Public Deposits
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Public Deposits
Besides the issue of securities, the companies have been accepting public deposits to meet their medium-term requirements. The rate of interest of deposits generally varies form I0 per cent to I3 per cent per annum depending upon the period of deposit and reputation f the company. Companies generally receive public deposits for different periods ranging from 6 months to 3 years and allow for renewal of deposits. Any person who is interested to deposit the money in a company can fillup a specified from and deposit the company with the company. The company in return issues a deposit receipts which is anachnowledgement of debt by the company. The terms and conditions of the deposit are mentioned on the back side of the deposit receipt.
Merits of Public Deposits. Companies raise finance for meeting medium-term requirement through public deposits because of the following advantages:
(i) It is beneficial to the company since it receives funds at lower rates of interest as compared tot eh rates of interest as compared to the rates charged by banks and special financial institutions.
(ii) Cost of administering public deposits is lower as compared to issue of shares and debentures. The company has to fulfill less formalities and follow a simple procedure. It receives money and issues a deposit receipt to every depositor.
(iii) Public deposits help in trading on equity if the company is earning more than the rate of interest paid on public deposits. A company can pay a higher rate of dividend to its shareholders and thus raise its reputation.
(iv) The depositors do not have any right to interfere with the internal management of the company. Thus, there is no dilution of control of shareholders.
(v) The public deposits are usually not backed by any charge on the assets of the company. The company can use its assets as security for raising loans form other sources like commercial banks and financial institutions. Public deposits introduce flexibility in the financial planning. Public deposits can be repaid when they are not required.
Demerits of Public Deposits. The method of public deposits has the following demerits.:
(i) This method is not dependable because it is difficult to predict whether public deposits would be forthcoming to the desired extent. Such deposits are termed as ‘fair weather friends’. The depositors may not respond when the conditions in the company are uncertain. They may think it better to deposit their savings with commercial bands. They may withdraw their money when they visualize, even on false grounds, the shaking position of the company. This may put the survival of the company into danger.
(ii) Depositors do not get any security for their deposits. Money deposited by them may be used by the management in any way it likes.
(iii) Public deposits are available for a short or medium-term though they can renewed. However, it is not a wise thing to depend on them for long-term financing.
(iv) New companies and companies with uncertain earnings cannot raise finance through public deposits.
(v) Receiving public deposits create unhealthy trends in the capital market. There are numerous rates of interest offered by different companies to attract public deposits.
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Merits of Public Deposits. Companies raise finance for meeting medium-term requirement through public deposits because of the following advantages:
(i) It is beneficial to the company since it receives funds at lower rates of interest as compared tot eh rates of interest as compared to the rates charged by banks and special financial institutions.
(ii) Cost of administering public deposits is lower as compared to issue of shares and debentures. The company has to fulfill less formalities and follow a simple procedure. It receives money and issues a deposit receipt to every depositor.
(iii) Public deposits help in trading on equity if the company is earning more than the rate of interest paid on public deposits. A company can pay a higher rate of dividend to its shareholders and thus raise its reputation.
(iv) The depositors do not have any right to interfere with the internal management of the company. Thus, there is no dilution of control of shareholders.
(v) The public deposits are usually not backed by any charge on the assets of the company. The company can use its assets as security for raising loans form other sources like commercial banks and financial institutions. Public deposits introduce flexibility in the financial planning. Public deposits can be repaid when they are not required.
Demerits of Public Deposits. The method of public deposits has the following demerits.:
(i) This method is not dependable because it is difficult to predict whether public deposits would be forthcoming to the desired extent. Such deposits are termed as ‘fair weather friends’. The depositors may not respond when the conditions in the company are uncertain. They may think it better to deposit their savings with commercial bands. They may withdraw their money when they visualize, even on false grounds, the shaking position of the company. This may put the survival of the company into danger.
(ii) Depositors do not get any security for their deposits. Money deposited by them may be used by the management in any way it likes.
(iii) Public deposits are available for a short or medium-term though they can renewed. However, it is not a wise thing to depend on them for long-term financing.
(iv) New companies and companies with uncertain earnings cannot raise finance through public deposits.
(v) Receiving public deposits create unhealthy trends in the capital market. There are numerous rates of interest offered by different companies to attract public deposits.
For more help in Public Deposits click the button below to submit your homework assignment