OIL Project Final

1
TREASURY MANAGEMENT
AT OIL INDIA LTD.

A SUMMER PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT
FOR THE REQUIREMENT OF THE TWO YEAR POST GRADUATE
DIPLOMA IN MANAGEMENT
(2012-14)

BY:
MANVI GROVER
Roll no.-162/2012
PGDM (FT)

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT
DELHI
JUNE, 2013
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ACKNOWLEDGEMENT

No task is a one man effort. Cooperation and coordination of various people at
different times go into the successful completion and achievement of set goals. I would
thus like to express my profound gratitude to everybody who helped me through the
successful completion of this summer internship project.

First of all, I would like to thank Mr. Harish Madhav (Head- Finance) , Oil India
Limited (OIL) for providing me the chance to undertake this internship study and
allowing me to explore the area of finance particularly in Petroleum Sector which would
prove out to be very beneficial to me in my future assignments, my studies and my career
ahead.

I would like to express my gratitude towards Mr. S Maharana (Manager-F&A
Department) at Noida Corporate Office, for being an exceptional Mentor and project
guide.. I would also convey my sincere thanks to Mr. M. Kawish (Senior Officer-
Finance and Accounts) and Mr. A.P. Rao (Deputy Treasury Manager), for guiding
me in the completion of the report since the initial stage of my project.

I also choose this moment to acknowledge the contributions of my faculty guide, Prof.
Prem Sibbal, Academic Head at Lal Bahadur Shastri Institute of Management, for
his valuable and inspiring guidance throughout the progress of this project.

I elicit my deep regards to various other many people who shared valuable information
that helped in the successful completion of this project.
.

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EXECUTIVE SUMMARY

Oil India Limited (OIL) is an Indian public sector oil and gas company in India under the
administrative control of the Ministry of Petroleum and Natural Gas of the Government
of India. OIL is engaged in the business of exploration, development and production
of crude oil and natural gas, transportation of crude oil and production of liquid
petroleum gas. It is one of the most recognized PSE in India.
The project undertaken at OIL is a study of corporate finance. It includes analysis of the
financial performance of the organization over the years, the working of the treasury
department and how the surplus cash is being utilized, the sources of long term
borrowing and the study of under recoveries affecting the upstream sector.

Oil India Limited being a cash rich company has huge treasury operations and thus
treasury management is one of the very important corporate financial functions. Treasury
Management takes care of cash management, liquidity management, risk management,
etc.
The first part of the project OIL invests its short-term surplus funds in different
investment avenues throughout the year. Since the surplus cash of the Company has been
earmarked for future expansion plans and acquisition of assets, it is imperative for the
Company to maintain adequate liquidity in its investment portfolio. The Company also
recognizes that investment management is not its core business function and accordingly
protection of capital is a key driver for investment decisions. This reports talks about the
review of investment policy and explores different other investment avenues. Being a
PSE, OIL has to follow the Department of Public Enterprises (DPE) guidelines to park
its idle funds. Thus, an analysis of the investments of the company and its financial
performance over the years has been done.
The second part analyses the long term sources of funds. The company has surplus cash
invested at 9.5% approx and thus wishes to borrow externally at a lower cost . The
External Commercial Borrowing (ECB) option of taking loan has been explored in this
regard.
The third part deals with the study of the under recovery burden of OMCs being shared
by the upstream oil companies and how it is affecting their cash flows.

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Table of Contents
List of Figures ........................................................................................................................... 7
List of Tables ............................................................................................................................ 8
CHAPTER 1: INTRODUCTION ........................................................................................... 9
1.1Oil Industry in India .......................................................................................................... 9
1.1.1 Introduction ............................................................................................................... 9
1.1.2 Industry Structure ................................................................................................... 10
1.2 Key Regulatory Policies ................................................................................................ 13
1.3Company Profile ............................................................................................................. 17
1.4 Major Players: ................................................................................................................ 19
CHAPTER 2: RESEARCH OBJECTIVE .......................................................................... 20
CHAPTER 3: RESEARCH METHODOLOGY ................................................................ 21
3.1 Data Collection ............................................................................................................... 21
3.2 Research Design ............................................................................................................. 21
CHAPTER 4: OIL INDIA - FINANCIAL ANALYSIS ..................................................... 22
CHAPTER 5: TREASURY MANAGEMENT (TM) ......................................................... 31
5.1 Investments..................................................................................................................... 31
5.1.1 Study Of Department Of Public Enterprise (Dpe) Guidelines ............................... 31
5.1.2 Investment Of Surplus Funds At Oil ....................................................................... 34
5.1.3 Investment Policy Procedure At Oil India Limited ................................................ 38
5.1.4 Investment Policy .................................................................................................... 41
5.1.5 Investment Trend .................................................................................................... 42
5.1.6 Current Investment Portfolio ................................................................................... 43
5.1.7 Suggestion On Surplus Fund Investments ............................................................... 45
5.2 Borrowing....................................................................................................................... 51
5.2.1 Sources of Finance................................................................................................... 51
5.2.2 External Commercial Borrowing (Ecb) ................................................................... 53
5.2.3 Process Of Taking ECB ........................................................................................... 58
5.3 A study on Under Recoveries ....................................................................................... 66
5.3.1. Meaning ................................................................................................................. 66
5.3.2 Under recoveries burden on Upstream Companies ................................................. 68
5.3.3 Gradual diesel price hikes a step in the right direction ............................................ 71
CHAPTER 6: FINDINGS ..................................................................................................... 74
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Limitations .............................................................................................................................. 75
Key Learning .......................................................................................................................... 76
Bibliography ........................................................................................................................... 77
References ............................................................................................................................... 78

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List of Figures

1. Crude Oil demand supply in India....9
2. Indian Oil Industry..10
3. Reserves of Crude Oil.........12
4. Foreign Industrial Policy-Oil & Gas....16
5. Revenue from Operations18
6. Investment policy Framework.39
7. Investment from Term Deposit42
8. Investment trend in ICRs.42
9. Investment Portfolio 2011-12.43
10. Interest Earned Percentage 2011-1244
11. Interest on Term Loan.51
12. Process of taking ECB.58
13. Trend in Under Recoveries......66
14. Fuel Prices67
15. Under Recovery Procedure..68
16. Subsidy sharing Formula.....69
17. Subsidy sharing70
18. Annual Contribution of Oil India towards Under Recoveries70
19. Profit before and after Under Recoveries71
20. Sensitivity of Under Recoveries to Crude Oil prices and Currency72

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List of Tables

1. Working Capital Turnover Ratio.22
2. Fixed Asset Turnover Ration...22
3. Capital Employed Turnover Ratio...23
4. Asset Turnover Ratio23
5. Debtor Turnover Ratio..24
6. Inventory Turnover Ratio.25
7. Gross Profit Ratio.25
8. Net Profit Ratio.26
9. Return on Equity Ratio..26
10. Return on Investment27
11. Current Ratio.27
12. Quick Ratio...28
13. Cash Ratio.28
14. Debt Asset Turnover ratio.29
15. Debt Equity Ratio.29
16. Interest Coverage Ratio.30
17. DPE guidelines.38
18. Investment in Term Deposit..41
19. Investment in mutual funds41
20. Investment in ICDs41
21. Existing mutual fund weights47
22. Recommended weights..48
23. Recommended new fund weights..49
24. Commercial Paper Rates51
25. Cost of ECB...61
26. Interest Margin..63
27. Matching cash balance with loan payments..64
28. Subsidy sharing for 3 years69

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CHAPTER 1: INTRODUCTION

1.1Oil Industry in India
1.1.1 Introduction
India is
The 4
th
largest energy consumer in the world
Among largest net importers of oil globally
0.65% of worlds oil reserves
Significantly unexplored (only 22% explored)
Domestic crude oil production increased only marginally over the last few years, higher
refining capacity additions saw crude oil throughput increase at a CAGR of 7.6 per cent
during the last five years. This increased the country's dependence on imports to 81.3 per cent
in 2011-12 from 76 per cent in 2006-07.

Fig1: Crude oil Demand supply in india
Source : PPAC

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1.1.2 Industry Structure

Fig 2 :Indian oil industry structure

Indian oil & gas industry is mainly divided into upstream (includes exploration & production)
and downstream (includes refining & marketing and distribution) segments. Refineries distill
crude oil and process it into fuel and lubricating products, the important among these being
petrol, diesel, LPG, kerosene, ATF and lubricating oil.
The upstream companies in India include ONGC, Oil India, Essar Oil, Hindustan Oil
Exploration, Selan Exploration Technology and Cairn Energy. The downstream segment
involves refining of crude oil (distillation, conversion and treating) into final products and
marketing of these products.
Those entities involved only in refining and not marketing are known as standalone
refineries. Chennai Petroleum, Bongaigaon Refinery and Numaligarh Refinery are
examples of this category.
Companies which both refine and market are known as integrated refineries --
Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum, Mangalore Refinery
and Kochi Refinery.
Reliance Industries could be broadly put in a third category, as the company is
present along all points of the value chain from oil exploration to polyester [the
main textile derivative of petroleum] to fabrics.
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There are standalone marketing companies too such as Indo Burma Petroleum
Company.
Some companies are also involved in production and marketing of lubricants,
petroleum coke, paraffin wax, bitumen and asphalt. For instance, Castrol India,
Bharat Shell and Goa Carbon among others.
In the past few years the Indian petroleum refining industry has witnessed
consolidation, with oil marketers taking over standalone refineries.

ONGC bought out the total share of the initial promoters, A V Birla Group, in Mangalore
Refineries (MRPL) and infused further equity capital, in the process making MRPL its
subsidiary. IBP Co also got merged with its parent company Indian Oil Corporation. Also,
Kochi Refinery was merged into its parent Bharat Petroleum.

UPSTREAM

CRUDE OI L & PETROLEUM PRODUCTS

India has 26 sedimentary basins spanning 3.14 million sq. km of which 1.35 million sq. km.
is deep water(beyond 200m isobath). A substantial part is un explored or poorly explored,
with a well density of less than 1 well per 250 sq km.

