Auditor certificate must for deposit-taking firms to ensure investor safety

While this move by the Ministry of Corporate Affairs is a positive one, retail investors should run a few more checks of their own before investing in a company's fixed deposit

The Ministry of Corporate Affairs has made it compulsory for companies raising public deposits to attach a statutory auditor’s certificate in the circular or advertisement meant to raise deposits. The new rule will come into effect from August 15.

Before issuing the certificate, the auditor will have to check several things: Whether the company has accepted deposits in the past. If it has, did it to repay the principal and interest on time? If there was a default, did the company make good the default? And finally, it will check whether five years have elapsed since the date of making good the default. 

Earlier, no such certificate was required. In the Company Auditor Report Order (CARO), which is part of the annual audit report, the auditor said that the company has complied with the provisions of the Companies’ Act relating to acceptance of deposits. “This is a double check that the ministry wants to do. The idea is to protect the interests of the people who invest in deposits,” says Sanjeev Singhal, partner, SR Batliboi and Company. 

Many retail investors opt for corporate fixed deposits because they offer better rates of interest than bank fixed deposits. Many companies have defaulted in the past. DS Kulkarni, a Pune-based developer, is a prominent case from the recent past. “Usually, small investors who invest in these fixed deposits do not have the wherewithal to check whether a corporate has defaulted in the past. By providing this information upfront in the advertisement, the government is ensuring that the right picture is provided to investors,” says Mumbai-based financial planner Arnav Pandya. In many cases, he adds, even well-known companies have defaulted in the past.   

Financial planners suggest a few additional checks that investors should run before they invest in a company fixed deposit. “Go with established names. Check the company’s credit rating and that of any other debt instrument it may have issued in the recent past,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). He adds that investors should be especially cautious about investing in the fixed deposits of real estate companies where many defaults have happened in the past. 

Investors should also avoid entering these instruments for very long tenures. “One doesn’t know how the company’s financial situation will change a few years down the line,” says Pandya. Investors should also not roll over these fixed deposits automatically when they come up for renewal. “Look at the company’s situation with a fresh eye. If the picture doesn’t appear sound, shift to another company,” adds Pandya. 

Savvy investors should also examine the company’s balance sheet and profit and loss account. Debt-to-equity ratio and interest coverage ratio are two numbers they should look at closely. They should also do some research and try to understand the outlook for the company and the sector it operates in. They could also try to hunt for companies that are not doing too well at present, and are hence offering a higher rate of return, but are on the verge of a turnaround (which will reduce their risks in the future).

Checks you should run

• If the company's rating is available, look it up   
• Check the ratings of other debt instruments that the company may have issued in the recent past (such as non-convertible debentures, which are rated) 
• Look at ratios such as debt-to-equity and interest coverage 
• Enquire about the company's prospects, and that of the sector it operates in, and make sure that they are sound