risk management in oil n gass industry
TRANSCRIPT
INTRODUCTION
ONGC is a great company of reputation. It has many national and international accolades
to its name. This company has been top in Exploration and production in Asia and 2nd
largest in E&P activities. It has many subsidiaries companies (like MRPL, ONGC Videsh
Ltd., etc). Some of these companies are operating in operating in India and some are
working overseas. After setting standards in upstream sector, ONGC also has plans to
enter downstream sector in retailing, making it among the largest fully integrated
companies in world.
This project deals with the review of pricing module of crude oil and natural gas of
ONGC in commercial department. This project will help the readers to know about the
important elements in pricing of any Oil and gas product. A main limitation faced by
pricing section is the lack of independence in terms of setting the prices of its own crude
oil, because most of the agreements have expired with other parties. The prices of Crude
oil are negotiated between the ONGC and the other parties followed by signing of a
contract. The Price of Natural gas is regulated.
This project also talks about Treasury group where the study of strategy of investment of
surplus funds of ONGC along the risk factors faced by ONGC. Investment of surplus
fund is a very part of ONGC because if there funds remain idle for even a single day that
means a loss of lakhs of amount as interest, therefore ONGC has to constantly monitor
the fund position to know if there is any surplus at any time. This project will lead the
reader to know the various elements that are followed by every PSUs to make their
investment and how to get the maximum returns while following those guidelines. This
project will talk about the avenues for investment in market, while following the DPE
(Department of Public Enterprise) guidelines and minimizing the risk involved. Then an
overview of risk factor faced by ONGC in their whole operations and in their
administration is also studied in brief. These risk factors are very important for every
company and they need to be addressed. In this report an overview of these factors are
give with the solutions.
1
BACKGROUNDOIL AND GAS SECTOR SCENARIO IN INDIA
Table no. 1
Item Unit2000-
012001-
022002-
032003-
042004-
052005-
061. Reserves (Balance Recoverable)
(i) Crude oilMillion. Tonne
703 732 741 733 739 786
(ii) Natural GasBillin.Cub
.Mtr760 763 751 854 923 1101
2. Consumption
(i) Crude oilMillion Tonne
103.44 107.27 112.56 121.84 127.42 130.11
(in terms of refinery crude throughput)
(ii) Petroleum ProductsMillion Tonne
100.07 100.43 104.13 107.75 111.63 111.92
(excl RBF) 3. Production
(i) Crude oil Mn.
Tonne32.43 32.03 33.04 33.37 33.98 32.19
(ii) Petroleum Products " 95.61 100 104.14 113.46 118.58 119.75 4.Imports & Exports (I) Gross Imports:
(a) Qty : Crude OilMn.
Tonne74.1 78.71 81.99 90.43 95.86 99.41
Petroleum Product " 9.27 7.01 6.74 7.9 8.83 11.68Total (a) " 83.37 85.72 88.73 98.33 104.69 111.09
(b) Value : Crude OilRs.
Billion659.32 603.97 761.95 835.28
1170.03
1717.02
Petroleum Product " 120.93 72.49 82.06 96.77 148.88 255.75
Total (b) " 780.25 676.46 844.01 932.051318.9
11972.7
7 (II) Exports: (a) Qty :
Petroleum ProductMn.
Tonne8.37 10.07 10.29 14.62 18.21 21.51
2
(b) Value
Petroleum ProductRs.
Billion76.72 82.19 108.68 167.81 299.28 247.85
(III) Net Imports
(a) Qty ; Crude oilMn.
Tonne74.1 78.71 81.99 90.43 95.85 99.41
Petroleum Product " 0.9 -3.06 -3.55 -6.72 -9.38 -9.83Total (a) " 75 75.65 78.44 83.71 86.48 89.58
(b) Value: Crude oilRs.
Billion659.32 603.97 761.95 835.28
1170.03
1717.02
Petroleum Product " 44.21 -9.7 -26.62 -71.04 -150.4 7.9
Total (b) " 703.53 594.27 735.33 764.241019.6
31724.9
2 (IV) Unit Value of Crude oil imports (gross)
Rs./MT 8898 7673 9293 9237 12206 17272
5. India's Total Exports
Rs. Billion
2035.71
2090.18
2551.37
2933.67
3618.79
4548
6. Petroleum products Imports as percentage of India's total exports
(i) Gross Imports % 39.3 32.4 33.1 31.8 36.4 43.4(ii) Net Imports % 34.6 26.4 28.8 26.1 28.2 37.97.Contribution of Oil Sector to Centre/State Resources
(i) Royalty from crude oil
Rs. (in Billion)
22.72 24.86 30.67 31.74 42.71 50.6
(ii) Royalty from gas " 6.08 6.59 7.78 8.54 8.29 9.81(iii) Oil Development Cess
" 27.28 28.78 50.91 51.43 55.37 51.96
(iv) Excise & Custom Duties
" 359.12 361.04 451.27 507.33 563.95 NA
(v) Sales Tax " 233.75 200.9 297.41 328.49 390 NA(vi) Dividend " 34.82 32.87 67.94 63.1 94.36 NA 8. Natural Gas
(i) Gross ProductionBillion
Cun.Mtr29.477 29.714 31.389 31.962 31.763 32.202
(ii) Utilisation " 27.86 28.037 29.963 30.906 30.775 31.325INDIA DEPENDENCY IN ENERGY SECTOR
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Table no. 2
Product Type Production Imports ExportsDomestic
supply
Crude oil 28.7 71.3 0 100
Natural gas liquid
100 0 0 100
Refinery feedstock
NA NA NA NA
97.7 23.2 -20.9 100
Liquified petroleum gas
82 18 0 100
Motor gasoline 129.1 0 -29.1 100
Aviation gasoline
NA NA NA NA
Jet kerosene 129.5 0.1 -29.6 100Kerosene 93.5 6.5 0 100
Diesel 107.9 0.3 -8.1 100
Residual fuel oil 99.6 7.3 -6.5 100
The Oil & Gas sector plays a very important role in the economic and political scenario
of the world. Oil and gas industry size is estimated at US$ 110 billion (about 15 percent
of GDP). The Limited number of oil and gas reserves and increasing energy requirements
across the globe has led to a mismatch between the demand and supply forces and hence
to spiraling prices. The high economic growth in the past few years, increasing
industrialization coupled with a rapidly increasing population has created a lot of concern
for India's energy scenario. India has 0.5 % of the Oil and Gas resources of the world and
15 % of the world's population. This makes India heavily dependent on import of crude
oil and natural gas. Imports of petroleum oil and lubricants (POL) during April-June 2006
rose by 47.2 per cent (31.0 per cent a year ago). This in turn was mainly due to a rise in
international price level. The crude oil consumption increased to 119.3 million tonnes.
The compound annual growth rate (CAGR) for oil consumption in India has been 5.9
percent. As for the gas consumption, India is among 20 largest consumers of gas.
4
Petroleum and natural gas constitutes around over 16% of GDP and includes
transportation, refining and marketing of petroleum products and gas. At present, there
exists a huge gap between the demand and supply side, which needs to be bridged
.
PURPOSE OF STUDY
1. To give an overview at the pricing elements, risk factors of ONGC.
2. To find out the details for the Investment procedure used in ONGC.
3. To find and analyse the importance of investment made by ONGC.
4. To find out the new investment avenues for ONGC.
5. To know the importance of different pricing factors, considered by ONGC.
OIL AND NATURAL GAS CORPORATION LIMITED
5
COMPANY HISTORY
1947 – 1960
During the pre-independence period, the Assam Oil Company in the northeastern and
Attock Oil company in northwestern part of the undivided India were the only oil
companies producing oil in the country, with minimal exploration input. The major part
of Indian sedimentary basins was deemed to be unfit for development of oil and gas
resources.
After independence, the national Government realized the importance oil and gas for
rapid industrial development and its strategic role in defense. Consequently, while
framing the Industrial Policy Statement of 1948, the development of petroleum industry
in the country was considered to be of utmost necessity.
Until 1955, private oil companies mainly carried out exploration of hydrocarbon
resources of India. In Assam, the Assam Oil Company was producing oil at Digboi
(discovered in 1889) and the Oil India Ltd. (a 50% joint venture between Government of
India and Burmah Oil Company) was engaged in developing two newly discovered large
fields Naharkatiya and Moran in Assam. In West Bengal, the Indo-Stanvac Petroleum
project (a joint venture between Government of India and Standard Vacuum Oil
Company of USA) was engaged in exploration work. The vast sedimentary tract in other
parts of India and adjoining offshore remained largely unexplored.
In 1955, Government of India decided to develop the oil and natural gas resources in the
various regions of the country as part of the Public Sector development. With this
objective, an Oil and Natural Gas Directorate was set up towards the end of 1955, as a
subordinate office under the then Ministry of Natural Resources and Scientific Research.
The department was constituted with a nucleus of geoscientists from the Geological
survey of India.
A delegation under the leadership of Mr. K D Malviya, the then Minister of Natural
Resources, visited several European countries to study the status of oil industry in those
countries and to facilitate the training of Indian professionals for exploring potential oil
6
and gas reserves. Foreign experts from USA, West Germany, Romania and erstwhile
U.S.S.R visited India and helped the government with their expertise. Finally, the visiting
Soviet experts drew up a detailed plan for geological and geophysical surveys and
drilling operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61).
In April 1956, the Government of India adopted the Industrial Policy Resolution, which
placed mineral oil industry among the schedule 'A' industries, the future development of
which was to be the sole and exclusive responsibility of the state.
Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that
it would not be possible for the Directorate with its limited financial and administrative
powers as subordinate office of the Government, to function efficiently. So in August,
1956, the Directorate was raised to the status of a commission with enhanced powers,
although it continued to be under the government. In October 1959, the Commission was
converted into a statutory body by an act of the Indian Parliament, which enhanced
powers of the commission further. The main functions of the Oil and Natural Gas
Commission subject to the provisions of the Act, were "to plan, promote, organize and
implement programmes for development of Petroleum Resources and the production and
sale of petroleum and petroleum products produced by it, and to perform such other
functions as the Central Government may, from time to time, assign to it ". The act
further outlined the activities and steps to be taken by ONGC in fulfilling its mandate.
1961 – 1990
Since its inception, ONGC has been instrumental in transforming the country's limited
upstream sector into a large viable playing field, with its activities spread throughout
India and significantly in overseas territories. In the inland areas, ONGC not only found
new resources in Assam but also established new oil province in Cambay basin (Gujarat),
while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast
basins (both inland and offshore).
ONGC went offshore in early 70's and discovered a giant oil field in the form of Bombay
High, now known as Mumbai High. This discovery, along with subsequent discoveries of
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huge oil and gas fields in Western offshore changed the oil scenario of the country.
Subsequently, over 5 billion tones of hydrocarbons, which were present in the country,
were discovered. The most important contribution of ONGC, however, is its self-reliance
and development of core competence in E&P activities at a globally competitive level.
After 1990
The liberalized economic policy, adopted by the Government of India in July 1991,
sought to deregulate and de-license the core sectors (including petroleum sector) with
partial disinvestments of government equity in Public Sector Undertakings and other
measures. As a consequence thereof, ONGC was re-organized as a limited Company
under the Company's Act, 1956 in February 1994.
After the conversion of business of the erstwhile Oil & Natural Gas Commission to that
of Oil & Natural Gas Corporation Limited in 1993, the Government disinvested 2 per
cent of its shares through competitive bidding. Subsequently, ONGC expanded its equity
by another 2 per cent by offering shares to its employees.
During March 1999, ONGC, Indian Oil Corporation (IOC) - a downstream giant and Gas
Authority of India Limited (GAIL) - the only gas marketing company, agreed to have
cross holding in each other's stock. This paved the way for long-term strategic alliances
both for the domestic and overseas business opportunities in the energy value chain,
amongst themselves. Consequent to this the Government sold off 10 per cent of its share
holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the Government holding in
ONGC came down to 84.11 per cent.
In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC
diversified into the downstream sector. ONGC will soon be entering into the retailing
business. ONGC has also entered the global field through its subsidiary, ONGC Videsh
Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and
earned its first hydrocarbon revenue from its investment in Vietnam.
8
PROFFESIONAL ACHIEVEMENTS
Global Ranking
Is Asia’s best Oil & Gas Company, as per a recent survey conducted by US-based
magazine ‘Global Finance’.
Ranks as the 2nd biggest E&P company (and 1st in terms of profits), as per the Platts
Energy Business Technology (EBT) Survey 2004
Ranks 24th among Global Energy Companies by Market Capitalization in PFC
Energy 50 (December 2004). [ONGC was ranked 17th till March 2004, before the
shares prices dropped marginally for external reasons.
Is placed at the top of all Indian Corporate listed in Forbes 400 Global Corporates
(rank 133rd) and Financial Times Global 500 (rank 326th), by Market Capitalization.
Is recognized as the Most Valuable Indian Corporate, by Market Capitalization, Net
Worth and Net Profits, in current listings of Economic Times 500 (4th time in a row),
Business Today 500, Business Baron 500 and Business Week.
Has created the highest-ever Market Value-Added (MVA) of Rs. 24,258 Crore and
the fourth-highest Economic Value-Added (EVA) of Rs. 596 Crore, as assessed in the
5th Business Today-Stern Stewart study (April 2003), ahead of private sector leaders
like Reliance and Infosys. ONGC is the only Public Sector Enterprise to achieve a
positive MV A as well as EVA.
Is targeting to have all its installations (offshore and onshore) accredited (certified) by
March 2005? This will make ONGC the only company in the world in this regard.
Owns and operates more than 11000 kilometers of pipelines in India, including nearly
3200 kilometers of sub-sea pipelines. No other company in India operates even 50 per
cent of this route length.
Crossed the landmark of earning Net Profit exceeding Rs.10, 000 Crore, the first to
do so among all Indian Corporate, and a remarkable Net Profit to Revenue ratio of
29.8 per cent. The growth in ONGC's profits is not solely due to deregulation in crude
prices in India, as deregulation has affected all the oil companies, upstream as well as
9
downstream, but it is only ONGC which has exhibited such a performance (of
doubling turnover and profits).
Has paid the highest-ever dividend in the Indian corporate history.
Its 10 per cent equity sale (India's highest-ever equity offer) received unprecedented
Global Investor recognition. This was a landmark in Indian equity market,
establishing beyond doubt, the respect ONGC's professional management commands
among the global investor community.
The Market Capitalization of the ONGC Group (ONGC & MRPL) constitutes 10 per
cent of the total market capitalization on the Bombay Stock Exchange (BSE). ONGC
has an equity weightage of 5 per cent in Sensex; 15 per cent in the Nifty (the only
Indian corporate with a two-digit presence there); ONGC commands a 7 per cent
weightage in the Morgan Stanley Capital International (MSCI) Index.
The growth in ONGC's Market Capitalization (from Rs. 18,500 Crore before May
2001 to Rs.1, 25,000 Crore in January 2004) is unprecedented and except Wipro (who
had a higher market capitalization temporarily), no other Indian company (either in
public or private sector) has seen such a phenomenal growth.
ONGC has come a long way from the day (a few years back) when India and ONGC
did not figure on the global oil and gas map. Today, ONGC Group has 14 properties
in 10 foreign countries. Going by the investments (Committed: USD 2.708 billion,
and Actual: USD 1.919 billion), ONGC is the biggest Indian Multinational
Corporation (MNC).
ONGC ended the sectoral regime in the Indian hydrocarbon industry and
benchmarked the globally- established integrated business model; it took up 71.6 per
cent equity in the Mangalore Refinery & Petrochemicals Limited (MRPL), and also
took up a 23 per cent stake in the 364-km-long Mangalore-Hasan-Bangalore product
Pipeline, connecting the refinery to the Karnataka hinterland. By turning around
MRPL in 368 days, ONGC has set standards of public sector companies reviving
joint (or private) sector companies, proving that in business, professionalism matters,
not ownership.
10
ONGC Represents India’s Energy Security
ONGC has single-handedly scripted India’s hydrocarbon saga by:
Establishing 6 billion tonnes of In-place hydrocarbon reserves with more than 300
discoveries of oil and gas; in fact, 5 out of the 6 producing basins have been
discovered by ONGC: out of these In-place hydrocarbons in domestic acreage,
Ultimate Reserves are 2.1 Billion Metric Tonnes (BMT) of Oil Plus Oil Equivalent
Gas (O+OEG).
Cumulatively producing 685 Million Metric Tonnes (MMT) of crude and 375 Billion
Cubic Meters (BCM) of Natural Gas, from 115 fields.
India’s Most Valuable Company
With a market capitalization having exceeded Rs 1 trillion, ONGC retains it’s
position as the most valuable company in India in various listings.
As per 5th Business Today Stern-Stewart study, ONGC was the biggest Wealth
Creator during 1998-2003 (Rs 226.30 billion). It was again the highest wealth creator
during 1999-2004, as per Motilal Oswal Securities.
ONGC’s mega Public Offer (India’s biggest-ever equity offer worth more than Rs
100 billion was over subscribed 5.88 times.
ONGC is the only Indian company to have earned a Net Profit of over Rs 10,000
crores (2002-03).
The market capitalization of the ONGC group constitutes 8% of the market
capitalization of BSE.
ONGC added 49.06 MMT of ultimate reserves of O+OEG during 2003-04 (including
overseas acquisitions), maintaining the trend of positive accretion for the third
consecutive year.
11
ONGC’s Pioneering Efforts
ONGC is the only fully–integrated petroleum company in India, operating along the
entire hydrocarbon value chain :
Holds largest share (57.2 per cent) of hydrocarbon acreages in India.
Contributes over 84 per cent of Indian’s oil and gas production.
Every sixth LPG cylinder comes from ONGC.
About one-tenth of Indian refining capacity.
Created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited
around from being a stretcher case for referral to BIFR to among the BSE Top 30,
within a year.
Owns 23% of Mangalore-Hasan-Bangalore Product Pipeline (MHBPL), connecting
MRPL to the Karnataka hinterland.
Competitive Strength
All crudes are sweet and most (76%) are light, with sulphur percentage ranging from
0.02-0.10, API gravity ranging from 26°-46° and hence attracts a premium in the
market.
Strong intellectual property base, information, knowledge, skills and experience.
Maximum number of Exploration Licenses, including competitive NELP rounds.
ONGC owns and operates more than 11000 kilometers of pipelines in India,
including nearly 3200 kilometers of sub-sea pipelines. No other company in India,
operates even 50 per cent of this route length.
Strategic Vision: 2001-2020
Focusing on core business of E&P, ONGC has set strategic objectives of:
12
Doubling reserves (i.e. accreting 6 billion tonnes of O+OEG) by 2020; out of this 4
billion tonnes are targeted from the Deep-waters.
Improving average recovery from 28 per cent to 40 per cent.
Tie-up 20 MMTPA of equity Hydrocarbon from abroad.
The focus of management will be to monetise the assets as well as to assetise the
money.
The focus of management will be to monetise the assets as well as to assetise the money.
