Project Report- Meenu

A PROJECT REPORT ON

“THE STUDY OF SHORT TERM INVESTMENT POLICY OF ONGC”

A SUMMER PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENT OF THE TWO YEAR POST GRADUATE

DIPLOMA IN MANAGEMENT (FULL-TIME)

SUBMITTED BY

NAME: MEENUROLL NO: 15/029

CLASS: PGDM (1A)BATCH: 2007-09

APEEJAY SCHOOL OF MANAGEMENT, DWARKA, NEW DELHI

Oil & Natural Gas Corporation Ltd.

ACKNOWLEDGEMENT

A task or a project cannot be completed alone. It requires the efforts of many individuals. It is a great pleasure for me to have the opportunity to extend thanks to everybody who helped me through the successful completion of this summer internship project in ONGC without the help of whom, this project would have been difficult to complete.

At first, I thank ONGC Ltd. for giving me such challenging projects to work upon. I hope this challenge has brought best out of me.

I am indebted to my Company guides Mr.D.S.Misra, CM (F&A), Mr. Amarjeet Singh Yadav, (F&A) Officer in ONGC, for the direction and purpose he gave to the project through his invaluable insights, which constantly inspired me to think beyond the obvious. His support and encouragement helped me to look at the project from different aspects.

I express my deep sense of gratitude to my college guide Mr.Avijit.Chakravarti, for guiding me in the completion of the report since the initial stage of my projects.

I am also thankful to all the employees of ONGC who were very cooperative and provided their maximum support to me in the completion of the report.

Finally, I express my thankfulness to all those who have directly or indirectly contributed towards the successful completion of this report.

The project was a tough journey but a learning experience.

Meenu (!5/029-PGDM 1A)Apeejay School of Management, Dwarka, New Delhi.

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TABLE OF CONTENTS

S.No. TOPIC PAGE No.1. Executive Summary 42. Introduction to the topic of Study 5-63. Industry & Company Profile with Organization Chart 7-144. SWOT Analysis of the Company 155. Research Methodology 166. DPE Guidelines 17-187. CRISIL Report 19-318. Procedure of Investment of Surplus Funds 32-389. Permitted Investment Avenues 39-4010. Investment Policy-Exposure Limits 4111. Analysis of Investment Instruments

11.1 FDs with Scheduled Commercial Banks11.2 Inter-corporate Deposits11.3 Investments in Mutual Fund Schemes11.4 Liquid TDRs with SBI (ONGC) main banker11.5 Certificate of Deposits of banks & other Financial

Institutions11.6 Commercial Papers/ Corporate Bonds11.7 Government Securities and Treasury Bills

42-5543-4647-4950-525353

5455

12. Findings 56-5813. Recommendations 59-6214. Conclusion 6315. Learning 6416. Annexures 65-7317. Bibliography 7418. Glossary 75

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EXECUTIVE SUMMARY

Oil and Natural Gas Corporation Limited (ONGC) is engaged in the business of exploration and drilling of crude oil and natural gas. It is one of the most recognized PSE in India. It is world’s second biggest Exploration & Production (E&P) Company. Treasury Management (TM) in ONGC is a crucial function because; Treasury Management Group takes care of cash management, liquidity management, risk management, etc. ONGC invests its short-term surplus funds in different investment avenues through out the year. Since the surplus cash of the Company ahs been earmarked for future expansion plans and acquisition of assets, it is imperative for the Company to maintain adequate liquidity in its investment portfolio. The Company also recognizes that investment management is not its core business function and accordingly protection of capital is a key driver for investment decisions. Accordingly, the Company currently invests with a horizon of one year and deposits are placed with banks that have a minimum external credit rating of ‘A’.

This reports talks about the review of investment policy; different investment avenues; risk management, with respect to these investments.Being a PSE, ONGC follows the Department of Public Enterprises (DPE) guidelines to park its idle funds. Currently, the Company is investing in FDs with banks, ICDs to Central PSEs, UTI Liquid funds for 6 days and in Liquid TDRs with SBI its main banker.ONGC has appointed different agencies from time-to-time to review its investment procedure. It has appointed Price Waterhouse Coopers in 2001, CRISIL in 2002 and E&Y in 2007. CRISIL used a transparent and standardized methodology to review its investment procedure and to provide risk based limit structure for banks. It also used a model popularly known as CRAMEL model to determine the risk limit for banks i.e. the maximum limit up to which ONGC should invest in each bank.

The report also talks about the some other options, which the company can consider to invest its surplus funds.The report ends by concluding the findings and recommendations of this project followed by attaching some annexures and bibliography.

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INTRODUCTION TO THE TOPIC OF STUDY: (STUDY OF SHORT TERM INVESTMENT POLICY OF ONGC)

TREASURY MANAGEMENT (TM)

INTRODUCTION

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

MEANING OF TREASURY MANAGEMENT

TM generally refers to the set of policies, strategies and transactions that a company adopts and implements to raise finance at acceptable cost and risk, to manage its cash resources, and to reduce interest rate, foreign exchange and commodity price risks, as well as in the conduct of its relationships with its financial stakeholders (mainly banks).

So, in simple terms TM is management of an organization’s total wealth (Resources) management, from the viewpoint of liquidity, safety and returns in tune with its mission/ business objectives and in consonance with a regulatory framework to achieve the interest of all its stakeholders. It includes management of cash flows, banking, money market, and capital market transactions, the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks.

The scope of work involved under treasury management differs for banks, financial institutions and other organizations. Normally, TM is linked with bank and financial institutions where it involves many functions:

Investment Management Liquidity Risk Management Cash Management Interest Risk Management Currency Risk Management Equity Risk Management Commodity Risk Management

But, now days, other organizations are also putting focus on TM, though their scope may be limited as compared to Banking Institutions. Remarkable changes have taken place in the field of TM in the last decade. Today, the primary goal of a treasurer is to pursue investment decision in line with overall goals of a company. In an attempt to maximize

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the earnings, the treasurer is required to provide appropriate decision making tools and optimize the liquidity position of the organization.

TREASURY MANAGEMENT IN ONGC (INVESTMENT OF SHORT TERM SURPLUS FUNDS OF ONGC)

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 funds is the main function of treasury department in ONGC. While taking decision regarding investment, various other factors like maintaining 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.

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INDUSTRY PROFILE -OIL & GAS INDUSTRY

The Oil & Gas (Petroleum Industry) is usually divided into three major components:

UPSTREAM MIDSTREAM DOWNSTREAM

UPSTREAM SECTOR

The upstream oil sector is a term commonly used to refer to the searching for and the recovery and production of crude oil and natural gas. This sector is also known as the Exploration and Production (E&P) Sector.

The upstream sector includes the searching for potential underground or underwater oil & gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/ or raw natural gas to the surface.

MIDSTREAM SECTOR

The midstream industry processes, stores, markets and transport commodities such as crude oil, natural gas, natural gas liquids (NGLs mainly ethane, propane and butane) and sulphur. Midstream operations are included under the downstream category.

DOWNSTREAM SECTOR

The downstream oil sector is a term commonly used to refer to the refining of crude oil, and the selling and distribution of natural gas and products derived from crude oil. Such products include Liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, and other fuel oils.The downstream sector includes oil refineries, petrochemical plants, petroleum products distribution, retail outlets and natural gas distribution companies. The downstream industry touches consumers through thousands of products such as gasoline, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane.

The Indian petroleum industry is one of the oldest in the world, with oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drake’s discovery in Titusville. The industry has come a long way since then. For nearly fifty years after independence, the oil sector in India has seen the growth of giant national oil companies in a sheltered environment. A process of transition of the sector has begun since the mid-nineties, from a state of complete protection to the phase of open competition. The years since independence have however, seen the rapid growth of upstream and downstream oil sectors. The sector in recent years has been characterized by rising consumption of oil products.

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COMPANY PROFILE-OIL AND NATURAL GAS CORPORATION Ltd. (ONGC)

ONGC VISION & MISSION

To be a world class Oil and Gas Company integrated in energy business with dominant Indian leadership and Global presence.

ONGC HISTORY

Foundation

In August 1956 Oil and Natural Gas Commission was formed. Raised from mere directorate status to Commission, it has enhanced powers. In 1959, these powers were further enhanced by converting the commission into a statutory body by an act of Indian parliament. Major functions of ONGC accorded to this provision were to plan, promote, organize and implement programs for the development of petroleum resources and the production and sale of petroleum and its products.

1960-1990

ONGC since 1959 has made its presence noted in most parts of India and in overseas territories. ONGC found new resources in Assam and also established the new oil province in Cambay basin (Gujarat). In 1970 with the discovery of Bombay high (now known as Mumbai High), ONGC went offshore. Most important contribution of ONGC, however, is its self-reliance and development of core competence in exploration and production activities at a global competitive level.

Post 1990

Post 1990, the liberalized economic policy was brought into effect, subsequently partial disinvestments of government equity in PSUs were sought. As a result, ONGC was reorganized as a limited Company and after conversion of business of the erstwhile Oil & Natural Gas Commission to that of Oil & Natural Gas Corporation Ltd in 1993, 2% of shares through competitive bidding were disinvested. Further expansion of equity was done by 2% share offering to ONGC employees. Another big leap was taken in March 1999, when ONGC, OIL (Oil India Corporation) and GAIL (Gas Authority of India Ltd.) agreed to have cross holding in each other’s stocks. Consequently Government sold off 10% of its share holding in ONGC to IOC and 2.5% to GAIL. With this the Government holding in ONGC came down to 84.11%. In 2002-03 ONGC took over Mangalore Refinery and Petrochemicals Ltd (MRPL) from Birla Group and announced its entrance into retailing business. ONGC also went into global fields, through its subsidiary ONGC Videsh Ltd (OVL). ONGC has major investments in Vietnam, Sakhalin and Sudan.Oil and Natural Gas Corporation (ONGC) incorporated on June 23,1993, is an Indian Public Sector petroleum Company. It is a Fortune Global 500 Company. It is highest profit making corporation in India. It was set up as a commission on August 14, 1956. Indian Government holds 74.14% equity stake in this Company.

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ONGC Today

ONGC ranks as the Numero Uno Oil & Gas Exploration & Production (E&P) Company in Asia, as per Platt’s 250 Global Energy Company list for the year 2007. It is engaged in the upstream sector i.e. in the business of exploration and drilling of crude oil and natural gas. ONGC is the only Company from India in the Fortune Magazine’s list of the world’s most admired Companies 2007. ONGC is 9th position in the industry of mining, crude oil production.ONGC has 37 projects in 18 different countries (24 Exploration, 6 Development, 7 producing). MRPL its subsidiary has been given the status of Miniratna. With this the Company is working in the downstream sector of refining of crude oil, selling and distribution of refined petroleum products and natural gas

It contributes India’s 72% hydrocarbon discovery with a breakage of 77% oil and 62% gas.

HYDROCARBON DISCOVERY IN INDIA (Till 2007)

ONGC 72%OIL 11%Pvt./ JV 17%

ONGC discovers the major portion i.e. 72% of hydrocarbons in India as is clearly shown in the above graph.

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OIL DISCOVERY IN INDIA (Till 2007)

The chart and graph below shows the discovery of Oil in India contributed by different E&P Companies.


