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Inter corporate deposits


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Inter corporate deposits

  1. 1. INTER CORPORATE DEPOSITS A group 3 initiative
  2. 2. Inter-Corporate Deposit is essentially a short term assistance provided by one corporate with surplus funds to another in need of funds.
  3. 3. • Kingfisher Airlines owes Rs 260 crore to Airports Authority of India (AAI) for using their infrastructure across airports in the country. However, KFA has assured to make payments through inter-corporate deposit (ICD) from UB Group.
  4. 4. Sources of Funds • We have already learnt a lot about long and medium term sources such as :- Equity shares preference shares Debentures Term loans Public deposits And so on…………………..
  5. 5. Here we will try and concentrate more on short term source:- 1. Trade credit 2. Bank credit – Loans and advances – Cash credit – Overdraft – Discounting of bills 3. Customers’ advances 4. Installment credit 5. Loans from co-operatives
  6. 6. Merits of short-term finance a) Economical b) Flexibility c)No interference in management d) May also serve long-term purposes Demerits of short-term finance a) Fixed Burden b) Charge on assets c) Difficulty of raising finance d) Uncertainty
  7. 7. ICD- an introduction • An Inter-Corporate Deposit (ICD) is an unsecured borrowing by corporates and FIs from other corporate entities registered under the Companies Act 1956. The corporate having surplus funds would lend to another corporate in need of funds. • This lending would be an uncollateralized basis and hence a higher rate of interest would be demanded by the lender. The short term credit rating of the corporate would determine the rate at which the corporate would be able to borrow funds.
  8. 8. • Further the credit spreads demanded even for the top rated corporates would be higher than similar rated banks and the rates on ICDs would higher than those in the Certificate of Deposit (CD) market. • The tenor of ICD may range from 1 day to 1 year, but the most common tenor of borrowing is for 90 days.
  9. 9. ICD- features 1. Given by cash rich companies to low rated, cash starved companies unable to get a loan. 2. Unsecured loans but may be collateralized sometimes for weaker companies to get benefit of credit enhancement. 3. Interest rates are higher than bank rates 4. The risk premium is added in ICD.
  10. 10. 5. It is considered as the LAST RESORT as a source of finance. 6. Primary Dealers cannot lend in the ICD market. 7. The money is locked in for the specified period. 8. It is shown as “investments” in the balance sheet.
  11. 11. ICD-merits • Immediate capital for short term requirements • Transactions are free from bureaucratic and legal hassles • Better than bank loan
  12. 12. • Helpful for not so credit worthy companies as they find difficult to raise funds from other sources. • And it is a unsecured borrowing so doesn’t create any charge on the company’s assets.
  13. 13. ICD-demerits • The rate of interest is higher than other short term sources such as COD or short term bank loan as it factors in the risk premium. • It is not a reliable source as there is no formal market for it and depends mostly on inter- corporate relations. Its not like in the case of a bank loan you have option of so many banks you need to have contacts.
  14. 14. ICD-misuse The stock market scam of 2001 was one of the biggest scams in the history of India. Stock markets saw an unbelievable rise in some of the stocks for instance prices of visualsoft rose from Rs 625 to Rs 8448.It was found out that prices were being rigged and a quantum of the funds for rigging the prices came from inter corporate deposits.
  15. 15. ICD-types • 3-month deposits- These deposits are generally considered by the borrowers to solve problems of short-term capital inadequacy. The annual rate of interest given for three month deposits is 12%. This type of short-term cash problem may develop due to various issues.
  16. 16. • 6 month deposits- Six month deposits are usually made with first class borrowers, and the term for such deposits is six months. The annual interest rate assigned for this type of deposit is 15%. • Call deposits-Call deposits are the ones which can be called back any time with one day prior notice. The interest rates on such deposits is generally around 10%.
  17. 17. ICD-general terms • Issuer: Corporate having short term funds lend to corporate in need of funds • Rating: ICD is a non-public instrument. Hence, it is not rated. • Coupon terms: The interest rate is normally fixed and payable on maturity. The range of interest varies, depending upon the quantum, tenor, and the credit rating of the borrower.
  18. 18. • Day count convention for interest payment: Interest to be calculated on an actual/365-day year basis • Maturity: 90-180 days • Market Participants: Cash rich corporate, Public Sector Undertakings, Non Banking Finance Companies and Financial Institutions. Brokers play an important role in procuring/placing of funds. • Minimum denomination and transaction size: no fixed denomination or transaction size
  19. 19. ICD-prevention of misuse The following measures have been taken based on recommendations of the joint parliamentary committee and the RBI after the 2001 scam :- • Cant exceed 60% of paid up capital or 100 % of free reserves • Defaulted co's not allowed to extend loan • Interest rate should be higher than prevailing bank rates • CDs accepted from parent/promoter/group companies or any other related party should be on "arms length basis" and disclosed in financial statements as "related party transactions".
  20. 20. ICD-comparison • ICD’s are a hassle free source of fund as compared to other short term sources from banks and COD’s as these involve lot of legal formalities. • Also less creditworthy company cannot acquire loans from banks and public as they don’t have a goodwill in the market. ICD’s are the way out for them. • ICD’s can be a way by which companies from the same parent group can help each other in times of need.
  21. 21. ICD-disclosure • ICD’s received- as unsecured loans as Inter Corporate deposits(you also need to disclose the amount payable within one year). • ICD’s made- as under loans and advances as Inter Corporate deposits.
  22. 22. ICD-GSFS • Just to get an idea of interest rates of ICD’s, lets have a look at the interest rate offered by Gujarat State Financial services(an intermediary). • GSFS pays interest rate for the different tenors towards the Inter Corporate Deposits placed by various Government of Gujarat entities. The present interest rates offered by GSFS for different tenors are as under:
  23. 23. ICD Tenure ICD Rate 15 days to 90 days 7.00% p.a. 91 days to 180 days 8.00% p.a. 181 days to less than 1 year 8.50% p.a. 1 year to 3 years 9.00% p.a. Interest to be paid on premature withdrawal of ICD at 0.50% below the rate applicable for the period ICD has remained with GSFS. However, to extend more benefits to GoG entities, in cases of partial premature withdrawals, the remaining principal amount of ICD will continue at the original rate till maturity.
  24. 24. Bibliography