Till late eighties the entire upstream activity was concentrated in ONGC & OIL - the two
National Oil Companies(NOCs) , and the acreage was given on a nomination basis. In
1990s some unexplored as well as discovered areas were opened for international
competitive bidding, and PSC regime was experimented with. This led to pronouncement of
New Exploration & Licensing Policy(NELP) in 1998. Since then the practice of nomination
has been stopped, and the entire acreage is given through competitive bidding
under NELP rounds to both public and private sector upstream oil companies.

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Figure 3: Reserves of Crude Oil in India

NATURAL GAS
The production of natural gas was almost negligible at the time of independence. However,
in the late 1970s with the development of the Bombay High fields, there was a substantial
increase in the production of natural gas. The natural gas production experienced further
boost in the late 1980s when the South Bassein field in the Western offshore was brought to
production. Presently, the production of natural gas has surged to around 87 mn standard
cubic meters per day (MMSCMD). Out of this production, around 74 MMSCMD is
available for sale to various consumers after internal consumption, extraction of LPG and
unavoidable flaring. Much of Indias gas reserves are located in the Western offshore area.
Apart from this, the onshore fields in Assam, Andhra Pradesh and Gujarat states are other
major producers of gas. The dominant players in the natural gas segment are ONGC and
OIL. In addition, private parties from some of the gas fields are producing gas under the
production sharing contract.

DOWNSTREAM

REFI NI NG
The Indian refining industry has come a long way since the Mumbai refinery of HPCL was
set up post independence. Over the years, the PSU refineries have gradually increased their
capacities at existing locations or constructed Greenfield refineries at new locations. Today
there are around 20 refineries in the country with an existing refining capacity of about 178
mn tonnes per annum (mtpa). Moreover, even large expansions are being planned by Essar
and PSUs like IOL, BPCL and HPCL. The major expansion plans include the Vadinar
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refinery of Essar, the IOC refinery at Paradeep and the planned refineries at Bina in Madhya
Pradesh by BPCL and Bhatinda in Punjab by HPCL-Mittal Energy. This coupled with lower
capital costs as compared to other Asian countries are expected to enable India to emerge as
the global hub for oil refining. Besides, the ability of the latest refineries to process heavy,
low-grade crude as well as Indias closeness to other oil-producing regions of the Middle
East are expected to further help in this regard.

MARKETI NG

In India, PSUs such as IOC, BPCL and HPCL are involved in marketing of refined oil.
Decontrolling of the marketing sector from April 1, 2002 facilitated the entry of new private
sector players such as Essar Oil, RIL and Royal Dutch Shell Plc. Public Sector Oil
Marketing Companies like IOC, BPCL, and HPCL are also engaged in marketing of
subsidized LPG in the country under the Public Distribution System (PDS).
. The supply of oil and gas is carried out through railways (40%), pipelines (30%), coastal
tankers (12%) and road (18%). Requirements of the industrial units are met through direct
supplies. Further, a National Gas Grid is also planned.

DI STI BUTI ON
Distribution of petroleum products and natural gas in India is carried through a vast network
of pipeline infrastructure. By FY11, India had a network of 25 product pipelines with a
length of 10,300 km and a capacity to carry 63.66 MMTPA of petroleum products and 3
LPG pipelines with a length of 2,124 km and capacity to carry 4.53 MMTPA of products in
place. Moreover, there are 4 crude oil pipelines of 5,559 km with a capacity to transport
45.88 MMTPA.

1.2 Key Regulatory Policies
Over the years various policies have been implemented by the Government to regulate and
develop the oil and gas sector. The Petroleum Act to control issues relating to import,
transport, storage, production, refining and blending of petroleum was already in place since
1934. Further, the Oil Fields (Regulation and Development) Act, 1948 and the Petroleum and
Natural Gas Rules, 1959 provided regulatory framework for domestic exploration and
production of Oil & Gas. The Directorate General of Hydrocarbons (DGH) was set up under
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the administrative control of the Ministry of Oil and Natural Gas in April 1993, as an
upstream advisory and technical regulatory body to promote effective management of
domestic oil and gas resources keeping in view the environmental safety, technological and
economic aspects of upstream activities. In September FY06, the DGH was designated as an
authority or agency to exercise statutory powers to carry out its functions under the Oil Fields
(Regulation and Development) Act, 1948.

1. FRAMEWORK
Upstream:
Ministry of Petroleum and Natural Gas (E&P)
Directorate General of Hydrocarbons (DGH)
New Exploration Licensing Policy (NELP)
Production Sharing Contract (PSC)
Downstream: (Refining and Marketing)
Ministry of Petroleum and Natural Gas (Pipelines)
Petroleum and Natural Gas Regulatory Board
Downstream: (Distribution)
Pipeline policy Petroleum and Natural Gas Regulatory Board
FDI Policy
Foreign Investment Promotion Board
Foreign exchange Management act (FEMA)

2. REGULATORY ISSUES

A. NELP Policy
I. Fiscal Stability.
II. International price for oil discoveries.
III. Revised PSC.

B. PSC Provisions
I. Freedom to market gas in the domestic market.
II. Oil and gas prices to be market driven.
III. Government take of royalty, cost petroleum, profit petroleum.
EFFECTS:
Not adhering to these policies will disincentives competitive markets and may lead to
destabilization of the initiatives taken up
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This could have a cascading impact on harnessing domestic energy, supply security,
economic growth.

C. Pipeline Policy
I. Initiated in 2006 to create a framework for enhancing investment in
pipelines.
II. With the enactment of the Board, the pipeline activity will be governed by
the Board.

D. Policy guidelines in addition to the provisions of the Act
I. The policy lays down additional conditions for grant of authorization to
entities which include design capacity of pipelines open access to third
party, transportation tariffs.
REASONS FOR STEPS C AND D:
Pipeline is an inevitable infrastructure
There is a need to promote investment in this sector
Free competition needs to be fostered
The regulatory framework must ensure a stable tariff framework that provides a fair
RoI to investors.
Regulator needs to balance Monopoly V/s RoI.
Must enable unbundling the markets as they develop.

E. Petroleum and Natural Gas Regulatory Board
I. Establishment of the Board to regulate the refining, processing, storage,
transportation, distribution, marketing and sale of petroleum products and
natural gas.
II. Objectives are to ensure uninterrupted and adequate supplies and to
promote competitive markets.

F. Functions of the Board
I. Registration of entities to market petroleum products, natural gas and
establish and operate Liquefied Natural Gas (LNG) terminals.
II. Authorize entities to lay, build, operate or expand common carrier /
contract carries, City Gas Distribution (CGD).
III. Declare pipelines as a common carrier or contract carrier.
IV. To decide the period of exclusivity for CGD.
V. Decide on the transportation tariffs.

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REASONS OF POINTS E AND F
Need to create transparency
Ensure markets are made competitive and at the same time protect consumer interest
by fostering competition
Ensure that investments do not turn in fructuous.

3. FOREIGN INVESTMENT POLICY- OIL & GAS SECTOR

Fig4:Foreign investment policy
Source: Department of Industrial Policy & Promotion

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1.3Company Profile

Oil India Limited is a premier Indian National company under the administrative control
of Ministry of Petroleum & Natural Gas, Government of India, engaged in the business of

Exploration, development, and production of crude oil and natural gas
Transportation of crude oil and
Production of LPG.

In a recent CRISIL-India Today survey, OIL was adjudged as one of the five best major
PSUs and one of three best energy sector PSUs in the country.

BACKGROUND

The story of Oil India Limited (OIL) traces and symbolises the development and growth of
the Indian petroleum industry. From the discovery of crude oil in the far east of India at
Digboi, Assam in 1889 to its present status as a fully integrated upstream petroleum
company, OIL has come far,
crossing many milestones.

On February 18, 1959, Oil India
Private Limited was incorporated to
expand and develop the newly
discovered oil fields of Naharkatiya
and Moran in the Indian North East.
In 1961, it became a joint venture
company between the Indian
Government and Burmah Oil
Company Limited, UK.

In 1981, OIL became a wholly-owned Government of India enterprise. Today, OIL is a
premier Indian National Oil Company engaged in the business of exploration, development
and production of crude oil and natural gas, transportation of crude oil and production of
LPG. OIL also provides various E&P related services and holds 26% equity in Numaligarh
Refinery Limited.
The Authorized share capital of the Company is Rs. 2000 Crores. The Issued, Subscribed
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and Paid share capital of the company is Rs. 601.14 Crores. At present, The Government of
India, the Promoter of the Company is holding 68.43% of the total Issued & Paid-up Capital
of the Company. The balance 31.57% of the Equity capital is held by Public and others
including Bodies Corporate, Mutual Funds, Banks, FIIs, Resident Individuals etc.

OIL has over 1 lakh
sq km of PEL/ML
areas for its
exploration and
production activities,
most of it in the
Indian North East,
which accounts for its
entire crude oil
production and
majority of gas
production. Rajasthan
is the other producing
area of OIL, contributing 10 per cent of its total gas production.

Additionally, OILs exploration activities are spread over onshore areas of Ganga Valley and
Mahanadi. OIL also has participating interest in NELP exploration blocks in Mahanadi
Offshore, Mumbai Deepwater, Krishna Godavari Deepwater, etc. as well as various overseas
projects in Libya, Gabon, Iran, Nigeria and Sudan.

Fig5:Revenues from operations
Source: Crisil Research

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1.4 Major Players:
Oil India Limited has three main functions in oil industry that is Exploration, Production
and Transportation. Hence only one company is the major competitor of OIL that is Oil and
Natural Gas Corporation Limited (ONGC).
Oil and Natural Gas Corporation Limited (ONGC) is an Indian state-owned oil and gas
company headquartered in New Delhi, India. It is one of the largest Asia-based oil and gas
exploration and production companies, and produces around 77% of India's total crude oil
production (and around 30% of total demand) and around 81% of natural gas production.
ONGC is one of the largest publicly traded companies by market capitalization in India and
the largest India-based company measured by profits.
If we look at the total assets and sales point of view ONGC is much larger to OIL but both
these PSUs have worked together as joint operators in many oil projects which are successful.

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CHAPTER 2: RESEARCH OBJECTIVE

To undertake a detailed study of the financial performance of the company and compare
the same with the industry as well as competitor.
To understand the management of surplus funds of the company on the basis of DPE
guidelines and the companys investment policies and suggest improvements.
To analyze the long term sources of funds and undertake a detailed study.
To study the affect of under recoveries on the company cash flows.

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CHAPTER 3: RESEARCH METHODOLOGY

3.1 Data Collection
SECONDARY SOURCES:
Annual Reports of OIL for financial performance and the Financial Statement,
Records of the company.
DPE guidelines regulating the .activities of PSUs
RBI guidelines on ECB
Return on Investment instruments from internet
Books on Finance

PRIMARY SOURCES:
Discussion with management and briefing by the members of the department. While
collecting the primary data I have discussed with the management about the companys
financial position in the past years and how the surplus funds are being utilized. I had a
meeting with the Finance Head, senior officer of F&A, Deputy Treasury Manager and
Officials in Business Development Department.
3.2 Research Design
I have carried out the Ratio Analysis to evaluate the financial performance of the
company in the past few years.
I have worked on Treasury Management to analyze the utilization of the surplus fund of
the Company. The returns on various instruments have been calculated from the
company data of investments in the past two years and through the data available on
various internet sites to find the average return on the instruments for the past 5 years.

Linear programming and Solver in excel has been used to design the appropriate
portfolio for investments.

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CHAPTER 4: OIL INDIA - FINANCIAL ANALYSIS

A few ratios have been calculated to analyze the financial performance of the company over a
period of 5 years from 2008 till 2012. These are compared to the ONGC to judge how well
the company has been performing.

1. ACTIVITY RATIOS:-
Table1 :WORKING CAPITAL TURNOVER RATIO:-
WORKING CAPITAL
TURNOVER RATIO (OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Sales 9058.43 8113.22 7748.56 7139.71 5865.39
Current Assets 15948.5 12993.95 9962.61 7328.21 5571.08
Current Liability 3479.44 2099.59 1804.53 1463.67 1101.6
OIL 0.73 0.74 0.95 1.22 1.31

WORKING CAPITAL
TURNOVER
RATIO (ONGC) 2011-12 2010-11 2009-10 2008-09 2007-08
Sales 76887.05 68648.8 60204.8 63968.1 60137
Current Assets 36584.4 58643.6 53771.3 54599.9 49833.1
Current Liability 27940.4 23747.3 19499.9 21105 17608.2
ONGC 8.89 1.97 1.76 1.91 1.87

A company uses working capital (current assets - current liabilities) to fund operations and
purchase inventory. These operations and inventory are then converted into sales revenue for
the company. The working capital turnover ratio is used to analyze the relationship between
the money used to fund operations and the sales generated from these operations. In a general
sense, the higher the working capital turnover, the better because it means that the company is
generating a lot of sales compared to the money it uses to fund the sales. A low ratio indicates
inefficient utilization of working capital. The ratio should be carefully interpreted because a
very high ratio may be a sign of insufficient working capital. The working capital for ONGC
is consistently better than OIL.

Table 2:FIXED ASSET TURNOVER RATIO
FIXED ASSETS TURNOVER
RATIO (OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Sales 9058.43 8113.22 7748.56 7139.71 5865.39
Net Fixed Assets 4484.74 4248.29 4018.09 3655.23 2970.68
OIL 2.02 1.91 1.93 1.95 1.97

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FIXED ASSETS TURNOVER
RATIO (ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Sales 76887.05 68648.8 60204.8 63968.1 60137
Net Fixed Assets 86355 32671.1 25889.8 22110.8 17592.4
ONGC 0.89 2.10 2.33 2.89 3.42

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-
asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A
higher fixed-asset turnover ratio shows that the company has been more effective in using the
investment in fixed assets to generate revenues. Fixed asset turnover ratio of OIL is 2.02 in
2011-12, which is higher than ONGC.

Table 3:CAPITAL TURNOVER RATIO
CAPITAL TURNOVER
RATIO(OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Sales 9058.43 8113.22 7748.56 7139.71 5865.39
Capital Employed 16961.85 15727.7 13019.1 8919.2 7393.2
OIL 0.53 0.52 0.60 0.80 0.79

CAPITAL TURNOVER
RATIO(ONGC) 2011-12 2010-11 2009-10
2008-
09 2007-08
Sales 76887.05 68648.8 60204.8 63968.1 60137
ONGC 0.85 0.86 0.82 1.00 0.99

Capital turnover is used to calculate the rate of return on common equity, and is a measure of
how well a company uses its stockholders' equity to generate revenue. The higher the ratio is,
the more efficiently a company is using its capital also called equity turnover. The ratio
indicates how much a company could grow its current capital investment level.

Table 4:ASSET TURNOVER RATIO:
ASSETS TURNOVER
RATIO(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Sales 9058.43 8113.22 7748.56 7139.71 5865.39
Total Assets 22681.3 21231.12 14824.07 10288.75 8974.51
OIL 0.40 0.38 0.52 0.69 0.65

ASSETS TURNOVER
RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09 2007-08
Sales 76887.05 68648.8 60204.8 63968.1 60137
Total Assets 171727.6 125019 112606.4 102573.3 90470.9
ONGC 0.45 0.55 0.53 0.62 0.66

The amount of sales generated for every dollar's worth of assets. Asset turnover measures a
firm's efficiency at using its assets in generating sales or revenue - the higher the number the
better. ONGC ratio is slightly higher than OIL. It also indicates pricing strategy: companies
24

with low profit margins tend to have high asset turnover, while those with high profit margins
have low asset turnover.

Table 5: DEBTOR TURNOVER RATIO:
DEBTORS TURNOVER
RATIO(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Credit Sales 9058.43 8113.22 7748.56 7139.71 5865.39
Avg Debtors 650.64 454.57 532.2 507.86 509.84
OIL 13.92 17.85 14.56 14.06 11.50

AVERAGE COLLECTION
PERIOD(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Days 360 360 360 360 360
Debtor Turnover Ratio 13.92 17.85 14.56 14.06 11.50
OIL 25.86 20.17 24.73 25.60 31.30

DEBTORS TURNOVER
RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Credit Sales 76887.05 68648.8 60204.8 63968.1 60137
Avg Debtors 5007.8 3452.2 3571.2 4222 2207.2
ONGC 15.35 19.89 16.86 15.15 27.25

AVERAGE COLLECTION
PERIOD(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Days 360 360 360 360 360
Debtor Turnover Ratio 15.35 19.89 16.86 15.15 27.25
ONGC 23.45 18.10 21.35 23.76 13.21

Debtors turnover ratio plays a very important part in oil industry because all the sales done is
a credit sales. Hence the efficiency of management of credit is very important. More the ratio
signifies better efficiency. When we compare OIL with ONGC, the ratio is less which means
the efficiency in management of funds is not very good. Faster collection of funds is
suggested to the company.

Table 6:INVENTORY TURNOVER RATIO:
INVENTORY TURNOVER
RATIO(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Net Sales 9058.43 8113.22 7748.56 7139.71 5865.39
Average Inventory 516.84 477.17 477.48 475.94 429.45
OIL 17.53 17.00 16.23 15.00 13.66

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HOLDING PERIOD(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Days 360 360 360 360 360
Inventory Turnover Ratio 17.53 17 16.23 15 13.66
OIL 20.54 21.18 22.18 24.00 26.35

INVENTORY TURNOVER
RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Net Sales 76887.05 68648.8 60204.8 63968.1 60137
Average Inventory 4642.2 4398.7 4369.6 3770.6 1750
ONGC 16.56 15.61 13.78 16.96 34.36

HOLDING PERIOD(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Days 360 360 360 360 360
Inventory Turnover Ratio 16.56 13.61 13.78 16.96 34.36
ONGC 21.74 26.45 26.12 21.23 10.48

The inventory turnover ratio measures the rate at which a company purchases and
resells products to customers. In general, low inventory turnover ratios indicate a
company is carrying too much inventory, which could suggest poor inventory
management or low sales. Excess inventory ties up a company's cash and makes the
company vulnerable to drops in market prices. Conversely, high inventory turnover ratios
may indicate a company is enjoying strong sales or practicing just-in-time inventory
methods. High inventory turnover also means a company is replenishing cash quickly and
has a lower risk of becoming stuck with obsolete inventory.OIL inventory ratio is higher
than ONGC.

2. PROFITABLITY RATIO

Table 7 :GROSS PROFIT RATIO
GROSS PROFIT RATIO(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Gross Profit 5101.86 4313.2 3895.09 3386.96 2713.4
Net Sales 9058.43 8113.22 7748.56 7139.71 5865.39
OIL 56.32 53.16 50.27 47.44 46.26

GROSS PROFIT
RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Gross Profit 36642.5 27616.37 24983.9 23980.7 25234.6
Net Sales 76887.05 68648.8 60204.8 63968.1 60137
ONGC 47.66 40.23 41.50 37.49 41.96

26

Gross profit is very important for any business. It should be sufficient to cover all expenses and
provide for profit. There is no norm or standard to interpret gross profit ratio (GP ratio).
Generally, a higher ratio is considered better. The ratio can be used to test the business
condition by comparing it with past years ratio .A consistent improvement in gross profit ratio
over the past years is the indication of continuous improvement.

Table 8:NET PROFIT RATIO
NET PROFIT RATIO(OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Net Profit 3446.92 2887.73 2611 2162 1789
Net Sales 9058.43 8113.22 7748.56 7139.71 5865.39
OIL 38.05 35.59 33.70 30.28 30.50

NET PROFIT RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09 2007-08
Net Profit 25122.9 18924 16767.5 16126.4 16701.6
Net Sales 76887.05 68648.8 60204.8 63968.1 60137
ONGC 32.68 27.57 27.85 25.21 27.77

It shows the overall measure of the firms ability to turn each rupee sales into net profit. The
ratio of OIL is better as compared to ONGC which shows that the company is performing well
and is in an advantageous position to survive in the face of falling selling prices, rising cost of
production or declining demand..