ONGC discovers major portion of discovery of Oil in India i.e. 77%

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GAS DISCOVERY IN INDIA (Till 2007)

The chart and graph below shows the Gas discovery in India contributed by different E&P Companies.


ONGC also discovers major portion of gas in India i.e. 62%.

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PRODUCTION OF OIL AND NATURAL GAS IN INDIA

In the production sector also ONGC is the number one among the upstream companies as in the exploration sector.

CRUDE OIL PRODUCTION IN INDIA (‘000’ TONNES) (2006-07)

The chart below shows the production of Crude Oil in India in ‘000’ Tonnes by different companies and their respective percentages.

ONGC 26051 76.65%OIL 3107 9.14%JV/ PRIVATE 4830 14.21%

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NATURAL GAS PRODUCTION IN INDIA (MILLION CUBIC METRES) (2006-07)

The chart below shows the production of Natural Gas in India in Million cubic metres by different E&P Companies.

ONGC 22443 70.69%OIL 2265 7.13%JV/ PRIVATE 7039 22.17%

The above given facts clearly shows that ONGC contributes about 70% in both the exploration and production sectors of the upstream sector among different E&P Companies.

During the financial year 2006-07, the Company recorded an operating profit of Rs 21,147 Crores whereas net cash flow from operating activities was Rs 22,910 Crores. As on March 31, 2007, the Company cash and bank balances amounted to Rs 19,280 Crores.

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ORGANIZATION CHART

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CMD

Company Secretary Corporate Affairs Chief Vigilance Officer

MD, ONGC VIDESH Ltd.

Director Offshore

Director Onshore

Director Exploration

Director HR

Director Tech & Field Services

Director Finance

Mumbai High

Heera & Neelam

Supply Bases

Uran Plant

Hizaria Plant

Offshore PSC-JV

Ahmedabad

Ankleshwar

Mehsena

Assam

Karaikal (Cauvery)

Rajamundhry (KG)

Tripura

Western (Offshore)

Western (Onshore)

Assam

Cauvery

Geophysica-l Services

Exploration Directorate

HRD

Functional HR Planning

Employees relations

ONGC Academy

Security

Legal

Medical

Chief Drilling Services

Chief Well Services

Chief Logging

Explor. & Dev. Tech.

Internal Audit

Commercial

Performance Measurement & Benchmarking

TREASURY MANAGEMENT


SWOT ANALYSIS OF THE COMPANY

STRENGHTS

ONGC ranks as the Numero Uno Oil & Gas E&P Company in Asia. ONGC has a very efficient and professional management team. ONGC being an international company has sufficient resources and capital to

invest. ONGC has ISO-9001 & ISO-14001 registration. The investment procedure of ONGC to invest its surplus funds is satisfactory.

WEAKNESS

ONGC is facing difficulties to produce oil from aging reservoirs.

OPPOURTUNITIES

Natural Gas: Natural Gas has the potential to be the fuel of the future with demand outpacing supply by more than two times. Such high scarcity of natural gas provides big opportunities for Oil companies.

Out of 26 sedimentary basins in India only 6 are being exploited today, so there is a large for those willing to assume the risk of exploitation.

Along with the upstream sector Company is also into the downstream sector with its subsidiary MRPL, it has a scope to go into the power generation as the major world’s player are in.

Automobiles sale have been surging every year. Consumption of petrol, diesel and LPG are on a steep rise.

In terms of its investments of short-term surplus, the company has many untouched avenues from where it can get good returns on its money.

THREATS

The Mumbai High field remains the biggest producing property in the country, but it is entering into plateau phase with yields failing.

In some exploration Campaigns Company involves high technology and high risks.

COMPETITORS OF ONGC

As ONGC is the Numero Uno Company in the E&P sector in Asia, thus it has no competitors. There are a few other players in the upstream sector and they areOIL, JV/ Private players and they include Reliance, Cairn Energy, HOEC, Premier Oil, GSPC, etc.

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RESEARCH METHODOLOGY

The project is to study the short-term investment policy of ONGC.I have followed the following approach:

Study of DPE guidelines:All the PSEs have to follow the guidelines of DPE to park their idle funds. Hence these are the basic guidelines, which the company keeps in mind before taking any investment decisions.

Study of CRISIL report:The Company has appointed CRISIL in 2002 to study its investment procedure and it has devised “Risk based limit structure for banks” for the company.

Study of Investment Procedure of the Company:The Company has its own investment procedure to park its idle funds.

Study of Investment Avenues of ONGC:Currently, the Company invests in very few avenues. DPE and the Investment Committee of ONGC restrict the investment avenues of the Company. This portion deals with the study of those investment avenues of the company.

Study of Investment Portfolio of the Company:This portion deals with the current investments of the company, and the analysis of the returns, which the Company gets from them.

Study of other investment avenues:In this part of the study all those investments avenues are studied in which DPE allows the company to invest. So this portion deals with the study of those investments avenues, which are untouched by the company till date.

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STUDY OF DEPARTMENT OF PUBLIC SECTOR ENTERPRISES (DPE) GUIDELINES

DPE has formulated different policies for PUBLIC SECTOR ENTERPRISES (PSEs) regarding investment of short-term surplus. The guidelines are issued dated 14th December, 1994 by DPE and are reviewed from time to time dated 1st November, 1995, 11th March, 1996,2nd July, 1996,14th February, 1997, 25th November, 1999, 29th September, 2005, 31st August, 2007, 4th December, 2007, 11th April, 2008, 15th April, 2008.

PRINCIPLES CONCERNING INVESTMENTS

The PSEs should observe the following guidelines in regard to investment of surplus funds.

Investments should be made only in instruments with maximum safety. There should be no element of speculation on the yield obtaining from the

investment. There should be a proper commercial appreciation before any investment decision

of surplus funds is taken. The surplus availability may be worked out for a period of minimum one year at any point of time.

Funds should not be invested by the PSE at a particular rate of interest for a particular period of time while the PSE is resorting to borrowing at an equal or higher rate of interest for its requirements for the same period of time.

Investment decision should be based on sound commercial judgment. The availability should be worked out based on cash flow estimates taking into account working capital requirements, replacement of assets and other foreseeable demands.

The remaining period of maturity of any instrument of investment should not exceed one year from the date of investment where the investment is made in an instrument already issued. Where investment is made in an instrument newly issued, the final maturity of the instrument should not exceed one year. However, only in the case of term deposits with banks, it can be up to three years.

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

Term deposits with any scheduled commercial bank (i.e., banks incorporated in India) and Rs.100 Crores as ‘net worth’ of the bank, i.e. the paid up capital plus free reserves of the bank should not be less than Rs.100 Crores, fulfilling the capital adequacy norms as prescribed by the R.B.I. from time to time. These adequacy norms should be reflected in the last published balance sheet.

Instruments which have been rated by an established Credit Rating Agency and are falling under investment credit rating e.g. Certificates of deposits, Deposits schemes or similar instruments issued by scheduled commercial banks/term lending institutions including their subsidiaries, as well as Commercial paper of corporates.

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Inter-corporate loans are permissible to be lent only to the Central PSEs, which have obtained highest credit rating awarded by one of the established Credit Rating Agencies for borrowings for the corresponding period.

Any debt instrument, which has obtained highest credit rating from an established Credit Rating Agency.

Mutual funds subject to following conditions:Only Navratna and Miniratna CENTRAL PUBLIC SECTOR ENTERPRISES (CPSEs) are permitted to invest in SEBI regulated public sector mutual funds.Investments in schemes of such mutual funds, having equity investments, should not exceed 30% of the available surplus funds of the concerned CPSE.The Board of Directors of these CPSEs would decide the guidelines, procedures and management control systems for investment in such mutual funds in consultation with the Administrative Ministries. CPSEs are not allowed to invest their surplus funds in the Call Money Market.

DPE GUIDELINESS No PERMISSIBLE

INSTRUMENTS MAXIMUM TENOR/RESIDUAL MATURITY

RATING OTHER CRITERIA

1 Fixed Deposits with banks

3 years N/A Any Scheduled Commercial Bank (Banks incorporated in India) 2. Net Worth of minimum 100 Crores 3.Meets capital adequacy requirements as prescribed by RBI

2 Government Securities and Treasury Bills

3 year Sovereign N/A

3 Bonds/ Commercial Paper issued by Central PSEs

1 year Investment Grade

N/A

4 Inter-corporate deposits to Central PSEs


N/A

5 Certificates of deposits


N/A

6 Public Sector Mutual Funds

N/A N/A Investments in schemes of such mutual funds, having equity investments, should not exceed 30% of the available surplus funds with the Company

*Under current DPE guidelines direct investment in equity is not permitted.*PSEs are also not allowed to directly invest in the call money market.

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CRISIL REPORT (24 th JULY 2003)

ONGC has mandated CRISIL to provide it with a Risk based limit structure for investment of its short-term surplus funds.

The main objectives of the report were:

Develop a risk-based limit structure for exposures to banks/other counter-parties. Redesign existing investment processes to implement risk-based limit structure. Monitor the key economic and banking related risk indicators and rebalance the

limit structure on a bi-monthly basis.

The purpose of the report was:

To review existing investment processes. To propose risk based limit structure. Recommendations to incorporate risk based limit structure in existing investment

procedures.

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REVIEW OF PERMITTED INVESTMENT AVENUESCURRENTLY PERMITTED* INVESTMENT AVENUES

CURRENTLY APPLICABLE* CONDITIONS

COMPARISION WITH DPE GUIDELINES

Term deposits with scheduled commercial banks

Such banks to be incorporated in India with a minimum net worth of Rs.100 Crores and also meeting the capital adequacy norms, as prescribed by the RBI.

Meets DPE Guidelines requirements

Certificates of Deposits, Deposits Schemes or similar instruments issued by scheduled commercial banks, and subsidiaries of term lending institutions.

Instruments rated "AA" or "P-2" equivalent or above.


Short-term deposit scheme of Primary Dealers

Instruments/ schemes to be with highest credit rating (P1+ or equivalent). 50% or more of the equity of such Primary Dealers is to be held by scheduled commercial banks/ financial institutions. The maximum duration of such deposit shall be 91 days.


Commercial paper issued by corporates

Corporate to have highest credit rating (P1+ or equivalent) from an established credit rating agency. In case of CP of corporates, other than central PSEs, the issuer must be a company whose shares are listed as "Category A" shares on Bombay Stock Exchange.


Inter-corporate loans to central 'Navratna' PSEs

Borrower to have highest credit rating (AAA or equivalent) from an established rating agency for borrowing for the corresponding period.


Bond issued by central PSEs Issuer to have highest credit rating (AAA or equivalent)


Treasury Bills and Governments of India Securities


*Currently refers to the period of 2003

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PROPOSED INSTRUMENTWISE LIMITSCRISIL has recommended that the instrument wise limits be changed as follows:

The limits for TDRs/ STDRs of banks have been raised from Rs. 6000 Crores to Rs. 10000 Crores.

The limit for investment in T Bills/ GOI securities is raised to Rs. 10000 Crores. The limit for Rated Instruments of Banks has been changed to Rs. 1000 Crores

and for Rated Instruments of Term Lending Institutions has been changed to Rs. 1000 Crores as compared to the existing combined limit of Rs. 6000 Crores for these two categories.

