Inter Corporate Deposit Agreement – Everything You Need to Know
An inter corporate deposit agreement (ICD) is a financial arrangement between two companies, where one company, typically a corporate, invests or lends a certain amount of money to another corporate. The agreement is signed between the two companies, and the terms and conditions of the investment or loan are laid out in a written contract, usually in the form of a PDF.
ICDs are a popular tool for companies looking to invest their surplus funds while generating some returns. For companies that need short-term funds, ICDs can also be an attractive source of liquidity. In this article, we will delve into the key features of an ICD agreement, as well as the pros and cons of this financial instrument.
Key Features of an Inter Corporate Deposit Agreement
1. Interest Rate: The interest rate on an inter corporate deposit agreement can either be fixed or floating, depending on the terms of the agreement. Companies offering deposits usually offer higher interest rates than traditional banks.
2. Tenure: ICDs generally have a shorter maturity period than other investment options, ranging from a few days to a maximum of three years.
3. Minimum Investment Amount: The minimum investment amount for an ICD varies among financial institutions. In most cases, the minimum investment amount is INR 1 crore.
4. Security: ICDs are secure financial instruments as they are backed by the corporate reputation of the company offering the deposit.
5. Withdrawal: While ICDs generally have a fixed maturity period, some agreements may allow for early withdrawal, subject to penalty charges.
Pros of an Inter Corporate Deposit Agreement
1. Higher Returns: ICDs offer higher returns than traditional bank deposits, making them a more attractive investment option for companies.
2. Short-Term Liquidity: For companies in need of short-term funds, ICDs can be a good source of liquidity.
3. Corporate Reputation: As mentioned earlier, ICDs are backed by the corporate reputation of the company offering the deposit, making them a secure investment.
Cons of an Inter Corporate Deposit Agreement
1. Minimum Investment Amount: The minimum investment amount for ICDs is relatively high, which may make it unattractive for smaller companies.
2. Limited Flexibility: ICDs may have limited flexibility, particularly when it comes to early withdrawal. Penalty charges may be imposed for early withdrawal.
3. Credit Risk: Despite the backing of corporate reputation, ICDs carry some credit risk, particularly if the company offering the deposit is not financially stable.
ICDs are a unique financial instrument that can provide attractive returns to companies with surplus funds or in need of short-term liquidity. However, companies should carefully weigh the pros and cons of this option before investing. It is important to thoroughly research the financial institution offering the ICD, including its creditworthiness and reputation, and to review the terms and conditions of the deposit agreement. As with any investment, it is important to seek professional advice before making any decisions.