Public deposits:
When a company accepts deposits of about 6 months to 36 months from public to satisfy its short-term financial need such as working capital, the amount it receives is called public deposits.
The deposit is borrowed capital and so a debt of the company. The investors who invest their money as public deposits are called creditors of the company. The company pays them a specific interest quarterly half yearly or on maturity i.e. at the end of duration along with the principle amount as per decided terms. According to the provisions of companies Act, 2013 private companies excluding ‘ banking companies and non-banking finance companies cannot accept deposit from public.
Advantages of public deposits:
- Easy to obtain: It is quite easy for a well-established and profit making company to obtain finance.
- Less expensive finance option: Compared to other sources of finance, a company can easily obtain public deposits that too quickly and) with lesser expenses.
- Assets do not have a charge i.e. no need to mortgage assets: A company need not mortgage its assets to obtain public deposits. Hence, it can mortgage the assets to obtain finance from other sources in future.
- Interest is an expense: A company needs to pay interest on the public deposits. The interest paid is considered as an expenses and it is to be subtracted from profit while preparing accounts for income tax. Thus, a company needs to pay lesser income tax.
- Useful as working capital: A company can satisfy its short-term need of working capital through public deposits.
Limitations:
- Uncertainly: It is quite uncertain to obtain public deposits. The investors may not be interested in investing due to their personal preferences, behaviour, lack of spare money etc.
- Insecurity to investors: Company does not give under-writing like in case of shares and debentures and so investor consider it as risk and feels insecured. Hence, public deposits are also called unsecured debts.
- Fair weather friends: When the company is under financial crisis and if such news or rumors gets spread in the market then, depositors rush to company to withdraw their money even before the maturity date. This creates financial problems for the company and so public deposits are considered fair-weather friends.
- Difficult for new and weak companies: Investors do not have much faith in new and financially weak companies. Hence, they do not wish to risk their capital in such companies. So, such companies face difficulties in raising public deposits.
