Reliance Cap Move Rattles Players

Companies feel they will find it difficult to lure investments in their fixed deposits and mobilise money.

"Investors will not be keen to put their money in the fixed deposit schemes announced by manufacturing companies given an option to invest in schemes with a 20 per cent interest on five-year deposits with non-banking finance companies," said J S Chatterjee, president-corporate finance, Jenson & Nicholson.

Companies will be hard-pressed to follow suit, and will have to hike the interest rates to 17 per cent or 18 per cent.

Much will depend on "marketing gimmicks, which will have to be strengthened to compete with the numerous fixed deposits floating in the market," S Lakshman, manager of Calcutta branch, GIC Mutual Fund, said.

 

Small-time investors of non-metropolises will also have to be tapped aggressively by agencies and marketing arms of the companies, he said.

A host of fixed deposit programmes are being drawn up by a number of private sector majors, including ITC, the Calcutta-based Williamson Magor & Co, Bishnauth Tea Company, India Foils, Bata India, Duncans Industries, Jenson & Nicholson Financial Services and Graphite India.

An annualised yield of 29.77 per cent at the end of five years on fixed deposits of Reliance Capital has put the manufacturing companies in a tight spot, agreed a senior official of the K K Bangur-managed Graphite India.

"The scenario is very bleak, and companies' fixed deposits will take a severe beating. To mobilise funds, we will have to think of ways and means, and innovate attractive incentives to attract investors to subscribe to our FD schemes," he said.

According to industry watchers, managements will be left with no alternative but to target group shareholders and employees with additional benefits like offering low interest loans (or even interest-free loans) to meet their target.

Removal of interest rate cap and freedom on deposit-raising limits for the non-banking finance companies by the Reserve Bank of India will also have an adverse effect on the country's debt market.

Analysts claim that "the bonds' route being tapped by leading financial institutions -- Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI) and SCICI -- will also be adversely affected in this free-interest regime".

Also likely to be affected are a large number of mutual fund schemes.

Since the only plank of a blighted mutual fund industry is the relatively lower degree of risk, and since this risk-limitation can now be done through investments in the fixed deposit programmes, the asset management industry is expected to face a reversal of fortunes.