Do you know what is public deposit? you might or might not know, Public deposits are the fixed deposits accepted by public companies.
Hopefully, By the end of this blog, you would be able to understand what is public deposit.
While Inviting public deposit, the company must issue an advertisement (which indicates its financial position) in the newspaper of the state where the company establishes its registered office.
what we are going to learn today
- What is a public deposit?
- Features of public deposit
- The Advantages of public deposit
- Criticisms of finance from public deposit
What is a public deposit?
Public deposits are the fixed deposits accepted by public companies directly from the public. It is a popular source of short term and middle term finance.
Companies may invite and accept public deposits for meeting its fixed and working capital subject to legal registrations.
Moreover, it may be accepted for short and medium periods and the rates of interest may vary according to the length of the period of deposits.
Public deposit may be a source of both fixed and working capital, it is more suitable for meeting working capital needs because it is a fair-weather friend.
Sometimes it may be dangerous to build up fixed capital with public deposits because the public may be panicky during the depression and they may withdraw their deposits at a time.
In such a case, the company may even collapse. When public deposits are raised for meeting working capital, they may be advantageous because the rate of interest is generally lower than the rate of dividend.
In short, Public deposits are generally unsecured loans and as such preferred by the companies.
Features of public deposits
- No company can accept or renew any deposit unless an application is made by the intending depositor for the acceptance of deposits.
- The minimum period for acceptance of deposit is normally 6 months and the maximum period is 36 months.
- However, for meeting short term requirement of funds, a company may accept a deposit for a period of 3 months, the total amount of which should not exceed 10% of share capital and free reserves.
- The company shall not accept any deposit which is repayable on demand. Once a deposit is accepted for a certain period, the company cannot repay the same before the expiry of 6 months.
- It is necessary for every company to give receipts for the amount received by them to the depositors or their agents for accepting or renewing any deposit.
- Certainly, The rate of interest may vary from 8 % to 12% depending upon the tenure of the deposit.
- For mobilizing deposits, companies may require to pay brokerage to the brokers, managers, or consultants which is usually 1% of such deposit.
- Most importantly, if a company fails to repay any deposit or a part thereof, the Company Law Board may direct the company by order to make the repayment instant or within a stipulated time.
The Advantages of public deposit
From the company’s point of view:
- Financing through public deposit is simple without much-complicated formalities.
- It is beneficial for the company since it receives funds on lower rates of interest than charged by banks and financial institutions.
- Above all, The cost of collecting deposits from the public is less.
- The public deposits are usually not backed by any security or assets of the company. So, the company can use its assets as security for raising capital from other sources.
- The depositors don’t have any right to interfere with the internal management of the company. Thus, there is no dilution in the control of shareholders.
- moreover, the interest paid on public deposits is a charge against profit, So the company can have a tax benefit on such interest.
- Public deposits introduce flexibility in financial planning. These can be repaid when they are not required.
Investors also find certain advantages in public deposits which are:
- The rate of interest is usually higher than several alternative sources, such as banks, post offices, etc.
- As the maturity period is short ranging from 6 months to 36 months, investors are in a position to utilize their money in different alternative sources, if necessary, just after a maximum of a 3 years time period.
Criticisms of finance from the public deposit
Public deposits are not without criticism. There are several drawbacks to the source. These drawbacks are:
From the company’s point of view:
- Raising funds through public deposits is not a reliable and dependable source of finance.
- A maximum of 25% of the paid-up capital and reserves can be raised from the general public, whereas the percentage is only 10 if it is raised from shareholders, directors, etc.
- Meanwhile, the maturity period of public deposit is relatively short though they can be renewed, but it is not a wise thing to depend on them for long term financing.
- most importantly, New companies and companies with unreliable earnings cannot raise finance through it.
From the investor’s point of view:
- Investors do not get any security for their deposits. Money deposited by them may be utilized by the management in any way it likes. So, the risk of investment in public deposits is much higher.
- Public deposits are neither covered by any insurance nor guaranteed by the government as opposed to bank deposits. In spite of many safeguards, there is a danger of losing money to the mismanaged companies.
- in addition, interest income on public deposit is not exempted from tax. Hence, many investors do not like to invest in public deposits.
- In conclusion, Public deposits are not very liquid assets. It is possible for an investor to withdraw his deposit from the bank easily but not from a company.
You may consider it as an example, Public company often receive public deposit from the general public, employees, and its shareholders.
To raise their short and medium-term finances.
In conclusion, public deposits are usually not backed by any security or assets of the company. So, the company can use its assets as security for raising capital from other sources. I also share with you its pros and cons.
So, guys, I hope I solved your problems regarding Finance from public deposit. I also used images to educate you.
after that, read my further blogs related to finance:
A. Yes, a public company as well as a private company can accept public deposits.
A. Yes, A maximum of 25% of the paid-up capital and reserves can be raised from the general public, whereas the percentage is only 10 if it is raised by directors.
A. In public deposit, you receive funds on lower rates of interest than charged by banks and financial institutions.
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