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| Firms vary rate card for FDs; distributors pleased |
| Neha Pandey / Mumbai Mar 16, 2010, 01:02 IST |
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Companies are busy raising funds through fixed deposit (FD) schemes, some at high interest rates.
Take Network18, which closed its deposit scheme in the first week of February. The company offered nine per cent for six-month deposits and 12 per cent for one, two and three years. In addition, sources said distributors were offered 1.5-3 per cent as commissions to promote the product.
Among other schemes offering high returns is that of United Spirits, giving 11 per cent for one-year and 11.50 per cent for two years. Distributors are being paid another 1.5-2 per cent. Ravi Nedungadi, chief financial officer of the UB Group, said funds raised through this route are mostly deployed towards working capital requirements.
Smaller companies like Sejal Architectural Glass and Avon Corporation are offering 12 per cent for three years. In addition, sources said they were giving another 2-2.5 and 3 per cent, respectively, to distributors. Clearly, the cost of raising cash in the first year for such companies is as high as 12 to 16 per cent, in many cases.
Then, there are others like Dewan Housing, that is giving 8.9 per cent (one year), 9 per cent (two years) and 9.10 per cent (three years), respectively.
Companies favour this route for many reasons. P K Choudhury, vice-chairman & group CEO, Icra, said: “Raising resources through fixed deposit schemes is attractive because of the flexibility available with this instrument. Companies need not state the reason for picking up this money. Consequently, the proceeds can be used anywhere.”
But, it may also be an indication that the company is unable to raise cash through cheaper routes. D R Dogra, managing director & chief executive officer of Care Ratings, said: “These companies mostly have a low rating of BBB-. Banks either don’t lend to such firms or lend a meagre amount at nothing less than 12-13 per cent. Non-banking finance companies charge 4-5 per cent higher than banks. “
Many companies have had to raise their rates. When it launched its scheme in October 2009, Avon was offering 9.5 per cent. Now, it is offering 12 per cent.
Ashwin Shetty, GM-compliance and company secretary, Sejal Architectural Glass, while admitting the cost structure was expensive, said higher rates help in increasing visibility. “We have collected Rs 10-12 crore since the launch of the scheme,” added Shetty.
Bank FD rates are significantly lower. State Bank of India is giving 6.25 per cent on one-two year deposits, 6.75 per cent for 2-3 years and 7 per cent for 3-5 years. Others like ICICI Bank and HDFC Bank are offering between 6.25-6.5 for two years. Between two and five years, the rates are hovering around 7-7.5 per cent.
However, all companies are not offering such lucrative returns. Big boys like Tata Motors, Jindal Steel & Power (JSPL) and Godrej Industries are offering around 8 per cent for one-year deposits and 8.5-8.75 for two-three years.
Rajesh Bhatia, director-finance, JSPL, said: “As the bank rates were very low, corporate deposit schemes cashed on the opportunity by offering lucrative rates. In the process, both the company and the investors benefit.”
Distributors’ commissions are also lower here. “Tata Motors is offering 0.75 per cent for 3-year schemes and HDFC is giving around 1.1 per cent for three years and 0.35 per cent for one year,” said another distributor.
As far as servicing the high-cost loans go, these companies claim a higher lock-in period reduces the pressure on their finances. “Since the money will be used for working capital requirements, it would be easier to pay back the investors,” said a company secretary, who did not wish to be named.
Distributors, meanwhile, are making hay while the sun shines. “Selling corporate CDs has become extremely profitable after the Securities and Exchange Board of India had banned entry load on mutual fund schemes,” said a distributor.
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