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With the stock markets yet to recover and banks lowering fixed deposit rates, companies accessing public deposits are seeing investors parking funds.
In the last six months, the corporate public deposit market has almost doubled to Rs 700 crore (Rs 7 billion) to Rs 800 crore (Rs 8 billion) a month and is expected to reach around Rs 1,500 crore (Rs 15 billion) by the end of the fourth quarter of 2008-09, channel partners for companies accessing deposits said. This is in addition to fund-raising by finance companies such as HDFC that have always depended on public deposits.
There are close to 110 companies that are accessing the window to raise funds, offering up to 12 per cent on public deposits for up to three years. Last month, around 60 companies offered public deposit schemes.
"As other sources of capital-raising have dried up, companies are rushing in to mop up money through fixed deposits this year. The trend is more pronounced in real estate," said Ravi Kapoor, managing director, India head, Capital Markets Organisation, Citigroup.
Tata Motors, which has tapped the market on December 1, has grabbed nearly a quarter of the public deposit space. The firm that launched its scheme on December 1 said it had collected Rs 175 crore (Rs 1.75 billion) within a month. "There was tremendous response once the scheme opened. Some investors who would have invested in other companies opted for Tata Motors," said an executive at one of the companies.
Tata Motors has a statutory limit of Rs 2,700 crore (Rs 27 billion) for raising deposits from the public. The company did not disclose the exact amount that it plans to raise or the date till which it will offer the scheme. The automobile manufacturer turned to public deposits after facing difficulties in raising finance for its acquisition of Jaguar and Land Rover, the two marquee brands of Ford Motors, in the UK for $2.3 billion.
Companies such as Ansal Housing & Construction, Ceat, Jindal Saw, Jindal Steel and Power, Jai Prakash Associates, Mahindra & Mahindra, TV18 and United Spirits are also accessing the public deposit route.
Meanwhile, companies that have always depended on the route to access funds are looking to raise more. For instance, Dewan Housing is hoping to raise Rs 70 crore (Rs 700 million) this year against Rs 45 crore (Rs 450 million) in 2008-09. Sriram Finance is looking to raise Rs 1,000 crore (Rs 10 billion) next year, said the company's managing director, S Sridhar. The company has already raised around Rs 400 crore (Rs 4 billion) through this route and hopes to raise another Rs 200 crore (Rs 2 billion) in the fourth quarter.
For HDFC, which has raised Rs 7,500 crore (Rs 75 billion) to Rs 8,000 crore (Rs 80 billion) this year, deposits provided around 62 per cent of its funding requirement during the April-October period. During October, 2008, when the money market was short of liquidity, deposits accounted for around 90 per cent of funding requirements, said an HDFC spokesperson.
"Although raising money through fixed deposits is an expensive route, companies do not have any other option to complete projects. Since the fixed deposit schemes are not rated, small- and medium-cap companies might face difficult in raising capital through this route. Real estate companies will face more difficulties because some of their projects have been abandoned just halfway due to a shortage of capital and absence of buyers," said Prithvi Haldea of Prime Database.
With increasing demand for such schemes Tata Capital, the non banking financial arm of Tata Group, is also planning to enter the business of arranging public deposits for other corporates. Though the interest rate on offer is higher than what banks pay, distributors such as Bajaj Capital and RR Financial are advising caution to avoid a 1990-type situation when many companies raised deposits, which are still to be refunded.
For starters, they warn that deposits up to three years are unsecured loans for companies.
"The company may be in perfect shape at the moment but if it has interests in real estate or the non-banking finance business, it makes sense for investors to look at it more carefully," said an executive at one of the distribution companies.
Abhineet Kumar, Anirudh Laskar, Niladri Bhattacharya and Raghavendra Kamath contributed to the story
