INVESTING IN A COMPANY
Companies are empowered to borrow funds from the general public and utilize the same for conducting their business activities. These borrowings are termed as â€˜Company Fixed Depositsâ€™. These deposits are mainly issued by manufacturing companies and Non-Banking Finance Companies (NBFCs).
Company Fixed Deposits-Higher risk element
Though company fixed deposit schemes carry a higher interest rate (vis-Ã -vis other debt instruments such as bank fixed deposits, small savings schemes, etc) they are highly risky in nature. This is because these deposits are unsecured. In other words, if a company fails to meet its obligation of interest and/or principal payment, then the only recourse available to you, as a deposit holder, is to approach the requisite grievance settling agencies.
To address the risk-related fear that arises in the mind of the depositor, companies get their fixed deposit schemes rated by credit rating agencies such as CRISIL, CARE, ICRA and FITCH Ratings India Pvt Ltd.
Credit Rating Defined
Credit Rating is the process of arriving at a particular â€˜gradeâ€™ (rating) for a companyâ€™s fixed deposit scheme. Primarily, it summarizes the companyâ€™s ability to make timely repayments of the principal and the interest amounts.
It is mandatory for NBFCs to get their fixed deposit schemes rated. In the case of manufacturing companies, it is optional.
Credit ratings are denoted in an alphanumeric form and each credit rating agency has its own unique rating scale. However, the â€˜gradesâ€™, â€˜sub-gradesâ€™ and â€˜what each grade stands forâ€™ remains similar. In a decreasing order of credit quality and safety, these grades are broadly classified as â€˜AAAâ€™, â€˜AA+â€™ â€˜AAâ€™ , A+â€™, â€˜Aâ€™ , â€˜A-â€˜ BBB-, â€˜BBBâ€™ , BBB+, â€˜BB+â€™ , â€˜BBâ€™ , BB- , B+ , B, B-, C, and D.
â€˜AAAâ€™ implies the highest safety and minimal risk whereas the grades below â€˜BBâ€™ carry a higher risk and are susceptible to default.
Generally, each credit rating agency affixes a unique alphabet/s which either precedes/follows the rating. For instances, an â€˜AAAâ€™ rating by CRISIL would be denoted by â€˜FAAAâ€™, â€˜MAAAâ€™ or â€˜LAAAâ€™ by ICRA, â€˜IND AAAâ€™ by Fitch Ratings India Pvt Ltd and â€˜CARE AAAâ€™ by CARE.
Credit rating does not remain constant
Ratings are formally reviewed by the rating agencies at least once in a year. The rating agencies monitor these ratings, once assigned, on a continuous basis over the term of the fixed deposit scheme. In other words, the rating can undergo a change during the term of the policy. Depending on the companyâ€™s repayment practice, the rating can be upgraded or downgraded.
It is mandatory for each and every application form of a companyâ€™s fixed deposit scheme to provide information on the credit rating assigned to the fixed deposit scheme. In addition, credit ratings are also made public by the agencies through their periodic newsletters as well as press releases.
Ratings and returns attached to a company fixed deposit scheme share an inverse relationship with each other. A company fixed deposit scheme, which is assigned a credit rating of â€˜AAAâ€™ will carry a lower rate of interest than one, which is assigned â€˜Dâ€™.
We advise due importance must be given to the rating whilst investing your funds in this investment avenue that is company fixed deposits. Rating is assigned to the company fixed deposit scheme only after the concerned credit rating agency undertakes a thorough study of the companyâ€™s financials. The rating is a good indicator of quantum of risk associated with the deposit.