On the basis of the relatively low liquidity and lack of availability of high volumes of good credit quality of commercial paper/ bonds of corporates the investment limit on Commercial Paper/ Bonds of Central PSEs have been reduced to Rs. 1000 Crores from the current level of Rs. 2000 Crores.

PROPOSED INSTRUMENTWISE LIMIT STRUCTUREINSTRUMENT EXISTING LIMITS

(Rs. CRORES)PROPESED INVESTMENT LIMITS (Rs. CRORES)

T Bills/ GOI Securities6000 10,000

TDRs/ STDRs of Banks 6000 10,000Rated Instruments of Banks

6000

1000Rated Instruments of Term Lending Institutions

1000Commercial Paper/ Bonds of Corporates 2000 1000Intercorporate loans to Central PSEs

2000 2000 (No Change)Deposits with PDs

500 500 (No Change) PROPOSED RISK BASED LIMIT STRUCTURE FOR BANKS

The risk based limit structure developed by this process is applicable as counter party limits for banks covering all investments with banks-Term deposits as well as investment in other rated instruments.This process has following steps:

INITIAL SHORTLIST OF BANKS RISK GRADING OF BANKS CONVERTING RISK GRADES INTO RISK LIMITS

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The initial shortlist of banks is based on certain qualifying criteria. It is operated at two levels.

LEVEL 1 CRITERIATYPE OF BANK NET WORTH CAPITAL ADEQUACY RATIO (CAR)Public Sector Banks

Minimum of Rs. 100 Crores

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 Banks

Minimum of Rs. 500 Crores

CRISIL has justified their recommendation on the ground that the credit-worthiness in the banking sector has a very linkage to size, and ‘Networth’ is a very good proxy for size. LEVEL 2 CRITERIAOnly banks in the ‘Risk grades’ A, B and C will qualify for allocation of limits.

MAIN PROCESS I: RISK GRADING OF BANKS

Risk Grades are obtained from a Cramel based model developed by CRISIL. The Cramel based model uses financial and other business information to assess the creditworthiness of banks. Banks are graded into four categories- a, b, c, d- in decreasing order of creditworthiness.An equity price based dynamic scoring model provides a one-year forward estimate of default probability measure for each bank. Based on this measure the banks are again graded into four categories- 1, 2, 3, 4- in the decreasing order of credit quality.A combined grade is obtained for each bank based on a decision logic that ensures that the Cramel model retains primacy.

MAIN PROCESS: CONVERTING RISK GRADES TO RISK LIMITS

Mapping Crisil Default Probability Data to the Risk Grades- A, B, C. Conversion of Default Probabilities to Risk Weights. Allocation of risk based limits to banks based on risk grades.

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RISK BASED LIMITS

MAPPING CRISIL DEFAULT PROBABILITIES TO RISK GRADES- A, B, C

CONVERSION OF DEFAULT PROBABILITIES TO RISK WEIGHTS

COMBINED RISK GRADES OF BANKS (A, B, C, D)

CRAMEL BASED RISK SCORES (a, b, c, d)

EQUITY PRICE BASED DYNAMIC SCORING (1, 2, 3, 4)

INITIAL SHORT LIST OF BANKS


RISK BASED LIMT STRUCTURE OF BANKS PROPOSED BY CRISIL

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MAIN PROCESS I: RISK GRADING OF BANKSSUB PROCESS I: CRAMEL BASED RISK SCORING

CRAMEL BASED MODEL – 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 and 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)

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INPUTSFinancial performance and other business factors data of banks.

CRAMEL BASED CRISIL PROPRIETARY SCORING TOOL

OUTPUTSCalculation of Risk Scores and ordering of banks into grades according to creditworthiness.

CRAMEL BASED RISK SCORES (a, b, c, d)


SCALES USED FOR SCORINGPERFORMANCE SUB FACTORS

VALUE OF SUB FACTOR

SCORE

Capital Adequacy Ratio (%) Less than 8% Greater than 15% Between 8% to 15%

0 10 Proportionately on a scale of 1- 10

Tier I Capital Ratio (%) Less than 5% Greater than 14% Between 5% to 14%


Net Worth/ Net NPA Less than 0.5 Greater than 5.0 Between 0.5 to 5.0


Cost of Deposits Less than 6% Greater than 10% Between 6% to 10%


Deposit Growth (%) Less than 10% Greater than 35% Between 10% to 35%


Average Net NPA 0% Greater than 14% Between 0% to 14%


Return on Assets Less than 0.0% Greater than 1.5% Between 0.0% to 1.5%


Operating Expenses/ Total Income

Less than18% Greater than 33% Between 18% to 33%


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MAIN PROCESS I: RISK GRADING OF BANKSSUB PROCESS II: EQUITY PRICE BASED DYANMIC SCORING

The equity price based dynamic scoring model provides a one-year forward estimate of default probability for each bank. This process determines the default risk associated with any entity on a dynamic basis by linking it to its stock price data. The rationale behind use of such a methodology is that the markets reflect the consensus opinion of participants and is therefore a very good source of current information of the creditworthiness of an entity. The process involves the following broad steps:

Estimation of the banks’ implicit assets and business risk – proxied by asset volatility from market prices and non-equity liabilities.

Combination of business risk, assets value and “minimum payable’ liabilities into a single risk measure for each bank.

Benchmarking this measure against historical default experience of rated companies to arrive at a probability of default for each bank into four grades as 1, 2, 3, and 4 in decreasing order of credit quality.

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INPUTSFinancial parameters and equity prices/volatility data, market interest rates

EQUITY PRICE BASED CRISIL PROPRIETARY DYNAMIC SCORING TOOL

OUTPUTSCalculation of default probabilities and ordering of banks into four grades according to default probabilities/ risk score

EQUITY PRICE BASED DYNAMIC SCORE(1, 2, 3, 4)


MAIN PROCESS I: RISK GRADING OF BANKSSUB PROCESS III: COMBINING CRAMEL BASED SCORE AND EQUITY PRICE BASED SCORE TO GRADE 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 than the CRAMEL based grade but it can be lower than the CRAMEL based grade.

The grades of Cramel based scoring are a, b, c, d (descending credit quality) and the grades of equity prices based model are 1, 2, 3, 4 (descending credit quality) and the grades of the combined grading are A, B, C, D (descending credit quality). The decision logic is as follows:A – a1, a2B – a3, a4, b1, b2, b3C – b4, c1, c2, c3D – c4, d1, d2, d3, d4

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INPUTSCramel based risk scores. Equity price based dynamic risk score. Asset –Liability Profile of banks.

DECISION LOGIC TO COMBINE SCORES

OUTPUTSGradation of banks into four-risk grades- (A, B, C, D)


MAIN PROCESS II: TRANSFORMING RISK GRADES TO RISK LIMITSSUB PROCESS I: MAPPING CRISIL DEFAULT PROBABILITY DATA TO THE RSK GRADES – A, B, C.

CRISIL has a proprietary database of default probabilities of different credit categories. This is derived from the history of rating movements over 11 years.The mapping of CRISIL Default probability data to Risk Grades is done as follows:

Risk Grades are mapped to appropriate groups of company ratings in the Crisil Database using percentile matching.

Default probability of each group of company ratings is extracted from the Crisil Database.

These default probabilities are assumed to be the default probabilities for the corresponding risk grades.

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INPUTSRisk Grades of the banks, i.e., output of Main Process I

CRISIL DEFAULT PROBABILITY DATABASE

OUTPUTSDefault probability for each risk grade


MAIN PROCESS II: TRANSFORMING RISK GRADES TO RISK LIMITSSUB PROCESS II: CONVERSION OF DEFAULT PROBABILITES TO RISK WEIGHTS

On the basis of pooled survey and model-based evidence, Basel Committee has devised a functional relationship between the Default Probability (DP) and the risk weights. The relationship is:

Risk Weight = 976.5*N (1.118*G (DP)+1.288)*[1+0.0470*(1-DP)/DP0.44]

Where N is the cumulative Normal Distribution and G is the inverse of cumulative Normal Distribution.This relationship is used to convert the default probabilities associated with Risk Grades A, B, C, into risk weights.The relative limit allocations in the Risk Grades A, B, C is approximately 70:20:10 on the basis these risk weights.

GRADES No OF BANKS IN CATEGORY

PROBABILITY OF DEFAULT (CRISIL DATEBASE)

RISK WEIGHTS (BASLE FORMULA)

ALLOCATION RATIO

ALLOCATION PROPORTION

A 13 0.00315 60.10291 11.63065 0.701028B 9 0.02305 209.8547 3.331048 0.200776C 8 0.0799 429.0785 1.629157 0.098196

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INPUTSDefault Probability for each risk grade – A, B, C

FORMULA DEVELOPED BY BASLE COMMITTEE ON BANKING SUPERVISION

OUTPUTSRisk Weight for each risk grade – A, B, C.


MAIN PROCESS II: TRANSFORMING RISK GRADES TO RISK LIMITSSUB PROCESS III: CALCULATING RISK BASED LIMITS

The following limit allocation rules are used to operationalise a risk based limit structure for banks.LIMIT ALLOCATION RULES

ONGC will estimate the Maximum Investible Surplus (MIS) bimonthly. Crisil will use this figure as the base for the base for development of limit structure.

Overall Limit amount allocated to banks would be 1.5 times the MIS Overall limit amount is allocated to each risk grade in the inverse proportion of

their risk weights. This proportion is 70:20:10. Limits are allocated to banks with Risk Grade of A, B, C . For Grade A, bank wise limits are capped at a prudential limit of 12.5% of overall

limit. Similarly the caps would be 3.5714% of overall total limit for Grade B and 1.7857% of overall limit for Grade C. State bank of India would be an exception to this rule and would have the higher of the following as its upper cap: Rs. 1000 Crores OR 12.5% of overall limit.

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 0.06 times their net Worth. Additionally, the limits of small private sector banks (Less than Net Worth of Rs. 2000 Crores) would be capped at 5% of their Net Worth.

In case allocation of the full amount (worked out in the ratio of 70:20:10) is not possible in Category B or Category C on account of hitting of prudential limits for individual for individual banks or the 5% of net worth cap for small private banks, such unallocated amount will be shifted to Category A.

To ensure that banks in the lower credit quality grades do not have a higher “Limit/ Net Worth percentage” than the banks in higher grades the following iterative process is followed:

o The Limit/ Adjusted Net Worth percentage for any bank in Category B would be capped at the “Highest Limit/ Adjusted Net Worth Percentage” for Category A. The “Highest Limit/ Adjusted Net Worth Percentage” for Category A is the highest Limit/ Adjusted Net Worth percentage of all the banks in Category A except the ones that are capped by the 12.5% prudential limit or the 5% of net worth cap on small private banks. Any unallocated amount in Category B would be shifted to Category A.

o The Limit/ Adjusted Net Worth percentage for any bank in Category C would be capped at the “Highest Limit/ Adjusted Net Worth Percentage” for Category B. The “Highest Limit/ Adjusted Net Worth Percentage” for Category B is the highest Limit/ Adjusted Net Worth percentage of all the banks in Category B except the ones that are capped by the 3.5714% prudential limit or the 5% of net worth cap on small private banks. Any unallocated amount in Category C would be shifted to Category A.

o Limits to banks in Category A would be recalculated after addition of the amounts shifted from Category B and Category C.