Sagar Sammriddhi : Biggest Global Deepwater Campaign
ONGC launched ‘Sagar Sammriddhi’, the biggest deep-water exploration campaign ever
undertaken by a single operator, anywhere in the world.
Strategic plan to accrete 4 billion tones of reserves by 2020.
US$0.75 million per day investment.
Integrated Well Completion approach.
Plans to drill 47 deepwater wells up to water depths of 3 kms.
Leveraging Technology
To attain the strategic objective of improving the Recovery Factor from 28 per cent to 40
per cent, ONGC has focused on prudent reservoir management as well as effective
implementation of technologies for incremental recovery to maximize production over
the entire life cycle of existing fields
Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) schemes are being
implemented:
13
In 15 fields including Mumbai offshore
At a total investment exceeding US $2.5 billion.
Yielding incremental 120 MMT of O+OEG over 20 years
Sourcing Equity Oil Abroad
ONGC's overseas arm ONGC Videsh Limited (OVL), has laid strong foothold in a
number of lucrative acreages, some of them against stiff competition from international
oil majors.
OVL has so far, acquired 15 properties in 14 foreign countries, and striving to reach out
further
OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq, Iran, Lybia, Syria,
Myanmar, Australia, and Ivory Coast. It is further pursuing Oil and gas exploration
blocks in Algeria, Australia, Indonesia, Nepal, Iran, Russia, UAE and Venezuela.
Production Sharing Contract in Vietnam for gas field having reserves of 2.04 TCF,
with 45 per cent stake in partnership with BP and Petro Vietnam. Gas production has
commenced from January 2003.
20 per cent holding in the Sakhalin–1 Production Sharing Agreement. The US $ 1.77
billion investment in Sakhalin offshore field is the single largest foreign investment
by India in any overseas venture and the single largest foreign investment in Russia.
It is scheduled to go on production during 2005-06
Acquired 25 per cent of equity in the Greater Nile Oil Project in Sudan, the first
producing oil property. ONGC Nile Ganga BV, a wholly-owned subsidiary, has been
set up in the Netherlands to manage this property. Around 3 Million Tonnes of crude
oil is coming to India annually from this project. This is the first time that equity
crude of a group of companies in India is being imported into India for refining by the
group
14
Discovered a world-class giant gas field ‘Shwe” in Block A-1 (where OVL has 20 per
cent share) in Myanmar, with estimated recoverable reserve of 4 to 6 trillion cubic
feet of gas.
Besides taking equity in oil & gas blocks and looking for stakes in E&P companies,
OVL is also bagging prospective contracts (like the refinery up gradation and pipeline
contracts in Sudan, awarded to OVL on nomination basis due to its performance in
that country), which will increase ONGC’s equity oil basket. ONGC’s strategic
objective of sourcing 20 million tones of equity oil abroad per year is likely to be
fulfilled much before 2020. In fact, OVL is now eyeing a long-term target of 60
MMT of Oil equivalents per year by 2025.
Going by the investments (Committed: US $ 4.3 billion, and Actual: US $ 2.75
billion), ONGC is the biggest Indian Multinational Corporation (MNC).
Frontiers of Technology
Uses one of the Top Ten virtual Reality Interpretation facilities in the world
Rolled out ICE, one of the biggest ERP implementation facilities in the world
Best in Class Infrastructure And Facilities
ONGC’s success rate is at par with the global norm and is elevating its operations to the
best-in-class level, with the modernization of its fleet of drilling rigs and related
equipment, at an investment of around US $ 400 million.
ONGC has adopted Best-in-class business practices for modernization, expansion and
integration of all Info-com systems with investment of around US $ 125 million.
Onshore
15
Production Installation :- 225
Pipeline Network (km) :- 7900
Major Offshore Terminals (including CFU, LPG, Gas, Sweetening plants, Storage
Tanks) :- 2
Drilling Rigs :- 75
Work Over rigs :- 66
Seismic Units :- 33
Logging Units :- 35
Offshore
Well Platforms :- 131
Well-cum-Process Platforms :- 5
Process Platforms :- 28
Drilling/ Jack-up-Rigs :- 18
Pipeline Networks (km) :- 3200
Offshore Supply Vessels :- 32
Special Application Vessels :- 4
The Road Ahead
ONGC is entering LNG (regasification), Petrochemicals, Power Generation, as well as
Crude & Gas shipping, to have presence along the entire hydrocarbon value-chain.
While remaining focused on its core business of oil & gas E&P, it is also looking at the
future and promoting an applied R&D in alternate fuels (which can be commercially
brought to market). These efforts in integration are basically to exploit the core
competency of the organization – knowledge of hydrocarbons, gained over the five
decades.
New Business
16
ONGC has also ventured into Coal Bed Methane (CBM) and Underground Coal
Gasification (UCG); CBM production would commence in 2006-07 and UCG in 2008-
09. ONGC is also looking at Gas Hydrates, as it is one possible source that could make
India self-sufficient in energy, on a sustained basis.
Continuing On the Growth Trajectory
The ONGC Group has doubled its turnover from 5 billion US dollars to 10 billion US
dollars (from Rs 23,238 Crore to Rs 48,368 Crore) in the last 3 years (2001- 2004); and it
aims to go to 50 billion US dollars in the next 5 years. As this implies a commendable
annual growth rate (compounded) of 40-50 per cent, this objective of ONGC, when
realized, would be an outstanding achievement, by any standards.
ONGC Is Now Geared To Meet Its Vision
To be an Indian Integrated Energy Multinational (PSU); Target: A Turnover of 50 Billion
US dollars in 5 years.
ORGANIZATION STRUCTURE
Fig. 1
17
MAIN DEPARTMENTS AND THEIR FUNCTION
Director Offshore
This department looks after the operations of discovered reservoir and basins in offshore
region. The have their own asset management under different basins. Ex – Mumbai High,
Heera & Neelam etc. This department also has the responsibility of their Uran and Hazira
Plant all the kind of offshore Joint venture according to Product sharing contract.
Director Onshore
18
This department looks after the operations of the discoveries made onshore in the regions
of Ahmedabad, Ankleshwar, Mehsana, Assam, Karikal, Rajamundhry, Tripura. They
have their own financial management system which looks after the asset base of their
own blocks.
Director Exploration
This department looks after the exploration activities carried out in their blocks whether
onshore or offshore. This department carries status report of each block and reports it to
DGH. They have to maintain coordination with DGH and keep them update about
different blocks and they also carry research on their blocks through 2D – 3D seismic and
Geo physical and Geo chemical methods.
Director HR
This department looks after the recruitment of people according to the demands of
different departments. This department also works towards training of employee, to keep
them updated against new technology. They also look after the performance appraisal of
every employee at the end of the year. This department also includes medical depts., legal
depts., security depts., and corporate communication.
Director technical and field services
This department take care of technical matters of various blocks and field like drilling
service, casing, cementing, mud requirement, appraisal, development etc. for drilling site
and at the time of depletion of well, then employment of which kind of EOR(Enhanced
Oil Recovery) method etc.
Director Finance
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This department has division like commercial & treasury group, costing, and Integrated
Trading desk, taxation depts., import and export, internal audit etc. These different
divisions work in an integrated manner to mage the resources of company.
Business development and marketing department
This department has the responsibility of business development and marketing of value
added products and by products for ONGC, its refinery, its subsidiary companies (like
MRPL, OVL). Products are like LSHS, Naphtha, Ethane – Propane, Natural gas etc.
Material management department
This department looks after the raw material requirement of company along with its
management on an EOQ (Economic Order Quantity) model basis, procurement and
contracting, works and civil contract, resource management, Accounting of material,
stock verification, stock disposal, and inventory control are some of the activities of this
department.
PRODUCTION STATUS OF CRUDE OIL
Table 3
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YEAR
PLANNED TARGET(MMT)
ACTUAL PRODUCTION
(MMT)
PERCENTAGE ACHIEVEMENT
(%)
SHORTFALL / SURPLUS
%AGE CHANGE
OVER LAST YEAR
2003-04 26386 26065 98.78 - 1.21 0.23
2004-05 26175 26485 101.184 1.1841.61
2005-06 26616 24409 91.70 - 8.29 - 7.83
2006-07 27351 26050 95.24 - 4.756 6.72
SOURCE : Petroleum.nic.in
TECHNOLOGICAL DEVELOPMENT
Technologies like Q – marine, Time lapse 3D Seismic are introduced for higher
resolution of sub – surface and better reservoir monitoring and fluid flow.
Advanced technology were introduced in offshore/onshore for better reservoir
characterization and management :
o Rotary side wall coring tool
o Modular Dynamic tester live fluid analyzer
o Production logging in horizontal wells.
o On line data transmission in offshore
o Cased hole formation resistivity (CHFR) in onshore
o Cased hole formation density (CHFD) and Cased hole formation porosity
(CHFP) in offshore.
Field processing units and mobile processing units with latest software or survey
design and seismic quality control and to reduce API cycle time.
New air injection setup to screen reservoir.
21
Composite material pipes being implemented for effluent/produced water, utility
water, water injection and also in ETPs.
COLLABORATION WITH FOREIGN INSTITUTES / DOMAIN EXPERTS
BG, SHELL and ENI for exploration and development of blocks including CBM
exploration.
Domain experts were hired for process validation of interpretation for various
prospects in shallow and deep water.
Institute of petroleum technology of Norwegian, Institute of Science and Technology
for reservoir modeling using Fractal Theory and 4D Seismic for Enhanced Oil
Recovery (EOR).
Agarkar research Institute, IIT – Mumbai, MS University Baroda, TERI New Delhi,
UNSW, Sydney, Australia, and University of Calgary, Canada are some of the
institute from which ONGC has tie – up.
OPERATIONAL PROCESS
ONGC is the only fully-integrated petroleum company in India, operating along the
entire hydrocarbon value chain. It is not only the largest E&P Company in India but also
one of the most valuable companies in India. Oil and Natural Gas Corporation Limited
(ONGC) (incorporated on June 23, 1993) is engaged in exploration and production
activities. It is involved in exploring and exploiting hydrocarbons in 26 sedimentary
basins of India. It owns and operates more than 11,000 kilometers of pipelines in India.
Its main operation is in Crude oil and gas extraction, which is further sent to refinery(like
Tatipaka, Hazira, Ussar) where it is refined for more value added products (e.g. Naptha,
M.S., LSHS, Kerosene, HSD etc.) and from there it is again sent to further buyers(like
IOCL, HPCL, BPCL, GAIL etc) and subsidiary companies(MRPL) . ONGC has
agreement with IOCL, HPCL, BPCL, for supply of crude oil to them, then ONGC has
agreement with GAIL for supply of LNG to them. Then the remaining fractionates of
Ethane – Propane, HSD, M.S. are sold either through contract, provisional government
directives or through their trading desk in open market.
22
ONGC PRODUCING AREAS
Table 4
Company/State Basin/AssetOil
FieldsGas
Fields
Oil & Gas
Fields
Total Fields
ONGC 8 106 216 330a) ONSHORE
Gujarat Cambay 2 7 83 92Assam Upper Assam 0 0 29 29
Assam & Assam
Arakan0 4 2 6
Rajasthan Jodhpur 0 7 0 7Andhra Pradesh K.G.Basin 0 32 11 43
Tamil Nadu Cauvery 0 7 18 25
TripuraAssam Arakan
Fold Belt0 7 0 7
NagalandAssam & Assam
Arakan2 0 1 3
b)OFFSHORE
East Coast Cauvery Offshore 0 1 3 4
KG Offshore
(Shallow)0 4 5 9
KG Offshore
(Deep)0 9 2 11
Andaman 0 1 0 1
West Coast Cambay 0 0 2 2 Mumbai Offshore 4 23 59 86 Kutch 0 4 1 5
These are the main assets of ONGC which produce Crude oil and other associated gases.
These basins are sub divided into small number of well sites. Each basin have small
refining plant installed over there, to do some minor refining(according to the purity level
of crude) of crude at the site itself, then the refined crude and value added
products(derived from the plant) are stored at a “Group Gathering Station(GGS)” which
are located at that basin. Each basin has different number of GGS according to their
production level.
23
Then some amount of crude oil and other value added products are send to different
refinery for further process, some amount is sent to fertilizer plant for use as a feedstock
for their end products, some amount is sent to power plant where it is useful for power
generation, and likewise all the amount is distributed among these 3 industry (refinery,
fertilizer, power plants) and some other small scale industries in their vicncity. Major of
the crude oil and value added products are send to refinery. Below a table is given
showing distribution of crude oil to different refinery:
SALES PATTERN OF ONGC CRUDE OIL
Table 5
ONGC Crude Refinery/Location Mode of Transport(1) Mumbai High IOC,Vadinar Tanker BPCL, Mumbai Pipeline HPCL, Mumbai Pipeline CPCL, Chennai Tanker KRL, Kochi Tanker HPCL, Vizag Tanker MRPL, Mangalore Tanker (2) Gujarat
North Crude IOC, Koyali PipelineSouth Crude IOC, Koyali Pipeline
(3) Tamil Nadu
Cauvery CPCL, Chennai Pipeline
(4) Andhra Pradesh KG Crude HPCL, Vizag Tanker
(5) Assam Crude IOC, Guwahati Pipeline BRPL, Assam Pipeline NRL, Numaligarh Pipeline
The maximum of sales revenue earned by ONGC is from sales of crude oil rather from
the sales of other value added products (e.g. naphtha, M.S., H.S.D., S.K.O., C2 – C3,
24
etc). This crude oil sales revenue is received periodically from clients according to the
crude oil delivered and MOU (explained later) signed between them.
Product type
1st April 02 to 31st
March 03
Percentage of product
sales
1st April 03 to 31st
March 04
Percentage of product
sales
1st April 04 to 31st
March 05
Percentage of product
sales
1st April 05 to 31st
March 06
Percentage of product
sales
Crude oil 244131 70.37 222124 68.33 311824 66.76 317357 65.84Natural Gas 49986 14.41 52039 16.01 53206 11.39 66701 13.84
LPG 19087 5.50 16352 5.03 12066 2.58 16293 3.38Naphtha 4906 1.41 5785 1.78 6546 1.40 9876 2.05
Ethane/Propane 5837 1.68 4779 1.47 5705 1.22 7401 1.54Aromatic Rich
Naphtha17129 4.94 16753 5.15 22714 4.86 25803 5.35
Superior Kerosene Oil
3188 0.92 2658 0.82 16896 3.62 10605 2.20
HSD 80 0.02 85 0.03 29277 6.27 23403 4.86Motor Siprit 0 0.00 0 0.00 6846 1.47 3797 0.79
Others 995 0.29 1060 0.33 1434 0.31 617 0.13Price Revision
Arrears1568 0.45 3461 1.06 584 0.13 156 0.03
TOTAL 346907 325096 467098 482009
SALES REVENUE CONTRIBUTION BY DIFFERENT PRODUCT
Table 6
Fig 2
25
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
500000
Revenue
Years
SALES REVENUE FROM CRUDE
TOTAL 346907 325096 467098 482009
Crude oil 244131 222124 311824 317357
2003 2004 2005 2006
CRUDE OIL PRICING
CRUDE OIL PRICING
IDENTIFICATION OF PROBLEM
Problem Statement
1. Most of the agreements of ONGC with their buyers have expired, leading to
payments received by ONGC at old rates, which are generally low.
26
2. Since along with the crude oil, ONGC also produces natural gas, and some
other petroleum products, as the share of these products are very minor in
ONGC revenue. Therefore, there hasn’t been a fixed pricing mechanism for
these products.
Hypothesis, if any
In this project there was no assumptions was as, such made and no hypothesis was
thought to be appropriate for conducting the research investigations.
LITERATURE REVIEW
In order to check on the entire pricing methods adopted by ONGC for sale of their
crude oil they follow list of documents which are reviewed & scrutinized.
Some books and documents which are studied for taking the review are as follow:
- Sale agreement of crude oil with IOCL,
- Sale agreement of crude oil with BPCL,
- Sale agreement of crude oil with HPCL,
- MoP&NG provisional circular regarding natural gas,
- Sale agreement of Methane and Ethane with IPCL.
RESEARCH DESIGN METHODOLOGY
Data sources
For the collection of data various websites have been visited and the personal
interviews have been done.
27
The data shown has been taken from the internal documents and their description is
given in detail. No survey and sample is taken in this study, since there is no need
of it.
ANALYSIS AND FINDINGS
DIFFERENT PRICING METHODS
1) ADMINISTERED PRICE MECHANISM
It refers to a controlled price scenario wherein a posted price is fixed which is then used
to compute royalties and income tax paid to producing countries. APM ensures stability
of prices by insulating domestic market from the volatility of prices in international
markets. In the administered pricing mechanism, the pool price of crude is taken. This is
the weighted average of world and indigenous prices. Product price adjustments help to
keep the prices of some items lower and some others higher than the actual prices based
on cost.
2) IMPORT PARITY PRICE
Following components are added to the Free on Board (FOB) price of the respective
marker crude in the international market to calculate the import parity price of domestic
crude:
a) ocean freight
b) insurance
c) customs duty
d) ocean loss
e) port dues
f) excise duty
g) freight upto depots
h) marketing cost/margin
28
i) state specific irrecoverable levies
j) delivery charges from depot to retail pump outlets
k) sales tax/other local levies
l) Dealers’ commission, etc.
In simple words, Import Parity Price (delivered prices) is the lowest price of product
sourced from different markets, plus the freight rate on the most common size vessel used
for the route from the port of loading to the port of destination, plus/minus quality
adjustments. The concept of import parity or alternate cost of supply essentially means
allowing domestic producers to price their products at the total landed cost including
import duties as if the same products are imported.
However, import parity allows domestic producers to profiteer (middleman) at the cost of
the consumer.
3) EXPORT PARITY PRICE
Export Parity Price (fob prices) is the highest price of possible export markets, minus the
freight rate in the most common size vessel used for the route from the port of loading to
the port of destination, minus duty charges.
4) TRADE PARITY PRICE
Trade parity pricing model is a weighted average of the import parity and export parity
prices in certain ratio. In trade parity, pricing is lower than the import parity to the extent
of freight cost and other taxes and duties.
5) COST PLUS FORMULA
Cost plus formula includes acquisition cost of crude and other operating costs with a
certain assured post tax return on net worth.
29
INTERNATIONAL PRICING METHODS
In general, crude oil is sold through a variety of contract arrangements and in spot
transactions. Oil is also traded on futures markets but not generally to supply physical
volumes of oil, more as a mechanism to distribute risk. These mechanisms play an
important role in providing pricing information to markets.
In fact, the pricing of crude oils has become increasingly transparent from the 1990s
onwards through the use of marker crude such as:
West Texas Intermediate (WTI – USA)
Brent (Europe and Africa)
Dubai and Oman (Middle East)
Tapis and Dubai (in Asia)
The main criteria for a marker crude is for it to be sold in sufficient volumes to provide
liquidity (many buyers and sellers) in the physical market as well as having similar
physical qualities of alternative crude.
