Public Deposits and Inter-Corporate Deposits

Public Deposits

Public deposits refer to unsecured deposits raised by companies from the public, primarily to finance their working capital requirements. These deposits serve as a short-term financing option for companies.

In India, companies are subject to strict regulatory limits regarding public deposits. A company can accept deposits from the public up to a maximum of 25% of its paid-up share capital, securities premium, and free reserves combined. This limit is enforced by the Reserve Bank of India (RBI) and governed by the Companies Act, 2013. Additionally, companies are prohibited from accepting deposits that are repayable on demand.

Key Restrictions on Public Deposits in India:

• Maximum Limit: A company cannot accept public deposits exceeding 25% of its total net worth, which includes paid-up share capital, securities premium, and free reserves.
• No Demand Deposits: Non-banking financial companies (NBFCs) are specifically prohibited from accepting deposits that are repayable on demand.
• Regulatory Body: The RBI regulates the acceptance of public deposits by companies. The Reserve Bank of India Act, 1934 defines public deposits, and companies must comply with RBI regulations to raise such deposits.
• Procedure for Acceptance: Companies must follow a prescribed process, which includes passing board resolutions, obtaining shareholder approval, and filing necessary forms with the Registrar of Companies (ROC) to accept public deposits.

Benefits of Public Deposits:

• For Investors: Public deposits generally offer higher interest rates compared to bank deposits, making them an attractive investment option.
• For Companies: Public deposits are often more cost-effective for companies compared to borrowing from banks, providing them with a cheaper source of short-term financing.

Inter-Corporate Deposits (ICDs)

Inter-Corporate Deposits (ICDs) are another form of short-term borrowing, distinct from commercial papers (CPs). These deposits allow one company with surplus funds to lend money to another company in need, and are regulated under the Companies Act, 2013.

Key Features of ICDs:

• Unsecured Nature: ICDs are unsecured loans, meaning they are not backed by physical assets or collateral.
• Eligibility: Only companies are permitted to participate in the ICD market, lending money to other companies.
• Interest Rate: The interest rate on an ICD depends on current market conditions and the creditworthiness of both the borrower and lender.
• Limit on Lending: The amount raised through ICDs cannot exceed 50% of a company’s net-owned funds. The total amount a company can lend through ICDs is capped at either 60% of its paid-up share capital, securities premium, and free reserves, or 100% of its free reserves and securities premium—whichever is higher. This cap is set by the Companies Act, 2013.

Regulatory Body: The Reserve Bank of India (RBI) oversees the ICD market. While the RBI allows Primary Dealers to accept ICDs up to 50% of their net worth, it also places restrictions on lending in this market. Primary Dealers are prohibited from participating in the lending side of ICDs, and may face additional limitations.

Minimum and Maximum Duration of ICDs in India:

• Minimum Period: As per RBI guidelines, an ICD must be held for a minimum period of 7 days.
• Typical Duration: Most ICDs have durations ranging from a few days to 90 days.
• Maximum Duration: While ICDs can be issued for up to a year, companies typically prefer shorter tenors to manage their short-term liquidity needs.

Disadvantages of ICDs: ICDs are generally more expensive than traditional bank borrowings, as they come with higher interest rates due to their unsecured nature. The inherent risk associated with unsecured lending results in higher risk premiums being built into the interest rates.