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If actual invested amounts in Grade B and Grade C together is 30% or more of the actual total investments no fresh bids may be invited from the banks in Grade B and Grade C.

These limits were calculated on publicly available audited financial results for the year ending March 2003.

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INPUTS Risk Weights for each risk grade Adjusted net worth of all banks Portfolio size

ALLOCATION RULES TO CONVERT INPUTS TO LIMITS

OUTPUTSRisk based limit for each bank.


PROCEDURE FOR INVESTMENTS OF SURPLUS FUNDS

Investment of surplus funds involves the following activities: Preparation of Cash Forecast and determining Investible surplus, if any. Inviting quotations from eligible parties, as may be approved by the competent

authorities from time to time. Investments decisions after necessary deliberations and recommendations by

ONGC Board and approval by a designated Committee of Directors comprising of C&MD & Director (Finance) and Director (HR), to whom powers of investment of surplus funds up to specified limit have been delegated by the Board.

Deployments of funds with successful bidders in line with investment decisions. Settlement activities at the time of investments as well as at the time of maturity. 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.

INVESTMENT PROCEDURE

OBJECTIVE1. The objective of the cash management activity is 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.

CASH FORCASTING(Responsibility)

2. The Fund Section of the Corporate Accounts Department, Dehradun, has the responsibility of cash forecasting activity.

Nature & Periodicity of Cash Forecast

3. The Funds Section will prepare cash-forecast for the next one year with monthly break-up on roll-over basis and weekly break-ups for the first two months, as also break-ups in between wherever major cash flows such as offshore royalty, advance tax, dividend payment etc are involved. The Cash Forecast will be accompanied by and advice to call quotations, along with indicative amount/ range of funds for which quotations are to be invited. The Cash Forecast will detail the assumptions made for the preparation of forecast, the variation vis-à-vis the previous forecast and the reasons thereof, to the extent practicable. The Cash Forecast will be sent to Treasury Management Group, New Delhi (TMG) every week on a fixed day (such as, every Wednesday) to be decided by Funds Section with the approval of Head of Corporate Accounts to have regularity and better

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control over the forecasting system. In addition, Cash Forecast will also be sent on request from TMG/ Investment Committee.

Communication of Cash Forecast to TMG

4. The Cash Forecast will be sent by fax/ e-mail to TMG with a post copy by Dak Box/ Courier.

PROCESS OF INVITATION OF OFFERS UPTO APPROVAL OF INVESTMENT PROPOSAL AND ISSUE OF INVESTMENT AUTHORITY NOTE(Responsibility)

5. TMG will have the responsibility to coordinate the process of invitation of offers, preparation of comparative statement, providing required assistance to the Investment Committee, and issue of investment authority to the Accounts Department for effecting the investment transactions.

Invitation of Bids

6. The Treasury Management (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 an Investment Committee member, from the eligible parties, as per the approved list of invitees, from time to time. Offers are to be invited for investment in avenues by the Board. Bids may be invited from the eligible bidders for a minimum amount of Rs. 5.00 Crores.

7. The invitation letter inter-alia, will specify the indicative investment amount, indicative dates of investment, indicative tenure and the last date/time for the submission of bids. Such amounts and tenures will be subject to change depending upon availability of funds, yields for various maturities, etc and approval of the competent authority for investment decision.

8. Bids will be invited from eligible parties. Invitations should be sent through fax/ e-mail/ website and quotations be invited in sealed cover/ e-mail from the eligible parties. In case, it is not feasible to send the invitation by fax/ e-mail due to non-availability of fax/ e-mail facility at bidders end or for any other reason, invitation may be sent by ordinary post or handed over to authorized representative of the bidders to the extent practicable.

9. 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 any bid without any further reference to the bidders.

10. 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

11. The bidders will be requested to submit their bids within the date and time specified in the invitation letter. Bids should be submitted in a bid box (Treasury Bid Box) to be kept at a location (to be specified in the invitation letter) in office

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of the ONGC at New Delhi. The bidders may, if they so like, submit their bids by courier or registered post provided that the bids must reach the addressee specified in the invitation letter within the stipulated date and time. Under such circumstances, offers received by any other mode such as fax within the date and time will also be taken into consideration. However, ONGC will not be responsible for any loss or delay of bids in transit.

12. Late offers are not to be considered.13. The Bids should be firm and unconditional and give the information requested in

the invitation letter in the manner requested. Investment Committee will have full powers to reject any incomplete bid.

14. If any bidder after submission of bids, withdraws/ amends any term or condition and/ or expresses inability in acceptance of any term/ rate quoted, such bidder, with the approval of D (F) and C&MD, may not be considered for future invitation of bids. Upon request of the bidder or otherwise under a general review, invitation to such bidder may be re-initiated with the approval of D (F) and C&MD.

Opening of Bids and Comparative Statements

15. The bids will be opened by (a) at least two members of the Investment Committee, or (b) at least one member of the Investment Committee and an official of the TMG.

16. Bidders will be invited to depute, if they so wish, their authorized representative to be present at bid opening.

17. A bid opening register, showing the details of bids received and duly signed by the bidders’ representatives, if any, present at the time of bid opening, has to be maintained by the TMG.

18. The Comparative Statement will be prepared and signed by two officers of TMG and the same along with the offers will be put up to the Investment Committee for its deliberation and recommendations.

Investment Committee Proceedings

19. The Investment Committee will comprise of such officials and shall have such quorum as may be decided by the Board from time to time.

20. The deliberations and recommendations of the Investment Committee shall be recorded and signed by the participating members. Where any particular member of the Investment Committee is unable to be physically present at the location where the Investment Committee is deliberating, he may, with consent/ request of other participating members, participate in the deliberations by telephone or other communication modes and sigh the Investment Committee minutes on fax.

Guiding Principles for Investment Committee

21. The following guiding principles are to be kept in view by the investment Committee:

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Investment Committee will evaluate the offers on commercial principles. The investments shall strictly be made on the basis of tenders submitted by

the bidders and further negotiations or matching be held. Any changes in bid after tender closing will not be considered. However, if better rates are offered by the bidder(s) who is (are) in reckoning otherwise, the same maybe considered.

Investments are to be made in accordance with the various exposure limits as may be approved by the Board from time to time.

Investment Committee will recommend investment up to maximum one year (including one year and one/ two days). Investment transactions for more than one year would be put up to Broad for ratification.

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 higher yield and is considered commercially beneficial. However, such recommendations will normally consider maintaining at all times a cushion of Rs 100 crores 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.

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. 5.00 crores, then no amount may be placed with the said bidder.

Investment Committee shall ensure that its recommendations are in accordance with the DPE Guidelines on the subject.

Approval of Director (HR) and Director (Finance) & C&MD

22. The recommendations of the Investment Committee shall be put up to Director (HR) and Director (Finance) & C&MD on immediate priority to avoid any delay in investment action.

Issue of Investment Authority Note

23. 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) & C&MD. Where any investment is to be made at Dehradun, the Investment Authority Note would be invariably sent to Head of Corporate Accounts, Dehradun, for information/ accounting purposes.

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24. The Investment Authority Note will specify, inter alia, 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.

25. The Investment Authority Note will be signed by (a) any two officers of the TMG or (b) any one officer of TMG and any Investment Committee member.

26. The Funds section would intimate fund availability and provide drawing power for investment.

27. 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 & RECONCILATIONSettlement Function

28. All settlement 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 receipts at the time of maturity, informing Corporate Accounts Deptt. About investment/ maturity would be managed by the Head of Finance, Delhi Office/ Head of Fund Section, Dehradun, as the case may be.

Documents

29. In case of all investments, proper documentary evidence such TDR receipt should be obtained expeditiously and in a reasonable time. If instruments are not received within one week from the date of investment, Head of Finance, Delhi Office/ Head of Fund Section, Dehradun, as the case may be, should follow up the matter with the concerned bank/ institution. After a period of two weeks, the matter should be formally informed to TMG.

30. 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.

31. A register containing details of investment & maturity should be maintained by Head of Finance, Delhi Office/ Head of Fund Section, Dehradun, as the case may be. A column, showing the date of receipt of instrument, may be maintained in the register.

32. There should be a system of monthly reconciliation of records maintained by Head of Finance, Delhi Office/ Head of Fund Section, Dehradun and TMG, wherein all information and calculations are crosschecked to ensure correctness of the available data/ details. In case of shorter duration investments, the above reconciliation must be done before the date of maturity of such investments.

Discrepancies

33. Within two working days of receipts 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

37


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

34. A copy of every Investment Authority Note would be invariably sent to Head of Corporate Accounts, Dehradun, for information and accounting purposes.

35. TMG would inform, on monthly basis, the monthly investment details to the Funds Section and Corporate Budget Section regularly.

36. TMG would also regularly put up note giving details of investments for the information/ ratification of the Board.

AUDIT

37. The investment transactions would be periodically reviewed by Internal Audit, to ensure compliance with Board approved policy and procedures. The audit would inter alia carry out securities reconciliation that is reconciliation of investment documents such as TDR receipts with investment registers and accounting records.

38. 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

39. TMG will periodically update the panel of invitees and their financial details, audited balance sheets, exposure limits etc.40. It is the intention to use information technology measures such as web-based bidding to increase efficiency of bidding process and reduce cycle time. Procedures for such web-based bidding may be evolved with approval Director (HR) and Director (Finance) &C&MD.

41. This procedure applies to all the investments to be made through Investment Committee and with the approval of Director (HR) and Director (Finance) & C&MD under delegated powers in accordance with the decisions taken by the Board from time to time.

42. Director (HR) and Director (Finance) & C&MD are authorized to alter the constitution of Investment Committee whenever needed provided that any such alteration shall be reported to the Board as soon as practicable, preferably at its next meeting.

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7. Approval for Investment decision

6. Present Comparative Statement 8. Recommend to facilitate final decision on final decision

placement on placement

9. Place funds with successful bidder 1.Prepare Cash

Forecasts 2. Estimate investible Surplus,

Invites bids from eligible banks/ PSUs to place fixed deposits

4. Place bids specifying rate,

5.ObtainComparative 10.Update FD

statements placement details

3. Update bid detailsOn the system

INVESTMENT PROCEDURE

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TREASURY MANAGEMENT

GROUP

Fund Section (Corporate Accounts

Department) Dehradun

Authorized Banks

e-Bidding Software

Committee of Directors (Director (Finance) & C&MD

Investment Committee

SAP


PERMITTED INVESTMENT AVENUES

Investment in following avenues are permitted by the Board of Directors of ONGC: Term Deposits with scheduled commercial banks (incorporated in India):

o Public sector banks with a minimum net worth of Rs. 100 Crores and also meeting the capital adequacy norms, as prescribes by the RBI.

o Private sector banks, with a minimum net worth of Rs.500 Crores and also meeting the capital adequacy norms prescribed by RBI from time to time.