Table 9;RETURN ON EQUITY RATIO
RETURN ON EQUITY
RATIO(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Net Profit 3446.92 2887.73 2611 2162 1789
Shareholders Equity 17721.3 15601.87 13763.78 9331.01 7932.97
OIL 0.19 0.19 0.19 0.23 0.23

RETURN ON EQUITY
RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Net Profit 25122.9 18924 16767.5 16126.4 16701.6
Shareholders Equity 112956.7 97504.4 87282.6 78735.4 70617.3
ONGC 0.22 0.19 0.19 0.20 0.24

The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested. ROE is more than a measure of profit; it's a measure of
efficiency. A rising ROE suggests that a company is increasing its ability to
generate profit without needing as much capital. It also indicates how well a company's
management is deploying the shareholders' capital. In other words, the higher ROE considered
better for the company. Falling ROE is usually a problem.

27

Table 10 :RETURN ON INVESTMENT RATIO
RETURN ON INVESTMENT
RATIO(OIL) 2011-12 2010-11 2009-10 2008-09
2007-
08
Net Profit 3446.92 2887.73 2611 2162 1789
OIL 0.20 0.18 0.20 0.24 0.24

RETURN ON INVESTMENT
RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09
2007-
08
Net Profit 25122.9 18924 16767.5 16126.4 16701.6
ONGC 0.28 0.24 0.23 0.25 0.28

This ratio indicates the efficiency and profitability of a company's capital investments. To
calculate ROI, we determine what percentage of a company's invested capital it made in profit
before tax before borrowing costs. A high ROI indicates that a larger part of profits can be
invested back into the company for the benefit of shareholders. The ratio of OIL is slightly less
than the ONGC which reflects that the company is getting less return on its investment.

3. LIQUIDITY RATIO

Table 11 :CURRENT RATIO
CURRENT RATIO(OIL) 2011-12 2010-11 2009-10
2008-
09 2007-08
Current Assets 15948.5 14801.05 12269.54 8355.35 6176.56
Current Liabilities 3479.44 3321.61 3269.29 3091.36 1754.06
OIL 4.58 4.46 3.75 2.70 3.52

CURRENT RATIO(ONGC) 2011-12 2010-11
2009-
10
2008-
09 2007-08
Current Assets 36584.4 58643.6 53771.3 54599.9 49833.1
Current Liabilities 27940.4 23747.3 19499.9 21105 17608.2
ONGC 1.31 2.47 2.76 2.59 2.83

Current ratio measures the firm short-term solvency; it shows the margin of safety for
creditors. It indicates the availability of current assets in rupees for every one rupee of
current liability. Conventional rule says that this ratio should be 2, ONGC is 1.31 and
OILs ratio is 4.58 . This is too high and shows that the company is not investing its
funds in appropriate channels.

28

Table 12 :QUICK RATIO
QUICK RATIO(OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Current Assets 15948.5 14801.05 12269.54 8355.35 6176.56
Inventories 533.32 500.36 458.38 500.99 450.89
OIL 4.43 4.31 3.61 2.54 3.26

QUICK RATIO(ONGC) 2011-12 2010-11
2009-
10 2008-09 2007-08
Current Assets 36584.4 58643.6 53771.3 54599.9 49833.1
Inventories 5165.4 4118.9 4678.5 4060.6 3480.6
ONGC 1.12 2.30 2.52 2.39 2.63

Quick ratio is a more penetrating test for liquidity. Inventories may not be easily
converted into cash. Hence they are removed from acid-test ratio. Generally a figure
close to 1 is considered to be sufficiently liquid and ONGC is 1.12. Here we can see that
OIL current ratio is around 4.43 which show that company is highly liquid. Too high
quick ratio may imply that company is underutilizing its funds. This is a trade-off
between being more cautious and being impulsive.

Table 13:CASH RATIO
CASH RATIO(OIL) 2011-12 2010-11
2009-
10 2008-09 2007-08
Cash & Marketable Securities 10935 11767 8543 6070 4281
OIL 3.14 3.54 2.61 1.96 2.44

CASH RATIO(ONGC) 2011-12 2010-11
2009-
10 2008-09 2007-08
Cash & Marketable Securities 20124.5 14481 10827.9 12140.5 16014.3
ONGC 0.72 0.61 0.56 0.58 0.91

Most liquid asset in balance sheet is cash. There is no benchmark available for this ratio,
but if we compare the ratio of ONGC with OIL, ratio of OIL is higher. This shows that the
company maintains good bank balance to fulfill its current obligations. But, at the same
time the company can be said to have cash more than required for current operation which
would carry a high opportunity cost,

29

4. SOLVENCY RATIO

Table 14: DEBT ASSET RATIO
DEBT ASSET RATIO(OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Debt 10.13 1026.79 37.5 56.45 174.89
Total Assets 22681.3 17942.19 14824.08 10288.75 8974.51
OIL 0.00045 0.05723 0.00253 0.00549 0.01949

DEBT ASSET RATIO(ONGC) 2011-12 2010-11 2009-10 2008-09 2007-08
Debt 4500 - 4.97 26.73 36.94
Total Assets 171727.6 125019 112606.4 102573.3 90470.9
ONGC 0.026204 0 .000044 0.00026 0.00041

The higher the debt ratio, the greater risk will be associated with the firm's operation. The
debt ratio shows the proportion of a company's assets which are financed through debt. If the
ratio is less than 0.5, most of the company's assets are financed through equity. Debt ratio is
very less than 0.5, which shows that the assets of OIL are financed through equity. Since,
OIL is a cash rich and thus less levered company.

Table 15 :DEBT EQUITY RATIO
DEBT EQUITY RATIO(OIL) 2011-12 2010-11 2009-10 2008-09 2007-08
Debt 10.13 1026.79 37.5 56.45 174.89
Equity 17721.3 15601.87 13763.79 9331.02 7932.97
OIL 0.001 0.066 0.003 0.006 0.022

DEBT EQUITY
RATIO(ONGC) 2011-12 2010-11
2009-
10 2008-09 2007-08
Debt 4500 4.97 26.73 36.94
Equity 112956.7 97504.4 87282.6 78735.4 70617.3
ONGC 0.040 0.000 0.000 0.000 0.001

It is a measure of a company's financial leverage which indicates what proportion of equity
and debt the company is using to finance its assets. The ratio of both OIL and ONGC are very
low. Debt comes with tax shield and a very low Debt Equity ratio is not good for the
company as it increase our tax expenditure.

Table 16:INTEREST COVERAGE RATIO
INTEREST COVERAGE
RATIO(OIL) 2011-12 2010-11
2009-
10 2008-09 2007-08
EBIT 5111.23 4327.12 3898.74 3395.71 2747.76
Interest 9.37 13.92 3.65 8.74 34.36
OIL 545.49 310.86 1068.15 388.53 79.97

30

INTEREST COVERAGE
RATIO(ONGC) 2011-12 2010-11
2009-
10 2008-09 2007-08
EBIT 36642.5 27616.3
24983.
8 23895.4 25234.7
Interest 34.8 25.1 14.4 118.9 58.9
ONGC 1052.95 1100.25
1734.9
9 200.97 428.43

The interest coverage ratio measures the company's ability to make interest payments. The
lower the ratio is, the more a company is burdened by its debt expense. The interest coverage
ratio of both the companies are very high.

31

CHAPTER 5: TREASURY MANAGEMENT (TM)

Introduction

TM is the area, which was linked with the accounting related activities till some years
back. But now the focus has been completely shifted from accounting activities to
decision-making activities.
TM is fast emerging as a specialization in many companies and the accounting function
is being de-linked from the finance function. Highly focused knowledge of capital
markets, money markets, instruments and investment avenues, treasury and risk
management and related areas, has become essential for managing the treasury, profit
centre.

Meaning Of Treasury Management
TM generally refers to the set of policies, strategies and transactions that a company
adopts and implements to raise finance at acceptable cost and risk, to manage its cash
resources, and to reduce interest rate, foreign exchange and commodity price risks, as
well as in the conduct of its relationships with its financial stakeholders (mainly banks).
So, in simple terms TM is management of an organizations total wealth (Resources)
management, from the viewpoint of liquidity, safety and returns in tune with its mission/
business objectives and in consonance with a regulatory framework to achieve the
interest of all its stakeholders. It includes management of cash flows, banking, money
market, and capital market transactions, the effective control of the risks associated with
those activities and the pursuit of optimum performance consistent with those risks.
5.1 Investments
5.1.1 Study Of Department Of Public Enterprise (Dpe) Guidelines

DPE has formulated different policies for PUBLIC SECTOR ENTERPRISES (PSEs)
regarding investment of short-term surplus. The guidelines are issued dated 14
th

December, 1994 by DPE and are reviewed from time to time dated 1
st
November, 1995,
11
th
March, 1996,2
nd
July, 1996,14
th
February, 1997, 25
th
November, 1999, 29
th

September, 2005, 31
st
August, 2007, 4
th
December, 2007, 11
th
April, 2008, 15
th
April,
2008.

32

PRINCIPLES CONCERNING INVESTMENTS
The PSEs should observe the following guidelines in regard to investment of surplus
funds:
Investments should be made only in instruments with maximum safety.
There should be no element of speculation on the yield obtaining from the investment.
There should be a proper commercial appreciation before any investment decision of
surplus funds is taken. The surplus availability may be worked out for a period of
minimum one year at any point of time.
Funds should not be invested by the PSE at a particular rate of interest for a particular
period of time while the PSE is resorting to borrowing at an equal or higher rate of
interest for its requirements for the same period of time.
Investment decision should be based on sound commercial judgment. The availability
should be worked out based on cash flow estimates taking into account working capital
requirements, replacement of assets and other foreseeable demands.
The remaining period of maturity of any instrument of investment should not exceed one
year from the date of investment where the investment is made in an instrument already
issued. Where investment is made in an instrument newly issued, the final maturity of the
instrument should not exceed one year. However, only in the case of term deposits with
banks, it can be up to three years.