In addition, the marker crude should provide pricing information. WTI does this through
its use on the New York Mercantile Exchange (NYMEX) as the basis of a futures
contract where trade is equivalent to many hundreds of millions of barrels per day, even
though physical WTI production is less than 1 million barrels per day. A futures contract
for crude oil is a promise to deliver a given quantity of crude oil but this rarely occurs as
participants are more interested in taking a position on the price of the crude oil. Futures
markets are a financial instrument to distribute risk among participants with the side
effect of providing transparency on the pricing of crude oil.
Brent offers pricing information based more on the physical trading of oil through spot
trading, and forward trading but also offers futures trading but not to the same extent as
WTI.
30
In Asia there is no futures exchange where crude oil is traded and which would provide
pricing information to the same extent as WTI and Brent. In Asia the pricing mechanism
for say Tapis, a marker for light sweet crude in the region, is based on an independent
panel approach where producers, refiners and traders are asked for information on Tapis
crude trades.
PRICING METHODS FOLLOWED BY SOME OF THE COUNTRIES
MIDDLE EAST
Most of the oil produced in the Middle East is sold via long-term contracts between
national oil companies and direct users, such as ExxonMobil, TotalElfFina,
ChevronTexaco, BP-Amoco, or AGIP. The oil producers also sell to large trading
companies, such as Mark Rich in Switzerland or Phibro in the United States, which in
turn resell to ultimate users. The contracts between the users and producers generally
specify that prices be set (often quarterly) by the producer based on a standard
benchmark, such as prices of Brent or Dubai light, and adapted to conditions such as
distance, sweetness (level of sulfur), and gravity.
The most common price benchmarks used in long-term contracts between the Gulf state
oil companies and their buyers are Dubai Light for shipments to the Far East, Dated Brent
(North Sea) for shipments to Europe, and West Texas Intermediate (WTI) grade for
shipments to the United States. Prices of the crude oil actually shipped are modified by
adding or subtracting a certain amount per barrel to reflect the grade, the quality, the
distance to the market served, and the timing of the purchase relative to the benchmark
quote.
When a producer is ready to effect a shipment under a given contract, it contacts the user,
who in turn arranges to have a tanker ready at the point of sale for loading within forty-
eight hours. Shippers and users, who have quite precise expectations on when to expect
loading orders, often have tankers waiting nearby the loading facilities. In the case of
Gulf shipments, tankers wait near Khor Fakkan on the Gulf of Oman.
31
There are two mains systems used in pricing in the Middle East crude, formula
pricing (price calculated with a formula) and retroactive pricing. The big
difference between them is timing of pricing. The formula price is typically
announced a few days in the month before loading, while the retroactive price the
first few days in the month after loading.
With the formula pricing system competing crude in a given destination region
are first put to relative evaluation by taking into account qualitative differential
from the marker crude and transportation cost. Then the formula price is set in
reflection to the delivered prices of competing crude. The formula price has three
key characteristics: (1) announced in advance of loading, (2) destination-
dependent, and (3) usually non-tradable.
With retroactive pricing, the price is determined after loading, destination is not
designated and crude are tradable to someone else. When setting up the
retroactive price, price responsiveness, fairness and confidence are taken into
account. Crudes with the formula price are marketed not only in Asia but also
around the world, such as the US, while those with the retroactive price trend to
be sold in the East only.
AUSTRALIA
Tapis is used as the appropriate Australian crude marker because of the strong
trade relationship Australia has with the region as a source for crude oil and also
petroleum product imports.
The Singapore benchmark price of unleaded petrol (MOPS95) & diesel (Gas oil)
are the key petrol and diesel price benchmarks for Australia.
Means of Platts Singapore. The mean of high and low components of a Platts
assessment for oil cargoes loading from Singapore. Often used as a component in
floating price deals.
CHINA
China with its booming economy is becoming the second largest consumer of
petroleum.
32
From 30th January 2007, China adopted the new pricing policy i.e. the crude plus
cost pricing mechanism.
“crude price plus cost” method was based on the Brent, Dubai and Minas crude
oil prices, taking into account processing costs and possible opportunities for
enterprises to profit.
MALAYSIA
Since 1970s, the Malaysian petroleum industry had been dominated by the national oil
and gas corporation, Petronas as well as Shell along with ESSO, Mobil, BP and Caltex.
The sector had been deregulated in 1983, except for automatic pricing mechanism to
regulate retail selling prices for MS, HSD for transportation & LPG for domestic use.
DOMESTIC PRICING METHODS
Since India is a booming economy, and its oil reserves are not sufficient to meet its
domestic oil demand. Therefore they import approximately 70% of their crude oil
demand, for this most of Indian oil companies has long term contract with foreign
producers. Indian crude oil prices are set according to the prices of Indian crude oil
basket. This crude oil basket is the mixture of different variety of crude from where India
imports their crude oil. This mixture can be changed according to the places from where
India imports their crude. This basket is maintained according to the weight age of
different types of crude oil imported.
Fig 3
33
India follow import parity prices theory for pricing of crude oil imported & for other
value added products domestically produced. But for some of the value added products
(e.g. M.S. & H.S.D.), India follow trade parity prices theory in the mixture of (80:20) i.e.
IPP & EPP respectively. Prices of value added products are set by Indian Oil Corporation
Limited which is applicable throughout the country and followed by all the companies
domestically, and these prices differ on account of state levied taxes etc. in different
states. Prices of crude oil produced domestically are priced differently by the companies
on the basis of their usage (used domestically or exported after refining), but still they are
priced on the basis of import parity prices, whereby different companies takes some
marker crude (whose quality is most similar to their own crude characteristics) as their
benchmark and then adjusted their prices, whether by adding premium or deducting
discount on the basis of differential of their quality, then they get prices of marker crude
oil on FOB basis in India then the insurance, taxes, and different other necessary charges
are added.
34
ONGC PRICING MECHANISM
CRUDE OIL
The government of India, deregulated the Oil sector effective from March’02, crude oil
price became market determined from 1 April ’02. The upstream oil companies (NOCs)
viz., ONGC and OIL entered in to MoU with PSU oil refineries through which crude oil
is sold on the basis of negotiate pricing basis. Though the pricing is deregulated, the
allocation of ONGC’s and crude oil is still regulated by the government.
Based on the MoUs, all the crude of ONGC, being sweet in nature, are benchmarked to
Nigerian sweet crude namely Bonny Light. The components of the crude price received
by ONGC are:
Table 7
CRUDE PRICES COMPONENTS
COMPONENTS OFFSHORE ONSHOREQuality adjusted FOB
price---Yes--- ---Yes---
Custom Duty 50% @ 5% of FOB price ---No---
Sales tax 50% of prevalent rateOn actual basis except
Assam crudeNotional Ocean
freight---Yes--- ---No---
Octroi (applicable for Mumbai refineries of HPCL and BPCL only)Crude pipeline
chargesOnly supplied to BPCL and
HPCLApplicable to all except
Assam
NCCDOnly 50% @ Rs. 50/MT
applicable from 1 March ‘03---No---
Special discount on North Gujarat crude only
These MoUs were valid for a period of two years. Thereafter, the MoU could not be
extended amongst ONGC and refineries due to non agreement in pricing terms and
introduction/continuation of subsidy sharing mechanism. Therefore, as on date, the
pricing and other terms for supply of crude oil by ONGC continues to be governed on the
basis of these expired MoUs.
35
So from the above we can find out that the main components for pricing of crude oil are
following:
1. Monthly average of high – low Free on Board (FOB) price of Nigerian Bonny
light as per Platts Oilgram.
2. Difference in quality between Bonny Light and ONGC crude (termed as Gross
Product Worth) determined on the basis of product yield and prices on 4 cut
basis.
3. Quality adjustment on account of excess Basic Sediment and Water.
4. Freight and Pipeline / Transportation charges.
5. Taxes and Duties.
6. RBI reference rate for conversion to Indian Rupees
PRICING MECHANISM
The Net Price of crude oil is calculated as shown below:-
1. Free on Board Price (FOB price) of ONGC crude:-
The price actually charged at the producing country’s port of loading. The
reported price should be after deducting any rebates and discounts or adding
premiums where applicable and should be the actual price paid with no
adjustments for credit terms.
It comprises of -
(a) Base price i.e. FOB of marker crude in case of ONGC we are taking FOB
price of Nigerian Bonny Light.
(b) Gross Product Worth (GPW) Differential based on 4 cut basis –
Table 8
CARBON CONTENT PRODUCT PRICE Upto C4 Liquefied Petroleum Gas(Saudi Armaco)
C5 – C175 Naphtha (Singapore)C175 – C350 Gas Oil 0.5%(Singapore)
36
C350+ Fuel Oil and LSWR (Singapore)
Gross Product Worth (GPW) can be defined as the multiplication of the spot
price for each refined product by its percentage share in the yield of the total
barrel of crude.
Now to find the GPW differential we take the difference between GPW of
ONGC crude and GPW of Bonny Light.
GPW differential = GPW (ONGC) – GPW (Bonny Light)
(c) Specific Discount for NG crude - $0.75 / barrel on account of high LSHS
content.
(d) Discount for excess Basic Sediment and Water (BS&W)
Table 9
.
FOB price = Base price + / - GPW differential – Specific discount for NG crude –
Discount for excess BSW.
2. Ocean Freight (for Offshore crude only)
Net freight is the difference between the Notional freight for bringing Crude Oil
from Import port to refinery port and the freight for bringing crude from
Mumbai port to refinery port.
BS&W LEVEL (%) DISCOUNT (US $ / BARREL)
0.2%<BSW<0.5% $0.10 per barrel 0.5%<BSW<0.1% $0.15 per barrel
Increase of BS & W by every 0.5%
Additional discount of $ 0.05 per barrel
37
(a) Inwards Freight - Notional freight for bringing Crude Oil from Import
port to refinery port.
It is calculated on the basis of World Scale rates and AFRA rates.
World Scale rates published on yearly basis and vary from Port to
Port
AFRA rates published on monthly basis and vary from Vessel Size
(b) Outward Freight - Actual freight incurred by refinery for bringing crude
from Mumbai port to refinery.
Net Freight = Inward Freight – Outward Freight.
3. Custom Duty & NCCD (for Offshore crude only)
The Custom duty is payable on FOB price at the applicable rate and NCCD is
payable at Rs 50/MT (applicable w.e.f.1st March 03). Custom Duty and NCCD
are equally shared by ONGC with refineries.
4. Crude Pipeline charges for North Gujarat, South Gujarat, and Cauvery crude as
per last rates approved by PPAC in 2001-02. These hold for onshore crude and
for BPCL and HPCL refineries in case of offshore crude.
5. Sales Tax at applicable rate for onshore crude. In respect of offshore crude the tax
amount is equally shared by ONGC and refinery.
6. Octroi is payable only in respect of MH crude supplied to BPCL and HPCL
Mumbai.
NET PRICE OF CRUDE OIL = FOB Price + Ocean Freight + Custom Duty +
NCCD + Pipeline charges + Sales tax + Octroi
Hypothetical Example
38
The above pricing mechanism can be explained with the help of an example of
Mumbai High crude and South Gujarat crude supplied to IOC.
Particulars Mumbai High South GujaratUS $/ barrel
(1) FOB price of Bonny Light crude 60.00 60.00 (b) GPW Differential (i) GPW of Marker crude (Bonny Light) 59.05 59.05(ii) GPW of ONGC crude 56.60 58.75GPW Differential = (ii) - (i) -2.45 -0.30 (c ) Basic Sediment and Water 0.00 0.10 FOB Price of MH crude (a) - (b) - (c ) 57.55 59.60 (2) Ocean Freight (a) Inward Freight 1.03(b) Outward Freight 0.60Net Freight (a) - (b) 0.43 0.00 (3) Custom Duty @ 5% on FOB Price 1.44 0.00to be paid 50% by ONGC (4) NCCD @ Rs.50/MT 0.08 (*) 0.00to be paid 50% by ONGC
(5) Crude Pipeline charges 0.30Assumed at Rs. 95/MT
(6) Sales Tax @ 4% 1.15 2.40to be paid 50% by ONGC for MH crude (7) Net Price = (1)+(2)+(3)+(4)+(5)+(6) Dollar per barrel 60.65 62.30Rupee per barrel 2547.30 2616.60
(*) Note: It has been assumed that 1 barrel = 7.5 MT and 1 Dollar = Rs 42
SUBSIDIY SHARING MECHANISM
Though the intention of the government was to deregulate the oil sector completely, this
could not be done initially in the case of LPG (supplied to Domestic sector) and SKO
(supplied to PDS) and later on in respect of MS and HSD. Due to various economic
compulsions, the retail selling prices of these products could not be increased, whereas
the purchase prices of crude oil and these products to refineries are linked to import
parity. As a result the Oil marketing companies (OMCs) started to incur substantial
39
under recoveries on selling these products. The government introduced a subsidy sharing
mechanism from 2003 – 04 wherein the upstream companies i.e. ONGC, OIL, and GAIL
were also asked to share the part of under recoveries of OMCs in the form of subsidy
discount. The under recovery is borne by ONGC in the form of discount on crude oil,
domestic LPG and SKO PDS supplied by ONGC. The amount of subsidy shared by
ONGC is as follows:
Table 10
Year Amount (Rs. Crores)2003 - 04 2,6902004– 05 4,1042005– 06 11,9572006- 07 17,026
NATURAL GAS
Unlike crude oil, the natural gas is not deregulated. The price of majority of gas
produced and sold by ONGC to GAIL is regulated by MoP&NG. The current price of
natural gas sold by ONGC to GAIL is regulated by MoP&NG’s which conveyed the
approval of the government on partial rationalization of gas price effective from 1 July
’05. The government decisions inter – alia provided the following for pricing of gas
produced by ONGC:
1. The determination of producer prices for gas produced by ONGC will be
referred to the Tariff Commision. At present, ONGC and OIL produce about 55
MMSCMD gas (hereinafter referred to as APM gas). Till the tariff commission
submits its recommendation and a decision is taken thereon, the consumer price
of APM gas is fixed at Rs. 3200/MCM on adhoc basis;
2. All the available APM gas would be supplied to only power and Fertilizer sector
consumers, along with specific end – users committed under court orders/small
scale consumers having allocation up to 0.05 MMSCMD at the revised rate of
Rs. 3200/MCM. The price would be linked to the calorific value of 10,000
K.cal/M3. However, the gas price for transport sector (CNG), Agra – Ferozabad
Small Industries and small scale consumers having allocation up to 0.05
40
MMSCMD would be progressively increased over the next 3 – 5 years to reflect
the market price.
3. Consumers, other then those mentioned in point (2) above, will be supplied gas
at market price depending on the producer price being paid to JVs and private
operators at landfall point subject at a ceiling of ex – Dahej RLNG price of US $
3.86/mmbtu for the year 2005 – 06. For the NE region, Rs. 3200/MCM will be
considered as market price during 2005 – 06.
4. For the year 2005 – 06, the producer price of ONGC is determined after
deducting gas pool contribution of Rs. 150 Crore from the consumer price.
5. Further, ONGC will no longer bear the purchase differential which was arising
as a result of selling higher JV gas at a lower price to power and fertilizer
consumers.
6. Effective from 1 April’06, ONGC will get a fixed producer price of Rs.
3200/MCM till Government takes final decision on its price based on
recommendations of Tariff Commission.
7. The price of gas for NE region, is pegged at 60% of the revised price of general
consumers i.e. Rs. 1920/MCM.
8. subject to the determination of the producer price, based on the recommendation
of the Tariff Commission, any additional gas as well as future production of gas
from new fields, to be developed in future by ONGC/OIL, will be sold at market
price in the context of NELP provisions.
Subsequently, MoP&NG conveyed the revision in APM price for consumers other than
Power & Fertilizer. MoP&NG has said to increase the price of APM gas supplied to
consumers other than Power and Fertilizer sector by 20%. Accordingly, the price for
general consumers was increased to Rs. 3840/MCM and price for North East consumers
was increased to Rs. 2304/MCM with effect from 6 June’06. However, producer price
for ONGC remains at Rs. 3200/MCM for general consumers and Rs. 1920/MCM for
North East consumers.
PAST PRICING POLICIES IN INDIA
41
The history of Crude pricing in India can be discussed in three time period as under:
Table 11
FROM TO MECHANISM
TillMarch, 1998
APM(Administered Price Mechanism)
April, 1998
March, 2002
APM (phased dismantling being underway) and complete dismantle of cost plus formula
April, 2002
onwardsMarket determined price mechanism (MDPM) after
total dismantling of APM
(A) ADMINISTERED PRICE MECHANISM (APM)
The first attempt to regulate the oil prices was based on Value Stock Account (VSA)
procedure agreed between the government of India and Burmah Shell in 1948. In 1958,
VSA was terminated and Import parity pricing was brought on the recommendation of
Dalme Committee (1961) and Talukdar Committee (1965).
In 1969, the Shantilal Shah Committee examined and recommended the removal of
Import Parity Pricing.
Evaluation of APM
On 16th March 1974, the government appointed Oil Prices Committee (OPC) under
the stewardship of Dr. K.S.Krishnaswamy, the then Executive Director of RBI. In
November 1976, OPC recommended discontinuance of the import parity system and
introduction of a pricing system based on domestic cost of production.
The major reasons cited by OPC for a complete move away from import parity pricing
to APM were as follows:-
1. The import of products constituted less than 10% of the total demand of the country
and with the continued increase in the domestic refining capacity; the share of
imported products was expected to come further down.
42
2. The export of products from Middle East constituted only about 5% of the total
export of crude oil and products and hence, the posted price of the products did not
reflect prices appropriate to Indian conditions
3. There was a time lag in the response of products posting to the changes in crude
prices and also that the posting of all the individual products did not move in
unison.
4. There was no unique system of stable crude prices which could be linked to a set of
posting of individual products.
5. The import parity principle did not take into account the inter refinery differences in
respect of type of crude oil, production pattern and size complexities of the
refineries.
The Administered Pricing Mechanism (APM) was put to practice as per
recommendation of Oil Pricing Committee during the end of 1976 and was further
strengthened with modification in the year 1984.
Objective of APM
1. The pricing of petroleum products for the refining and marketing units was based
on the retention concept where under oil refineries, oil marketing companies and the
pipelines were compensated operating costs and return @ 12% post tax worth.
2. The ex- storage ceiling selling price were uniform at all the refineries.
3. For consumers, the selling price of a product was arrived at by adding the
applicable freight from the oil refinery to the depot and from the depot to the retail
outlet or direct consumers. Dealers commission wherever applicable was also
added.
4. The prices of certain petroleum products like kerosene, LPG (domestic) and feed
stocks for fertilizers units were subsidized for socio-economics reasons. Similarly,
fuels like petrol, ATF, LPG for industrial use were priced above the cost of
production to discourage their inessential use.
43
5. The prices of petroleum products were reviewed and revised from time to time to
see that the oil pool accounts were balanced.
September 1992 to March 1998
The prices of indigenous crude oil were based on cost plus return of 15% post tax on
capital employed.
