Inter Corporate Deposits

Inter-Corporate Deposits (ICDs) refer to short-term loans or deposits made by one company to another, typically within the corporate sector, without the involvement of a formal banking institution. These deposits are a vital component of corporate finance in India and several other economies, providing temporary funding solutions for working capital requirements or liquidity management. Inter-Corporate Deposits function as a flexible financial instrument that helps businesses manage short-term cash surpluses and deficits efficiently.

Nature and Concept

An Inter-Corporate Deposit is essentially a short-term, unsecured borrowing arrangement between companies. Corporates with surplus funds lend to other firms in need of temporary liquidity, usually for durations ranging from 7 days to 180 days. The arrangement does not involve public participation or any intermediary such as a bank or financial institution, making it a purely bilateral financial transaction.
These deposits are governed under Section 186 of the Companies Act, 2013 (formerly Section 372A of the Companies Act, 1956), which stipulates the limits, approvals, and disclosure requirements for inter-corporate lending and investment. ICDs are usually not meant for long-term financing but are an effective tool for short-term treasury operations within the corporate sector.

Objectives and Purpose

The practice of extending Inter-Corporate Deposits serves multiple purposes, primarily centred on efficient capital utilisation and liquidity management:

• Optimisation of Surplus Funds: Companies with idle funds can earn short-term returns by lending to other firms.
• Meeting Working Capital Needs: Borrowing companies use ICDs to bridge temporary gaps in cash flow or working capital.
• Avoidance of Complex Formalities: ICDs provide quicker access to funds than traditional bank loans, with fewer procedural delays.
• Mutual Corporate Cooperation: Often, ICDs occur within business groups or among companies with established business relationships, promoting financial cooperation.
• Higher Returns for Lenders: Interest rates on ICDs are typically higher than those offered by banks on short-term deposits, providing better yields for the lending company.

Types of Inter-Corporate Deposits

ICDs are categorised primarily based on their tenure and the nature of the lending relationship. The main types are as follows:

1. Call Deposits:
   • These are short-term deposits repayable on demand or within a notice period of one to three days.
   • They are usually employed by companies requiring very temporary liquidity.
2. Short Notice Deposits:
   • Deposits with a fixed maturity of 7 to 14 days.
   • Often used when firms expect cash inflows in the near term but need immediate working capital.
3. Fixed Deposits:
   • Deposits with a definite maturity period, typically ranging from 3 months to 6 months.
   • The most common form of ICDs, they carry fixed interest rates and specified repayment dates.
4. Bridge Deposits:
   • These are temporary arrangements that help a borrowing company meet immediate financial obligations until longer-term financing is secured.

Regulatory Framework

Under the Companies Act, 2013, the following regulatory provisions govern Inter-Corporate Deposits:

• Section 186: Lays down restrictions on the extent to which a company can lend, invest, or provide guarantees.
• Lending Limit: A company cannot make loans or investments exceeding 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is higher, without shareholder approval.
• Board Approval: Every ICD must be approved by a resolution of the company’s Board of Directors.
• Disclosure: Companies must disclose such loans or deposits in their financial statements, including details of interest rates and related parties.
• Interest Rate: The interest rate charged cannot be lower than the prevailing yield of government securities of similar maturity.

The Reserve Bank of India (RBI) does not directly regulate ICDs since they occur between non-banking entities. However, the Ministry of Corporate Affairs (MCA) monitors compliance with statutory limits and disclosure requirements.

Interest Rates and Market Practices

The interest rate on ICDs depends on several factors such as the borrower’s creditworthiness, market liquidity, duration of the deposit, and overall financial conditions. Typically, ICD rates are higher than bank fixed deposit rates but lower than those charged by commercial lenders.
Rates may vary between 8% and 14% per annum, depending on the level of risk and the relationship between the lending and borrowing entities. ICD agreements are usually formalised through a mutual contract, specifying the tenure, interest rate, repayment schedule, and default clauses.

Advantages of Inter-Corporate Deposits

ICDs offer several benefits to both the lending and borrowing companies:

• For Lenders:
  • Opportunity to earn higher returns on surplus funds.
  • Flexible short-term investment option without long-term commitment.
  • Useful for treasury management and maintaining liquidity balance.
• For Borrowers:
  • Quick and simple access to funds compared to institutional loans.
  • Minimal procedural formalities and faster disbursement.
  • Generally lower borrowing costs compared to bank overdrafts or commercial borrowings.
• For Both Parties:
  • Promotes inter-corporate trust and financial cooperation.
  • Provides flexibility in structuring repayment and interest terms.

Risks and Limitations

Despite their advantages, Inter-Corporate Deposits involve significant risks due to their unsecured and informal nature. The primary concerns include:

• Credit Risk: The lending company faces a high risk of default since ICDs are generally not backed by collateral.
• Liquidity Risk: The lender may face cash shortages if the borrower fails to repay on time.
• Lack of Regulation: The absence of direct supervision by financial regulators increases exposure to non-repayment or fraudulent practices.
• Concentration Risk: Over-reliance on ICDs for funding or investment may expose companies to financial instability.
• Legal Complications: Recovery of ICDs in cases of insolvency or bankruptcy of the borrower can be difficult.

Due to these risks, prudent financial management and due diligence are essential before entering into any ICD arrangement.

Accounting Treatment

From an accounting perspective:

• The lending company records the ICD under Loans and Advances on the asset side of the balance sheet.
• The borrowing company records it as a Short-Term Borrowing or Current Liability.
• The interest income for the lender and the interest expense for the borrower are recognised on an accrual basis in their respective profit and loss accounts.

Proper disclosure in financial statements, including the amount, terms, and interest rate, is mandatory under Schedule III of the Companies Act, 2013.

Practical Examples

Inter-Corporate Deposits are commonly observed among large corporate groups and affiliated companies. For instance, a parent company with surplus liquidity may extend an ICD to its subsidiary for meeting immediate project or operational expenses. Similarly, unrelated companies may engage in ICD transactions based on mutual trust and credit assessment.
Such practices are particularly prevalent in sectors like manufacturing, construction, real estate, and trading, where working capital cycles often fluctuate.

Contemporary Relevance

In the present financial environment, the role of Inter-Corporate Deposits remains significant despite the availability of alternative financing instruments. With the tightening of bank lending norms and increasing demand for flexibility, ICDs continue to serve as an essential mechanism for short-term funding in India’s corporate sector.