Question

What are medium-term public deposits and what are their advantages to public deposits?

Answer 1

Public deposits:- Public deposits refer to unsecured deposits invited from the public. A company wishing to invite public deposits place an advertisement in the newspaper. Any member of the public can fill up the prescribed form and deposit money with the company. Generally, the public deposit can be invited by companies for a period of six months to 3 years.

Advantages of public deposits:-

1. Simple procedure:- The procedure for obtaining a public deposit is much simpler than the equity and debenture issues. For obtaining public deposits companies do not take permission from the controller of capital and there is no need to get listed in any stock exchange market.
2. Economical:- Obtaining public deposits involves very less cost. Companies don't need to spend on prospectus and underwriter's commission. There are very few administrative costs involved in obtaining public deposits. The interest paid on public deposits is less than the interest paid on debentures and loans.
3. No Security:- Public deposits are unsecured so the assets of the company are free to be used as a mortgage in the future.
4. Flexibility:- Public deposits can be repaid when they are not required. Therefore public deposits introduce flexiblity in the financial structure of the company.