Table 12
DATE OF REVISION
CRUDE OIL BASIC PRICE (RS/MT)
16.9.92 1506.001.1.93 1796.001.4.96 2119.73
The “R” Group that submitted its report in September, 1996, recommended dismantling
of the APM for the following main reasons:-
1) Cost Plus compensation did not provide strong incentive for cost reduction
thereby breeding inefficiencies.
2) Absence of internationally competitive petroleum sector in the context of global
economy.
3) With the entry of private sector, gold plating of the costs would be encouraged.
4) Wide distortion in consumer prices due to subsidies/ cross subsidies.
5) Adverse impact on oil companies due to huge deficits in Oil Pool Accounts as
price revision was not timely.
(B) DISMANTLING OF APM (April ‘1998 onwards)
44
In September 1997 the Government decided to dismantle Administered Price
Mechanism (APM) and introduced Market Driven Pricing Mechanism in phased
manner. The Cost plus system was abolished.
Effective 1.4.1998, the crude oil producers had been paid a pre-announced increase in
percentage of the international FOB prices on year to year basis subject to a floor of
Rs1991/MT and a ceiling of Rs5570/MT
Table 13
PARTICULARS MODEL
Transition Phase 4 Years
Year 1 (1998-99)
Removal of cost plus formula and payment to crude
producers as percentage of weighted average FOB price
of actual imports
Sourcing of crude
Year 2 (1999-2000)
Payment to crude producers as percentage of weighted
average of FOB
Year 3 (2000-01)
Payment to crude producers as percentage of weighted
average FOB price
Year 4 (2001-02)
75 per cent
Sourcing of crude to be liberalized and import to be allowed for joint and private sector refineries under actual user license
77.5 per cent
80 per cent
45
Payment of crude producers as percentage of weighted
average FOB price
2002 onwards
82.5%
Withdrawal of cost plus formula for shipping of crude oil and move towards market
related rates
Deregulation of imports and pricing
Full deregulation
Now since the APM was considered for dismantling it was proposed that it will be done
in phases which were suggested by the “Expert Technical Group (ETG)” appointed by
the government of India.
The recommendations of ETG were:-
1. There should be a phased de-regulation of the sector spread over a period of four
to five years, culminating in total de-regulation by 1st April 02.
2. The first phase encompasses full de-regulation of upstream refineries and partial
de-regulation of marketing sectors.
3. The customs tariff structure, which provided for a negative duty protection needs
to be amended so as to attract investments to the sector.
4. Changes in tariff to be done over the transition phase, keeping in mind the
equilibrium to be maintained between the Governments’ revenue needs, necessity
to keep low consumer prices and need to increase the profitability of the
companies.
5. Subsidies to be phased out gradually to within acceptable limits which will be
provided through the budget.
6. In the end, on de-regulation, the duties be so positioned that the tariff protection
becomes 25%of the value addition while the government revenue is maintained.
46
Reasons for Dismantling of APM
1. APM cannot generate sufficient financial resources required for investments in
upstream and downstream sectors.
2. Private Capital as well as foreign direct investment would not be forthcoming in
view of the inherent regulatory controls imposed by the government.
3. APM does not provide strong incentives for investments in technological up
gradations or for its cost minimization.
4. APM has not been completely successful in achieving the primary objective of
ensuring s consumer friendly and internationally competitive vibrant petroleum
sector capable of global presence to provide energy security to the country.
5. Since all costs are reimbursed, there is no incentive to make profitable
investments. Therefore cost plus formula inbreeds inefficiencies.
6. With the entry of the private sector, the cost plus formula will encourage “gold
plating” of the plant and inflate costs which the consumer would have to bear.
The subsidies and cross subsidies have resulted in wide distortion in the consumer
prices and do not reflect economic cost of petroleum products, which are not being
passed on to the consumers automatically. This in turn has led to inefficient use of
precious fuels and large scale misuse of highly subsidized products.
(C) CRUDE PRICING POST APM – AFTER MARCH 2002
As per the Government notification of November 1997, the Finance Minister
announced the dismantling of the Administered Price Mechanism in the petroleum
sector from April1, 2002. The pricing of petroleum products will become market
47
determined. Crude pricing became fully deregulated. Crude oil is being sold to
Refineries on the basis of negotiated pricing principles.
Post APM, the government of India brought Market Determined Price Mechanism,
the prices of indigenous crude oil are determined on the basis of the Crude Oil Sales
Agreement (COSA) between the producers and the refineries by benchmarking
various indigenous crude oils to equivalent international crude oils.
As far as ONGC is concerned, Memorandums of Understanding (MOUs) were signed
with Public Sector Refining companies, namely, IOCL, BPCL and HPCL for two
years till March 2004. Crude oil has been benchmarked to Nigerian Sweet Crude
namely Bonny Light due to its similarity in quality. However ONGC does not receive
full import parity and instead it receives only the FOB price adjusted for the Gross
Product Worth (GPW) and discount towards Base Sediment and Water (BS&W) plus
transportation charges in respect of crude oil sales to all refineries.
Components of crude price
The ONGC pricing Mechanism is based on the Market Determined Price Mechanism
(MDPM) which was adopted after the dismantling of Administered Price Mechanism
w.e.f.1st April 2002.
The various components that are considered while determining the pricing of crude
oil in term of Memorandum of Understanding are as under:-
1. Monthly average of high – low Free on Board (FOB) price of Nigerian Bonny
light as per Platts Oil gram.
2. Difference in quality between Bonny Light and ONGC crude (termed as Gross
Product Worth) determined on the basis of product yield and prices on 4 cut basis.
3. Quality adjustment on account of excess Basic Sediment and Water.
4. Freight and Pipeline / Transportation charges.
5. Taxes and Duties.
6. RBI reference rate for conversion to Indian Rupees.
48
PRICING OF OTHER VALUE ADDED PRODUCTS
In India, prices of value added products are formulated by Indian Oil Corporation
Limited on the basis of import parity and trade parity basis. Except M.S. and H.S.D,
prices of all other Value added products are based on Import parity prices, whereas
prices of above said two products are based on trade parity prices in the ratio of 80:20
(i.e. import parity: export parity).These prices are set as same as crude oil prices are
set, but the components are different from those of crude oil price methodology.
INVESTMENT PORTFOLIO ANALYSIS
49
Treasury department in ONGC has been involved in different activities. It takes care of
the Cash Management, Working Capital Management and Investment of short-term
Surplus Funds apart from some routine nature of work like approving expenses, bills etc.
Investment of short term surplus is the main function of treasury Department in ONGC
while taking decision regarding investment, various other factors like maintaining proper
liquidity (Cash Management), taking care of future requirements of funds etc. are kept in
mind.
These factors are required to be always considered to ensure availability of required
funds in proper time to ensure smooth conduct of the business of the Company and to
deploy the surplus funds of the Company from time-to-time to avoid idling and generate
returns and making availability of funds whenever required in future.
IDENTIFICATION OF PROBLEM
Problem Statement
To get the maximum return on short term investments with minimum risk.
Hypothesis, if any
In this project it is assumed that the investment procedure of ONGC is very secure
and reliable and there can’t be any more optimal procedure then that.
LITERATURE REVIEW
In order to check on the entire investment procedure adopted by ONGC for
investment of their surplus fund the following list of documents which are being
reviewed & scrutinized.
Some books and documents which are studied for taking the review are as follow :
- Investment procedure documents of ONGC,
50
- Cash forecasting process,
- Investment notes of ONGC,
- Treasury module of ONGC,
- Reports of CRISIL and PricewaterhouseCopper,
- Department of Public Enterprise website.
RESEARCH DESIGN METHODOLOGY
Data sources
For the collection of data various websites have been visited and the personal
interviews have been done.
Exploratory research has been done for finding out the new avenues of investment,
like UTI investment schemes. For UTI data,
ANALYSIS
Guidelines for investment
ONGC regularly invests its short term surplus funds in accordance with the DPE
(Department of Public Enterprise) Guidelines that have been issued for PSUs as well as
decisions taken by the Board of Directors of ONGC. These guidelines and decisions are
with respect to investment avenues, exposure limits, delegations, etc. The practices in this
regard have evolved over a period of time.
So, before going in detail to the procedure of investment of surplus funds in ONGC, we
need to understand the DPE guidelines with regard to investment of surplus funds and
other facts.
51
DPE GUIDELINES FOR INVESTMENT OF SHORT TERM SURPLUS BY
PUBLIC SECTOR ENTERPRISES:-
The GOI issued vide 14th December 1994, 1st November 1995 and 11th March 1996, 14th
February 1997, 29th September 2005 detailed guidelines on investment of surplus funds
by the public sector undertakings. The memorandum was prepared to ensure that no
misuse of PSU funds recurs. These guidelines are in consultation with the Ministry of
Finance.
Principles concerning investments
1. PSU’s are not allowed to invest surplus funds in public or private mutual funds as
they are equity based and are, therefore, inherently risky.
2. There should be proper commercial appreciation before any investment decision of
surplus finds is taken and best estimates of availability of surplus funds may be
worked out. Therefore, it has been decided to empower Central PSEs to prepare the
best estimates of the availability of surplus funds for investment decisions to be
taken by the Board of Central PSEs and then keep the Administrative Ministry
informed. Consultation with administrative ministry may not be made necessary.
3. While one year ceiling on the remaining maturity period shall hold good for the
general instruments the public enterprises can also select treasury bills and GOI
securities up to three years maturity period.
4. Investment decision should be based on sound commercial judgement. The
availability should be worked out based on cash flow estimates taking into account
working capital requirements, replacement of asset and other foreseeable demands.
5. Funds should not be invested by the PSE’s 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. But now it is
permitted to Central PSEs to take decision on all matters relating to short term cash
management, as they would be the best judge of asset – liability mismatch in the
short run.
52
Eligible Investments
1. Term deposit with any scheduled commercial bank, the net worth of the bank must
not be less than Rs 100 Cr i.e. paid up capital and free reserves must not be less
than Rs. 100 Cr., fulfilling the capital adequacy norms as prescribed by the R.B.I.
from time to time.
2. Credit ratings by agencies must be classified into investment grade and non-
investment grade. Since ‘highest credit rating’ would mean the top most in the
investment grade which would limit choice and probably lower the overall yield,
PSU’s will now be free to invest in instruments falling under investment credit
rating .
3. Inter – corporate loans are permissible to be lent only to Central PSEs, which have
obtained highest credit rating awarded by one of the established Credit Rating
Agencies for borrowings for the corresponding period. The GOI has reiterated that
inter-corporate borrowing programme can also be credit rated by rating agencies
and the public enterprise may invest surplus funds only on the basis of such ratings.
Authority Competent to Invest
1. Decision of investment of surplus funds shall be taken by the PSU board. However
decisions involving investing short term surplus funds up to one year maturity may
be delegated up to prescribed limits of investment to a designated group of
directors. Where such delegation is made the delegation order should spell out the
levels of approval.
INVESTMENT OF SURPLUS FUNDS INVOLVES THE FOLLOWING MAJOR
ACTIVITIES
1. Preparation of Cash Forecast and determining investible surplus, if any.
2. Inviting quotations from eligible parties, as may approved by the competent
authorities from time to time.
53
3. Investment decisions after necessary deliberations and recommendations by the
Investment Committee if senior officials of ONGC constituted by the INGC Board
and approved by the a designated Committee of Directors comprising of C&MD
and Director (Finance) and Director (HR), to whom powers of investment of
surplus funds up to a specified limit have been delegated by the Board.
4. Deployment of funds with successful bidders in line with investment decision.
5. Settlement activities at the time of investments as well as at the time of maturity.
6. Generating relevant MIS based on financial results of the empanelled
entities/market intelligence reports or other sources and providing the same to the
higher management. In particular, reporting of the investment transactions to the
Board as required by DPE Guidelines and seeking Board approval/ratification,
wherever required.
CASH FORECASTING
Fig 4
54
a. Offshore expenses
• JVC
• Sales tax/VAT
• Cess
• Royalty
• Foreign Debt
• Other Payments
b. Onshore expenses
• Sales tax/VAT
• Cess
• Royalty
• Indian debt including
interest
• Other payments
• Sales receipts
• Subsidy
• Maturity of investments
• Interest on investments
• TDS interest on
investments
• Interest from MRPL
• Final Dividend
• Re-payment from OVL
• Interest on oil bonds
Inflows Project Outflows
• Corporate tax payments
• Payment to OVL
• Investments
• Fringe benefit tax
• Dividend/Other payments
• CPF Soft Loan
• Annual incentive
Corporate Outflows
=- - Surplus/ Deficit+Opening Balance
a. Offshore expenses
• JVC
• Sales tax/VAT
• Cess
• Royalty
• Foreign Debt
• Other Payments
b. Onshore expenses
• Sales tax/VAT
• Cess
• Royalty
• Indian debt including
interest
• Other payments
• Sales receipts
• Subsidy
• Maturity of investments
• Interest on investments
• TDS interest on
investments
• Interest from MRPL
• Final Dividend
• Re-payment from OVL
• Interest on oil bonds
Inflows Project Outflows
• Corporate tax payments
• Payment to OVL
• Investments
• Fringe benefit tax
• Dividend/Other payments
• CPF Soft Loan
• Annual incentive
Corporate Outflows
=- - Surplus/ Deficit+Opening Balance
The objective of cash management is to maximize the ONGC’s cash position by ensuring
that cash balances are sufficient to meet its obligations without foregoing investment
income. Cash management is the process whereby the cash inflows and outflows are
controlled so that current obligations will be met on time and any excess cash can be
invested to earn income. At some points in the year, ONGC have excess cash that is not
immediately required, while at other points in the year, the cash inflow may be
insufficient. By exercising proper cash management, ONGC can potentially increase its
interest revenue and reduce its bank service charges.
ONGC should consider use of information technology options for preparation and
dissemination of information to reduce efforts and cycle time activity.
Cash forecasting is the basis of all the investing activities. Cash forecasting is one of the
most important elements of cash management. Short term cash forecasting may be
particularly important and it is functional to have an efficient cash management for many
companies. It is used to support management decision making activities surrounding
investment management activity.
The funds section of the corporate accounts department:
Dehradun office has the responsibility of forecasting the cash requirement. The cash
forecasting is done at two different levels:
55
1. Regional level
2. corporate level
The forecast of the work centers are collated and consolidated at the respective regional
office and submitted to Dehradun head office to prepare the corporate forecast. Cash
forecast are prepared for a year with the month wise break up for first two monts.
The company is using information technology to speed up the proceedings and reduce the
effort and cycle time. It is envisaged that the project ICE would provide information
technology options for preparation and dissemination of the cash forecast to reduce cycle
time.
Procedure of cash forecasting at ONGC
The forecast for the year are prepared every month with details of the following two
months being prepared with weekly details. Considerations are being made with regards
to
1. Offshore productions
2. Statutory tax payments to be made as royalty, cess, corporate tax and
payments to OVL.
These estimates are made on the information available or on the estimates made from the
past. Then these forecasts are checked for surplus and deficit, if there is a deficit then
daily cash forecast is prepared. In case of surpluses the amount of surpluses and the
period for which it is available is determined.
PROCESS OF INVITATION OF OFFERS UP TO APPROVAL OF INVESTMENT
PROPOSAL AND ISSUE OF INVESTMENT AUTHORITY
Responsibility: TMG will have the responsibility to coordinate the process of invitation
of offers, preparation of comparative statement, providing required assistance to the
56
Investment Committee, and issue of investment authority to the Accounts Department for
effecting the investment transactions.
Invitation of Bids:
1. The Treasury Management Group (TMG) on the basis of the Cash Forecast and
considering actual/anticipated changes, if any, in the fund position, will invite
quotations, with the approval of Investment Committee members, from the eligible
parties, as per approved list of invitees, from time to time. Offers are to be invited
for investment in avenues permitted by the Board. Bids may be invited from the
eligible bidders for a minimum amount of Rs.5 Crore.
2. The invitation letter will specify the indicative investment amount, indicative dates
of investment, indicative tenure and the last date/time for the submission of bids.
Such amount and tenures will be subject to change depending upon availability of
funds, yield for various maturities, etc and approval of the competent authority for
investment decision.
3. Bids will be invited from eligible parties. Invitation is send my fax/e-mail or it can
be also be sent by ordinary post or handed over to authorized representative of the
bidders to the extent practicable.
4. The invitation of bids will not in any way bind ONGC for placement of fund with
any of the bidders. ONGC will reserve the right to reject an y bid without any
further reference to the bidders.
5. The bids should be invited directly from the bidders and no broker should be
involved in the transaction between the bidder and ONGC.
Submission of Bids:
1. The bids will be requested to submit their bids within the date and time specified in
the invitation letter. Bids should be submitted in office of the ONGC at New Delhi.
2. Late offers are not being considered.
57
3. The Bids should be firm and unconditional and give information requested in the
invitation letter. Incomplete bids shall be rejected by the Investment Committee.
4. If any bidder after submission of bids withdraws/amends any terms or condition
and/or expresses inability in acceptance of any term/rate quoted, such bidder, with
the approval of D (F) and CMD, may not be considered for future invitation of bids.
Opening of Bids and Comparative Statement:
1. The bids will be opened by at least two members of the Investment Committee or at
least one member of the Investment Committee and an official of the TMG.
2. Bidders will be invited to depute, if they so wish, their authorized representative to
be present at bid opening.
3. A bid opening register, showing the details of bids received and duly signed by the
bidder’s representative, if any, present at the time of bid opening, has to be
maintained by the TMG.
4. The Comparative Statement will be prepared and signed by two officers of TMG
and the same along with offers will be put up to the Investment Committee for its
deliberation and recommendations.
Investment Committee Proceedings:
1. The Investment Committee will comprise of such officials and shall have such
quorum as may be decided by the Board from time to time.
2. The deliberations and recommendations of the Investment Committee shall be
recorded and signed by the participating members.
Guiding Principles for Investment Committee:
The following guiding principles are to be kept in view by the Investment Committee:-
1. Investment Committee will evaluate the offers in commercial principles.
58
2. The investments shall strictly be made on the basis of tenders submitted by the
bidders and no further negotiations or matching be held.
3. Investments are to be made in accordance with the various exposure limits as may
be approved by the Board from time to time.
4. Investment Committee will recommend investment up to maximum one year.
Investment transactions for more than one year would be put up to Board for
ratification.
5. Where the funds are available for a longer period but with temporary decline in
availability during the fund availability period, Investment Committee may
recommend investment of funds for the longer period by availing cash credit
facility for such temporary deficit period where such temporary deficit will lead to
investment at a higher yield and is considered commercially beneficial. However,
such recommendation will normally consider maintaining at all times a cushion of
Rs 100 Crore in cash credit limit for any day to day variations or unforeseen
requirement of funds. Working Capital Demand Loan (WCDL) limit is not to be
exposed for investments and should be kept fully available over and above the
cushion in CC limit for any contingencies.
