Corporates with a short-term surplus can place their deposits with Inter Corporate Deposits based on the ongoing rates of collateralised borrowing and lending obligation (CBLO), and Call Rates in the Money Market. The minimum period of deposits should be starting from a minimum of 7 days in the form of Inter Corporate Deposits (ICD). In general, we can say when companies arrange funds from another company it is known as Inter-corporate deposits.
Inter Corporate Deposits Market:
We are aware of certificates of Deposits issued by financial institutions and banks and Commercial papers are issued by primary dealers, large corporations, and All-India Financial Institutions. Apart from Commercial Papers (CPs), corporates can also participate in another market called the “Inter Corporate Deposits” (ICD) market.
An Inter Corporate Deposits Market deals with unsecured loans taken out by corporations and financial institutions (FIs) from other corporations or financial institutions (FIs) registered under the Companies Act 1956. A company with excess funds would lend to another company in need of money.
There is a scope for the better-rated corporates who can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than that for a bank, the rates in this market are higher than those in the other markets. Also, as ICDs are unsecured, the risk inherent is high and the risk premium is also built into the rates.
The RBI has not prescribed any norms for raising resources through ICDs by the Financial Institutions. However, the FIs which are structured as companies under the Companies Act 1956 are eligible to issue ICDs as permissible under the Act. The amount of resources raised through ICDs should be within the overall umbrella limit fixed by the RBI. Thus, the issue of ICDs together with other instruments viz. term money, term deposits, CDs, and CPs should not exceed 100 per cent of its net owned funds as per the latest audited balance sheet.
RBI permits Primary Dealers to accept Inter- inter-corporate deposits up to fifty percent of their Net Worth and that shall not be for not less than 7 days. However, they cannot lend in the ICD market.
Difference between Inter-corporate deposits and inter-corporate loans:
Inter-corporate Deposit:
An inter-corporate deposit is a short-term investment made by one company into another for a fixed period ranging from 7 days to a few months. The company making the deposit earns interest on the deposited amount, which is usually higher than traditional bank deposit rates. Normally, inter-corporate deposits are made between related or affiliated companies.
Inter-corporate Loan:
An inter-corporate loan is a form of financial assistance provided by one company to another in the form of a loan through an agreement wherein the borrower agrees to repay the principal amount along with interest at a later date. The loan period can be short-term or long-term.
The terms “deposit” and “loan” may not be mutually exclusive, but in each case, the intention of the parties and the circumstances must be considered.
“Loan” is a transaction between lender and borrower under a contract. In the case of “Deposit,” the same is made of one’s own volition or free will. In other words, the main difference between inter-corporate deposits and inter-corporate loans lies in the financial transaction: deposits involve one company investing funds with another for a fixed period. In comparison, loans involve one company providing financial assistance to another in the form of a loan that must be repaid with interest.
Related Posts:
