Uncertainties in the business environment and attractive interest rates from banks are making Indian Inc mimic the retail investor and park a higher share of cash surpluses in term deposits
Corporate India invested another Rs 34,470 crore in fixed deposits with banks in 2010-11 — that is, some 40 per cent over the previous year's level.
An analysis of the investments and cash balances of over 260 listed companies shows that India Inc. preferred to allocate more funds to bank fixed deposits (FDs) in 2010-11 compared to the previous year. These companies had parked as much as Rs 117,621 crore in term deposits by end-March 2011. Indian corporates' appetite for bank deposits can be gauged from the fact that term deposits grew only 15 per cent the previous year, 2009-10.
Industry observers and financial analysts feel that companies have been willing to lock into term deposits because of the fluid business environment. “Global uncertainties and government inaction forced most companies to shelve their expansion plans last year,” explained Mr Andrew Holland, CEO of Investment Advisory, Ambit Capital.
The attractive rates offered by banks, in their race for low-cost deposits last year also aided the trend. Mr Ritesh Jain, Head of Investments, Canara Robeco Asset Management, made the point that Corporate India now has a good balance-sheet, while the Government, after all the stimulus spending, has stretched finances.
“Worldwide, post the Lehman Brothers collapse, it is the governments that have supported the economies and private sector hasn't spent money.”
So what India Inc. is doing is essentially in keeping with what's happening globally, he added.
Not all companies raised their FD holdings for the above reasons, though. For instance, Aurobindo Pharma saw an increase in term deposits over the year as the company was accumulating funds to repay its FCCB holders in May 2011, explained Mr Sudhir Singhi, the company's Chief Financial Officer.
Then, companies that saw a huge cash inflow last year, either due to deals struck (such as Biocon) or due to IPOs (such as Prestige Estates) or rights offer (such as EIH) too chose to keep their excess funds safe, in the coffers of a bank.
Investments in bonds up
There also was a significant increase in investments in quoted securities/debentures/ bonds by corporates. Though these instruments aren't as liquid and are riskier, FY11 saw India Inc. increase its investments in quoted bonds by a whopping 29 per cent to Rs 97,332 crore.
“Much of the money invested in Fixed Maturity Plans (FMPs of mutual funds) is from corporates,” said Mr Jain, while explaining this. Be it FMPs or bank FDs, corporate money may have gone into these because they did not find a more suitable use. The trend, however, may remain till such time inflation and interest rates cool off and there is some stability in the global scenario.
On the whole, India Inc.'s cash and equivalents grew by about 34 per cent to Rs 1, 94,054 crore in FY11.