6. In case of a tie in rates, the investible amount may be distributed broadly in
proportion to the net worth of the respective bidders, subject to their exposure limits
and minimum/maximum amount acceptable to them. If such distributed amount
falls below the minimum amount acceptable to any bidder or less than Rs.5 Crore,
then no amount may be placed with the said bidder.
7. Investment Committee shall ensure that its recommendations are in accordance with
the DPE Guidelines on the subject.
Approval of Director (HR) and Director (Finance) and CMD:
The recommendations of the Investment Committee shall be put up to Director (HR) and
Director (Finance) and CMD on immediate priority to avoid any delay in investment
action.
59
Issue of Investment Authority Note:
1. TMG will issue a request note (the Investment Authority Note) to the head of the
F&A section of New Delhi office for making the investments in accordance with
the approval granted by Director (HR) and Director (Finance) and CMD. Copy of
the Investment Authority Note will be sent by fax to Funds Section and to Head of
Corporate Accounts, Dehradun, for information/accounting purposes.
2. The Investment Authority Note will specify the amount of investment, name and
address of the borrower, particulars of instrument, rate of return, date of investment,
date of maturity and maturity amount.
3. The Investment Authority Note will be signed by any two officers of the TMG or
one officer of TMG and any Investment Committee member.
4. The Funds Section would intimate fund availability and provide drawing power for
investment.
5. The Head of Finance, Delhi Office/Head of Fund Section, Dehradun, as the case
may be, will invest the surplus funds in accordance with the Investment Authority
Note issued by TMG.
SETTLEMENT, ACCOUNTING & RECONCILATION
Settlement Function:
All settlements related activities, like issuing of cheques, drawing power for clearing of
cheques, custodianship of deposits, maturity advise to the parties, collecting maturity
proceeds, releasing the deposit receipt at the time of maturity, informing Corporate
Accounts Dept. about investment would be managed by the Head of Finance, Delhi
Office/Head of Fund Section, Dehradun, as the case may be.
Documents:
60
1. In case of all investments, proper documentary evidence such as TDR receipt
should be obtained expeditiously and in a reasonable time.
2. Photocopy of all investment instruments are to be retained by the Head of Finance,
Delhi office/Head of Fund Section, Dehradun, as the case may be.
3. A register containing details of investments & maturity should be maintained b
Head of Finance, Delhi Office/Head of Fund Section, Dehradun, as the case may
be.
4. There should be a system of monthly reconciliation of records maintained by the
Head of Finance, Delhi office/Head of Fund Section, Dehradun and TMG, wherein
all information and calculations are cross checked to ensure correctness of the
available data/details.
Discrepancies:
Within two working days of receipt of the instrument, Finance, Delhi office/Fund
Section, Dehradun, as the case may be, should check up the interest and maturity value.
In case of any discrepancy in the maturity amount intimated in the Investment Authority
Note and the maturity amount mentioned in the instrument, the matter should be taken up
with the concerned bank/institution by the Head of Finance, Delhi office/Head of Fund
Section, Dehradun, as the case may be, in consultation with TMG.
MIS & REPORTING TO BOARD
1. Copy of every Investment Note would be invariably sent to Head of Corporate
Accounts, Dehradun for information and accounting purposes.
2. TMG would inform, on monthly basis, the monthly investment details to the Funds
Section and Corporate Budget Section regularly.
3. TMG would also regularly put up note giving details of investments for the
information/ratifications of the Board.
AUDIT
61
1. The investment transactions would be periodically reviewed by Internal Audit, to
ensure compliance with the Board approved policy and procedures. The audit
would carry out securities reconciliation, that is, reconciliation of investment
documents such as TDR receipts with investment registers and accounting records.
2. TMG would maintain the records of Investment Committee deliberations approvals
and make the same available for audit (internal as well as statutory Government) as
and when required.
MISCELLANEOUS
TMG will periodically update the panel of invitees and their financial details, audited
balance sheet, exposure limits etc.
Use of information technology measures such as web based bidding to increase efficiency
of bidding process and reduce cycle time.
INVESTMENT AVENUES
1. The following investments avenues are presently available, as approved by the
board from time to time.
2. Term Deposits with scheduled commercial banks (incorporated in India) with a
minimum net worth of Rs.100 Cr and also meeting the capital adequacy norms ad
prescribed by RBI.
3. ‘Investment grade’ rated “AA” or “P-2” or equivalent instruments, e.g., Certificates
of Deposits, Deposit Scheme or similar instruments issued by scheduled
commercial banks, term lending institutions including their subsidiaries.
4. Short term deposit scheme with highest credit rating (P1+ or equivalent) of Primary
Dealers provided 50% or more of the equity if such Primary Dealers is held by
scheduled commercial banks/financial institution duration in such windows should
not exceed 14 days.
62
5. Commercial paper having highest credit rating (from established credit rating
agency) issued by central PSEs.
6. Inter corporate loans to central ‘Navratna’ PSEs having higher credit rating from an
established rating agency for borrowing for the corresponding period.
7. Treasury bills and Government of India Securities.
The maximum investment duration shall be one year (including 1 year and one/two days).
Also, if the maturity date happens to be a holiday, then investment/maturity shall be for a
tenure upto the next working day, as per the banking practice.
LIST OF INVITEES FOR INVESTMENT OF SURPLUS FUNDS
The following parties are to be invited for investment of short term surplus funds by
ONGC, subject to availability of exposure limits:
1. For investment in term deposit and rated instruments issued by banks, invitees shall
comprise of the list of empanelled banks, as approved by the board.
2. For inter corporate loans, the invitees shall comprise of central navaratna PSEs
having highest credit rating, Accordingly, invitees will comprise of Indian Oil,
GAIL, NTPC, SAIL and BHEL, subject to the availability of highest credit rating.
3. For investment in rated bonds/ CPs as well as T-bills/Govt. securities, the invitees
should comprise of primary dealers promoted by one or more scheduled
commercial banks (registered in India)/financial institutions, and operating at Delhi.
In case of banks, invitation will be sent to the Zonal office at Delhi or to branch at Delhi
nominated by Zonal office of the respective bank. In case of SBI, the invitation shall be
made to Tel Bhawan Branch (where the banking facilities of ONGC are centralized) an
New Delhi min branch (where ONGC maintains its current account).
EXPOSURE LIMITS
63
The Board has approved the following counter party exposure limits for investments by
ONGC.
(1) For a Public Sector Banks and Financial Institutions
Table 14
Net NPAS to Net Advances ratio up to 10%
40% of their Net Worth
Net NPAs to Net Advances ratio up to 15%
25% of their Net Worth
Net NPAs to Net Advances ratio over 15%
NIL
The above limits are subject to over all limit of Rs.1500 Cr for any single institution.
(2) For Banks promoted by Financial Institutions.
Table 15
Net NPAs to Net Advances ratio up to 10%
25% of their Net Worth
Net NPAs to Net Advances ratio up to 15%
12.5% of their Net Worth
Net NPAs to Net Advances ratio over 15%
NIL
The above limits are subject to overall limits of Rs.100 Cr for any single institution.
(3) For other Private Banks:Table 16
Net NPAs to Net Advances ratio up to 10% Rs.25 Cr
Net NPAs to Net Advances ratio over 10% NIL
(4) For loans to central Navratna PSEs: 25% of Net Worth.
The above is subject to a limit of Rs.1000 Cr for IOC and Rs.250 Cr for others.
(5) For short term deposit with Primary Dealers: 25% of Net Worth
The above limits are subject to overall limit of Rs.100 Cr for any single
institution. As an immediate and interim measure, the exposure limits of IDBI and
IDBI bank have been clubbed and restricted at Rs.1500 Cr and the limits of ICICI
and ICICI Bank have been restricted at the actual exposure level of Rs.1475 Cr.
64
EXPOSURE LIMITS (in 2002)
The investments are to be made subject to the following exposure limits:-
(1) For Public Sector Banks
Table 17
Net NPAs to Net Advances ratio up to 5%
50% of their Net Worth up to 1500 Cr.
Net NPAs to Net Advances ratio up to 10%
40% of their Net Worth up to 1200 Cr.
Net NPAs to Net Advances ratio over 10%
NIL
(2) For Banks promoted by Financial Institutions
Table 18
Net NPAs to Net Advances ratio up to 5%
25% of their Net Worth up to 250 Cr.
Net NPAs to Net Advances ratio over 5%
NIL
For ICICI Bank, in view of its merger with ICICI, the limit would be calculated on
the same basis as PSU bank, and (a) till financial results for 2001-02 are available
based on the financials of ICICI and (b) Thereafter, on the basis of financials of
ICICI Bank.
(3) For other Private Banks:-Table 19
(4) For Commercial Paper of Corporate/Bonds of Central PSEs
Table 20
Net NPAs to Net Advances ratio up to 5% Rs.25 Cr.
Net NPAs to Net Advances ratio over 5% NIL
65
Central PSEs 25% of its Net Worth, subject to a cap of Rs.250 Cr.
Other Corporates 25% of its Net worth, subject to a cap of Rs.25 Cr.
(5) For Inter-Corporate loans to central Navratna PSEs: 25% of Net worth, subject to
a cap of (a) Rs.1500 Cr. For Indian Oil Corporation and, (b) Rs.250 Cr for other
PSUs.
(6) For Short term deposit with Primary Dealers: 25% of Net worth, subject to a cap
of Rs.250 Cr.
(7) For T-Bills/G-Securities: No credit exposure limits, in view of sovereign
exposure.
Table 21
TDRs / STDRs of banks Rs 6000 Cr.Rated Instruments of banks/FIs Rs 6000 Cr
Commercial Paper/Bonds of Corporates Rs. 2000 CrInter-corporate loans to central PSEs Rs.2000 Cr
Deposits with PDs Rs.500 CrT-Bills/GOI Securities Rs.6000 Cr
66
67
Fig 5
TREASURY MANAGEMENT GROUP FUNCTIONING PROCESS
APPOINTMENT OF PRICE WATERHOUSE COOPERS
With the increasing risk of default by banks, ONGC also felt the need to review its
investment procedure. SO, it appointed Price Waterhouse Coopers for this purpose.
68
Price Waterhouse Coopers (PWC) carried out review of existing investment policy of
ONGC and explored areas for improving post investment monitoring and controls by
ONGC, so that suitable action may be taken for recalling/existing investments in case of
deterioration on financial condition of bank/FI etc. The gist of recommendations of PWC
is given below:
1. ONGC should take up matter with DPE to permit investment decision making
powers below Board level and also seek clarification/approval on new investment
options, namely debt and money market based mutual funds, floating rate debt
(with swap into fixed rate) and equity derivatives.
2. ONGC should consider use of information technology options for preparation and
dissemination of cash forecasts to reduce efforts and cycle time of activity.
3. ONGC should explore the prospect of automating the entire bidding process
through web-based bidding.
4. ONGC should consider setting up instrument wise exposure limits to further
diversify the concentration risk and also a credit risk model be developed by the
ONGC based on certain criteria and exposure limits be fixed for each
counterparty individually.
5. ONGC may formulate a risk management policy to manage interest rate risks.
6. ONGC should have clearly documented procedures to call back the investments
in context of post-investment monitoring mechanism.
7. While PWC considers the existing MIS to be adequate to present needs of ONGC,
it has been recommended that ONGC may also consider generating more reports.
Based on the recommendation given by PWC, ONGC revised the exposure limit for
different counter-parties.
For Public Sector Banks
Table 22
Net NPAs to Net Advances ratio up to 5%
50% of their Net Worth up to 1500 Cr.
Net NPAs to Net Advances ratio 40% of their Net Worth up to
69
up to 10% 1200 Cr.Net NPAs to Net Advances ratio
over 10%NIL
For Banks promoted by Financial Institutions
Table 23
Net NPAs to Net Advances ratio up to 5%
25% of their Net Worth up to 250 Cr.
Net NPAs to Net Advances ratio over 5%
NIL
For ICICI Bank, in view of its merger with ICICI, the limit would be calculated
on the same basis as PSU bank, and (a) till financial results for 2001-02 are
available based on the financials of ICICI and (b) Thereafter, on the basis of
financials of ICICI Bank.
For other Private Banks
Table 24
For Commercial Paper of Corporate/Bonds of Central PSEs
Table 25
Central PSEs25% of its Net Worth,
subject to a cap of rs.250 cr.
Other Corporates25% of its Net worth, subject
to a cap of Rs.250 Cr.
Net NPAs to Net Advances ratio up to 5%
Rs.25 Cr.
Net NPAs to Net Advances ratio over 5%
NIL
70
APPOINTMENT OF CRISIL
ONGC wanted that some standardized techniques should be used to determine the limit
for banks. So, it wanted some other agency for this purpose. Finally, CRISIL was
appointed by ONGC to provide it Risk based limit structure for investment of short-
surplus funds.
The main objectives of CRISIL were:
To develop a risk-based limit structure for exposures to banks/other counter-
parties
To redesign existing investment processes to implement risk-based limit structure
To monitor the key economic and banking related risk indicators and rebalance
the limit structure on a bi-monthly basis
Methodologies used by CRISIL
CRISIL has used a dynamic method to reach at the risk limits of banks. It can be
explained in the following steps:
STEP 1 - LIST OF BANKS SATISFYING SCREENING CRITERIA
The list of banks satisfying the Screening Criteria has been reviewed based on financial
year 2003-04 data.
Qualifying Criteria is as follows:
Table 26
TYPE OF BANK Net Worth Capital Adequacy Ratio (CAR)
Public Sector Banks Minimum of Rs.100 Cr.
Fulfilling norms as prescribed by RBI(The current norms of RBI require banks to maintain a minimum Capital to Risk-weighted Assets Ratio of 9% on an ongoing basis.)
Private Sector BanksMinimum of Rs. 500 Cr.
71
CRISIL has justified their recommendation on the ground that the credit-worthiness in
the banking sector has a very strong linkage to size, and ‘Net worth’ is a very good
proxy for size. The banks who qualify in Step 1 as above have only been considered for
further evaluation.
STEP 2: CRAMEL BASED RISK GRADING OF BANKS
This is the main part of methodology used by CRISIL. Risk grades have been obtained
from a CRAMEL based model developed by CRISIL. The CRAMEL based model uses
financial and other business information to assess the credit-worthiness of banks. Under
the CRAMEL model, following aspects are studied:
Parameters for risk scoring:
Capital Adequacy (Sub parameters: Capital Adequacy Ratio, Tier I Capital ratio,
Net worth/ Net NPA, Advances Growth, Net worth size)
Resources & Liquidity (Sub parameters: Cost of Deposits, Deposit Growth,
Deposit Size)
Asset Quality (Sub parameters: Average Net NPA, Advances Growth, Advances
Size)
Earnings (Sub parameters: Return on Assets, Operating Expenses/ Total Income,
Profit After Tax size)
SCALES USED FOR SCORING
Table 27
PERFORMANCE SUB FACTOR
VALUE OF SUB FACTOR
SCORE
Capital Adequacy Ratio (%)
Less than 8%Greater than 15%
Between 8% to 15%
010
Proportionately on a scale of 1-10
Tier I Capital RatioLess than 5%
Greater than 14%Between 5% to 14%
010
Proportionately on a scale
72
of 1-10
Net Worth/Net NPALess than 0.5
Greater than 5.0Between 0.5 to 5.0
010
Proportionately on a scale of 1-10
Cost of DepositsLess than 6%
Greater than 10%Between 6% to 10%
100
Proportionately on a scale of 1-10
Deposit Growth (%)Less than 10%
Greater than 35%Between 10% to 35%
010
Proportionately on a scale of 1-10
Average Net NPA0%
Greater than 14%Between 0% to 14%
100
Proportionately on a scale of 1-10
Return on AssetsLess than 0.0%
Greater than 1.5%Between 0.0% to 1.5%
010
Proportionately on a scale of 1-10
Operating Expenses/Total Income
Less than 18%Greater than 33%
Between 18% to 33%
100
Proportionately on a scale of 1-10
Practical implication of CRAMEL based model
Five banks have been selected conveniently and scores have been provided to them on
different aspects that come under CRAMEL model. It can be understood with the help of
following tables:
The different performance parameters for all five banks have been presented in the
following table:
Table 28
73
PNBUCO BANK
INDUSIND BANK
STATE BANK OF TRAVANCORE
CANARA BANK
PROFIT BEFORE TAX (RS. CRORE)
7137.9 3044.35 968.37 1740.85 6818.26
PROFIT AFTER TAX (RS. CRORE)
1439.31 196.65 36.82 258.68 1343.22
TOTAL INCOME (RS. CRORE)
10126 3946 1260 2379 8712
OPERATING EXPENSES/TOTAL INCOME
21.01 25.53 27.18 24.36 22.13
TOTAL ASSETS (RS. CRORE)
144356.67 61158.76 17398.71 31730.18 131975.18
CAPITAL ADEQUACY RATIO (%)
11.95 11.12 10.54 11.15 11.22
TIER I CAPITAL RATIO (%)
10.06 6.09 6.84 7.24 11.22
NET WORTH (RS. CRORE)
9073.99 1987.14 865.87 1331.66 7018.86
NET NPA (RS. CRORE) 810.17 784 198 276 879
NET WORTH/NET NPA11.2001062
2.5346173
4.37308081 4.8248550727.98505119
COST OF DEPOSITS (%) 4.14 5.01 5.53 5 4.69DEPOSIT GROWTH (%) 13.01 10.26 14.43 7.72 20.71AVERAGE NET NPA (%) 0.29 2.1 2.09 1.47 1.12
RETURN ON ASSETS (%)0.99705126
0.3215402
0.21162488 0.8152490781.01778228
SOLVENCY RATIO (%) 9.32 13.22 11.4 7.3 16.76
Providing Scores to Selected Banks using CRAMEL Model
Table 29
PROVIDING SCORES TO
SUB FACTORS OF
CRAMEL
BANKS
PUNJAB NATIONAL
BANK
UCO BANK
INDUSLAND BANK
STATE BANK OF
TRAVANCORE
CANARA BANK
Capital Adequacy Ratio (%)
6.05 5.11 4.39 5.21 5.53
Tier I Capital Ratio
6.1 2.25 2.84 3.25 7.22
Net Worth/Net NPA
10 5.1 8.42 8.78 10
Cost of Deposits
10 10 10 10 10
74
Deposit Growth (%)
1.20 0.11 1.77 0 4.28
Average Net NPA
9.76 8.59 8.58 8.87 9.14
Return on Assets
6.67 2.13 1.40 5.4 6.73
Operating Expenses/Total
Income8.03 4.93 4.02 5.69 7.37
Total Score 57.81 41.54 41.42 47.2 60.27Limit provided
by CRISIL2724 463 43 310 2107
From this data, it is clear that Punjab National Bank and Canara Bank scored higher as
compared to other banks. And, the limit provided by CRISIL is also higher for these 2
banks as compared to other banks.
Though, CRISIL has also used Equity Price Based Dynamic Risk Scoring for reaching at
the limit for each bank.
STEP 3: RISK GRADING OF BANKS THROUGH EQUITY PRICE BASED
DYNAMIC SCORING
The equity price based dynamic scoring model puts reliance on the stock market prices
of banks, and provides a one-year forward estimate of default probability for each bank.
