An interest rate of 11-12 percent per annum for a period of 3-5 years seems pretty lucrative. Moreover, if it comes from a deposit, it appears safe. No wonder investors rush to buy company deposits. These are fixed deposits issued by companies that include manufacturing firms and Non-Banking Finance Companies (NBFC). What these investors fail to understand is that company deposits are not as safe as they appear.
You must have read about the crisis in Dewan Housing Finance (DHFL) and how company deposit investors are waiting to their money. The rating agencies could not detect the gradual deterioration in DHFL’s financials. The agencies quickly downgraded the company after it was found that DHFL couldn’t repay its debts.
Now, fixed deposit holders have moved the apex court seeking their money. A special leave petition in the Supreme Court was filed and it is expected to be listed in the next few weeks. DHFL owes close to Rs. 15,000 Crores to fixed deposit holders and another Rs. 38,000 Crore to banks. The total debt of DHFL is estimated at over Rs. 85,000 Crore, including mutual funds and bondholders. If you invested in a company deposit and the company defaults or has cheated you, what should you do?
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Steps in getting back your money
First and foremost is to try calling the company on the phone number mentioned in the company deposit application form. You must also send emails or postal mail to the addresses given on the application form. If despite repeated emails and phone calls, the company fails to respond or return your money, go to the consumer court and file a complaint against the company under Sec.12 of the Consumer Protection Act, 1986. When fighting the case, include relevant papers as annexures and remember that you can claim compensation for mental agony. Go to the Consumer Guidance Society of India’s website ( www.cgsiindia.org ) where the steps for filing a consumer complaint are listed.
You could file complaints with relevant authorities. For manufacturing firms, you could file a complaint online with the Ministry of Corporate Affairs (MCA). Go to the MCA website, fill in the investor complaint form and you would be able to track the complaint status online. For NBFCs, you can approach the company law board (CLB). Under section 45QA of the Reserve Bank of India (RBI) Act, 1934, CLB can order repayment of deposits accepted by an NBFC.
To file a complaint with the CLB, you must fill form No.4 and submit this in duplicate along with a photocopy of your company deposit receipt. CLB Benches are present at New Delhi, Mumbai, Chennai and Kolkata, where the forms can be given in. You need a demand draft of Rs.50 for filing this form. Without a fight, you might not get back your funds from some of these fraudulent firms.
In the case of unregulated deposits, the Banning of Unregulated Deposit Schemes Bill, 2019, seeks to prevent unregulated entities from collecting deposits and duping the gullible of their hard-earned savings. According to the bill, there are three different types of offenses—running an unregulated deposit scheme, fraudulent default in regulated deposit scheme, and wrongful inducement. The bill will provide for the appointment of senior government officials or a ‘competent authority’ that can attach assets or properties. Once realised, the assets will be used towards repaying depositors. The bill will make a provision for creating an online central database to collect and share information on deposit-taking activities in the country. The bill will have adequate provisions for punishment and disgorgement/repayment of deposits where such schemes manage to raise deposits illegally.
Note that companies like DHFL might prefer settling their obligations with someone who is hurting their reputation the most. Silent investors may not get their funds back. Also, if you are going in for a fight, remember that it might take a huge amount of time, effort and money to get your money back. You might have to run from one place to another and send loads of letters and sometimes even give several reasons for premature withdrawals. This is precisely the reason why one has to do due diligence before investing in corporate FDs.
Also read : How Safe Is Your Bank Fixed Deposit?
Due diligence
The first is to look at the rating. Typically, unrated deposits offer higher interest rates when compared to rated deposits because of the risks they entail. Rating agencies analyse the financials of the company and assign ratings based on the strength of the financials. So, the higher the rating of the company deposit, the lower would be the default risk.
Manufacturing companies do not need to comply with any regulations as regards ratings. They can issue unrated corporate deposits, unlike NBFCs who have to mandatorily get their FD rated by rating agencies like CRISIL, ICRA, CARE.
Companies with a loss on their books of account and companies below AA ratings should be avoided. Also, be wary of high-interest rates. If for a given period of maturity the spread between the bank deposit rates and corporate deposit rates is more than 2.5 to 3 percent then one should be cautious before investing in those companies.
If you are unsure about the company and the deposits offered, check www.watchoutinvestors.com . This is a website sponsored by the Ministry of Corporate Affairs, Government of India. The website lists companies that have carried out illegal or offensive activities. You can search the database on the website for gathering information on the company. There are more than 1 lakh defaulting companies’ information on the website.
If you are unsure about the company and the deposits offered, check www.watchoutinvestors.com . This is a website sponsored by the Ministry of Corporate Affairs, Government of India. The website lists companies that have carried out illegal or offensive activities. You can search the database on the website for gathering information on the company. There are more than 1 lakh defaulting companies’ information on the website.
The website’s registry covers several entities including companies, intermediaries and individuals who:
have been indicted for an economic default and/or
have been non-compliant of laws/guidelines and/or
are no longer in the specified activity
The information on defaults which is difficult-to-use, disorganized and spread across a large number of sources including publications, notifications, websites, databases, orders of the government and organizations, agencies, courts of law, tribunals and commissions, have been aggregated, indexed, standardised, reformatted and re-presented on this website in a form that can be accessed in a user friendly manner.
You can use this information about entities/individuals:
before making any new investments with them
for continuously reviewing their existing portfolio vis-à-vis such entities
when dealing with them in any manner
There are 3 essential things that you must examine before investing in company deposits. Credit rating for the deposits, any recent downgrade in the ratings and liquidity options available are some of the important points to keep in mind.
Also read: Online banking frauds: Beware of your liability
Here are the steps to follow…
Find the company deposit’s credit rating. Do not go for unrated deposits.
Search forums like consumercommplaints.in . If the company deposit is a fraudulent one, it will be discussed here.
Check websites such as www.watchoutinvestors.com . This website lists companies that have carried out illegal or offensive activities.
Analyse company financials. Dividend payment history and losses are the first points to note.
Looking for better investments? Mutual funds are better regulated and their activities are transparent. If you have a low-risk investor, you can look at debt mutual funds. These are many debt funds such as strategic bond funds that have given returns of more than 11%. Compare across funds to choose the fund that is best suited you our profile.