These adequacy norms should be reflected in the last published balance sheet of the bank. List of empanelled banks and the bank-wise exposure limit shall require approval of the Board. Instruments rated “AA” or “P-2” or equivalent e.g., Certificates of Deposits,

Deposit Schemes or similar instruments issued by scheduled commercial banks. Commercial paper issued by corporates having highest credit rating (P1+ or

equivalent) from an established credit rating agency. In case of CP of corporates, other than central PSEs, the issuer must be a company whose shares are listed as “Category A” shares on Bombay Stock Exchange.

Inter-corporate loans to central ‘Navaratna’ PSEs having highest credit rating (AAA or equivalent) from an established rating agency for borrowing for the corresponding period.

Bonds issued by central PSEs having highest credit rating (AAA or equivalent).o Treasury Bills and Governments of India Securities.o Liquid TDR, automatic and value-dated, with SBI, Tel Bhavan for the

minimum period.The maximum investment duration shall be one year (including one year and one/ two days). Also, if the maturity date happens to be a holiday, then investment/ maturity shall be for tenure up to the next working day, as per the banking practice.

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ONGC INVESTMENT POLICY - INVESTMENT AVENUESS No PERMISSIBLE

INSTRUMENTSMAXIMUM TENOR/ RESIDUAL MATURITY

RATING OTHER CRITERIA

1 Fixed Deposit with Public Sector banks

1 year N/A 1. Any scheduled commercial bank (Banks incorporated in India) 2. Net worth of minimum 100 Crores 3. Meets capital adequacy requirements as prescribed by RBI

2 Fixed Deposit with Private Sector banks

1 year N/A 1. Any scheduled commercial bank (Banks incorporated in India) 2. Net worth of minimum 500 Crores 3. Meets capital adequacy requirements as prescribed by RBI

3 Certificate of deposits of scheduled commercial banks

1 year AA/ P-2 Or equivalent

N/A

4 Commercial Paper 1 year P1+ Or equivalent

N/A

5 Inter-corporate deposits (ICD) to Central PSEs

1 year AAA Or equivalent

Only to Central Navratna PSEs

6 Bonds issues by Central PSEs

1 year AAA Or equivalent

N/A

7 Liquid TDRs with SBI ONGC Main Banker

Minimum tenor

N/A N/A

8 Government Securities and Treasury Bills

3 years Sovereign N/A

9 UTI Liquid Plan 6 days N/A N/A

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INVESTMENT POLICY-EXPOSURE LIMITS

For Commercial Banks (investment in TDRs and STDRs):As per bank-wise exposure limit approved by the Board.

For Commercial paper of corporates/ Bonds of central PSEso Central PSEs: 25% of its Networth, subject to a cap of Rs.250 Crores.o Other Corporates: 25% of its Networth, subject to a cap of Rs 25 Crores.

For Inter-corporate loans to central Navaratna PSEs: 25% of Networth, subject to a cap of

Rs. 1000 Crores for Oil Sector PSEs and Rs. 500 Crores for non-oil Sector PSEs For T-Bills/ G-Securities: No credit exposure limits, in view of sovereign

exposure. The Networth of PSEs/ other corporates shall be taken as per the latest available audited accounts (previous year’s published audited accounts) of the respective parties.

The above limits are further subject to following instrument-wise limits: T-Bills/ GOI Securities: Rs 10,000 Crores TDRs/ STDRs of banks: Rs. 25,000 Crores Certificates of deposits and other rated instruments of banks/ FIs: Rs.1, 000

Crores Commercial Paper/ Bonds of corporates: Rs. 1,000 Crores Inter-corporate loans to central PSEs: Rs 2,000 Crores. UTI Liquid Fund: Rs 1,000 Crores.

INVESTMENT POLICY-EXPOSURE LIMITSS No PERMISSIBLE INSTRUMENTS EXPOSURE LIMITS1 Fixed Deposits with scheduled

commercial banksAs per bank-wise exposure limit approved by the board

2 UTI Liquid Fund Up to 6 days subject to a maximum limit of 1000 Crores

3 CP/ Bonds of Corporates 1.Central PSEs: 25% of its Networth, subject to a cap of Rs. 250 Crores. 2.Other Corporates: 25% of its Networth, subject to a cap of Rs. 25 Crores

4 Inter-corporate deposits 25% of Networth, subject to a cap of 1. Rs. 1000 Crores for Oil Sector PSEs, and 2. Rs. 500 Crores for Non-Oil Sector PSEs

5 Treasury Bills and Government Securities

No Credit Exposure Limit

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ANALYSIS OF INVESTMENT INSTRUMENTS

The Company’s investments are mainly short term in nature. Protection of capital is the key driver for investment decisions. Accordingly eligible instruments have been selected based on the following criteria with the first criteria being accorded the highest priority, the second criteria being accorded the second highest priority and so on:

CRITERIA 1: Protection of capital locked in investment avenues. CRITERIA 2: Ensuring that adequate liquidity is maintained to meet forecasted

day- to-day operations as well as meet unforeseen fund requirement at short notice.

CRITERIA 3: Optimizing return on investible surplus within the overall risk appetite of the company and limits set for individual instruments, counter parties and asset classes.

Accordingly each permissible asset class as per DPE guidelines has been evaluated based on aforesaid criteria. The permissible asset classes considered for the purpose of setting limits are as follows:

Fixed Deposits with scheduled commercial banks UTI Liquid Fund Certificates of Deposits and other rated instruments of Banks/ FIs CP/ Bonds of Corporates Inter-corporate deposits Treasury Bills and Government Securities

ONGC INVESTMENT POLICY- INSTRUMENT WISE LIMITSS No PERMISSIBLE

INSTRUMENTSINSTRUMENT LIMIT (INR CRORES)

OUTSTANDING INVESTMENT AS ON JAN 31,2008 (INR CRORES)

1 Fixed Deposits with scheduled commercial banks 25,000 15,710

2 UTI Liquid Fund 1,000 NIL3 Certificates of Deposits and

other rated instruments of Banks/ FIs 1,000 NIL

4 CP/ Bonds of corporates 1,000 NIL5 Inter-corporate deposits 2,000 NIL6 Treasury Bills and

Government Securities 10,000 NIL

CURRENT INSTRUMENTS:

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The Company has its own Investment Committee that finally takes the decision of parking the idle funds with different instruments, keeping in mind the DPE Guidelines.At present the company invests only in three instruments. They are as follows:

Fixed Deposits with scheduled commercial banks Inter-corporate deposits UTI Liquid Fund (if the surplus cash is there for less than 7 days)

FIXED DEPOSITS WITH SCHEDULED COMMERCIAL BANKS

A deposit held at a financial institution that has a fixed term. These are generally short-term with maturities ranging anywhere from a month to a few years. When a fixed deposit is purchased the lender (the customer) understands that the money can only be withdrawn after the term has ended or by giving a pre-determined number of days notice. Fixed deposits also give a higher rate of interest than savings banks account. The facilities vary from bank to bank.

FEATURES:

SAFE:

Bank deposits are fairly safe because banks are subject to control of RBI (Reserve Bank of India). As the Company’s main Criteria of investments are protection of capital, thus this is the safest avenue for the company to park its idle funds. So, to reduce its risk the Company has locked 97% of its investments into fixed deposits.

VARYING INTEREST RATES:

The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to somewhat higher effective rates. The rate of interest of bank fixed deposits varies between 4 to 11% depending on the maturity period (duration) of FD and the amount invested. Interest rate also varies with each bank. A bank FD does not provide a regular interest income, but a lump-sum amount on its maturity.That’s why the Company has adopted a policy of inviting bids for investment in fixed deposits, and invests with the bank offering the highest interest rates. For the quarter-ended September 30, 2007, the weighted average annualized pre-tax yield on bank deposits was 9.96%p.a.

DEPOSIT AMOUNT:

The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100.

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The Company has its own list of empanelled banks, as approved by the Board for investments of surplus funds, and their exposure limits are also set depending upon the “Risk based limit structure” given by CRISIL.

TENOR:

The term of fixed deposits vary from one month to few years. Depending upon which the interest rates also vary.ONGC can place its funds only for a tenor of 1year.

ADVANTAGES:

Bank Deposits are the safest after the post office deposits.It is possible to get loans up to 75-90% of the deposit amount from banks against the fixed deposit.

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PRESENT SCENARIO:

ANALYSIS OF INVESTED AMOUNT IN FDs

The company has locked 97% of its funds in the fixed deposits with different banks. Following is the amount invested by the Company in the fixed deposits.

DATES (QUARTER ENDED)

June 30,2006

September 30,2006

December 31.2006

March 31,2007

June 30,2007

September 30,2007

December 31,2007

FDs (INR CRORES)

7,452 11,053 11,057 13,643 15,413 15,758 15,410

The data is from June 30,2006 to December 31,2007. The Company’s investments in the same have grown by 107% over the past six quarters. This clearly shows that Company parks most of its funds in FDs.

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ANALYSIS OF RETURNS IN FDs

Returns varies from the amount invested and the rates offered at the time if bidding for the investments from different banks.Following are the rate of returns obtained for the six quarters:

QUARTERS Q2 FY 2006-07

Q3 FY 2006-07

Q4 FY 2006-07

Q1 FY 2007-08

Q2 FY 2007-08

Q3 FY 2007-08

RATE (%p.a)

8.11% 8.14% 8.71% 9.60% 9.96% 9.84%

The data is for the past six quarters. The rate of returns has shown a consistent increase. It has increased from 8.11% to 9.96% in one year.

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INTER-CORPORATE DEPOSITS (ICDs)The Inter-corporate deposits are referred to as the deposits made by one company with another company. The Inter-corporate deposits are usually made of six months. The three types of ICDs are three months deposits, six months deposits, call deposits.

THREE MONTHS DEPOSITS:

The three months deposits are the most popular among the three types of the deposits. These deposits are generally considered by the borrowers in order to solve the short-term capital inadequacy problems. This type of short-term cash problem may develop due to various reasons such as- tax payment, excessive raw material imports, break in the production, payments of dividends, delay in collection, and excessive expenditure of capital. The rate of interest given for three months deposits is 12% per year.

SIX MONTHS DEPOSITS:

The six months deposits are made for first class borrowers and the term period for such deposits is six months. The interest rate defined for this type of deposit is 15%.

CALL DEPOSITS:

The concept of call deposits is different from the previous two deposits. On giving the notice of one day, this deposit can be withdrawn from the lender. Interest rates on call deposits are around 10%.

FEATURES:

The inter-corporate market shows a number of interesting features. The biggest advantage of investing in ICDs that the transaction is free from bureaucratic and legal hassles. The business world otherwise is regulated by a number of rules and regulations. The existence of ICDs market shows that the business world can be regulated without rules. The market of ICDs maintains secrecy. The brokers in this market never reveal their lenders and borrowers, as they believe if proper secrecy is not maintained then the rate of interest can fall abruptly. The market of ICDs crucially depends on the personal contacts. The biggest risk investing in ICDs is that it is an unsecured investment avenue. And the market for ICDs is not very liquid. And thus, ONGC invests very less percentage of its funds in this instrument.

PRESENT SCENARIO:

The Company invests mostly in FDs and very few of its funds in ICDs.As per DPE guidelines, ONGC is permitted to make ICDs only with central PSEs having highest investment rating. However as per the present investment policy ONGC is allowed to make ICDs only with the following six central Navratna PSUs: IOC, HPCL, BPCL, NTPC, SAIL, and BHEL.