The process involves the following broad steps:
a) Estimation of the banks’ implicit assets and business risk – proxied by asset
volatility from market prices and non-equity liabilities
b) Combination of business risk, asset value and “minimum payable” liabilities
into a single risk measure for each bank.
c) Benchmarking this measure against historical default experience of rated
companies to arrive at a probability of default for each bank and ordering of
banks into four grades.
Based on this measure the banks are again graded into 4 categories viz., 1,2,3,4 – in the
decreasing order of credit quality.
75
STEP 4: COMBINED GRADING OF BANKS
A combined grade is obtained for each bank based on a logic which ensures that the
CRAMEL model retains primacy – the combined grade cannot be better that the
CRAMEL based grade but it can be lower than the CRAMEL based grade.
STEP 5: TRANSFORMING RISK GRADES TO RISK LIMITS
Based on the BASLE committee recommended methodology, the total portfolio has
been allocated in the proportion of 70:20:10 in respect A, B & C category banks.
STEP 6: ALLOCATION OF EXPOSURE LIMITS
The Board has delegated power to Director (Finance) and C&MD for investment of short
term surplus funds upto Rs.18000 Cr. A factor of 2 has been applied and accordingly the
overall limit has been fixed at Rs. 36,000 Cr. This has been done so as to ensure that
sufficient numbers of quotations are received and ONGC does not lose interest/yield on
account the institution-wise investment limits imposed. Limits are allocated to each bank
within a risk grade in proportion of its adjusted Net worth. For Public Sector Banks the
adjusted Net worth is the same as the Net worth. For Private Sector banks the adjusted
Net Worth is 0.6 times their Net worth. Additionally, the limit of small private sector
banks is capped at 5% of their respective Net worth.
So, all the above six steps have been formed by CRISIL to analyze the Investment
Procedure of ONGC. All these steps can also be put in the form of following two figures:
76
Fig 6
Combined CRAMEL Based Score and Equity Price Based Score to Grade.
Equity Price Based Dynamic Scoring
CRAMEL Based Risk Scoring
Risk Grading of Banks
77
INVESTMENT OF SURPLUS FUND IN UTI MUTUAL FUND: AN EMERGING
VENUE FOR PSEs (INCLUDING ONGC)
Calculating Risk based Limits
Conversion of Default Probabilities to Risk Weights
Transforming Risk Grades to Risk Limits
Mapping CRISIL default Probability Data to the Risk Grades- A, B, C
78
Investment in UTI Mutual Fund has been an option for PSEs since 1997. But, still PSEs
are generally investing their surplus funds with banks because of safety involved and
some misconception about mutual funds. They hesitate to invest surplus funds in UTI
mutual fund even though DPE guideline has allowed them to invest in it.
Department of Public Enterprises has changed its policy for UTI mutual fund from time
to time. It has issued following guidelines for PSEs for making investment of their
surplus funds in UTI mutual funds:
After the Harshad Mehta SCAM the department of Public enterprise (DPE) issued
a guideline on 14/12/1994 regarding investment of surplus funds by PSEs. The
main highlights of this circular were that investment should be made only in
instruments with maximum safety and there should be no speculation on the yield
obtaining from the investment.
In 1995, it was said that PSEs will not be allowed to invest in UTI because its
schemes are “equity based” and therefore inherently risky.
In 1996, PSEs were advised to phase out their existing holdings in schemes of
UTI or other mutual funds over a period of 3 years.
However, in 1997, the restrictions on Investments of surplus funds in the units of
UTI were removed, both for Fresh Investments and for Disinvestments in a
phased manner of existing units. This was done in view of the special nature of
establishment and activities of UTI and its Units being eligible securities in Indian
trust Act etc.
On 29/9/2005, DPE further clarified that Boards of PSEs can take a decision and
consultation with Administrative ministry may not be made necessary.
So, as per the DPE guidelines, PSEs are allowed for investment in UTIMF from 1997
onwards. But, no significant investment was made by PSEs in UTIMF till 2 years ago.
But, now PSEs are considering it a good investment avenue for their surplus funds.
ONGC has also started making investment in UTIMF from March 2007 onwards.
79
It has helped in getting use of their idle funds for less than 7 days which cannot be
invested in banks. But, UTIMF is also providing other options also for PSEs which are
providing better rate of return than banks.
Between 1995 and 2006, MF industry has changed substantially and UTIMF has Fixed
Maturity plans and Liquid Plans, both investing 100% only in debt securities, i.e., Govt.
securities, Highly rated CP’s/CD’s/STD’s/Corporate Debt & Bonds apart from some
other options for PSUs to invest in UTIMF.
So, the basic assumption of Risk ness because of Investment in Equity is misplaced in the
case of Investment made in FMP’s & Liquid Plans.
While PSE banks/ NBF’s under RBI Regulations have started investing in Schemes of
UTI some of the PSEs have expressed the following concerns:
The guidelines of December 1994 say that there should be no speculation on the
yield obtaining from the Investment. Although in eligibility it allows investments
in CD’s and CP’s having higher rating and Debt instrument with highest credit
rating.
By SEBI Regulations MF’s cannot guarantee the rate of return but have
instruments such as FMP’s where an indicative return is given in advance.
UTIMF has always given a return higher than the indicative return. Besides
Investment is 100% in Govt. Bonds or highly rated corporate debt/bonds., the
entire portfolio can be shown to the PSEs.
As per the December 1994 guidelines, PSEs can make investments in CP’s issued
by corporate but they are not investing in UTIMF FMP’s or Liquid Plans which
are investing 100% in Govt. Bonds/ Highly Rated Corporate Debt.
The problem from this ironical situation is that a PSE (either 100% owned by Govt. or
listed on the stock exchange ) which has to compete with another corporate in the same
area of operation is at a disadvantage in “Treasury Management”. This is because FMPs
of UTIMF have given better returns than fixed deposits of banks. Not only that, there is
differential tax treatment for investments in MF’s in case of bank deposits. As such PSEs
have got further disadvantage.
80
If a PSE with an active of Rs. 500 Crores loses even 100 bps in Treasury Operations
compares to a private sector, the it’s profitability is affected by Rs. 50 Crores in a year.
This is serving nobody’s purpose except that of Banks- mostly Private Sector Banks and
Foreign Banks.
Now a day, many PSEs have started investing in UTIMF and many are on the way of it.
Following PSEs are already investing with UTI:
Oil India Ltd.
MRPL
Nuclear Power Corporation Ltd.
Indian Rare Earths Ltd.
Power Trading Corporation
Petronet LNG
Agricultural Insurance Corporation Ltd.
Securities Printing and Mining Corporation of India Ltd.
BPCL
Chennai petroleum Corporation
Numaigarh Refineries
UTI has been providing different options to PSEs to invest in UTIMF according to
requirement of PSEs. Following are the some plans of UTI which are suitable for all
PSEs and which take into consideration the DPE guidelines:
UTI LIQUID FUND CASH PLAN
81
UTI liquid fund provides PSUs to use their idle funds for less than 7 days. Because
investment can’t be made in banks for less than 7 days.
The main features of UTI Liquid plan are following:
It is an open ended debt scheme. It means it can be redeemed any time with
fulfilling specified conditions.
It has Direct Debit/Credit facility with various banks
It provides tax-free dividends in the hands of investors as the MF pays the
DDT(Dividend distribution Tax)
It provides following benefits to PSEs:
Investment can be done even for 1 day
Redemption can be done through fax before 3 p.m. and the amount will be
credited to the investor’s bank a/c and the next working day
It is a highly tax efficient scheme
It has a well diversified portfolio where money is invested by UTI.
Better monitoring of investment performance
Constant NAV under Daily Dividend Option
Ease of Operation
It doesn’t involve any kind of entry/exit load
Why investment is safe in UTI Liquid Plan?
Investments are made in only AAA/Equivalent papers of short term nature
Dividend is declared out of the appreciated surplus generated on a daily basis
Daily reinvestment of the Dividend is declared
It has a constant NAV which means the invested amount remains the same
82
If we compare the average return of UTI Liquid Plan with Bank’s Deposit, we get the
following data regarding them:
Table 30
PeriodGross return
(%)
Tax Free Dividend Income
(%)/ Post Tax
Returns
Effective Pre Tax for Corporate being taxed @ 33.99%
Fixed Deposit Returns
for Period
less than 15 days
Effective Post tax Returns
from Bank
1 day 8.22 6.4050 9.7031 0.0 0.0003 days 8.28 6.4518 9.7739 0.0 0.0001 week 8.31 6.4752 9.8094 7.0 4.644
2 weeeks 8.40 6.5453 9.9156 7.5 4.9761 month 8.36 6.5141 9.8684 8.0 5.307
From this table, it is obvious that UTI Liquid Fund has been providing better returns than
Bank Deposit. UTIMF pays only 22.66% Dividend Distribution Tax (DDT), while bank
Deposits attracts 33.99% tax. No TDS at the time of repurchase under UTIMF. Thus,
even overnight post tax return of UTI Liquid Fund is higher than Deposits with Banks.
Fear from Indicative Rate of Return given by UTIMF
PSUs have certain doubt regarding rate of return given by PSUs on investments. They
say that the rate of return mentioned by UTIMF is only indicative. So, in realty, it may be
less too.
But their doubt has no ground. Because, if we look at the history of UTIMF, we find that
it has always provided better returns than indicative return mentioned by them.
It is also clear from following example:
NAV Date
83
1019.4457 19/07/2006
1019.4457 18/07/2006
1019.4387 17/07/2006
1019.4321 16/07/2006
1019.4155 15/07/2006
1019.3989 14/07/2006
1019.3824 13/07/2006
1019.3656 12/07/2006
1019.3466 11/07/2006
1019.3294 10/07/2006
1019.3122 09/07/2006
1019.2951 08/07/2006
1019.2781 07/07/2006
1019.2611 06/07/2006
1019.2477 05/07/2006
1019.2314 04/07/2006
1019.2191 03/07/2006
1019.2045 02/07/2006
1019.1876 01/07/2006
1019.1707 30/06/2006
1019.1541 29/06/2006
1019.1376 28/06/2006
1019.1237 27/06/2006
1019.1091 26/06/2006
1019.0958 25/06/2006
1019.079 24/06/2006
1019.062 23/06/2006
1019.0444 22/06/2006
1019.03 21/06/2006
1019.017 20/06/2006
1019.0032 19/06/2006
84
1018.9899 18/06/2006
1018.9767 17/06/2006
1018.9632 16/06/2006
These figure show that the NAV of any particular day is always at least equal to or higher
than yesterday’s NAV. It means that it also provides a return equal to or higher than
indicative return.
Similarly following figures show the asset allocation and credit profile of UTI Liquid
Fund Cash Plan:
Asset Allocation:
Fig 7
UTI Liquid Fund Cash Plan
1.80%
1.19%
7.22%
25.04%
52.77%
11.98% NCDs
NCA
FRBs
Deposit
CP/CDs
Securitized Debt
Credit Profile:
Fig 8
85
Credit Profile of UTI Liquid Fund Cash Plan
1.16%
68.93%4.86%
25.05%NCA/Others
AAA/Equivalent
AA+
STD
UTI FIXED MATURITY PLAN (FMP)
86
It is a close ended fixed tenure debt scheme comprising several investment plans with
portfolio of debt/money market and Govt. securities normally maturing in line with the
time profile of each plan. The investment objective of the scheme and plans launched
thereafter is to seek regular returns by investing in a portfolio of fixed income securities
normally maturing in line with the time profile of respective plans, thereby enabling the
investors to nearly eliminate interest rate risk by remaining invested in the Plan till the
maturity or final redemption.
The Scheme seeks to generate regular income through investments in Debt / Money
Market instruments and Government securities with suitable maturity. The scheme is not
a money market mutual fund. The Scheme comprises of three series viz., Quarterly Series
(QFMP), Half-Yearly Series (HFMP) and Yearly Series (YFMP) and) each plan offers
Dividend and Growth options. The Scheme proposes to launch 2 QFMPs, 1 HFMP and 1
YFMP every month. Each FMP shall be identified by a distinct number, will have a
portfolio of Debt / Money Market Instruments and Government securities normally
maturing in line with the time profile of each FMPs .
UTI is also going to launch 1month FMP soon.
Key Features of UTI FMP
It is available with the initial offer price of Rs. 10 per unit
Load: it involves Exit load. As money is locked till maturity of portfolio,
premature withdrawal is allowed only at exit load. It has been done so to prohibit
the interest of other investors and restricting investors from taking benefit of
changes in market rate at the cost of other investors.
It is available with Growth Option and Dividend Option
It provides a predictable Returns
It has a very Transparent Portfolio construction process
It is also Tax efficient
Transparency involved
87
The FMP plan involves greater transparency. The AMC calculates and discloses the first
Net Asset Value of the respective Plan not later than 15 business days from the closure of
Initial Offer Period. Subsequently, the NAV will be calculated and disclosed at the close
of every Business Day. In addition the AMC will disclose details of the portfolio of the
Scheme on a half-yearly basis.
Liquidity in the Scheme
The Scheme being offered through this Offer Document is a closed ended Scheme.
The Scheme offers for Repurchase of Units at NAV based prices (subject to exit load as
detailed below) on every Business Day on an ongoing basis, (before the Maturity Date /
Final Redemption Date) commencing not later than 15 business days from the closure of
the respective Plans. Under normal circumstances, the Mutual Fund will endeavor to
dispatch the Redemption cheque within 3 Business Days from the acceptance of the
Redemption request
Safety
UTI FMP scheme has chosen a portfolio of only rated instruments from debt/money
market and Govt. securities. The safety is also clearly indicated with the modal portfolio
of the plan.
The safety involved with investing in UTI FMP is clearly indicated with the modal
portfolio which involves following securities:
Model portfolio of Quarterly FMP
Table 31
SECURITY RATING
ABN Amro Bank A1+
Allahabad Bank P1+
Canbank Factors P1+
Citicorp India Finance Ltd. P1+
Citifinancial Consumer Finance India Ltd. P1+
Corporation Bank Ltd. P1+
88
DBS Choramandlam Finance Ltd. P1+
DSP Merill Lych Capital Ltd. P1+
GE Capital Services India P1+
HDFC Bank Ltd. PR1+
HDFC Ltd. A1+
ICICI Bank Ltd. A1+
Indian Bank P1+
ING Vysya Bank Ltd. P1+
Jammu & Kashmir Bank Ltd. P1+
Kotak Bank Ltd. P1+
Kotak Mahindra Prime Ltd. P1+
L&T Finace Ltd. PR1+
Rabo India Finance Ltd. P1+
Shriram Transport Finance Ltd. P1+
Standard Chartered Bank P1+
TGS Investment & Trade Pvt. Ltd. A1+
UCO Bank Ltd. P1+
UTI Bank Ltd. P1+
Yes Bank P1+
Redemption of the Scheme
Each Plan has a Maturity Date / Final Redemption Date. Each Plan is compulsorily and
without any further act by the Unit holder(s) being redeemed on the Maturity / Final
Redemption Date. On Maturity / Final Redemption Date of the Plan, the Units under the
Plan are redeemed at the Applicable NAV. For Redemptions made on the Maturity Date /
Final Redemption Date, the AMC does not intend to charge any Exit Load. The
Unitholder(s) may also redeem their investments on any other Business Day (before the
Maturity Date / Final Redemption Date) subject to payment of applicable Exit Load.
SEBI clause for minimum number of investors in schemes/plan of Mutual Funds:
89
This scheme also takes into consideration SEBI guidelines which say that each scheme
and individual plan(s) under the schemes should have a minimum of 20 investors and no
single investor should account for more than 25% of the corpus of such scheme/plan(s).
In respect of Fixed Maturity Plans (FMPs), the above conditions are required to be
complied immediately after the close of the IPO itself i.e. at the time of allotment, failing
which the provisions of Regulation 39 (2) (c) of SEBI (Mutual Funds) Regulations, 1996
would become applicable automatically without any reference from SEBI. Accordingly,
schemes /plans shall be wound up by following the guidelines laid down by SEBI.
This FMP is available with following tenure:
Table 32
TENOR
QFMP(0507)94 DAYS
TENOR
HFMP (05/07)
186 DAYS
TENOR
YFMP (05/07)
396 DAYS
Launch Date
Closing Date
16th,May,2007
29th May,2007
Launch Date
Closing Date
1st May,2007
28th May,2007
Launch Date
Closing Date
16th May,2007
11th June,2007
Re-Opening For
Redemption
Load Structure
1.0% if redeemed
within 90 days of closure and
no load thereafter
Load
Structure
1.0% if redeemed within 180
days of closure and no load thereafter
Load
Structure
2.00% of the NAV, if
redeemed within a period
of 365 days from the date of closure of the
said plan
UTI is also going to launch 1 month FMP soon that can attract more PSEs towards this scheme.
90
Comparison of UTI FMP with Bank Deposit with regards to Illustrative Returns and Tax Impact:
Table 33
QUARTERLY FMP
3 MONTH BANK
DEPOSITYEARLY FMP
YEARLY BANK
DEPOSITGross Returns
(%)9.00 9.00 10.50 10.50
Tax Incidence (%)
22.66 33.99 11.33 33.99
Net Return (%) 7.34 5.94 9.31 6.93Equivalent Pre Tax Returns
(Assumed Tax Rate 33.99%)
_ 11.115521 _ 14.104454
Dividend distribution tax is @22.66%; the net income is tax-free in the hands of the investor.
Corporate tax is applicable on the interest earned on bank deposits. Long term capital gain tax is @11.33% for corporate without indexation.
So, it is obvious from the above chart that UTI FMP provides much better return as compared to Bank Deposit. Hence, PSEs should also consider this option while making investment of their surplus funds.
The contents of a UTI FMP scheme can be understood with the help of a recently launched scheme by UTI:
Table 34
Indicative yield(for IP) 9.80%Brokerage(for IP) 0.15 % UpfrontIndicative yield(for retail) 9.30%Brokerage(for retail) 0.50 % UpfrontDate of opening 16/05/2007Date of closing 11/06/2007Date of allotment 11/06/2007Date of opening for repurchase 15/06/2007Maturity date 11/07/2008(Tues day)Load structure 2% if redeemed within 365 daysNo load Period From 11/06/2008(Tuesday)Performance of UTI Fixed Maturity Plan during last few 2 years:
Table 35
NAME OPTION PERIOD(DAYS) CLOSING MATURITY INDICATIVE ACTUAL
91
OF PLAN
DATE DATE RATE (%)RETURNS
(%)Yearly FMP 07/05
Yearly 396 8/10/2005 9/10/2006 6 6.04
Yearly FMP 09/05
Yearly 396 10/5/2005 11/5/2006 6.15-6.20 6.29
Quarterly FMP 11/05
Quarterly 94 11/23/2005 2/25/2006 6.00-6.05 6.09
Quarterly FMP 12/05
Quarterly 94 12/19/2005 3/23/2006 6.20-6.25 6.30
Quarterly FMP 1/06
Quarterly 94 2/6/2006 5/11/2006 7.25 7.34
Quarterly FMP 12/06
Quarterly 94 2/23/2006 5/28/2006 7.55-7.60 7.62
FTIF Q418
months18 months 3/7/2006 9/6/2007 8.10 8.30
Quarterly FMP 05/06
Quarterly 94 5/29/2006 8/31/2006 6.65-6.70 6.72
Quarterly FMP 08/06
Quarterly 94 8/29/2006 12/1/2006 7.25 7.25
Quarterly FMP 10/06
Quarterly 94 10/19/2006 1/21/2007 7.55 7.57
Quarterly FMP 11/06
Quarterly 94 11/7/2006 2/9/2007 7.65 7.66
Quarterly FMP
11/06(II)Quarterly 94 11/28/2006 3/2/2007 7.70 7.70
HFMP 12/06
6 months 12/20/2006 19/4/2007 8.35 8.41
Quarterly FMP
12/06(II)Quarterly 94 12/27/2006 3/31/2007 8.75 8.82
UTI G-SEC FUND:
92
This fund invests money only in government securities. Thus, investment is highly safe.
