Under this method, the company invites the public to deposit their money with the company for a specific period at a specified rate of interest. In India, on account of certain historical reasons, this method was very popular till the first quarter of the present century. At that time, the public themselves used to run to good companies to deposit their surplus funds. This was the most important source for the cotton mills in Bombay and Ahmedabad. The system however, had its own drawbacks and weaknesses. In times of real need of money it was difficult to obtain deposits through this source. The tendency of the depositors to withdraw their advances on the slightest rumours made the position still worst. This system therefore is highly inelastic, volatile and very undependable.
At present no facility is available of ‘insurance cover’ as it is available for bank deposits. The interest received by investors is not free from income tax. The funds thus collected from public may be used in non-priority sectors and the indiscrimate borrowings may distort interest rate pattern in the country. The maximum rate of interest payable is now 8% and on debentures it is 7.5%.
The slugishness in the capital market after 1962 and the increasing difficulties experienced by the company in raising finance again attracted the investors for making public deposits. The difference was that the company now invites the public to deposit their funds with the company. During the last two decades or so there has been a substantial growth in public deposits. But unfortunately several cases of malpractices were noticed. Hence, the Reserve Bank of India issued several rulesand regulations for the acceptance of the deposits by the Non-Banking and Non-Financial Companies. The purpose is to curb the undesirable and unhealthy practices of the companies and thus to protect the interests of the innocent investors.