ELEGIBLE INVESTMENTS AVENUES
Investments may be made in one or more of the following instruments, subject to
principles outlined in the previous paragraph:

33

4 Inter-corporate
deposits to Central
PSEs
1 year Investment
Grade
N/A
5 Certificates of
deposits
1 year Investment
Grade
N/A
6 Public Sector
Mutual Funds
1 year N/A Investments in schemes of
such mutual funds, having up
to 30%
equity investments, should not
exceed 30% of the available
surplus funds with the
Company
*Under current DPE guidelines direct investment in equity is not permitted.
*PSEs are also not allowed to directly invest in the call money market.
Table 17: DPE GUIDELINES
S No PERMISSIBLE
INSTRUMENTS
MAXIMUM
TENOR/RESIDUAL
MATURITY
RATING OTHER CRITERIA
1 Fixed Deposits
with banks
3 years N/A 1. Any Scheduled Commercial
Bank (Banks incorporated
in India)
2. Net Worth of minimum
100 Crores
3. Meets capital adequacy
requirements as prescribed
by RBI
4. Atleast 60 % investment in
Scheduled Public Sector
Banks
2 Government
Securities and
Treasury Bills
3 year Sovereign N/A
3 Commercial
Paper issued by
Central PSEs
1 year Investment
Grade
N/A

34

5.1.2 Investment Of Surplus Funds At Oil

OIL is presently investing its surplus with

empanelled public sector (PSU) banks and Private banks
Inter Corporate Deposits (ICD) with Central Public Sector Enterprises
(CPSEs)
with a maturity period of one year as per DPE
investments in UTI, SBI and IDBI Mutual Funds for period less than one
year. To avail the benefit of higher post-tax yields on Tax Free Bonds.
recently started investment of its surplus fund in AAA rated Tax Free
Bonds, after obtaining Board approval.

1. Term Deposits:

These are deposit held at a financial institution that has fixed term. They are generally of
short-term with maturity period ranging anywhere from a month to few years. When a
term deposit is taken, the lender understands that the money can only be withdrawn after
the term has ended or by giving a predetermined number of days notice.

Benefits of Term Deposits:
Term deposits are extremely safe investments and are therefore very appealing to
conservative, low risk class investors.
By having money tied up to Term Deposits, a higher rate of return is earned as compared
to Demand Deposits.

Limitation of Term Deposits:
The money invested in a Term Deposit freezes for the term of the deposit.
If in case money is withdrawn before term, penalty needs to be paid on doing so.
35

It has an opportunity cost of capital i.e. the cost to loose out on investment on an
alternate investment opportunity.

2. Inter Corporate Deposits (ICD):

Inter-Corporate Deposit is essentially a short term financial asset provided by one
corporate with surplus funds to another corporate in need of funds. Inter-corporate
deposits are deposits made by one company with another company, and usually carry a
term of six months.
Types:
Fixed rate ICD with a Put/Call option: the quantum/ rates/ term to maturity of the ICD
are negotiated by the two parties at the beginning of the contract and remains same for
the entire term of the ICD. As per the RBI guidelines the minimum period of the ICD is
7 days and can be extended to period of 1 year. The rates are generally linked to
Interbank Call Money Market Rates.
Floating rate ICD with a Put/Call option: Corporate interested in using the daily
volatility of the call money market are offered Floating Rate ICD which may be
benchmarked/ linked to either NSE Overnight Call/ Reuters Overnight Call rates. The
corporate are also given Put/ Call option after 7 days for managing their funds in the
event of uncertainty of availability of idle funds.
There are three types of floating inter-corporate deposits:
a) Three month deposits: Three month deposits are the most popular type of inter-
corporate deposits. These deposits are generally considered by the borrowers to solve
problems of short-term capital inadequacy. This type of short-term cash problem may
develop due to various issues, including tax payment, excessive raw material import,
breakdown in production, payment of dividends, delay in collection, and excessive
expenditure of capital. The annual rate of interest given for three month deposit is 12%.
b) Six month deposits: The six month deposits are usually made with first class borrowers,
and the term for such deposits is six months. The annual interest rate assigned for this
type of deposit is 15%.
c) Call deposit: The concept of call deposit is different from the previous two deposits. On
giving a one day notice, this deposit can be withdrawn by the lender. The annual interest
rate on call deposits is around 10%.

Benefits:
Interest rates are higher than bank rates
36

The risk premium is added in ICD.
Transactions are free from bureaucratic and legal hassles.
Unsecured loans but may be collateralized sometimes for weaker companies to get
benefit of credit enhancement.
Features:
Issuer: Corporate having short term funds lend to corporate in need of funds
Rating: ICD is a non-public instrument. Hence, it is not rated.
Coupon terms: The interest rate is normally fixed and payable on maturity. The range of
interest varies, depending upon the quantum, tenor, and the credit rating of the borrower.
Day count convention for interest payment: Interest to be calculated on an actual/365-day
year basis
Maturity: 90-180 days
Market Participants: Cash rich corporate, Public Sector Undertakings, Non Banking
Finance Companies and Financial Institutions. Brokers play an important role in
procuring/placing of funds.
Minimum denomination and transaction size: no fixed denomination or transaction size

3. Mutual Funds:
A mutual fund is a form of collective investment that pools money from investors and
invests the money in stocks, bonds, short-term money-market instruments, and/or other
securities.

Types of Mutual Funds:
Open Ended Mutual Funds: Open-ended funds can have an unlimited number of
investors or money in the fund. These funds are always open to accept money from
investors and to return the money back to investors. This gives the investor the flexibility
to enter into the scheme or to exit from the scheme or to exit from the scheme as and
when required as per their needs. These funds do not have fixed maturity period. Key
feature of open ended funds is liquidity.
Close Ended Mutual Funds: A close-ended Mutual fund has a stipulated maturity
period e.g. 5-7 years. The fund is open for subscription only during a specified period at
the time of launch of the scheme. Investors can invest in the scheme at the time of the
37

initial public issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where the units are listed. In order to provide an exit route to the investors,
some close-ended funds give an option of selling back the units to the mutual fund
through periodic repurchase at NAV related prices.

Benefits:
Affordability: A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.
depending upon the investment objective of the scheme
Diversification: It simply means that you must spread your investment across different
securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and
different sectors This kind of a diversification may add to the stability of your returns
Variety: Mutual funds offer a tremendous variety of schemes. This variety is beneficial
in two ways: first, it offers different types of schemes to investors with different needs
and risk appetites; secondly, it offers an opportunity to an investor to invest sums across
a variety of schemes, both debt and equity.
Tax Benefits: More tax efficient as less as lower Dividend distribution tax compared to
tax on bank deposits.
Flexibility: Mutual Funds offering multiple schemes allow investors to switch easily
between various schemes.

Limitations of Mutual Funds:
Fluctuating Returns: Mutual funds are like many other investments without a
guaranteed return. There is always the possibility that the value of your mutual fund will
depreciate.
Costs: Mutual funds provide investors with professional management; however, it comes
at a cost. Funds will typically have a range of different fees that reduce the overall
payout.

4. Tax Free Bonds:
Tax free bonds have emerged as highly popular investment option among investors due
to the taxation benefit that they offer. These bonds, generally issued by government
backed entities, are exempt from taxation on the interest income received from such
instruments under the Income Tax Act, 1961. Tax-exempt bonds usually pay
38

lower coupons than corporate bonds as they enjoy a better credit rating and the interest
received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond.
Benefits:
Tax-Free Income
Low risk of default, since companies have a better credit rating

5.1.3 Investment Policy Procedure At Oil India Limited

Investment Policy:
An investment policy is a statement about the surplus funds for which Treasury manager
takes decisions on behalf of the company stake holders, how funds are to be managed
and what controls should be placed on their management. It is the guidelines by which
company expects their goals and objectives for a particular financial asset to be met.

Investment Policy Procedure at Oil India Limited:

Major Policy Decisions regarding investment of surplus funds are taken according to the
DPE (Department of Public Enterprise) guidelines.
The investment policy is made by a third party.
The Board Approves Investment Policy.
Specific Approval from the Board for any changes is taken for changes in investment
amounts and banks .This takes place annually.

39

Fig 6: Flowchart Depicting Investment Policy Framework At Oil India Limited

Basis for Investment Policy and Risk Based Study of Credit assessment of Banks,
CPSEs, and SEBI regulated Public Sector Mutual Funds:

Though the investments in term deposits with empanelled PSU Banks, private banks,
inter corporate Deposits (ICDs), Mutual Funds, etc., are made keeping in view the
highest safety and security of companys funds, Ministry of Petroleum & Natural Gas,
vide letter No. 31018/41/2011/ONG-III dated 25.07.2011 had advised OIL to decide on
the exposure limits for investments in Banks on sound commercial prudence.
Accordingly, with a view to make the investment policy commercially prudent and
procedures more transparent and stringent and also to broad base the list keeping in mind
the safety and security, OIL engaged M/s ICRA Management Consulting Services
(IMaCS), through tendering processes, to conduct a risk based study of credit assessment
of Banks, CPSEs and SEBI regulated Public sector Mutual Funds. ONGC and GAIL had
IMaCS
Annually
40

also got similar study done. Based on DPE guidelines, financial parameters of Banks,
CPSEs and Mutual Funds, IMaCS has completed the risk based study and has submitted
its report, which is placed at Annexure 1 of the note.
For carrying out the risk assessment and recommending the limits of investments in
various PSU and private sector banks, the analysis by IMaCS is based on the following
key parameters:
Asset size;
Capital adequacy measured based on capital adequacy ratio, internal capital growth and
net NPA to Net worth ratio;
Asset quality assessed based on percentage of non-performing assets relative to total
advances;
Profitability measured based on net interest margin and return on assets;
Assessment of liquidity and cost of liquidity based on deposit growth rate and cost of
deposits;
Credit rating by a rating agency.
For risk assessment of CPSEs IMaCS has considered
Financial risk
Management risk
Business risk and Industry risk of each CPSE,
and based on their overall scores, investments limits with various CPSEs have been
recommended.
For investments in Mutual Funds, the parameters considered by IMaCS for risk
evaluation are
Sponsors risk
Liquidity risk
Concentration risk
Credit quality and
Risk Adjusted Return.

