The public deposits refer to the deposits that are attained by the

numerous large and small firms from the public. The public deposits are
generally solicited by the firms in order to finance the working capital
requirements of the firm.

The companies offer interest to the investors over public deposits. The
rate of interest, however, varies with the time period of the public deposits.
The companies generally offer 8 to 9 percent interest rate on the deposits
made for one year. The companies offer 9 to 10 percent interest rate over
public deposits for two years while 10 to 11 percent interest rate is offered
for the three year deposits.

There are rules regulating the fixed deposits. According to the

Companies Amendment Rules 1978, here is the list of rules for public
deposits:

 The maximum maturity period for a public deposit is 3 years

 The minimum maturity period for public deposits is 6 months
 The maximum maturity period for a public deposit for Non-Banking
Financial Corporation is 5 years
 The public deposits of a company cannot go past 25% of free reserves
and share capitals
 The companies asking for public deposits need to publish information
regarding the position and financial performance of the firm
 The companies having public deposits need to keep aside the 10% of
the deposits by 30th April every year that will mature by 31st March
next year.
The various advantages of public deposits enjoyed by the companies are:
 There is no involvement of restrictive agreement
 The process involved in gaining public deposit is simple and easy
 The cost incurred after tax is reasonable
 Since there is no need to pledge security for public deposits, the assets
of firm that can be mortgaged can be preserved

The disadvantages of public deposits from the company's point of view are:
 The maturity period is short enough
 Limited fund can be obtained from the public deposits

The advantages of public deposits enjoyed by the investors are:

 The interest rate is higher than the other financial investment
instruments
 The fund maturity period is short

The disadvantages of public deposits from the investors' pint of view are:
 The interest that is charged on the public deposits does not enjoy tax
exemption
 There is no pledging of security against public deposits
Meaning of "public deposits"
Besides the issue of shares- equity and preference and debentures, a
company can accept deposits from the public to finance its medium and
short-term requirements of funds. This source has become very popular
recently because, a company offers interest at a rate higher than offered by
banks. Under this method, companies are able to obtain funds directly from
public without financial intermediaries.

The practice of accepting public deposits by public companies in India

developed during the first quarter of the 20th century when textile mills of
Bombay, Ahmedbad and Sholapur and tea gardens of Assam and West
Bengal accepted public in banks. Moreover, at that time, there were no
public financial institutions to provide medium and long term finance to
industries in India. The practice in other industries was not popular. In recent
year, the method of raising finance through public deposits has again gained
popularly. Now public deposits are accepted by the companies under non-
banking companies (Acceptance of deposits) rules. The Government has laid
down limits as to interest, acceptance and renewal of deposits from public.

Companies accept deposits for varying periods ranging from 6 months

to 3 years at rates of interest which are higher than those offered by the
commercial banks. The rate of interest varies from 11 percent to 15 percent
depending upon the period of deposit and reputation of the company.
Companies generally take help of financial brokers and other intermediaries
in raising funds through public deposits. The company issues a deposit
receipt under terms and conditions printed on the back of the deposit
receipt.
As a source of finance, public deposits have the following advantages:
 It is beneficial to the company accepting deposits since it receive
finance at a lower rate of interest than charged by the banks and
special financial institutions on lending.
 Interest paid on deposits is a deductible expense for income tax
purpose.
 Administrative cost of deposits is lower than that involved in issuing
shares and debentures. The company has to fulfill lesser formalities in
accepting public deposits.
 As the rate of interest on public deposits is fixed, it helps the company
to play trading on equity, if the company is earning more than the rate
of interest paid on public deposits.
 Depositors have no interference in the management and control of the
affairs of the company as they have no voting rights. Thus, there is no
dilution of control of shareholders.
 Public deposits are not backed by any charge on the assets of the
company. The company may accept charge on its assets while raising
loans from other sources like banks and financial institutions.
 Capital structure of the company remains flexible by accepting
public deposits. Company can repay the deposits when they are not
required by the company.

The method of raising funds through public deposits suffers from the
following limitations disadvantages:
 Public deposits are fair weather friends'. It is an uncertain and
unrealistic from of financing. When depositors feel that the company is
 in a shaky position, they may not respond to fresh deposits or may
start withdrawing their existing deposits.
 Public deposits are available mainly for short period. Company cannot
depend on this source of finance for its long-term requirements.
 The management may misuse the deposits as such deposits are not
secured. Company may use them as it likes.
 Public deposits are generally not available to new companies or
companies with uncertain earnings.
 There are legal restrictions on the acceptance and renewal of
public deposits. A company cannot raise unlimited amount from this
source.
 Receiving public deposits create unhealthy trends in capital market.
There are numerous rates of interest offered by different companies.

This source of raising finance is valid only for short-term financial needs of
the company. Recently this method has gained popularity to the extent
that government companies start raising finance through this source.

Definition of Public Deposits

Public deposit is the source of fund for private and non-banking companies. It
means to accept fund from public in the form of deposit. The interest on
these deposits is more than interest which is given by banks and post
offices.

This is the risky investment but investor can earn high return on public
deposits. From June 1980, public companies of India also started to accept
public deposits. More than Rs. 5000 crore has been invested by Indian
Investors in public deposits.
Government Regulation on Public Deposits

Company law 1956’s section 58- A provides the power to central govt. to
make rules and regulation for controlling public deposits. Government of
India has made Companies (acceptance of deposits) Rules 1975. From time
to time, these rules are amended.

Following are the main features of these rules

1. Ceiling on Deposits

A company can accepts public deposits up to following level

a) Company can accept public deposits up to the 25% of the total of payable
capital and free reserves.

b) Company can accept public deposits from existing shareholders or

debenture holders up to 10% of total of payable capital and free reserves.

2. Maturity of Deposits

Company has to accept deposits from public minimum for 6

months and maximum for 3years.
3. Form and Particulars of Advertisement

Company must publish its advertisement in English news paper and in local
language newspaper.

4. Form of Application for Deposits

Public deposits must be accepted on given application by depositor.

5. Register of Deposits

Like register of shareholder and debenture holder, company should record all
persons’ name, address, deposit cash, date, maturity date, and rate of
interest in register of deposits.

6. Interest on Deposits

Company can fix rate of interest on deposits money according to regulations

of RBI.