposit at any time," says Vyakaranam.