41

5.1.4 Investment Policy
Since the Company Investment Policy cannot be disclosed , the following is a format of
how the policy is prepared

Table 18:Investment in Term Deposit

Table 19:Investment in Mutual Fund

Specific fund types and the their investment ratios have been specified.

Bank Limits( in Crores)
A 2000
B 1000
C 450
Fund type Existing Ratios

A plan m 40%
B plan n 40%
C plan p 10%
D plan q 10%
42

Table 20 :Investment in Inter corporate Deposit

Company Maximum Investment Limit (in crores)
PSU A 1000
PSU B 840
PSU C 230

Investment in Tax Free Bonds
Maximum Investment Limit 1000 cr

5.1.5 Investment Trend

Fig 7: Investment trend in term deposits
Source: Company Data

The investments in term deposits have been rising throughout, falling marginally in 2011-12
0
5000
10000
15000
2007 2008 2009 2010 2011 2012
TERM DEPOSITS
43

Fig8 :Investment Trend in ICDs
The investment in Term Deposit is increasing continuously whereas in inter-corporate deposit
it is fluctuating depending upon the rate of return provided by other CPSEs in relation to
term deposit rate and the requirements of other CPSEs.
5.1.6 Current Investment Portfolio
The funds of OI L are invested in the following fashion

Fig 9: Investment Portfolio
0
200
400
600
800
1000
1200
2007 2008 2009 2010 2011 2012
ICDs (INTER CORPORATE
DEPOSITS)
83%
4%
12%
1%
INVESTMENT PORTFOLIO (2011-12)
TERM DEPOSITS
ICDs (INTER CORPORATE DEPOSITS)
MUTUAL FUNDS
TAX FREE BONDS
44

a) Although the minimum investment in term deposit has to 60 %,more
than 80% of the investment is made.
b) The company is permitted to invest 30% funds in public sector mutual
funds , but only 12% investment in such funds is made
c) Of the total surplus funds available 4% is invested in ICDs and 1% in
Tax Free bonds.

The Chart shows the post tax rate of return on various instruments.

Fig 10:interest earned 2011-12
Source: Company data

Tax free bonds give the highest rate of return. The company has already invested in tax
free bonds the maximum amount it is permitted to i.e. 1000 crores and thus no further
investments can be made.
Despite Mutual Funds providing a higher rate than Term Deposit, most investments are
made in term deposits.

6.86%
6.67%
7.14%
7.52%
TERM
DEPOSITS
ICDs (INTER
CORPORATE
DEPOSITS)
MUTUAL
FUNDS
TAX FREE
BONDS
Interest Earned(%) 2011-12
Interest Earned(%)
45

5.1.7 Suggestion On Surplus Fund Investments

Since the company is operating in a very rigid policy environment, the investment options
available to the company are very few. The following are some of the suggestions made to
the company on its investment policy:

TERM DEPOSIT

Although the maximum investment limits of PSU and Private sector banks have been
decided through the risk based assessment of these banks, it has been observed that
certain banks like SBI which have been given the maximum investment limit of 2000 cr.
have in the past always given consistently lower returns on deposits than other banks,
and thus the investment limits should be reallocated from SBI to those banks which
provide better returns but currently are in the lower maximum limit bracket.

.
SBI Low interest on Bulk Deposit
Maximum Investment Limit 2000 cr.
No deposits made in past few years

Since mutual funds provide a better rate of return than Term Deposits, only the minimum
amount specified should be invested in term deposits while the rest should be invested in
other sources providing better returns.

Reduction of the investments made in Term Deposits
46

MUTUAL FUNDS

The Specific Plan of the specific mutual fund is specified and this gives the employees
no flexibility in choosing funds which give better return or are introduced within the
year, as the investment policy is only revised annually.

By applying the method of linear programming and through the use of Variance
Covariance Matrix and the use of Solver in Microsoft Excel, the weights that would
maximize the return and keep the risk same can be found out.

Objective Function
Maximize Z= .0757s + .0764u + .0734i + 0.0744c

Where s : SBI mutual Fund liquid Plan
u: UTI liquid fund plan
i: IDBI liquid fund plan
c: Canara robecco liquid fund plan

47

Subject to

s+u+i+c = 1
s, u, I, c .10
Risk of new weights = risk of existing weights

The returns on mutual funds are taken as an average of the past 5 years returns from
2007-08 t0 2011-12.

Table 21:Existing Weights

LIQUID FUNDS WEIGHTS
SBI plan m 40%
UTI plan n 40%
IDBI plan p 10%
Canara Robecco
plan q
10%

Average Return = 7.52 %
Risk = 3.59 %

48

Table 22:Recommended Weights

Liquid Funds Weights
SBI plan m 15%
UTI plan n 55%
IDBI plan p 15%
Canara Robecco
plan q
15%

Average Return =7.58%
Risk = 3.52%
Constraint : Min weight 10%
Since there is not much difference in the risk and return and therefore the company can
continue with the existing weights.

The company according to the DPE guidelines can make investment in mutual funds
investing in upto 30% equity.
The company currently invests only in liquid debt funds. But there are other funds also
where the company can invest which provide higher rate of return .
Some of these mutual funds are:

49

Again, linear programming, covariance matrix and Solver have been applied to find the
recommended funds which provide better returns and their respective weights.
The return of these funds have been calculated as the average of their previous 5 years returns
from 2007-08 to 2011-12

Constraint: Min weight 10 %

Table 23:Recommended Weights

Fund SBI UTI IDBI Canara total
w 0.1 0.7 0.1 0.1 1
r 8.088 8.098 7.66 7.916 8.035008

As we can see that the recommended funds provide a higher rate of return at lower risk.

GENERAL SUGGESTIONS
Investment in Commercial Paper / Certificate of Deposit

Existing Funds
Return = 7.52%
Risk = 3.59%
Recommended funds
Return =8.03%
Risk =3.4301
50

Table 24: Commercial paper Rates
year Before tax Post tax
2012 10% 6.67%
2011 9.2% 6.134%
Source:RBI
The returns around the month of March are very high.
Investment in term deposit be reduced and reallocated to higher earnings.
The board should review the investment policy at least after every 6 months.
There should be a dedicated investment team in the company which will make and
review the policy.

51

5.2 Borrowing
5.2.1 Sources of Finance
The company has wants to take a long term loan of 5 years. The company has surplus
funds invested at 9.5%. It wants to take a loan thus at a lower percentage. The following
are the sources available
DOMESTIC
1. Equity
Cannot be done as will require approval from ministry since it will liquidate the
government of India holding

2. Preference
government of India holding

3. Bonds
The company can consider a bond issue.
Recent issue by IOCL at 8.14 % privately placed with call option after 18 months and 36
months
The industry risk for both the companies is same but the company risk for IOCL is more
than that of OIL. Therefore the bond issue for OIL will be at a rate in-between the risk
free rate i.e 7.5% and IOCL bond rate i.e. 8.14%.

4. Long term loan from bank
Rates are very high
TERM LOANS

Fig11:interest in term loan
52

INTERNATIONAL
1. ECB (External Commercial Borrowing)

2. FCCB (Foreign Currency Convertible Bond)
government of India holding.
3. FCEB (Foreign Currency Exchangeable Bond)
government of India holding.

4. Eurobonds:
A bond issued in a currency other than the currency of the country or market in which it
is issued
Foreign Bonds:
A bond that is issued in a domestic market by a foreign entity, in the domestic market's
currency

Recent Issues
Company Coupon Details
ONGC Videsh Ltd. (OVL) 2.5% $300mn
5 yrs
Foreign Bonds
IRFC 4.4% 5 years
Eurobond
ONGC Videsh Ltd 3.75% $500mn
10 years
Foreign Bonds

OVL has raised funds at very cheap rates through foreign bonds.
Therefore the option of Eurobonds and Foreign bonds can also be considered, the only
glitch being the immensity of rules and regulations to be complied with.

In the following section, I have explored the ECB option for the company.

53

5.2.2 External Commercial Borrowing (Ecb)

Overview
Foreign currency borrowings raised by the Indian companies from sources outside India
are called External Commercial Borrowings (ECBs). These are commercial loans with
minimum average maturity of 3 years. The ECBs include:-
Bank Loans
Buyers Credit
Suppliers Credit
Securitized instruments (e.g. floating rate notes and fixed rate bonds)
Credit from official export credit agencies
Commercial borrowings from the private sector window of multilateral financial
Institutions.
Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds ECBs act as
an additional source of funds for companies to finance its investment needs. Balance of
payment and foreign exchange reserves position are two important drivers to decide the
level of ECBs.

Regulations
In India, ECBs can be accessed through automatic and approval route. Major regulators
governing the ECBs in India are Exchange Control Department of RBI and ECB
Division in Department of Economic Affairs at Ministry of Finance. ECB policy aims at
keeping maturities long, costs low and encourages infrastructure and export sector
financing so as to ensure overall growth of the economy.
ECB policy focuses on three aspects:
Eligibility criteria for accessing external markets
Total amount of borrowings to be raised and their maturity structure
End use of the funds raised

Eligible Borrowers
Automatic Route
1. Companies except financial intermediaries
54

2. Units in Special Economic Zones (SEZ)
3. NGOs engaged in micro finance activities

Approval Route
1. Infrastructure or export finance companies such as IDFC, IL&FS, Power Finance
Corporation IRCON, Power trading corporation and EXIM bank.
2. Banks and financial institutions which participated in the textile or steel restructuring
package.
3. NBFCs to finance import of infrastructure equipment for leasing.
4. Multistate Co-operative society engaged in manufacturing activities.

Recognized Lenders
1. Internationally recognized sources such as international banks, international capital
markets, and multilateral financial institutions such as IFC, ADB and CDC, export credit
agencies, suppliers of equipment, foreign collaborators and foreign equity holders.
2. Overseas organizations and individuals with a certificate of due diligence from
overseas bank adhering to host country regulations (applicable only under the automatic
Route).

