Question

Explain the features/ Advantages of deposits or Public Deposits.

Answer 1

Meaning: -
Public deposits are an important source of financing short term requirements of a company. Companies generally receive public deposits for the period ranging from 6 months to 36 months.

Under this method, general public is invited to deposit their saving with the company for a varied period. Interest is paid by companies on such deposits. The rates of interest are higher than those allowed by commercial banks. The company issues 'Deposit Receipt' to the depositor. The term of deposit is mentioned in the 'Deposit Receipt'. Deposit Receipt is an acknowledgment of the debt by the company. Deposits are unsecured loans offered to the company. It is considered a risky investment but investors can earn a high return on public deposits. 

Companies Act 1956, Sec 58-A, provides the power to the central government to make rules and regulations for controlling public deposits. The government of India has made Companies (Acceptance of Deposits) Rule 1975. These rules are as under. 

Definition: -
According to the Companies Act 1956, the term deposit means 'Any deposit of money with the company and any amount borrowed by the company'.

1. Ceiling on deposits: - 

1. a) Company can accept public deposits up to 25% of total paid-up capital and free reserves. 

1. b) Company can accept public deposits from existing shareholders and debenture holders up to 10% of total paid-up capital and free reserves. 

2. Maturity of Deposits: - The company has to accept deposits from the public minimum for 6 months and a maximum of 36 months. 

3. Interest in Deposits: -Company can fix the rate of interest on deposits money according to the regulations of Reserve Bank of India.

4. Register of Deposit: -Company should record name, address, deposits money, date, maturity date, rate of interest in 'Register of Deposits'. 

5. Status of Deposit holder: -Deposits holders are creditors of the company.

Advantages of Accepting Deposits:

1. The rate of interest payable on deposits is lower than the rate of interest on a loan.

2. The deposit does not create a charge on the assets of the company.

3. It is a simple method of financing as it has very few legal complications and formalities to be fulfilled. 

4. Deposits holders are the creditors of the company. A company can collect a huge amount of money without interference of deposit holders in the management of it.

Answer 2

Meaning: - 
The term 'Public deposit' means any money collected by a company in the form of deposits or loans from the public. The advantages are as follows: 

Definition: -
According to Companies Act 1956 the term deposit means 'Any deposit of money with the company and any amount borrowed by the company'

1. Lower Cost: -The rate of interest on deposits is lower than the rate of interest on loans from banks. 
2. Unsecured: - Deposits are unsecured loans and thus no charge is to be created on the assets of the company. 

3. Control: - Deposits do not provide the depositors any control over the company and thus the owners retain the ownership in their existing ratios. 

4. Tax Savings: -Interest paid on public deposits by the company is deducted as expenses while calculating taxable income. Thus, the tax liability of the company is reduced. 

5. Working Capital: -Deposits act as an important source of raising working capital for the company. 

6. Increase in shareholders Return: - The interest cost of deposits is lower than loans from banks which increase the profits and thereby return to shareholders.