Various features of the scheme:
Nature of scheme: An open end gilt fund.
Scheme Objective: To generate risk free return in the form of capital appreciation
through investments in Central government securities including Call money,
Treasury Bills, Call Money Repos and Money Market instruments.
Investment Pattern: 100% investment in Central government securities, Treasury
Bills, Call Money Repos and Money Market Instruments.
Face value of Units: Rs.10 per Unit.
Minimum Amount of Initial Investment: Growth Option Rs.1000, Income Option
Rs. 10000.
Sale/Repurchase price: Both sale and Repurchase at Net Asset Value.
Risk factors in particulars to G-sec
In order to understand the Risk factors that are associated with this fund we need to
understand how this fund is operated. The corpus of the fund invests in Govt. Securities.
The investments in these securities are made keeping in mind the future interest rates for
risk free investments. Now since the securities are issued by the Govt. of India hence
there is no default risk. But there certainty lies the risk associated with the interest rate
movements suppose security that is giving a return at 6% and is due to mature after 10
years. Thus if this security is trading on its face value of Rs.1000 because risk free rate is
6% but if this risk free rate rises by 0.5% to 6.5% the face value of the security shall fall
because the prevailing interest rate is higher than the coupon rate of the security. So if we
now sell the security we will receive an amount less than Rs.1000 i.e. Rs.964 now this of
Rs.36 is because of the poor estimate of the interest rate movement.
Now if the interest rates fall the say by 0.5% to 5.5% the face value of the security
becomes Rs.1037.68 this profit of Rs.36 is a profit to the security holder in our case the
fund. Thus the fund which invests in a large number of securities with varied coupon
rates. Though these securities are traded in the secondary market for resale thus the
93
market tries to accommodate future interest rates as they perceive them to be. Thus it is
important for the fund manager’s assessment to be in line with actual interest movement,
thus there lays an element of speculation that is inherent with this fund.
For e.g. in November 2003 RBI Governor was going to announce the new Interest rates
and it was expected that interest rates would fall so the price of the securities were rising
but there was no such announcements thus there was a loss on the securities that were
purchased at price higher than the face value.
This was the reason for the fall of the NAV of the UTI G-Sec Fund during November
2003.
In case of the non volatility of the interest rates the regular coupon accruals is going to
provide return to the investor.
Initiatives taken by ONGC with regards to Investment in UTI Mutual
Fund
ONGC has started investing in UTIMF this year. A detailed presentation was given by
UTI to ONGC for both UTI Liquid Fund as well as UTI FMP.
The matter regarding investment in UTI Schemes was deliberated at the 2nd CFO meet
held at Jaipur in November 2006 and a consensus emerged that PSEs may explore the
possibility of investment in UTI Schemes. Accordingly a presentation by UTI on the
Schemes available with them for investment by PSEs was arranged.
After the presentation it was agreed to by all PSEs present that to start with ONGC may
also invest in the UTI Liquid Plan and approach DPE for issuing guidelines for
investment in the Fixed Maturity Plan.
An agenda for authorizing the designated Committee of Directors to invest in the UTI
Liquid Plan upto a limit of Rs.1000 Crores was submitted for Board’s consideration and
approval which was accepted by the board.
Finally ONGC invested its surplus funds into UTI Liquid Fund for the first time on
March 13, 2007. The details of which are following:
94
Date of Investment Amount Invested (Rs.) Tenure Maturity Amount (Rs.)
March13, 2007 200 Crores 2 days 200.07 Crores
After this, ONGC has been consistently investing in UTI Liquid Fund with the maximum
limit of Rs. 1000 Crores. Till April 30, ONGC has been able to earn total dividend worth
Rs. 100.30 lacs through this scheme.
Observation of all 3 schemes of UTI Mutual Fund:
95
UTI Liquid Plan
UTI Liquid plan is a good scheme that has been launched as per the requirement of PSEs.
It helps PSEs to make utilize its funds for less than 7 days which generally remain idle
because banks don’t accept deposit for less than 7 days. So, UTI Liquid Plan is providing
a great opportunity to PSEs for making utilization of surplus funds of less than 7 days.
Many PSEs have started investing their surplus funds in this plan and they are also
earning a good return on it. Apart from it, this plan is taking care of DPE guidelines that
put many restrictions on PSEs regarding investment. This plan also provides full freedom
to PSEs for investment because it doesn’t involve any kind of entry or exit barrier. So,
overall, this plan is a good investment avenue for PSEs for investment.
UTI Fixed Maturity Plan
UTI Fixed Maturity Plan is another scheme that has been prepared by taking care of
requirements of PSEs and it also follows DPE guidelines. It has been providing a higher
rate of return as compared to bank deposits. But, the one major drawback of this scheme
is that it involves exit barrier. This is a reason because of which PSEs are hesitating to
invest in this scheme. But, the argument of UTI in this regard also seems right that this
exit barrier has been attached with it for safeguarding the interest of other investors in the
scheme who may be on the loser side if exit is allowed without any load. But because of a
better rate of return, PSEs has started taking into consideration this scheme too. For
example, GAIL has started investing their surplus funds in UTIFMP. So, after analysing
this scheme, we can say that PSEs should look at this option for making investment. But
they should investment only if they are assured that they are not withdrawing it
prematurely because in that case, it may result in loss of interest for them.
UTI G-SEC FUND
This scheme also provides full safety to PSEs with regard to investment and take care f
DPE guidelines. It doesn’t involve any kind of entry or exit load. But still this scheme is
not serving to the best interest of PSEs. It is so because it provides a lower rate of return
as compared to other schemes. Another reason is that its fund size is very small just Rs.
122.53 Crores so it is not much suitable as per the requirement of PSEs.
96
Other Possible Investment Option by ONGC
At present, ONGC invests its surplus funds only in ‘AAA’ rated papers and banks that
are considered to be safest from the point of view of investment and least chances of
default.
However, if we compare the return of ‘AA’ rated instruments and other rated instruments
with ‘AAA’ rated instruments, we find that these instruments provide higher return as
compared to ‘AAA’ rated instruments. It is also clearly understood from following
figures:
Fig 9
Excess Return as compared to 'AAA' Rated Instruments
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
5% 10% 15% 20% 25%
% Exposure in Portfolio
Ad
dit
ion
al R
etu
rn f
or
Po
rtfo
lio
wit
h
Lim
ited
Exp
osu
re
Excess Return on 3 YearDeposit
Excess Return on 'AA' ratedInstruments
Excess Return on 'A' ratedInstruments
Excess Return on 'BBB'rated Instruments
So, it is clear that ‘AA’ and other rated instruments provide higher return as compared to
‘AAA’ rated instruments.
97
However, along with increasing returns, the risk of the investment also increases. The
analysis regarding default probabilities of different rated paper in India and US financial
markets has been done to explain it. It has been presented in the following way:
Table 36
CORPORATE RATING,
INDIA (1993-2003)
PROBABILITY OF
Default in 1 Year
Falling below Investment
Grade in 1 Year
Falling below Current Level
in 1 YearAAA 0% 0% 3%AA 0% 0% 11%A 1% 5% 14%
BBB 6% 21% 21%
Source: Standard & Poor Agency
Observation from given data:
There is very little probability of ‘AAA’ or ‘AA’ rated Corporate defaulting in one year.
The probability of ‘AAA’ or ‘AA’ corporate falling below investment grade is also very
low.
However in India, the rating transition of ratings at lower end of investment grade (A and
BBB) falling below investment grade is fairly high. Since, the DPE guidelines don’t
allow investments below investment grade, investments in ‘A’ rated or ‘BBB’ rated
options will expose the portfolio to additional risks.
But, if we look at the investment made by ONGC, it is obvious that it is taking
investment decisions from the commercial point pf view and as per the DPE guidelines. It
CORPORATE RATING, USA
(1993-2003)
PROBABILITY OF
Default in 1 Year
Falling below Investment
Grade in 1 Year
Falling below Current Level
in 1 YearAAA 0.00% 0.03% 6.34%AA 0.01% 0.18% 7.61%A 0.04% 0.74% 5.92%
BBB 0.24% 5.63% 5.63%
98
has been able to earn a higher return as compared to SBI card rates during last three years
on the investment of surplus funds. It can be understood from the following table:
Table 37
INTEREST EARNED ON INVESTED AMOUNT IN COMPARISON TO SBI CARD RATE
PERIOD
AMOUNT INVESTED
(RS/ CRORE)
WEIGHTED AV. RATE
OF INTEREST EARNED
SBI CARD RATE
INTEREST EARNED
ABOVE SBI CARD RATES
2004-05 13,775 5.71% 4.96% 0.75%
2005-06 19,712 6.91% 4.87% 2.04%
2006-07 (H1)
16,072 7.93% 5.64% 2.29%
FINDINGS
99
After analyzing the whole investment procedure of ONGC with existing investment
avenues and other emerging avenues like UTI Mutual Fund, we can say that ONGC has
been following a good investment procedure by keeping in mind the DPE guidelines.
There was a CFO meet of all oil companies was conducted in March 2007, in which all
companies agreed that ONGC has a best procedure for investment of surplus funds.
ONGC has been taking investment decision on pure commercial basis. It is because of
such sound policy that ONGC has been increasing a higher return on its investment as
compared to SBI card rates.
ONGC is earning a good rate of return higher than SBI rate. It has appointed
many agencies like PWC and CRISIL to review its investment procedure. CRISIL
has used a formalized procedure to review the investment policy of ONGC and it
has been quite satisfactory for ONGC.
It is also going to implement E-bidding process for investment of surplus funds
that will save a lot of time and paper work and will make the process more
efficient.
ONGC has also sought some changes in the investment procedure from the government
on following aspects:
Investment in debt funds: ONGC has sought clarification from DPE that
considering the change in scenario of mutual funds, existence of specialized
mutual funds, whether investment in debt funds, in particular gilt funds (other
than units/schemes of UTI) is permissible or not.
Investment in floating rate instruments: ONGC has asked for request from DPE
on the aspect that surplus funds can be invested in floating rate debt instruments
(such as linked to MIBOR) by locking in the yield through a floating to fixed rate
interest rate swap.
Inter corporate short term loan to central PSE with highest rating: ONGC had also
sought approval for it. Based on ONGC’s request, the same has been allowed by
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DPE. ONGC currently has following six PSEs (three of them are Oil companies)
on the invitee list for investment. These are IOC, BPCL, HPCL, NTPC, and
BHEL & SAIL.
ONGC has also started making investment in other investment avenues such as
UTI Mutual Fund and it has helped ONGC to utilize its idle funds for less than
seven days and it has earned good return on this investment. Now, ONGC is also
looking to make investment in other schemes of UTI Mutual Fund.
RECOMMENDATIONS
101
The present investment policy of ONGC doesn’t involve any major shortcoming. But still
some changes are required for it:
ONGC should explore the opportunity to invest in other schemes of UTIMF apart
from UTI Liquid Plan. For example, UTI Fixed Maturity Plan is a good scheme
that has been launched by UTIMF by taking care of needs of PSEs. But ONGC
needs to be careful while investing in this scheme because it involves exit load.
So, ONGC should invest only that surplus in this scheme for which it is sure that
it won’t take it prematurely. So, a good step will be to start investing in this
scheme with a small amount to get the inside of this scheme. GAIL has also
started investing in it by Rs. 25 Crores only.
UTI is thinking to come with 1 month UTI fixed maturity Plan. This plan can be
well suited to the needs of ONGC. So, if this plan comes, ONGC should take the
opportunity to invest in that plan.
ONGC, at present, is investing in only ‘AAA’ rated papers and banks. But if we
compare the rate of interest of these with ‘AA’ and others, we find a significant
difference in the rate of interest in them. So, ONGC should look for approval
from DPE for making investment in AA rated paper and banks though certain
criteria should be fixed for them also.
CRISIL is following a good procedure to determine the risk limit for each bank.
But there are certain factors that have not taken into consideration by it and which
have a major impact on the financial soundness of banks. For example:
Solvency Ratio
ONGC needs to implement a proper mechanism for cash forecasting. Because
there have been incidence in the past that there was a large difference between the
forecast and actual figure of cash in a year. So, it may result in withdrawing
102
investment prematurely or taking loan. In both cases, it will have to lose on
interest and ONGC has faced a lot of problem because of poor cash forecasting.
ONGC is going to implement E-bidding process from June 2007 onwards. It will
clearly save a lot of time and paper work. But it needs to have trained personnel
and also need to have implemented it in respective banks; otherwise it may not
produce the desired result.
RISK MANAGEMENT
103
IDENTIFICATION OF PROBLEM
Problem Statement
To identify the potential risk factors for the firm, and to provide optimum solution
not only for them, but also to any other risk management procedure followed by
ONGC.
Hypothesis, if any
In this project there was no assumptions was as, such made and no hypothesis was
thought to be appropriate for conducting the research investigations.
LITERATURE REVIEW
In order to check on the entire risk factors adopted by ONGC in their different
deparments the following list of documents which are being reviewed &
scrutinised.
Some books and documents which are studied for taking the review are as follow :
- Risk management in Treasury – S.K. Baggachi.
- Risk Management procedure of British Petroleum
- Risk Management procedure of Exxon Mobil.
- Risk Management procedure of Exxon Mobil
RESEARCH DESIGN METHODOLOGY
104
Data sources
For the collection of data various websites have been visited and the personal
interviews have been done with different department heads, for their risk strategy,
and knowing their department process and functionality.
Exploratory research has been done for finding out the new risk factors particularly
in relation to ONGC and some in general faced by every company.
ANALYSIS
In this business world, risk is everywhere – fires, natural disasters, exchange – rate
fluctuations, changes in interest rates, credit ratings and commodity prices. It’s the wild
card that can upset even the most carefully crafted business plan.
So it is not surprising that over the past couple of decades, executives have become ever
more adept at neutralizing risk with a battery of instruments, including not just insurance
but a variety of derivatives based on currencies, securities and credit ratings, as well as
customized contracts with counterparties. It’s even possible to hedge the weather.
As per revised clause 49 of the SEBI notified Listing Agreement (effective 01, Jan 2006)
all listed companies are required to assess the business risk and steps taken to minimize
the same.
Accordingly, every company shall lay down procedures to inform Board members about
the risk assessment and minimization procedures. These procedures shall be periodically
reviewed to ensure that executive management controls risk through properly defined
framework.
As of now oil and gas industry is of very hazardous nature due to its volume of
transaction and its importance because of its limited resources. Therefore in recognition
of possible risk to which this industry is exposed, many companies has started to mitigate
their risk through a proper route of risk management Therefore, risk management is the
process of defining and analyzing risks, and then deciding on the appropriate course of
action in order to minimize these risks, whilst still achieving business goals.
105
The current scenario of risk management in ONGC is in a decentralized way, which is
handled by different departments depending on the risk faced by them.
Therefore the object of this report is to:
Identify the potential risk factors of ONGC specifically.
Redesign the existing risk management policy on a centralized basis.
Provide a solution for existing risk factors with any alternatives.
The limitation faced by Oil and Natural Gas Corporation in risk management until now
are:
Decentralization of responsibilities and power which create hurdle in immediate
decision making.
Lack of creative decision making ability, because of centralized decision making
power.
Structural limitations, due to high no. of hierarchy level which create difficulties in
proper communication.
All commercial organizations are exposed to different types of business risks.
Assessment and management of these risks are essential to insulate / mitigate the effects
of these risks on the financial heath of the organization. ONGC is predominantly exposed
to following types of risks.
(1) Operational Risk
(2) Financial Risk
(3) Regulatory Risk
(4) Economic and Industry risk
OPERATIONAL RISK
106
Exploration Risk
E&P industry world over is fraught with the basic exploration risk which refers to the
probability of success in exploration endeavors. In this industry the inputs are
deterministic but output is probabilistic. Before making any hydrocarbon discovery
and establishment of reserves substantial cost are incurred in survey, processing and
interpretation of data to firm up a prospect and exploratory drilling which may or may
not result into hydrocarbon discovery. At times, such costs is enormous particularly in
frontier areas, deep water and logistically tough terrain.
Reservoir Behavior Risk
The reservoir is delineated and assessed based on the result of survey, exploratory
drilling, initial production testing results and data obtained through sustained
production. The reservoir behavior is largely unknown at initial assessment, but
becomes clearer with continued exploitation. The reservoir is affected by a host of
factors, controllable and non-controllable, which may impact the recoverability
factor.
Production Life Cycle Risk
During production life cycle, of a field, it is a common phenomenon that some wells
get de-optimized with respect to intended/expected production, which has its own
bearing on the targeted production. Then at any point of time, production field has
certain percentage of wells as non flowing wells i.e. the wells which don’t flow at all.
Efforts to optimize them as well as making them flow warrants further investment
which is normally unplanned in nature. These unplanned expenditures have a risk
associated with it in the sense that it may not fetch us targeted return.
During the production life cycle of a field, we also witness some risk arising out of
non-compliance of benchmark and standard and not adopting the change management
philosophy in its entirety. All this has significant bearing on the utilization of the
available capacity within field and within the company and thereby putting pressure
on the investment/expenditures of the company.
107
Input Cost Fluctuation Risk
ONGC is a capital intensive company and the oil industry is technology intensive.
Thus the variation in the coat of inputs associated with equipments, stores and spares
and manpower cost affects the future probability of the company. The cost of input
increases substantially when the crude oil prices in the international market are high
and vice – versa.
Damage to property risk
ONGC has operations spread over a vast geographical area covering both offshore
and onshore. It may not be possible to provide foolproof security to each and every
installation. This exposes ONGC to the risk of damage on account of fire,
earthquakes, hurricane, terrorist/miscreants attacks, accidents etc.
Project Execution Risk
Project Execution Risk refers to the probability of time and cost over an attached to
the project execution. In case of and integrated E&P company like ONGC each
activity like survey, drilling, testing, platform installation etc. is a project by itself.