Automatic Route
For ECBs up to USD 5 million at least 25 percent to be held directly by the lender
For ECBs more than USD 5 million - at least 25 percent to be held directly by the lender
and proposed ECB should not exceed four times the direct foreign equity holding

Approval Route
At least 25 percent to be held directly by the lender but proposed ECB exceeds four
times the direct foreign equity holding.

55

Amount And Maturity

Automatic Route
Maximum Amount of ECB in a financial year
Companies other than those in hotel, hospital and software sectors - USD 500 million
Companies in services sector viz. hotels, hospitals and software sector - USD 100 million
NGOs engaged in micro finance activities - USD 5 million

Minimum Maturity Period

ECBs up to USD 20 million 3 years

ECBs between USD 20 million and USD 500 5 years

Approval Route
Corporate can avail an additional amount of USD 250 million with average maturity of
more than 10 years over and above the existing limit of USD 500 million under the
automatic route.

All-In-Cost Ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, withholding tax payment and fees payable in Indian
Rupees.
Following are the all-in-cost ceilings:-

Average Maturity Period All-in-cost Ceilings over 6 month
LIBOR

Three to five years 300 basis points
More than five years 500 basis points
56

End Use
Permitted for
1. Investment (such as import of capital goods, new projects, modernization/expansion of
existing production units) in industrial sector including SMEs and infrastructure sector.
2. Overseas direct investment in Joint ventures and Wholly owned subsidiaries
3. First stage acquisition of shares in the disinvestment process and in the mandatory
second stage offer under the Governments disinvestment programme of PSU shares.
4. NGOs engaged in micro finance activities can utilize the proceeds for
a. lending to self-help groups
b. micro credit
c. bonafide micro finance activity including capacity building

Not permitted for

1. On-lending or investment in capital market or acquiring a company
2. Investment in real estate
3. Working capital, general corporate purpose and repayment of existing rupee loan
Procedure
Automatic Route

Approval Route

Modes Of Raising Ecbs
ECBs provide a broad range from where funds can be raised. It provides an option to
take both simple forms of credit such as suppliers credit to complex forms of credit such
as securitization instruments. Some of the well-known and prevalent ways of raising
ECBs are as follows:
57

Commercial Bank Loan in form of term loans from foreign banks
Buyers Credit
Suppliers Credit
Securitized instruments such as Syndicated loans
Credit from official export credit agencies
Commercial borrowing from the private sector window of multilateral financial
institutions such as International Finance Corporation, Asian Development Bank etc.
Loan from foreign equity holders and corporate with good credit rating
Lines of credit from foreign banks and financial institutions
Financial Leases
Import Loans
Investment by FIIs in dedicated debt funds
Non-convertible, optionally convertible or partially convertible debentures
Reasons For Ecbs Attractiveness To
Lender
ECB is for specific period which can be as short as 3 years
Interest and borrowed money is repatriable
Borrower
Large amounts of funds can be raised
Easy availability of funds for large reputed borrowers
Diversification of lenders base

Benefits Of Ecbs Over Other Sources Of Funds

1. Cost of raising ECBs is much lower than that of domestic funds
2. Global financial market is a much bigger source of credit.

58

5.2.3 Process Of Taking ECB

Fig 12:Process of taking an ECB
Source: Primary Data

Total Investment Outlay
The total investment to be made is approx. Rs 3000cr. for capex purposes.
Amount to be raised through ECB

The amount to be raised is $250 mn.
Duration : 5 years
The amount will be taken upfront.
Interest will be paid quarterly based on the 3 month Libor and Spread
Principal will be repaid at the end of 5 years.

Match the Projected Cash Inflows with the future Loan Payments
Calculate the Total Interest Cost by taking the Hedging Decision
Appoint Legal counsel by inviting tenders.
Calculate the Interest Cost and the Payments
Invite bids from banks to be the Authorized Dealers and select the
bank by evaluating the bids
Estimate the amount to be raised through ECB and the duration of
the borrowing
Estimate the total investment required for the project
59

Inviting and Evaluating bids of Banks

As per the policy, tenders are invited from the banks which provide details of the past
performance of the banks, their experience in the field, the financial cost etc. Some of the
selection criteria variables used to evaluate the bids are studied.
The selection criteria variables are broadly divided under the following two parameters:

Technical

Exchange profit in the last year
Number of deals won in previous two years
Number of deals $100mn in previous two years
Long term Investment grade by Credit rating Agencies
Financial

Spread
Upfront fees
Legal fee
Road show fee

Those banks which are able to meet the technical criteria are evaluated on the financial
front wherein they are evaluated on the basis of the least cost.

LEGAL COUNSELS
The company appoints legal counsels by inviting tenders and selects on the following
criteria

1. Technical
No.Of
Transactions
from 01.05.2011
No. Of
transactions
US$ 100mn
No. Of PSUs
served from
01.05.2011 to
60

to 30.04.2013 30.04.2013

2. Financial

Domestic
Counsel
Fees(INR)
English Counsel
Fees(US$)

HEDGING

A hedge is an investment position intended to offset potential losses/gains that may be
incurred by a companion investment. It is used to reduce any substantial losses/gains suffered
by an individual or an organization.
Since the company is entering in a transaction involving foreign currency cash flows, hedging
needs to be taken into consideration.
It has the following options:
No Hedge
Fully Hedge
i.e hedging both interest and Principle
Partially Hedge
i.e hedging either Principle or interest

The calculations for repayment are shown for when only interest rate hedging is done
while keeping the principle unhedged .Since the principle is a bullet payment at the end
of 5 years, it can be hedged later seeing the dollar rupee trend at that time. Likewise the
individual interest payments can also be hedged by seeing the exchange rate trends
before their due date arrives.
61

The decision to remain hedged or unhedged will ultimately depend on the prudence of
the Company Official and his/her estimates of future currency trend.
The following calculations are made when the spot rate was Rs 56.56/$.

Hedging Instruments
Forwards: A forward is a made-to-measure agreement between two parties to buy/sell a
specified amount of a currency at a specified rate on a particular date in the future.
Futures: A futures contract is similar to the forward contract but is more liquid because
it is traded in an organized exchange i.e. the futures market. Only standard
denominations of money can be bought instead of the exact amounts that are bought in
forward contracts.
Options: A currency Option is a contract giving the right, not the obligation, to buy or
sell a specific quantity of one foreign currency in exchange for another at a fixed price;
called the Exercise Price or Strike Price
Swaps: A swap is a foreign currency contract whereby the buyer and seller exchange
equal initial amounts of two different currencies at the spot rate

In this project, I have calculated the Loan Repayments in Rupees by converting Dollar
payments through Forward Rates. It can likewise be done through any other hedging
instrument.

Table 25:Cost of ECB
$ Spot rate Rs
principle 250000000 56.56 14140000000
Payments Qtr libor (forecasts) spread interest rate Interest Amount(USD) USD/INR Interest Payment (Rs) Total interest

1 2 0.27% 1.20% 1.47% 918750 58.4 5.37 7.00%
2 3 0.29% 1.20% 1.49% 931250 59.19 5.51 7.02%
3 4 0.31% 1.20% 1.51% 943750 59.88 5.65 7.04%
4 5 0.33% 1.20% 1.53% 956250 60.6625 5.80 7.06%
62

5 6 0.35% 1.20% 1.55% 968750 61.445 5.95 7.08%
6 7 0.37% 1.20% 1.57% 981250 62.2275 6.11 7.10%
7 8 0.39% 1.20% 1.59% 993750 63.01 6.26 7.12%
8 9 0.41% 1.20% 1.61% 1006250 63.7725 6.42 7.14%
9 10 0.43% 1.20% 1.63% 1018750 64.535 6.57 7.16%
10 11 0.45% 1.20% 1.65% 1031250 65.2975 6.73 7.18%
11 12 0.47% 1.20% 1.67% 1043750 66.06 6.90 7.20%
12 13 0.49% 1.20% 1.69% 1056250 66.86 7.06 7.22%
13 14 0.51% 1.20% 1.71% 1068750 67.66 7.23 7.24%
14 15 0.53% 1.20% 1.73% 1081250 68.46 7.40 7.26%
15 16 0.55% 1.20% 1.75% 1093750 69.26 7.58 7.28%
16 17 0.57% 1.20% 1.77% 1106250 69.935 7.74 7.30%
17 18 0.59% 1.20% 1.79% 1118750 70.61 7.90 7.32%
18 19 0.61% 1.20% 1.81% 1131250 71.285 8.06 7.34%
19 20 0.63% 1.20% 1.83% 1143750 71.96 8.23 7.36%
20 21 0.65% 1.20% 1.85% 1156250 72.2 8.35 7.38%

1.66%
Hedging Cost 5.53%

In the above table, after calculating the dollar interest payments, the rupee payments are
calculated using the forward rate for 5 years. The hedging cost is added to the LIBOR and
Spread .

INTEREST MARGIN
The following table shows the interest margin which the company will earn
d) When hedging is done
e) When no hedging is done
We can see that although the company here earns a high margin without hedging, it is
with a huge risk.