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ANALYSIS OF INVESTMENTS IN FDs AND ICDs (PORTFOLIO COMPOSITION):

As most of the chunk of surplus funds of ONGC goes in to the FDs and a very small amounts goes in to the ICDs. Its portfolio of investment has a major contribution by the investments in FDs. The portfolio composition of ONGC till December 30,2007 is as follows:

DATES (QUARTER ENDED)

June 30,2006

September 30,2006

December 31.2006

March 31,2007

June 30,2007

September 30,2007

December 31,2007

FDs (INR CRORES)

7,452 11,053 11,057 13,643 15,413 15,758 15,410

ICDs (INR CRORES)

400 500 500

The Company does not invest regularly in ICDs as it is shown by the portfolio composition.

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ANALYSIS OF RETURNS FROM FDs AND ICDs:

As the Company does not invest in the ICDs regularly thus the returns earned on them are well understood by comparing them with the returns earned on FDs. The returns earned from both of these are following:

QUARTERS Q2 FY 2006-07

Q3 FY 2006-07

Q4 FY 2006-07

Q1 FY 2007-08

Q2 FY 2007-08

Q3 FY 2007-08

RATE FDs (%p.a)

8.11% 8.14% 8.71% 9.60% 9.96% 9.84%

RATE ICDs (%p.a)

7.43% 7.43% 10.77% 10.77% 10.77%

Inter-corporate deposits is a riskier investment, the returns on ICDs is lower or similar to return on the FDs in the relevant period. The study of past investments of the company shows that it has invested its funds with IOC and HPCL only.

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INVESTMENTS IN MUTUAL FUNDS SCHEMES

A Mutual Fund is a trust registered with Securities and Exchange Board of India (SEBI). The fund pools the saving of several individuals and corporate investors who share a common financial goal- to make more money.The money that people invest is then invested in capital market instruments and securities like shares, debentures, bonds and government securities.Each mutual fund is managed by an asset management company (AMC). The AMC invests on behalf of the unit holders of the fund in accordance with the objective of mutual fund schemes. Fund’s unit holders share the income earned through these investments. The flowchart below describes broadly the working of a mutual fund.

INVESTOR

passed back to pool their money with

RETURNS FUND MANAGER

generates invests in

SECURITIES

ADVANTAGES OF INVESTING IN MUTUAL FUNDS:

PROFESSIONAL MANAGEMENT:

The primary advantage of funds is the professional management of the money. Investors purchase funds because they do not have the time or expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full time manager to make and monitor investments.

DIVERSIFICATION:

By owing shares in a mutual fund instead of owing individual stocks or bonds, the risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. Large mutual funds own hundreds of stocks in different industries. It would not be possible for an investor to build this kind of a portfolio with a small amount of money.

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ECONOMIES OF SCALE:

Because a mutual fund buys and sells large amount of securities at a time, its transaction costs a re lower than what an individual would pay for securities transaction.

LIQUIDITY:

It is easy to get money out of mutual fund. Write a check, make a call and you get the cash.

REGULATORY OVERSIGHT:

Mutual funds are subject to many government regulations that protect investors from fraud.

CONVENIENCE:

One can easily buy mutual fund shares by phone, mail or over the Internet.

LOW COST:

Mutual fund expenses are often no more than 1.5% of investment.

CHOICE OF SCHEME:

There are different schemes depending upon the risk appetite and returns required by an investor.

Mutual funds have their own drawbacks and may not be for everyone. Such as:

NO GUARANTEES:

No investment is risk free. If the entire stock market declines in value, the value of mutual funds shares will go sown as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds then when they buy and sell stocks on their own.

FEES AND COMMISSIONS:All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commission to compensate brokers or financial consultants, or financial planners.

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MANAGEMENT RISK:

Investment in a mutual fund depends on the fund’s manager to make the right decision regarding the funds portfolio. If the manager does not perform well as hoped, one might not make as much money as expected.

PRESENT SCENARIO:

As per DPE guidelines, PSEs are allowed for investment in Public Sector Mutual Funds irrespective of tenor and type of scheme from 1997 onwards. But the Company’s policy does not currently allow for investment in public sector mutual funds, except the UTI Liquid plan up to a tenor for 6 days subject to maximum limit of 1,000 Crores. But, no significant investment was made by ONGC in UTILF till one year ago. But, now ONGC is considering it a good investment avenue for their surplus funds and has also started making investment in UTILF from March 2007 onwards. It has helped in getting use of their idle funds for less than 7 days, which cannot be invested in banks.

ANALYSIS OF UTI LIQUID FUND CASH PLAN

UTI Liquid fund provides the PSEs to use their idle funds for less than 7days. As, investments cannot be made in banks for less than 7days.

FEATURES:

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).

BENEFITS:

Investments can be done even for one day. Redemption can be done through fax before 3 p.m. and the amount will be

credited to the investor’s bank account 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.

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LIQUID TDRs WITH SBI ONGC MAIN BANKER

This is a special kind of Investment Avenue for ONGC provided by its main banker that is SBI. Whenever there is idle cash for less than 7days in the Company’s account at the end of the day, SBI invests it into this scheme. And if the account shows a negative balance at the end of next day then it transfers the required amount from the Liquid TDR to the Company’s account, so as to make it positive. A nominal rate of interest is given to the company for this scheme. This scheme was very much in use before March 2007. But as now the Company has started investing in UTI Liquid funds and is getting better returns out of that avenue the proportion of investment in Liquid TDRs has decreased.

CERTIFICATES OF DEPOSITS OF BANKS AND OTHER FIs

Certificates of Deposits (CDs) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory note, for funds deposited at a bank or other eligible financial institution for a specified period of time. They were introduced in India in 1989.

FEATURES:SIZE: The minimum amount of CD should be Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter.TENOR: The tenor of CDs issued by banks is from 7days to 1 year. And for FIs it is from 1 year to 3 years.DISCOUNT/ COUPON RATE: CDs are issued at discount on face value. Banks/ FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank/ FI is free to determine the discount/ coupon rate.TRANSFERABILITY: CDs are freely transferable by endorsement and delivery. There is usually a penalty for early withdrawal of funds.LOANS/ BUY BACKS: Banks/ FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity.

PRESENT SCENARIO

ONGC is permitted to invest in CDs issued by scheduled commercial banks/ other FIs with rating of Investment grade according to DPE guidelines but the Company’s policy allows only to invest in CDs with a rating of AA/ P-2or equivalent, subject to a tenor of 1 year and maximum amount to be invested into them is Rs. 1,000 Crores. But at present the company is not investing in this avenue. Because, Company get better returns from other avenues and the market for this instrument is not liquid and the main concern for the Company is liquidity.

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COMMERCIAL PAPERS (CPs) / CORPORATE BONDS

CPs is an unsecured, short-term debt-instrument issued by a corporation, typically for the financing of accounts receivables, inventories and meeting short-term liabilities. CPs is introduced in India from 1990.

FEATURESSIZE: The minimum amount of CPs should be Rs. 5 lakhs and in multiple of its thereafter. TENOR: CPs is issued for maturities between 15days to1 year from the date of issue.RATINGS: Corporates have to obtain a minimum credit rating of P-2 from CRISIL or equivalent from such credit rating agency.DISCOUNT RATE: CPs is issued at discount to face value. And the issuer determines the rate.

CORPORATE BONDS:

Corporate bond is a bond issued by a corporation. The term is applied to longer-term debt instrument, generally with a maturity date falling at least a year after their issue date. Corporate bonds are often listed on major exchanges. Corporates, which are below investment grade, are also allowed to issue Corporate Bonds.

PRESENT SCENARIO

As per DPE guidelines the company is permitted to invest in these avenues for a maximum tenor of 1 year with a credit rating of at least Investment grade. According to the Company’s policy the credit rating of the issuer must be P1+ or equivalent or more than that. The instrument wise limit for this category is Rs. 1,000 Crores. But at present ONGC is not investing in this avenue because the Company is getting better returns from other avenues and the market is not very liquid for this instrument.

GOVERNMENT SECURITIES AND TREASURY BILLS

Government Securities also termed, as G-Sec is an interest bearing debt instrument issued by the Government of India or State Government through RBI. Government paper with a tenor beyond one year is known as dated securities. The instrument is in the nature of a bond. There is no default risk involved in the securities as they carry the sovereign guarantee. Therefore, if an investor decides to hold the investments till maturity, there is absolutely no risk and the returns are guaranteed. However, if the investor wants to sell the security before maturity, the selling price may vary depending up the prevailing interest rates. Besides, there is an element of re-investment risk.

FEATURESSIZE: G-Sec is available for a minimum amount of Rs. 10,000 and in multiples of Rs. 10,000.

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TENOR: Central government dated securities have tenor up to 30 years and state government dated securities have a tenor normally up to ten years.COUPON RATE: They are auctioned at fixed coupon rate. Auctions are conducted electronically on PDO-NDS system. They can also be purchased from secondary market.

TREASURY BILLS

Treasury Bills (T-Bills) offer short-term investment opportunities, generally up to 1 year. Thus they are useful in managing short-term liquidity.

FEATURESSIZE: T-Bills are issued at a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000.TENOR: At present Government of India issues three types of T-Bills, namely 91-days, 182-days and 364-days. There are no T-bills issued by State government.DISCOUNT RATE: They are issued at discount and are redeemed at par. While 91-days T-Bills are auctioned every Wednesday, 182-days and 364-days T-Bills are auctioned every alternative week on Wednesday. T-Bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system

PRESENT SCENARIO

As per DPE guidelines and ONGC’s own investment policy the Company is permitted to invest in this avenue for a tenor of 3 years with an instrument-wise limit of Rs. 10,000 Crores. But at present the company is not investing in this avenue, because the market liquidity for this avenue is not satisfactory.

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FINDINGS

Oil and Natural Gas Corporation Limited (‘ONGC’) is engaged in the business of exploration and drilling of crude oil and natural gas. The Company’s investment operations are carried out from its Treasury Department at New Delhi (Jeevan Bharti Building 8th floor). Since the surplus cash of the Company has been earmarked for future expansion plans and acquisition of assets, it is imperative for the Company to maintain adequate liquidity in its investment portfolio. The Company also recognizes that investment management is not its core business function and accordingly protection of capital is a key driver for investment decisions. Thus, the Company primarily invests its surplus funds in bank fixed deposits and UTI liquid fund schemes.After analyzing the whole investment procedure of ONGC with existing investment avenues, I can say that ONGC has been following a good investment procedure by keeping in mind the DPE guidelines to be followed by all PSEs. 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.

All the PSEs have to follow the DPE guidelines for investing their surplus funds ONGC has appointed many agencies like PWC, CRISIL and E&Y from time to

time to review its investment procedure. The Risk based Limit structure for banks given by CRISIL are quite satisfactory. ONGC is following a good investment procedure. ONGC is earning a good rate of return higher than SBI Card rate.

Although the Company is following a good investment procedure, but there are certain points in which the company should look into.

