Company Fixed Deposits Or NCDs: Which One Is Better?

While both the fixed deposits and non-convertible debentures issued by companies raise funds from investors and fetch them return at a pre-decided rate. There is a huge difference between the two instruments offered by the same group of companies mainly NBFCs in respect of their structure, associated risk and other important parameters.

For company deposits: RBI has ruled out that only deposit taking NBFCs having registration with the central bank can mobilize public deposits. Also there is a cap in respect of the extent to which the funds can be mopped and currently stands at 1.5 times the funds with the NBFC coming up with the offer. It is to be note that company deposits are raised for a maximum of 5 years term. Investment grade credit rating is a must to accept deposits.

NBFC NCDs: On the other hand, these are regulated and overseen by the SEBI and companies issuing the NCD have to come with a detailed mutual fund like prospectus detailing every crucial piece of information in it. In order to meet any exigency situation, the company has to keep a debenture redemption reserve of as much as 25% of the outstanding NCDs.

NCDs riskier proposition than FDs

While holding an investment grade credit rating is a must in case of FD issue, the NCDs can even by come up by companies with below investment grade rating. Also, while in case of a default of company FDs principal and interest repayment, you have several recourse to take by either through approaching the Company Law Board or file a suit. In the case of NCD issue, you need to first approach the debenture trustees for the grievance redressal.

It may also be the case that companies that are not allowed to accept public fixed deposits take up the NCD route for mopping funds to meet out their financial requirement. The issue by JM Financial is one such example.

But with a better reward as a higher yield and even the monthly pay-out regular stream of funds in case of some of the options under the NCD, you can be tempted with the offer at hand. Nonetheless, don't forget to check the credit rating assigned to the given NCD issue, its secured or unsecured nature as it allows the company to liquidate its assets in case of fund shortage to pay-out investor.

Also, just in case the NCD issue looks too attractive after all parameters taken into account as currently company deposits come with not over 8% return per annum do not lock-in your funds for over 5 years. Though, these instruments allow you to exit through the stock market route.

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