CORPORATE FD
A Corporate Fixed Deposit (FD) is a debt instrument where you lend money to a company (like an NBFC or Housing Finance Co.) for a fixed term, earning higher, regular interest than bank FDs, but without DICGC insurance, making credit rating crucial for safety. Historically, they evolved as companies needed direct funds, offering attractive rates (1-3% higher) to compensate for higher risk (no insurance), regulated by bodies like the RBI (for NBFCs) and NHB (for HFCs) under the Companies Act, functioning as a key capital-raising tool and investment for stable, albeit riskier, returns.
Brief History & Evolution
- Capital Raising Need: Companies, especially NBFCs, Housing Finance Companies (HFCs), and manufacturers, have always needed funds. Instead of just bank loans, they started offering FDs directly to the public as a debt instrument to raise capital.
- Incentive for Investors: To attract funds away from banks, these companies offered higher interest rates (often 1-3% more) than bank FDs, compensating for the increased risk.
- Regulatory Framework: Authorities like the Reserve Bank of India (RBI) for NBFCs and the National Housing Bank (NHB) for HFCs introduced rules (like those under the Companies Act) to govern these deposits, ensuring some transparency.
- Risk & Rating Focus: Because these FDs lack the insurance of bank FDs (DICGC cover), credit rating agencies (like CRISIL, ICRA, CARE) became vital, assessing the issuer's financial health and assigning ratings (e.g., AAA for high safety).
- Modern Role: Today, Corporate FDs are a standard part of financial planning for businesses (bridging cash gaps) and investors (diversification, higher yield), with careful analysis of credit ratings being paramount.
Key Characteristics
- Issuers: NBFCs, HFCs, Corporates.
- Returns: Higher fixed interest rates.
- Security: No DICGC insurance; relies on company's creditworthiness.
- Regulation: Governed by RBI/NHB rules; Section 58A of Companies Act.
- Risk: Higher default risk than bank FDs, necessitating credit checks
Bank FDs are safer (RBI regulated, DICGC insured), have lower but stable returns, and are highly liquid; NCDs (Non-Convertible Debentures) are company-issued debt instruments, offer higher, variable returns, carry higher credit risk (depending on issuer's rating), and are more liquid as they can be traded, with Corporate FDs (company-issued, not NCDs) offering better rates than banks but less liquidity than listed NCDs. The key difference lies in issuer, risk (credit rating), returns (higher in NCDs/Corp FDs), and liquidity (NCDs traded, Bank FDs flexible, Corp FDs locked-in).
Here's a detailed breakdown:
Bank Fixed Deposits (FDs)
- Issuer: Banks.
- Safety: Very High; regulated by RBI, insured up to ₹5 Lakh by {DICGC (Deposit Insurance and Credit Guarantee Corporation) website}.
- Returns: Lower, fixed rates.
- Risk: Lowest.
- Liquidity: High; easy premature withdrawal with minor penalties.
- Best For: Risk-averse investors seeking capital protection.
Corporate Fixed Deposits (CFDs)
- Issuer: Companies/NBFCs.
- Safety: Medium; depends on company's creditworthiness (AAA is best).
- Returns: Higher than bank FDs.
- Risk: Medium; higher than bank FDs, lower than unrated corporate debt.
- Liquidity: Lower; usually 3-6 months lock-in, higher withdrawal penalties.
- Best For: Investors wanting better returns than banks without the complexity of bonds.
Non-Convertible Debentures (NCDs)
- Issuer: Companies.
- Safety: Varies; linked to issuer's credit rating, can be secured or unsecured.
- Returns: Higher, fixed or floating.
- Risk: Higher; market-linked if traded, credit risk.
- Liquidity: High (if listed); traded on exchanges, but price fluctuates.
- Best For: Investors seeking high returns, understand market risk, and need liquidity.
Key Takeaway:Choose
Bank FDs for ultimate safety;
Corporate FDs for decent returns with moderate risk; and
NCDs for potentially higher returns and better liquidity, provided you understand and accept the higher credit/market risk, says
{Bajaj Finserv}.