63

Table 26: Interest Margin
Period Cost of ECB( with
Hedging)
Cost of ECB
(without hedging)
Interest on
term Deposit
Margin (with
hedging)
Margin(without
hedging)
1 7.00% 1.47% 9% 2.00% 7.53%
2 7.02% 1.49% 9% 1.98% 7.51%
3 7.04% 1.51% 9% 1.96% 7.49%
4 7.06% 1.53% 9% 1.94% 7.47%
5 7.08% 1.55% 9% 1.92% 7.45%
6 7.10% 1.57% 9% 1.90% 7.43%
7 7.12% 1.59% 9% 1.88% 7.41%
8 7.14% 1.61% 9% 1.86% 7.39%
9 7.16% 1.63% 9% 1.84% 7.37%
10 7.18% 1.65% 9% 1.82% 7.35%
11 7.20% 1.67% 9% 1.80% 7.33%
12 7.22% 1.69% 9% 1.78% 7.31%
13 7.24% 1.71% 9% 1.76% 7.29%
14 7.26% 1.73% 9% 1.74% 7.27%
15 7.28% 1.75% 9% 1.72% 7.25%
16 7.30% 1.77% 9% 1.70% 7.23%
17 7.32% 1.79% 9% 1.68% 7.21%
18 7.34% 1.81% 9% 1.66% 7.19%
19 7.36% 1.83% 9% 1.64% 7.17%
20 7.38% 1.85% 9% 1.62% 7.15%

64

COST OF ECB

LIBOR (London Interbank Offer Rate)
3 month Libor rate (forecasted)
Spread
Bank specific, i.e. it can vary from bank to bank
Assumed as 1.2%
Exchange rate Hedging Cost
5.53%

Matching Cash Balance with Loan Payments
I have estimated the future cash flows of the company for the next 5 years when the loan
payments are to be made and thus find out whether the company will have enough cash
balance so as to make the payments.
We can see in this case that the surplus balance is enough to pay the loan payments. Although
the loan payments are very less currently but this is a basic format of how the cash and the
loan payments be matched even when the loan amount taken is large.

Table 27:Matching Cash Balance with loan payments
Cash Balance (in
Crores)
Loan Payment (in Crores)
105.06 5.37
99.14 5.51
Total Cost of ECB= LIBOR + Spread + Hedging Cost
65

129.31 5.65
134.6 5.8
135.56 5.95
138.09 6.11
146.21 6.26
150.61 6.42
162.14 6.57
167.78 6.73
179.63 6.9
186.19 7.06
199.87 7.23
208.43 7.58
223.42 7.74
233.44 7.9
256.96 8.06
263.13 8.23
282.18 8.35

66

5.3 A study on Under Recoveries
5.3.1. Meaning
It is a notional loss in revenue to the extent the international price of the fuel is higher.
The losses are made by the Oil Marketing and Retailing companies like IOCL .They are
compelled to sell petroleum products below the normal market rate only to protect the common man
from volatility in international crude oil and product prices.
Therefore , the burden of the OMCs is shared by
a) Upstream Companies
They make heavy profits due to Import Parity Prcing.
b) Government
It makes budgetary allocations in the form of fuel subsidy. It is either in the form of
bonds or cash.

How this works is that Govt subsidises fuel prices. OMCs or the Oil Marketing
Companies HPCL, BPCL and IOC buy fuel from upstream companies ONGC,
GAIL and Oil India. The upstream companies buy crude at global prices and hence
sell at global prices. But this results in huge under recoveries for OMCs, meaning loss
between their purchase price of crude and the retail price at which they sell the fuel.
To help tide over the under recoveries, Govt issues oil bonds and gives cash subsidies.

Fig 13:Trend in Under recoveries

In 2011-12, oil marketing companies (OMCs) incurred record-high losses of
67

~Rs 10 per litre on diesel,
~Rs 27 per litre on kerosene, and
~Rs 270 per cylinder on LPG.
This was largely on account of inadequate revision of domestic prices, despite a sharp
increase in international prices. As a result, under-recoveries increased by 77 per cent in
2011-12 to Rs 1,385 billion from Rs 782 billion in 2010-11.

Fig14: Fuel Prices
Source: Crisil Resarch

68

The increase in under-recoveries was also due to increased consumption of regulated fuels
(like diesel) by private car owners due to significant difference in prices as compared to other
alternate fuels like petrol. The difference between the running cost for a petrol car vis--vis a
diesel car has gone up by ~85 per cent in the last 7-8 years. This makes diesel car more
lucrative for buyers, thereby increasing the fuels consumption.
Consequently, the proportion of diesel cars in total car sales has increased to 38 per cent in
2011-12 vis-vis 20 per cent in 2005-06. Hence, given the crippling under-recoveries of
OMCs and a fast deteriorating fiscal situation, a hike in prices of regulated fuels, especially
diesel, which accounts for 40 per cent of the overall petroleum product consumption and ~60
per cent of under-recoveries, is essential and inevitable.

Fig 15: Under recoveries product-wise

5.3.2 Under recoveries burden on Upstream Companies

Losses arising from under-recoveries are typically shared by the government, upstream oil
companies
(ONGC, OIL India and GAIL) and OMCs (IOCL, BPCL and HPCL) according to a
proportion determined by the government at the end of every fiscal year. Until 2010-11,
OMCs were able to bear some part of the under-recoveries as they were earning adequate
profits from the refining business. However, in 2011-12, when the under-recoveries shot up
significantly, OMCs didnt share the burden. All of it was shared between the government
and the upstream companies. This was because the weak refining profits coupled with rising
69

interest costs (on account of higher working capital borrowings) led to a situation where
OMCs were unable to share any burden.

Fig16: Subsidy sharing formulae

Subsidy sharing for 3 years
FY11 FY12 FY13
Petrol 2227
Diesel 34706 81192 92061
Kerosene 19485 27358 29410
LPG 21776 29997 39558
78190 138541 161029

GOI 47894 84894 101000 55019(9m)
45000(now)
Upstream 30296 53657 38.72% 60000 37.27%
78190 138541 161000

ONGC 24892 43113 80.36%
OIL 3293 7301 13.70%
GAIL 2111 3183 5.93%
30296 53647 60000

Table 28: Subsidy sharing for previous 3 years
Source: SP Tulsian
70

Fig 17: Subsidy Sharing
Source: Economic Times

Fig 18:Annual Contribution of Oil India towards Under recoveries

71

Rising under-recoveries will adversely affect oil PSUs profits and cash
flows
Although the government is likely to absorb a bulk of the subsidy, the PSU oil marketing
companies (IOCL, BPCL and HPCL) and upstream PSU oil companies (ONGC, OIL and
GAIL) will have to contribute more to compensate for the rising under-recoveries. This
would impact their profits and cash flows.

Fig 19:Cumulative profit before tax for PSU upstream companies (ONGC, OIL and GAIL)

5.3.3 Gradual diesel price hikes a step in the right direction

As the government has allowed oil marketing companies (OMCs) to make small revisions in
retail diesel prices, domestic and international prices of the fuel are expected to gradually
align. This coupled with an expected decline in crude oil prices and a stronger rupee is also
expected to more than halve under-recoveries in 2013-14. Consequently, the profitability of
OMCs, upstream oil companies and the government's finances are likely to improve

72

I ncrease in supply of subsidised cylinders to marginally increase under-recoveries
In September 2012,the government capped the supply of subsidised LPG cylinders at six per
year.However, with the government now increasing the supply of subsidised cylinders to 9
per annum, under-recoveries are expected to again increase by Rs 30-50 billion in 2013-14.

Gradual revisions in diesel prices to help align domestic and international prices
The government has authorised OMCs to make small revisions in diesel prices from time to
time and asked them to deregulate prices for bulk consumers like industries, defence,
railways and other agenciesDeregulating diesel prices for bulk consumers will also lower
under-recoveries by Rs 100-120 billion.
Fig 20:Sensitivity of under-recoveries to crude oil prices and currency (Rs billion)

Fig 20:Sensitivity of under-recoveries to crude oil prices and currency (Rs billion)
Source:CRISIL Research

With the rising prices of crude oil due to supply concerns and quantitative easing in US and
EU, and the weakening of rupee the under recovery burden is to rise.

Alignment of domestic prices with international prices critical for reigning
in subsidies and strengthening Indias energy security

Given the seriousness of the problem, it is absolutely crucial that prices of regulated fuels be
raised by at least 10-15 per cent immediately and gradually be linked to international prices.
The alignment of regulated fuel prices with international prices may affect domestic fuel
inflation in the short term, but in the long term, the move would help ease the governments
subsidy burden and reduce wasteful consumption of regulated fuels like diesel. In addition, it
will also help the OMCs by reducing their dependence on the government for reimbursement
73

of under-recoveries and give them enough flexibility to undertake capital expenditure and
make acquisitions. This, in turn, would help strengthen Indias energy security.

74

CHAPTER 6: FINDINGS

OILs Investment Policy follows DPE guidelines.
The Company is Risk Averse and thus prefers safe havens for parking its surplus
funds.
The Company is recommended the following:
Reallocation of Existing Bank Limits
Flexibility in investing in Mutual Fund schemes as and when a better scheme
comes.
Considering other mutual fund schemes like short term debt funds which are
giving better returns .
Investment in other avenues like Commercial Papers.
Having a dedicated team within the company to draft Investment Policy
Oil can take long term loan at least cost through External Commercial Borrowing
The company has to share the under recovery burden of OMCs and thus its profits
get reduced. The gradual hike in diesel prices will be a respite and reduce the burden
but the continuing weakening of rupee and the rising crude oil prices are becoming a
barrier.

75

Limitations

Detailed data regarding certain specific questions/problems may not be obtained because
some data is considered to be too sensitive to disclose by the company.
Shortfalls of Secondary data.

76

Key Learning

DPE Guidelines for framing the companys investment policy.
In depth knowledge of mutual funds
Understanding of different investment avenues for short term parking of
funds.
Structuring of an External Commercial Borrowing (ECB)
Hedging methods and process
Effect of under recovery on profits of Upstream company

77

Bibliography
Chandra , P., (2008), Financial Management. New delhi: Tata McGraw-Hill
Publishing Company Limited
Grewal, T.S, (2011), Analysis of Financial Statement.New delhi: Sultan chand
Educational Publishers
Pandey, I.M.,(2010), Financial Management. Noida: Vikas Publishing House

78

References

Company Annual Reports retrieved from http://www.oil-india.com/AReports.aspx
ECB guidelines retrieved retrieved from
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7353&Mode=0
DPE guidelines retrieved from
http://dpe.nic.in/important_links/dpe_guidelines/financial_policies
Mutual fund returns retrieved from
http://www.valueresearchonline.com/funds/default.asp
Oil Industry Details retrieved from
https://www.crisilresearch.com/industryasync.jspx?serviceId=18&State=null
Under Recoveries details retrieved from http://ppac.org.in/

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