Generally, public deposits mean depositing small amounts of savings by the public with industrial and business institutions for a specified period at specified rates of interest, for earning profits.
When small savings of common man are accepted by industrial units, as investments, without completing any legal procedure, on the conditions that these will be returnable on demand, then such investments are called public deposits.
These Deposits are accepted for a small period of 6 months to 1 year. Recently, the trend is developing for public deposits of the longer period.
Now, public deposits are being made for a period of 3, 5, 7 and 10 years also. But basically, these are sources of short term finance.
Importance of Public Deposits
Since ancient times, public deposits have been a source of rising trends, the reason being that the industries enjoy a high reputation and also due to the reason that banking facilities lack in villages.
Gradually, the importance of this source is increasing, because several practical rules have been framed and systems developed by the government, Besides, the fulfillment of financial requirements of the institution, strategies of financial institutions, high-interest rates of banks, the interest of public have also added to the importance of public deposits.
Advantages of Public Deposits
Following are the advantages of public deposits:
- This source of public deposits is suitable for seasonal industries.
- By obtaining loans through public deposits, the assets remain free from charge. In this source, assets are not be kept as security.
- This source is very easy because these deposits get available based on goodwill and reputation and legal formalities are also not required.
- Public deposits fulfill short term financial requirements and loans are returned on demand. Hence, the rate of interest is also low.
- Funds can be raised any time through public deposits and may be returned at any time. Hence, flexibility continues in the capital structure of the company and the financial burden remains with the limit.
- Public deposits provide loans at the lowest costs and low-interest rates, due to which shareholders get higher dividends and the financial position of the company gets strong by building up reserve funds.
- In addition to deposits, the company may get loans by mortgaging the assets of the company.
- Finances are quickly available by this source, whereas 6 to 8 months are required for taking loans from banks or the financial institution. Getting finance from this source does not take even 6 to 8 weeks.
Disadvantages of Public Deposits
Disadvantages attached to public deposits are as follows:
- A company may get substantial funds through this source during goods times. But, during periods of depression and bad times, what to talk of raising additional funds, even the amount of old investments are also required to be paid.
- Newly established companies cannot raise funds through this source, because the public virtually has no confidence in them.
- Due to getting money at low-interest rates from this source, more than required money is collected. As a result, the company becomes recapitalization.
- In case of not being able to return the money to the investors on their demand, substantial damage to the credit of the company is quite likely.
- In this source, there is no certainty about the volume of money likely to be collected and the duration of its retention with the company. Hence, this is not a reliable source.
- In this source, small amounts are to be collected from the public. Collection of small deposits, their accounting and repayments are very inconvenient.
- Several bogus companies deceive the investors by collecting deposits from them. This practice causes a bad reputation amount the depositors.
- Public deposits cause harm to the investments market, because people start investment through this source, rather than purchasing the shares.
Directions of Public Deposits
The Government has provided following directions for accepting public deposits:
- Only those companies are authorized to accept public deposits, whose own funds are of more than 1 Crore.
- Companies can accept deposits for a period of more than 6 months but up to 36 months.
- No company will be authorized to accept deposits for the amount of more than 35 percent of the total of paid-up capital and reserve funds, and no renewal of deposits will be done.
- Presently, interest may be paid at the maximum rate of 12.5 percent per annum, at monthly intervals.
- The company has to issue advertisements for inviting deposits, otherwise, all facts relating to advertisements are to be mentioned in the substitute statement.
- On accepting deposits, the company is required to give the receipt to the depositors and has also to maintain a register of deposits in its registered office.
- If some company does not make payment of public deposits at the maturity date, it will have to pay penal interest at the rate of 15 percent per annum.
For small depositors, this interest will be paid at the rate of 20% per annum.