The Company is following DPE guidelines to invest its surplus funds and it also has its own investment policy for the same, but from time to time it appoints different agencies like PWC, CRISIL and E&Y to review its investment policy. But the frequency at which the policy is required to be reviewed is not stated.

Currently the company prepares cash forecasts manually. Although interest accrual computation is SAP is automated, the end-term amount does not include the interest earned for the incomplete part of the quarter. This adjustment to give effect to this inaccuracy is currently manually addressed by the Treasury.

Cash forecasts are prepared for one year with monthly break-ups on rollover basis and weekly break-ups for first two months.

Cash forecasting is done at the Head office of ONGC Dehradun and is communicated to New Delhi by e-mail or fax; it is not included as a part of SAP.

Two persons currently staff the investment department within the Treasury. Although investment decisions are made by the investment committee and non-deal execution functions are managed by the Treasury Department leading to logical segregation of duties, as the Company diversifies into other investment avenues wherein finds are placed without a bidding process, segregation of duties may not be adequately ensured.

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Although the Company addresses the manual process for invitation of bids as well as uses e-bidding software for the same. But it is not fully operational. As sometimes it cannot be used properly from the lack on the part of the banks or due to some failure in sever. As well as the software neither generate the comparative statements of banks nor it updates the placement details of the FDs, which it should.

As per DPE guidelines the Company can invest for a tenor of 3 years in FDs as well in Government securities and T-Bills. But the current investment policy of the Company limits the investment horizon up to one year, irrespective of the instrument. This indirectly limits the investment avenues of the Company.

Currently, the company follows a bidding process to allocate funds in fixed deposits within the overall risk-based limit structure. In case of a tie in the rates quoted, funds are allocated in the ratio of net worth. The company may consider allocating funds in a different way mentioned in ahead in the recommendations.

As mentioned above the company invites bids for placing FDs with the banks, this ultimately leads to a kind of competition within the banks to quote a higher rate for getting the tender. In order to avoid undesirable competition amongst banks leading to arbitrary hikes in deposit rates (even for short periods), which have consequences for the economy. Thus the government has given instructions to the PSEs dated 15th January 2008 that the practice of inviting competitive bids for bulk deposits should be discontinued forthwith. And at least 60% of their funds should be placed with the Public Sector banks. They should place their bulk deposits with the bank(s) with whom they have a regular course of business, including public sector banks.

The policy does not currently allow for investment in public sector mutual funds, except for the UTI Liquid Plan up to a tenor of six days. The DPE guidelines currently permit investment in PSU mutual funds irrespective of tenor and type of scheme. Accordingly, the Company may consider enhancing the number of permissible schemes over a period of time.

Presently the Company is investing only in FDs, UTI Liquid funds, Inter-corporate deposits and Liquid TDRs and thus is not fully utilizing its all-permissible investment avenues.

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COMPARISION OF INVESTMENT AVENUES PERMITTED BY DPE, COMPANY’S POLICY AND COMPANY’S PRACTICE

S.No. INSTRUMENT DPE GUIDELINES ONGC POLICYCOMPANY PRACTICE

PERMITTED (YES/ NO) TENOR



1 FDs YES 3 YEARS

YES 1 YEAR YES 1 YEAR

2 LIQUID AND MONEY MARKET MUTUAL FUNDS

YES N/A YES 6 DAYS YES 6DAYS

3 ICDs-1YEAR YES AS PER TENOR

YES AS PER TENOR

YES AS PER TENOR

4 LIQUID TDRs YES AS PER TENOR

YES AS PER TENOR

YES AS PER TENOR

5 T-BILLS-91DAYS

YES AS PER TENOR

YES AS PER TENOR

NO N/A

6 T-BILLS-182 DAYS

YES AS PER TENOR

YES AS PER TENOR

NO N/A

7 T-BILLS-364 DAYS

YES AS PER TENOR

YES AS PER TENOR

NO N/A

8 G-SEC-3 YEARS

YES AS PER TENOR

NO N/A NO N/A

9 G-SEC-1 YEAR YES AS PER TENOR

YES AS PER TENOR

NO N/A

10 DEBT ORIENTED PSU MFs

YES N/A NO N/A NO N/A

11 CPs (AAA)-1 YEAR

YES AS PER TENOR

YES AS PER TENOR

NO N/A

12 CDs (P1+)-1 YEAR

YES AS PER TENOR

YES AS PER TENOR

NO N/A

13 EQUITY NO N/A NO N/A NO N/A

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RECOMMENDATIONS

The present investment policy of ONGC is as per the DPE guidelines and doesn’t involve any major shortcomings. But still some suggestions, which the company can consider for the shortcomings mentioned above in the findings, are as follows:

S.No. POLICY REFERENCE SUGGESTIONS1 Frequency of review of

policyThe frequency at which the Policy is required to be revised is not stated. Accordingly, it is recommended that the Policy specify the time period for review. The time period for mandatory review of overall policy parameters and processes may be set at one year whereas the time period for review of risk based limits may be set at one quarter.

2 Cash forecasts Currently, Company prepares cash forecasts manually. It is recommended that the process of cash forecasting and variance against forecasts be automated through leveraging SAP. As well as in the interest accrual computation, the end-term amount does not include interest. This inaccuracy is manually addressed. The computation logic in SAP for end-term amount may be revised to reflect the accurate value without manual intervention.

3 Cash forecasts tenor The Policy currently requires cash forecasting to be conducted for one year. To enable effective deployment of funds for longer horizon, the policy may require that the horizon for cash forecasting be increased to three years wherein monthly forecasts are prepared for the first year and quarterly forecasts thereafter.

4 Communication of Cash forecasts to TMG

Cash forecasts are communicated to TMG via e-mail or fax, it is recommended that cash forecasting and variance analysis should be included as a part of SAP. This would facilitate automation of the process and reduce communication gaps.

5 Logical Segregation of duties at TMG

There are only two persons staffed at TMG, now as the company diversifies into other investment avenues, segregation of duties may not be adequately ensured. Accordingly, it is recommended that a logical segregation between Front and Back Office be created within the Investment Department.

6 E-bidding Software Although the Company uses e-bidding Software for inviting bids for the placement of FDs, but sometimes it is not properly used. This point should be checked, as some banks do not place their bids through it and

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places the bids manually or via post. They should be asked to place bids with e-bidding software.

7 E-bidding Software The investment entries in SAP are currently made manually after the Investment Committee takes the investment decision and the investments are made. It is recommended that the Company consider automated updating of SAP based on the investment entries made in the e-bidding software post actual allocation approved by the investment committee members and investments made.

8 Investment Horizon The current investment policy of the Company limits the investment horizon up to one year, irrespective of the instrument. This limits the Company's investment avenues and in turns its returns. Accordingly the company may consider increasing the investment horizon up to 3 years in line with the prevailing DPE guidelines.

9 Allocation of funds in case of tie for the bids for FDs

The policy proposes allocation of funds based on the net worth of the bidder. This may however not lead to the most optimal risk weighted return. Accordingly it is recommended that in case of a tie, funds be allocated in the following manner:To the least risky bank in terms of external credit rating.In situations of tie in the credit rating of the banks, the funds may be allocated in the ratio of CRAR.

10 Investment in other asset classes

The company may consider increasing the investment horizon for the existing instruments. As well as it can consider broadening its investment portfolio.

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RECOMMENDATIONS WITH RESPECT TO DIFFERENT INVESTMETN AVENUES

FIXED DEPOSITS WITH BANKS: The Company is at present investing for a tenor of only 1 year with banks. As it is permitted to invest in this asset class up to a tenor of 3 years, the company can consider increasing its investment horizon with respect to this avenue. The main concern for ONGC is liquidity, so it can park 50% of its funds in FDs for more than 1 year for which the company is sure that these funds are not required by the company for this much time period.For increasing the investment horizon of the FDs, the company has to do the Cash forecasting for 3 years, so that it can clearly calculate the amount that will remain idle with the Company for more than 1 year. Then it will be possible for the company to invest in FDs for more than 1 year.If the Company will broaden its investment horizon with this avenue, then the company will get better returns as depending upon the time period of the investment. As it can be clearly understood from the chart given below. As the duration of FD increases, returns given on it also increases.

RATE OF RETURNS ON FDsDURATION INTEREST RATE (%) PER ANNUM15-30 days 5-7%30-45 days 5-8%46-90 days 6-8%91-180 days 6.5-9.5%181-365 days 7-9.5%1-1.5 years 8.5-10.25%1.5-2 years 8.5-10.5%2-3 years 9-10.5%3-5 years 9.5-10.5%5 years 9.5-11%

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MUTUAL FUNDS: Currently Company invests in UTI Liquid funds for 6 days. It is recommended that the Company may consider to park the funds for 1 month

so that to get better returns from it. As well as it can also consider other top performing PSU mutual fund houses such

as Life Insurance Corporation of India, State Bank of India, Bank of Baroda, etc and can follow a bidding process as in the case of placing the funds for FDs.

Company can also consider investing in the FMP (Fixed Mutual Plan) Schemes of the PSUs Mutual Fund houses for parking their idle funds for one month.

If the company wants to start investing in this avenue then, it has to do some basic improvements in its infrastructure. They are as mentioned ahead:

Subscription to research reports to evaluate ratings and performance of mutual funds schemes.

Customize SAP to capture deal data relating to investments in mutual funds.

GOVERNMENT SECURITIES AND TREASURY BILLS: G-Sec and T-Bills are sovereign securities and are backed by a Central Government guarantee in case of default. Accordingly, the probability of default for this asset class is considered as zero. It may be noted that the returns from G-Sec and T-Bills have been lower than the returns from FDs. A glance at the returns from these avenues is as follows:

ASSET CLASS RETURNT-Bills 91-days 182-days 364-days 8.06% 7.68% 8.25%G-Sec 1 year 2 years 3 years 7.47% 7.48% 7.59%

However, in the case the returns from G-Sec and T-Bills exceed those from FDs, the Investment Committee may decide to allocate funds towards this avenue. If the company wants to start investing in this avenue then, it has to do some basic improvements in its infrastructure. They are as mentioned ahead:Opening of CSGL account to facilitate transactions on the NDS platform, because to investment in to this avenue takes place through this NDS platform.Company has to evaluate impact of changes in market variables and market news, so as to be updated about the market liquidity of these assets.

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CONCLUSION

From the study of overall process of investment of short-term surplus of ONGC, I can conclude that it has devised a sound process of investment, which, is purely based on commercial basis. The Company is following the DPE guidelines to park its surplus funds, which all the PSEs have to follow. Along with it the Company has its own investment Committee which look after every aspect before investing the funds. The Company appoints different agencies from time-to-time to review its investment process. The Risk based limit structure for banks proposed by CRISIL is quite satisfactory. As the Company is a PSE, its major concern is the protection of capital and to maintain adequate liquidity. Thus, the Company do not invests its funds with any instrument for more than one year to meet any unforeseen contingencies. Similarly, the Company properly takes care of Default probability of each avenue before investing the funds with it. And hence, do not invest its funds with those instruments, which have risk associated with them.

The major portion of the Company’s funds is invested with the FDs with the banks (97%) and the Company is getting good returns from there. But at the same time there are some other avenues available for the Company in which it can invest and can get better returns from there in comparison what it is getting at present i.e. Mutual Funds. They are also in line with the guidelines given by DPE. Thus, the Company still has a lot of scope to broaden its investment portfolio.

