It is a very old method of finance practised in India. When commercial banks were not there, people used to deposit their savings with business concerns of good repute. Even today it is a very popular and convenient method of raising short and medium term finance.
Under this method companies can raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. To attract the public, the company usually offers a higher rate of interest than the interest on bank deposit. The period for which companies accept public deposits ranges between six months to 36 months.
Procedure of raising funds through Public Deposits
When an organisation wants to raise funds through public deposits it gives an advertisement in the newspapers. The advertisement highlights the achievements and future prospects of the undertaking and invites the investors to deposit their savings with it. It declares the rate of interest, which may vary depending upon the period for which money is deposited. It also declares the time and mode of payment of interest and the repayment of deposits. Normally they appoint some local firms to act as brokers and help them in providing service to the depositors.
Keeping in view the malpractices of certain companies, such as non-payment of interest for years together and not refunding the money, the Government has framed certain rules and made certain amendments in the Companies Act for their security. The maximum rate of interest and brokerage payable are decided by the Reserve Bank of India. The amount of deposit should not exceed 25% of the paid up capital and general reserves. The company is also required to maintain a Register of Depositors containing all particulars as to public deposits.
Following are the merits of public deposits:
Simple and easy: The method of borrowing money through public deposit is very simple. It does not require many legal formalities. It has to be advertised in the newspapers and a receipt is to be issued.
No charge on assets: Public deposits are not secured. They do not have any charge on the fixed assets of the company.
Economical: Expenses incurred on borrowing through public deposits are much less than expenses of other methods like issue of shares and debentures.
Flexibility: Public deposits bring flexibility in the capital structure of the company. These can be raised when needed and refunded when not required.
Following are the limitations of public deposits:
Uncertainty: A concern should be of high repute and have a high credit rating to attract public to deposit their savings. There may be sudden withdrawals of deposits, which may create financial problems. Depositors are regarded as fair weather friends.
Insecurity: Public deposits do not have any charge on the assets of the concern. It may not always be safe to deposit savings with companies particularly those, which are not very sound financially.
Limits on the amount raised: There are limits on the amount that can be raised through public deposits.