Therefore the time or cost overrun in any one of such activity can have cascading
effect on the company’s exploration and exploitation plan.
Employee Turnover Risk
Every organization is faced with the risk of employee’s turnover. With the NELP
regime in vogue, more private players are entering the E&P industry and therefore the
chances of existing employees leaving the organization are more. Higher employee
attrition rate has impact on the bottom-line on account of increased cost towards
training, relocation of employees etc. E&P activities, particularly related to reservoir
engineering and drilling, highly specialized ONGC employees have gained this
expertise he last few decades. Employees leaving from the core areas expose ONGC
to a great risk.
108
Directors’ & Officers Liability
In case of any Corporate, registered under the Companies Act, 1956, day-to-day
management of the entity is divested from the shareholders and rests with
professional management team consisting of Directors and Executives. ONGC is a
listed company and the shares are widely held within India and abroad. The shares are
held by FIs, FIIs and High Net worth Individuals (HNI) across many countries.
Therefore the company is exposed to risks arising out of commission and omission of
the management team. Similarly, Directors and officers are also exposed personal
liability for loses/liability arising in discharge of their official duties.
Risk pertaining to safety and occupational health
Risk arising out of unsafe operations is enormous and is well understood by each one
of us. Managing occupational health too has an element of risk in it-the risk which is
rather intangible. Stress, fatigue & other work –related ailments along with loss of
confidence and associated non-deliverability has its own bearing on the
“Productivity” of an employee (and on other employee as it works in contagious
fashion) and on productivity of an organization. This ha more relevance in a company
like ours particularly in offshore.
Environmental Risk
Risk arising out of pipeline ruptures, oil spills, produced water over boarding, flaring
of gas above and below technical flaring level etc. This also needs to be reflected
while deciding for the policy on risk management.
Technical risk
Since upstream industry is very capital intensive and technical savvy industry, so
there is always a risk of technical faults and difficulties (including technical problem
that may delay start – up or interrupt production from an upstream project or that may
lead to unexpected downtime of refineries or petrochemical plants).
The outcome of negotiations with co-ventures, governments, suppliers, customers or
others (including, for example, our ability to negotiate favorable long-term contracts
109
with customers, or the development of reliable spot markets, that may be necessary to
support the development of particular production projects)
FINANCIAL RISK
Commodity Price Risk
Prices of ONGC products, i.e., Crude oil and Value added products are linked to
import parity. The fluctuations in the price of crude oil and Value added products
have impact on the sales revenue of the company which on turn affects the
profitability.
Foreign Exchange Risk
The functional currency of ONGC is Indian Rupees (INR). However, ONGC is
exposed to foreign currency risk, both directly as well as indirectly. Direct exposure
refers to those liabilities which are settled in foreign currencies. This includes the
requirement arising out of Debt-serving as well as Import transactions (includes
goods and services). Indirect exposure refers to those foreign currency transactions
which are settled in INR but the underlying currency is a foreign currency (viz USD).
This includes the sales receipts from refineries which are benchmarked to
international prices in dollar terms but are ultimately paid in INR.
Interest Rate Risk
Interest rate risk can be defined as the risk to the profitability or value of a company
resulting from changes in interest rates. ONGC is exposed to Interest rate risk on
following counts:
Interest rate applicable to long-term debt obligations.
Interest rate applicable on short term investments made by ONGC.
Liquidity, financial, capacity and financial exposure
The group has established a financial framework to ensure that it is able to maintain
an appropriate level of liquidity and financial capacity and to constrain the level of
assessed capital at risk for the purposes of positions taken in financial instruments.
110
Failure to operate within our financial framework could lead to the group becoming
financially distressed leading to a loss of shareholder value. Commercial credit risk is
measured and controlled to determine the group’s total credit risk. Inability to
adequately determine ONGC credit exposure could lead to financial loss.
REGULATORY RISKS
Fiscal Regime Risk
E&P industry in India is affected by the changes in the tax and royalty regimes. Tax
includes both direct taxes like corporate tax as well as indirect taxes like sales tax,
service tax, turnover tax etc. In addition, the tax regime can also affect the cost of
inputs. Royalty is governed by the provisions of Oilfield (Regulation and
Development) Act, 1948 under which royalty can be charged upto 20% of the
wellhead value in case of Crude oil and Natural gas production. At present royalty is
charged @10 % in respect of natural gas and offshore crude oil production. In case of
deep-water production of oil & natural gas, the royalty is 50 % of the rate specified
for offshore production. However, Govt. can increase the royalty rates if it so desires.
Any such increase will have a direct bearing on the profitability of ONGC since the
crude oil prices are linked to international prices.
Other Regulatory Risks
ONGC is subject to regulation and supervision by the Government of India and its
departments. ONGC is a Public Sector Undertaking (PSU) and is subject to mandates
of GOI. The award of licences for exploration, production, transportation and sale of
hydrocarbons are dependent on the policies of the Govt. Existing Indian regulations
require that ONGC has to apply for and obtain Govt. licences and other approvals,
including extensions of exploration licences awarded in some cases, grant and
renewal of mining leases, which are basic requirements of E&P industry. Any change
in the Govt. policies/regulations can affect ONGC’s operations.
ECONOMIC AND INDUSTRY RISK
111
Economic disruptions
Slow down in expected economic growth rates and the occurrence of economic
recessions, can bring down slow down in demand and supply, this unexpected
occurrence can be very harmful for industry.
Weather risk
This risk is very common in every country. Since ONGC is multinational company it
operates in many countries, this kind of risk is very common for it. This kind of risk
involves seasonal variation in supply, at the time of regular demand. This includes
seasonal patterns that affect regional energy demand (such as demand for heating oil
or gas in winter) as well as severe weather events (such as hurricane) that can disrupt
supplies or interrupt the operations of ONGC facilities.
Alternate energy source
The competitiveness of alternate hydrocarbon and energy source can be a risk factor
for ONGC as there can be an introduction of new alternate fuel source, comparatively
cheaper and less hazardous and easy to access, where as at same time ONGC can loss
a fortune of revenue because of decrease in sales and consumers will switch over to
low cost of fuel source.
MANAGEMENT OF OPERATIONAL RISKS
The various risks listed above have so far been addressed as follows:
Exploration Risk
Exploration risk at best can be mitigated and cannot be eliminated in totality. ONGC
is reducing the risk in exploration through knowledge and technology enhancement.
Geoscientists are being trained and retained through in-house and foreign faculties for
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knowledge enhancement and through collaborative assignments with technology
leaders. Technology Hubs are created through collaboration with Schlumberger,
Halliburton, and Baker Hughes etc. State-of-the art technologies are inducted through
acquisition like Virtual reality Centre advanced geological and geophysical modeling
system, workstations for interpretation of data, reservoir evaluation software for
better reservoir characterization etc. ONGC is going for more and latest technique of
surveys such as 3D data acquisition, Q-marine seismic surveys, Sea bed logging and
others.
Also ONGC is consulting domain experts for interpretation of data as and when
required and also consultancy projects are rewarded to have second opinion on
interpretation to minimize the risk. In case of deep water activities Joint Ventures are
formed to share the risk and also to have latest technology from partners.
Reservoir Behaviour Risk
As brought out in the Para above, hydrocarbon reservoirs are affected by both
controllable and uncontrollable factors. While the controllable factors are addressed
by reservoir engineers and geo-scientists, the impact of uncontrollable factors are
mitigated through continuous monitoring of various reservoir parameters and through
an early detection system so that extensive damage is avoided with appropriate pre-
emptive measures. Requisite mid-course corrective actions during life of the field by
maintaining appropriate well parameters help in controlling reservoir fluid dynamics
in the drainage area, resulting in optimization of production rates and maximizing of
achievable recoveries. Of the factors which are uncontrollable, micro and macro
reservoir heterogeneities and drive mechanisms are perhaps the most important.
Tackling heterogenties is an important aspect like hydro-fracturing and techniques for
maximizing reservoir contact through the use of drain holes/horizontal wells,
multilaterals etc.
Production Life Cycle risks
These risks are inherent to E&P industry and are mainly addressed through
continuous monitoring of critical parameters and through training o field executives.
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Input cost fluctuation risks
In the E&P industry, the costs of owing/hiring of equipments generally move in
tandem with the crude oil prices. The prices of inputs/equipment normally increase
when the crude oil prices. Therefore E&P companies enjoy a natural hedge in form of
higher realization which compensates the increase in input costs.
Damage to Property risk
The risk of loss/damage to property is addressed by taking appropriate insurance
cover. All offshore equipments, platforms & facilities are insured against all risk of
physical damage of loss under a comprehensive offshore package insurance policy.
The total value of the property covered under this policy is about US$.12.72bn.
However, loss of profit is not covered under the present policy. To this extent the
company is self insured
Project execution Risk
Project execution risk is essentially addressed through deployment of Project
Evaluation and Review Techniques (PERT). The projects are monitored at different
levels depending upon the criticality of the project. In case project execution through
contractual services, appropriate liquidated damages clause is incorporated in the
contract to stress the importance of timely completion. Since most of the projects are
executed through hired services, wherein the rates are frozen during the validity
period, it is also ensured that cost overrun is controlled.
Employee Turnover Risk
1) The attrition rate in ONGC has been relatively low compared to private sector on
account of the fact the salary structure and the other social security benefits extended
to employees are comparable to the best in Indian PSU scenario.
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2). It is also ensured that appropriate succession planning is done in advance in
respect of all critical areas so that eventualities like death/resignation are absorbed
with minimal impact in the operations.
Directors & Officers Liability
The risk arising out of commission and omission of employees are addressed by the
fraud detection mechanism in place. At present, the actions of employees are
subjected to checks and verification by both internal control systems, periodic review
is carried out by specified agencies like internal audit, statutory audit, Govt audit, etc.
Internal audit dept has been strengthened with tenure based posting of technical
executives so that scope of audit includes technical aspects as well. Executives and
Directors are also protected against personal liability arising in discharge of their
official duties. As per the ONGC Board’s decision in its 124th meeting held on 26th
March 2004. Directors & Officers Liability Insurance Policy for a limit if Rs 100 cr is
being taken to cover aforesaid liability.
MANAGEMENT OF FINANCIAL RISKS
Commodity Price Risk
1) Effective from April 2002, the Government introduced full de-regulation in the
petroleum sector. As a result of the decision of the government, the crude prices and
prices of petroleum products are linked to international prices.
2) As witnessed over the past one year of price movements, both the crude prices and
prices of petroleum products are highly volatile and subsequent to the de-regulation,
the revenues and cash flows of ONGC are thus directly exposed to volatility in the
international prices.
3) So far the crude oil prices have increased consistently and the same has not
affected the bottom line. Instead, it has improved the profitability by enabling full
realization in tandem with international prices (except for the Govt. imposed subsidy
burden). However the price level has reached a level from where it can move both
ways (i.e. upward as well as downward) thereby resulting in volatility. The
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necessities the formulation of a corporate risk management policy to protect the
company from underlying commodity risk management policy to protect the
company from underlying commodity price exposures.
4) As of now, ONGC has no hedging against the fluctuation on crude oil or value
added products prices. However, ONGC is contemplating to appoint a professionally
competent Agency (consultant) to undertake this study and advise ONGC suitably as
hedging itself exposes the company to risk and cost.
Foreign Exchange Risk
1) Foreign Exchange risk management is generally done on “Net basis”. In other
words, the exposure on both receivables and payables are considered and the risk
management is limited to the net exposure so as to minimize the cost ONGC is
having a natural hedge, in respect of USD, in the form if sales receipts linked to
international prices in dollar terms.
2) However, ONGC is also having exposure to other currencies like Euro, GBP, JPY
etc arising on account of import of goods and services. Further, the effect of
Commodity Price risk and Foreign Exchange risk are to be considered together before
deciding on the hedging strategies.
3) The job of establishing a frame-work for Commodity Price risk and Foreign
Exchange risk may be mandated to a consultant as mentioned at Para. above.
Interest Rate Risk
1) ONGC, at present, is having only one foreign-currency loan, denominated in
Japanese Yen, drawn from State Bank of India at a fixed interest rate of 2.60% and
maturity is scheduled in 2010. The outstanding as on 31st March 2005 was JPY
2160.78 million (equivalent INR being Rs.88.29 Cr). The domestic interest rates on
deposits are averaging above 6% for a one year deposit. Further the fluctuation is
JPY: INR conversion is less than the interest rate differential. Therefore, it is would
not be beneficial to pre-pay the loan.
2) The investment portfolio mainly consists of investment in short term deposits with
banks. Generally the investments under the portfolio are held till maturity and the
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time horizon is limited to one year. Hedging was not considered necessary in view of
the short investment tenure and the associated hedging costs.
MANAGEMENT OF REGULATORY RISKS
Fiscal Regime Risk
Fiscal policies of the Govt. are drawn up in the light of macro-economic scenario and
the structural adjustment which the Govt. intends to bringing out the possible impact
on its operation and profitability.
Other regulatory risks
Regulatory framework is decided by the Govt. and ONGC has limited say. However,
as and when any regulatory change is contemplated, ONGC takes up from time to
time with administrative Ministry (MoP&NG) (through QPRM etc) detailing the
possible impact on its operation and profitability Interests of ONGC, being the
National Oil Company where GOI hold majority stake, are likely to be adequately
protected.
MANAGEMENT OF ECONOMIC AND INDUSTRY RISK
Economic disruptions
General economic disruptions and economic recession can be forecasted which help
ONGC to reduce their production in time, and generally these recessions are not for
long so ONGC can easily face it, if they change their production policy according to
the market conditions.
Weather risk
This kind of risk is very common, but ONGC has started recognizing its ills, so for
this risk separate insurance covers are now provided by insurance companies, and not
only that weather insurance contracts are now traded on exchange in developed
countries, on whose standard Indian commodity exchanges are also in line to launch
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such kind of contract which would be helpful for ONGC in future to mitigate their
risk at low cost.
Alternate energy source
This kind of risk can be fought by enhancing their research technique, and by keeping
themselves updated with new techniques of production.
Management of Foreign Exchange and Interest rate Risks
1. In this context, in Jan ’98, Government of India appointed a Committee (Reddy
Committee) under the chairmanship of Dr, Y.V.Reddy, the then Deputy Governor of
RBI, along with Directors (Finance) of ONGC, SAIL, BHEL, NTPC, and NALCO
and representatives of C&AG, DEA, Ministry of Industry, IDBI, Bank of Baroda and
FEDAI as members.
2. The committee laid down broad guidelines for management of exchange rate and
interest rate risk associated with foreign currency exposure, which may be adopted by
Public Sector Enterprises. The Committee submitted its report in Aug 1998.
3. The committee laid down broad guidelines for management of exchange rate and
interest rate risk associated with foreign currency exposures, which may be adopted
by Public Sector Enterprises. The committee submitted its report in August 1998.
4. Based on the approach suggested by Reddy Committee to manage foreign
exchange risk, an Agenda was placed before 62nd meeting of the board held on 15
March 2000. The board approved the Foreign Exchange Risk Management Policy
with following policy approach:
(i) ONGC to follow active approach to management of foreign exchange rate and
interest rate risk, with an objective to balance risk and cost.
(ii) Exposures are to be managed on a net basis (i.e. net inflows/outflows) with
hedging horizon for one year.
(iii) Benchmark hedge ratio of 50% to be followed, with leeway for covering
minimum 33.3% exposure and maximum 80% exposure, depending on views
from time to time. Such benchmark ratios to be subject to review by Finance
Management Committee of the Board.
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(iv) Decision making Authority for hedging transactions be delegated to Director
(Finance) and C&MD for instruments like forwards, SWAPS, options etc.
(v) Structured/complex derivative products to be used with the Board Approval.
(vi) Transactions to be reported regularly to the Board.
(vii) Periodic review by Internal Audit to ensure compliance with Board approved
framework.
(viii) Policy to be annually reviewed, preferably at the time of annual budget.
(ix) To engage professional agency to advice the company in the area of exchange
risk management strategies.
PRESENT PRACTISES FOLOWED BY ONGC
As of now there is no such uniform policy for risk management. ONGC has
decentralized system risk management, where different offices, assets all over India
have their own departments, which have their own policies to manage their potential
risk factors by themselves. Due to this there has been uneven cost expenditure for risk
management, and this lead to high variable cost. This method has also not been
effective due to lack of knowledge of risk factors of different process handled by their
respective departments; employees are not given proper training for handling any
unforeseen risk.
CONCLUSION
The Corporation size, strong capital structure, geographic diversity and the
complementary nature of the Upstream, Downstream and Petrochemical business
reduce the Corporation enterprise wide risk from changes in interest rates, currency
rates and commodity prices. As a result, the Corporation makes limited use of
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derivative instruments to mitigate the impact of such changes. The corporation does
not engage in speculative derivative activities or derivative trading activities nor does
it use derivatives with leveraged features. The Corporation maintains a system of
controls that includes the authorization, reporting and monitoring of derivative
activity. The corporation limited derivative activities pose no material credit or
market risks to ONGC operations, financial condition or liquidity.
The corporation is not much exposed to changes in interest rates, primarily because
all its short term debt has fixed interest rates.
The corporation conducts business in many foreign currencies and is subject to
exchange rate risk on cash flows related to sales, expenses, financing, and investment
transactions. The impact of fluctuation in exchange rates on ONGC geographically
and functionally diverse operations are varies and often offsetting in amount. The
Corporation makes limited use of currency exchange contracts, commodity forwards,
swaps and futures contracts to mitigate the impact of changes in currency values and
commodity prices. Exposures related to the corporation limited use of the above
contracts are not material.
Above all there is need to have a centralized risk management wing that should work
in coordination with all other departments. This wing will have specialized people
who will form strategies for respective departments, which will be followed
uniformly nation wide,
GLOSSERY
MMT – Million Metric Tonne
OVL – ONGC Videsh Limited
LNG – Liquified Natural Gas
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PSU – Public Sector Undertaking
MS – Motor Spirit
HSD – High Speed Diesel
SKO – Superior Kerosene Oil
C2 – Ethane
C3 – Propane
MOU – Memorandum of Understanding
IPP – Import Parity Prices
EPP – Export Parity Prices
LSHS – Low Sulphur Heavy Stock
NCCD – National Calamity Contingency Duty
PPAC – Petroleum Planning Analysis Cell
OMC – Oil Marketing Companies
MoP&NG – Ministry of Petroleum and Natural Gas
IRR – Internal Rate of Return
ROC – Return on Capital
MDPM – Market Determined Pricing Mechanism
TMG – Treasury Management Group
NPA – Non Performing Asset
DPE – Department of Public Enterprise
E&P – Exploration and Production
BIBLIOGRAPHY
WEBSITES
1. ppac.org
2. investopedia.com
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3. ongcindia.com
4. petroleum.nic.in
5. google.co.in
6. petroindia.com
7. eia.doe.gov
8. utimf.com
9. dpe.nic.in
10. ongcreports.in
Annual Report of ONGC 2005 -06
CMIE (PROWESS) Database
Baggachi SC, Treasury risk management
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