Possible RISKS with new fixed deposit schemes

05 Aug

Gitanjali Gems which has come out with a FD scheme is already facing the wrath of the market and a payment crisis. Despite reporting a net profit of Rs 265 crores for March 2013, the stock is down to Rs 128 from Rs 540 in the past one month, as investors are worried about the future prospects of the company due to policy changes. “The central bank has put severe restrictions on import of gold to bring down the current account deficit. This will hit profitability of jewellery companies as they import gold,

Unity Infra, IVRCL Sumeet Industries, Rasoya Proteins and Gitanjali Gems are some of the new players to the fixed deposit space and promises exorbitant and UN realistic returns on fixed deposits. Although these companies are there in the market for long time but not very people friendly companies. There will always a question mark on their corporate governance, their benefits to their share holders. Also important is the sectors they operate in are very volatile and risky.

Sumeet Industry is offering 12 per cent for a one-year deposit, 12.25 per cent for two years and 12.5 per cent for three years, respectively.

The promoter has pledged 55 per cent of his shares as of March 2013. “If the promoter has pledged more than 50 per cent of his shareholding, it indicates poor financial health. It means a fixed deposit will carry higher risk. This is because if the stock price moves down, the lender would ask the promoter to maintain margin by either pledging more shares or by bringing in cash. If the promoter is unable to bring in the extra margin, the lender could sell the shares in the market. This could affect the financial health of the company, which is not in the best interest of a fixed deposit holder.

These companies are offering rates far higher than banks (banks offer 8.75-9 per cent for a three-year fixed deposit) to attract investors, say experts, adding that investors should be extremely careful while investing money in these new companies. “The economy is going through a rough patch and most companies that tap the fixed deposit market are finding it tough to raise money from banks or through stock markets. They are tapping the fixed deposit route as a last-ditch effort. Fixed deposits are unsecured; carry high risk and investors should scrutinize each new entrant carefully before investing

Similarly, the going is tough for companies in the real estate segment as well as for infrastructure companies. In the case of Unity Infrastructure, margins are under pressure. Its net profit fell to Rs 92.6 crore in March 2013 from Rs 103.6 crore in March 2013. Many a time, real estate or infrastructure companies could get stuck in environmental/land clearances, thereby delaying execution of a project and hence revenues will not come through as planned


Finally, since these companies are raising fixed deposit for the first time, there is no past track record of service quality. This means you don’t know whether the fixed deposit receipts will be dispatched on time, interest warrants will be given on time and whether repayment of principal will happen on the due date.

Since there is uncertainty about its future profitability, there are few takers for its fixed deposits despite the company offering a 12.5 per cent interest. Gold is so volatile these days so where is the question of buying fixed deposits from Gitanjali Gems.

IVRCL is another risky player in real estate industry with lots of debt and not going well in last many years. Please do not invest your retirement fund in these high risk FDs.

In the fixed deposit space, we advise investors to stick to reputed corporate like HDFC, Shriram Transport, Mahindra Finance.

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Posted by on August 5, 2013 in Uncategorized


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