At last to conclude I would like to add that whatever the Company is doing at present with respect to invest its short-term surplus funds, depending upon its risk appetite is commendable.

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LEARNINGS

During the Summer Internship Program (SIP) at ONGC, New Delhi I devoted all my efforts systematically over a period of two months to gain as much knowledge as I can and add something useful to myself. These months proved as hands-on experience in corporate exposure, business communication and filling in the space between corporate and B-school students.

PROJECT LEARNINGS

Investment procedure of short-term surplus funds of ONGC. The basic guidelines of DPE that are to be followed by every PSE to park its idle

funds. Study of Risk based limit structure for banks developed by CRISIL. Study of different investment avenues in which a company can invest in to. Study of ratings given by different rating agencies for different instruments.

INDIVIDUAL LEARNING

It is not a cakewalk to work with a PSE, as it is a misconception with the general public.

Always try to be as cheerful as you can, because the solutions for the problems come with a calm and composed mind.

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ANNEXURES- CRISIL REPORT

Annexure 1 - List of banks satisfying Level 1 criteriaBank Name Bank Name

ANDHRA BANK UNITED BANK OF INDIABANK OF BARODA VIJAYA BANKBANK OF INDIA JAMMU & KASHMIR BANKCANARA BANK STATE BANK OF INDOREHDFC BANK UTI BANKICICI BANKING CORPORATION STATE BANK OF BIKANER & JAIPURORIENTAL BANK OF COMMERCE INDUS IND BANKPUNJAB NATIONAL BANK STATE BANK OF SAURASHTRASTATE BANK OF INDIA STATE BANK OF MYSORESTATE BANK OF PATIALA STATE BANK OF TRAVANCOREUNION BANK OF INDIA BANK OF MAHARASHTRACORPORATION BANK VYSYA BANKSTATE BANK OF HYDERABAD KOTAK MAHINDRA BANKSYNDICATE BANK KARUR VYSYA BANKCENTRAL BANK OF INDIA ALLAHABAD BANKUCO BANK FEDERAL BANKINDIAN OVERSEAS BANK KARNATAKA BANK

Note: The satisfaction Level I Criteria is based on publicly available audited financial results for the year as of 31st March 2003, except in the case of banks like Punjab & Sind Bank, Global Trust Bank whose audited results

were not available.

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Annexure 2 - Results of risk scoring conducted using Cramel model

Bank Name

Cramel based Risk

Grade Bank Name

Cramel based Resik Grade

ANDHRA BANK a UNITED BANK OF INDIA bBANK OF BARODA a VIJAYA BANK bBANK OF INDIA a SYNDICATE BANK bCANARA BANK a STATE BANK OF INDORE bHDFC BANK a UTI BANK bICICI BANKING CORPORATION a STATE BANK OF BIKANER & JAIPUR bORIENTAL BANK OF COMMERCE a INDUS IND BANK cPUNJAB NATIONAL BANK a STATE BANK OF SAURASHTRA cSTATE BANK OF INDIA a STATE BANK OF MYSORE cSTATE BANK OF PATIALA a STATE BANK OF TRAVANCORE cUNION BANK OF INDIA a BANK OF MAHARASHTRA cCORPORATION BANK a VYSYA BANK cSTATE BANK OF HYDERABAD a KOTAK MAHINDRA BANK cJAMMU & KASHMIR BANK b KARUR VYSYA BANK cCENTRAL BANK OF INDIA b ALLAHABAD BANK dUCO BANK b FEDERAL BANK dINDIAN OVERSEAS BANK b KARNATAKA BANK d

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Annexure 3 - Results of risk scoring using equity price based dynamic scoring model

Bank Name Risk Grades (Equity based

model)

ANDHRA BANK 1INDIAN OVERSEAS BANK 1ORIENTAL BANK OF COMMERCE 1STATE BANK OF BIKANER & JAIPUR 1STATE BANK OF INDIA 1STATE BANK OF TRAVANCORE 1SYNDICATE BANK 1BANK OF BARODA 2HDFC BANK 2BANK OF INDIA 2CORPORATION BANK 2INUS IND BANK 2JAMMU & KASHMIR BANK 3VIJAYA BANK 3UTI BANK 3FEDERAL BANK 3VYSYA BANK 3KARNATAKA BANK 4KARUR VYSYA BANK 4

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Annexure 4 - List of banks satisfying Level 1 criteria

Bank Name

Combined Risk

Grade Bank Name

Combined Risk

Grade

ANDHRA BANK A UNITED BANK OF INDIA BBANK OF BARODA A VIJAYA BANK BBANK OF INDIA A JAMMU & KASHMIR BANK BCANARA BANK A STATE BANK OF INDORE BHDFC BANK A UTI BANK BICICI BANKING CORPORATION A STATE BANK OF BIKANER & JAIPUR BORIENTAL BANK OF COMMERCE A INDUS IND BANK CPUNJAB NATIONAL BANK A STATE BANK OF SAURASHTRA CSTATE BANK OF INDIA A STATE BANK OF MYSORE CSTATE BANK OF PATIALA A STATE BANK OF TRAVANCORE CUNION BANK OF INDIA A BANK OF MAHARASHTRA CCORPORATION BANK A VYSYA BANK CSTATE BANK OF HYDERABAD A KOTAK MAHINDRA BANK CSYNDICATE BANK B KARUR VYSYA BANK DCENTRAL BANK OF INDIA B ALLAHABAD BANK DUCO BANK B FEDERAL BANK DINDIAN OVERSEAS BANK B KARNATAKA BANK D

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Annexure 5 - Recommended Exposure Limits for BanksBank Name Risk

GradeExposure

LimitSTATE BANK OF INDIA A 1875BANK OF BORADA A 1309ICICI BANKING CORPORATION A 1241CANARA BANK A 1237PUNJAB NATIONAL BANK A 1105BANK OF INDIA A 1001CORPORATION BANK A 707ORIENTAL BANK OF COMMERCE A 629UNION BANK OF INDIA A 618STATE BANK OF PATIALA A 421HDFC BANK A 402STATE BANK OF HYDERABAD A 373ANDHRA BANK A 333 Total Limits - Category A 11251

Bank Name Risk Grade

Exposure Limit

UNITED BANK OF INDIA B 535CENTRAL BANK OF INDIA B 532INDIAN OVERSEAS BANK B 371SYNDICATE BANK B 332UCO BANK B 260STATE BANK OF BIKANER & JAIPUR B 258VIJAYA BANK B 214JAMMU & KASHMIR BANK B 62STATE BANK OF INDORE B 167UTI BANK B 157

Total limits - Category B 2888Bank Name Risk

GradeExposure

LimitBANK OF MAHARASHTRA C 267STATE BANK OF TRAVANCORE C 206STATE BANK OF SAURASHTRA C 178STATE BANK OF MYSORE C 123ING VYSYA BANK C 35KOTAK MAHINDRA BANK C 27INDUS IND BANK C 26

Total Limits - Category C 862

Maximum Investible Surplus: Rs. 10,000 CroresOverall Limit size assumed: Rs. 15,000 Crores. Limits given above are in Rs. Crores

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ANNEXURES- INVESTMENT PROCEDURE

Annexure 6

CONSTITUTION AND QUORUM FOR INVESTMENT COMMITTEE

The investment Committee will comprise of Chief/ Head Corporate Affairs & Coordination at Delhi, Chief/ Head – Commercial, GM (F&A)-Treasury and Company Secretary and the proposals for investment of funds requiring approval of Director (HR) and Director (Finance) & C&MD should be put –up by the Investment Committee and in case of absence of any Member, any officer in his department not below the level of E-6 (Dy. General Manager), will represent the Member in the Investment Committee and three Members present in person or through such departmental officer, in case of investments for 15 days or above, and two members in person or through such departmental officer, in case of investments up to 14days, would constitute the quorum for the Investment Committee. I

Annexure 7

LIST OF INVITEES FOR OFFERS FOR INVESTMENT OF SURPLUS FUNDS

1. The following parties are to be invited for investment of short term surplus funds by ONGC, Subject to availability of exposure limits:

For investment in term deposits and rated instruments issued by banks, invitees shall comprise of the list of empanelled banks, as approved by the Board.

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, should to the availability of highest credit rating.

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.

2. 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) and New Delhi Main Branch (where ONGC maintains its current account).

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Annexure 8

DELEGATED POWER FOR INVESTMENT DECISIONS

The authority to take decisions on investments of funds up to one year maturity has been delegated by the Board of ONGC to a designated group of Directors (“Designated Group of Directors”), consisting of Director (HR) and Director (Finance) & C&MD of the company. The outstanding amount of investments made by the Designated Group of Directors under the delegated powers shall not exceed Rs. 16,000 Crores in aggregate at any point of time.

Annexure 9

PERFORMA OF TENDER NOTICE

Tender No:Tender Subject: Investment of Short Term Surplus Funds by ONGCIndicative Investment Date: …June 2008 to …June 2008Bid Valid Up to: …June 2008Tenure: Between 7days to 8 daysRemarks:Indicative Amount: Rs…in CroresRevised Amount: Rs…in Crores

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Annexure 10

PERFORMA OF COMPARATIVE STATEMENT

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Annexure 11

PERFORMA OF INVESTMENT AUTHORITY NOTE

INVESTMENT AUTHORITY NOTE

File Ref. No……. Value Date….

DGM (F&A), Delhi is hereby requested and authorized to make the following investment:Party Name Name of Bank Branch code RTGS Code Account No Instrument Folio No Amount Rs…….Crores (Rs. …….Crores Only)Investment date ………..,2008Maturity date Notice will be given one day in advanceApproval of competent authority exists for the investmentManager-(F&A)-Treasury F&A Officer-TreasuryCopy: 1.By fax: 2.By Hand to….Bank

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BIBLIOGRAPHY

Annual Report on ONGC (2006-07)

Websites:o www.ongcindia.com o www.investopedia.com o www.ppac.org.in o www.crisil.com o www.utimf.com o www.moneycontrol.com o www.valuereseachonline.com o www.rbi.org.in o www.lic.com o en.wikipedia.orgo www.google.co.in o petroleum.nic.in

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http://www.google.co.in/

http://www.lic.com/

http://www.rbi.org.in/

http://www.valuereseachonline.com/

http://www.moneycontrol.com/

http://www.utimf.com/

http://www.crisil.com/

http://www.ppac.org.in/

http://www.investopedia.com/

http://www.ongcindia.com/


GLOSSARY

AMC: Asset Management Company CD: Certificate of Deposit CP: Commercial Paper CRISIL: Credit Rating Information Services of India Limited CSGL: Constituent Subsidiary General Ledger Account DPE: Department of Public Enterprises E&Y: Ernst & Young G-Sec: Government Securities ICDs: Inter Corporate Deposits NAV: Net Asset Value NDS: Negotiated Dealing System ONGC: Oil and Natural Gas Corporation Limited PD: Probability of Default PSE: Public sector Enterprises T-Bills: Treasury Bills TDR: Term Deposit Receipt TM: Treasury Management

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Project Report- Meenu

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