Public deposits mean the funds raised by the company from the general public for financing its short-term and medium-term needs. It is an economical source of finance available to organization whereby they are required to pay a low rate of interest to depositors. Public deposits are unsecured deposits made by public as they do not involve any mortgage of company assets. Public gets attracted to these deposits as they pay them a good amount of interest as compared to bank deposits. These deposits are invited by company for a time period of 6 months to 3 years mainly for catering to its working capital requirements. The total amount of these deposits cannot exceed 25% of the company’s paid-up capital and free reserves.
Features of Public Deposits
- Convenient: Public deposit is a convenient source of finance which involves less formalities to be followed by company. Companies simply need to give an invitation to public for such deposits and issues a receipt to every depositor.
- Economical: These deposits are the cheapest source of finance as they carry a lower rate of interest. Companies pay low amount of interest to depositors in comparison to bank loans and debentures. Moreover, they are not required to pay any brokerage charges or other commissions for acquiring funds.
- Unsecured: Public deposits are unsecured deposit made by peoples with companies. It does not involve the mortgage of any company assets for safety purposes. The company is free to use its assets as security for raising funds in the future.
- Ceiling on deposits: These deposits are subject to certain limits which are to be followed by every company. Total amount of public deposits that can be accepted by company from general public amounts to 25% of its paid up capital and free reserves. In case these deposits are accepted from present shareholders and debenture holders of company, it is limited to 10% of paid up capital and free reserves.
- Maturity of deposits: Companies raises funds through public deposits with a maturity period in-between 6 months and 3 years. These deposits possess renewal facility which can be exercised by company as per their needs.
- Tax savings: Public deposits serve as an important tool for saving tax liability. Amount of interest that companies pays to depositors is allowed as an expense under income tax act.
- Unreliable source: It is an unreliable source of finance which totally depend upon how depositors responds to invitation of company. These deposits are also termed as “Fair weather friend” because depositors may not respond favorably when economic conditions are unsatisfactory.
Importance of Public deposits
- Simplicity in raising funds: Public deposit is an important source of finance which provide funds to companies with less complexities. It does not involve any complicated procedures like bank loans and debentures. Companies simply need to make an advertisement for updating public regarding acceptance of deposits by them.
- Lower interest rate: Companies pays lower amount of interest to their depositors as compared to other sources of finances. In addition to this, it does not involve any extra expenses such as commission and brokerage charges which makes public deposits an economic source of finance.
- No mortgage on assets: Acceptance of deposits from public do not require mortgage of company assets. Company assets are completely free to be used as a security for availing loans in future. It does not affect the borrowing capability of company.
- No dilution of control: Depositors do not carry any voting rights for interfering in the management of company. They are simply the creditors and are issued a receipt at the time of making deposits. Shareholder’s control is not diluted by accepting deposits from public.
- Flexibility: Public deposits are flexible source of finance through which funds can be raised whenever need arises. These deposits can be returned back at any point of time when need for funds is over. It introduces a sense of flexibility in financial structure of company and avoid chances of over capitalization.