A REPORT ON TREASURY MANAGEMENT & BANKING FUNCTION AT NHPC
This project report is submitted in partial fulfillment of the requirements of the PGDM (Finance) program of
Jaipuria Institute of Management, Noida
Under supervision of Dr. Pratibha Wasan
JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA
Submitted By: Davesh Kadian PGFA1113
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TABLE OF CONTENTS
1) Introduction 1.1 An overview
…………………………… 6
1.2 Objective, Limitation of study
…………………………… 7
1.3 Methodology
2.)
About Company 2.1 NHPC- overview
3.)
…………………………….. ………………………… ….. 8
……………………………. ………………………… …. 9
Treasury Management 3.1 Introduction
…………………………….10 ……………………………. 10
3.2 DPE guidelines for investing surplus cash
…………………………….10 ……………………………. 10
3.3 Investment of surplus cash
……………………………12 …………………………… 12
3.4 Eligible Instruments where NHPC can invest
………...………………….13 ………...…………………. 13
3.5 Procedure for investment
……………………………14 …………………………… 14
3.6 Comparison of NHPC‟s NHPC‟s Investment pattern with other companies
4.)
3.6.1 NTPC
…………………………....16 ………………………….. ..16
3.6.2 TATA POWER
…………………………..17 ………………………….. 17
3.6.3 RELIANCE POWER
.................………………. .................……………….18 18
3.7 Analysis of result
..………………………….. ..…………………………..20 20
3.8 Recommendations
…………………………….24 …………………………… .24
Is Investing in T.Ds a sound decision? 4.1 Methodology 4.3 Why UTI LIQUID SCHEMES?
……………………………..25 …………………………….. 25 ….………………………….…26 ….………………………….… 26
4.4 Opportunity cost of not investing in that schemes ………………………………...2 ………………………………...27 7 4.5 Interpretation of result
…………………………………..28
4.6 Comparison of Effective ROI on FDs &UTI MF Return ……..…………………..29 4.7 Interest that could have been earned ………………………………………………...3 ………………………………………………...33 3
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TABLE OF CONTENTS
1) Introduction 1.1 An overview
…………………………… 6
1.2 Objective, Limitation of study
…………………………… 7
1.3 Methodology
2.)
About Company 2.1 NHPC- overview
3.)
…………………………….. ………………………… ….. 8
……………………………. ………………………… …. 9
Treasury Management 3.1 Introduction
…………………………….10 ……………………………. 10
3.2 DPE guidelines for investing surplus cash
…………………………….10 ……………………………. 10
3.3 Investment of surplus cash
……………………………12 …………………………… 12
3.4 Eligible Instruments where NHPC can invest
………...………………….13 ………...…………………. 13
3.5 Procedure for investment
……………………………14 …………………………… 14
3.6 Comparison of NHPC‟s NHPC‟s Investment pattern with other companies
4.)
3.6.1 NTPC
…………………………....16 ………………………….. ..16
3.6.2 TATA POWER
…………………………..17 ………………………….. 17
3.6.3 RELIANCE POWER
.................………………. .................……………….18 18
3.7 Analysis of result
..………………………….. ..…………………………..20 20
3.8 Recommendations
…………………………….24 …………………………… .24
Is Investing in T.Ds a sound decision? 4.1 Methodology 4.3 Why UTI LIQUID SCHEMES?
……………………………..25 …………………………….. 25 ….………………………….…26 ….………………………….… 26
4.4 Opportunity cost of not investing in that schemes ………………………………...2 ………………………………...27 7 4.5 Interpretation of result
…………………………………..28
4.6 Comparison of Effective ROI on FDs &UTI MF Return ……..…………………..29 4.7 Interest that could have been earned ………………………………………………...3 ………………………………………………...33 3
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4.8 Conclusion
………………………………………………... ………………………………………………...35 35
5.) Banking Section 5.1 Function of Banking section 5.1.1 Payment function
..………………………………………………...3 ..…………………………… …………………...37 7 .…………………………………………………3 .……………………………… …………………37 7
5.1.2 Collection from beneficiaries beneficiaries ………………………………………………….41 5.1.3 Equity from GOI 5.1.4 Cash Credit and Loans 5.2 Recommendation
6.) References
.………………………………………………...41 .………………………………………………. .…………………………… ………………….42 42 ……………………………………………… ………………………… ……………………43 43
..………………………………………….… ..………………………………………….… 44
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Declaration I hereby declare that this project report entitled “Treasury Management & Banking Functions at NHPC” has been prepared by b y me with the help of industrial mentor and is i s an original work
submitted to Jaipuria Institute of Management, Noida towards fulfillment of the requirement for the award of Post Graduate Diploma in Management (2011-13). I also hereby declare that this project report has not been submitted at any time to any other university or institute for the the award of any Degree of Diploma.
Davesh Kadian PGFA1113 Jaipuria Institute of Management Noida
JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA
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Acknowledgement I owe a debt of gratitude to many people who helped me in this project report. They shared their experience, insights, research and writings and were so helpful an d gracious to me during the preparation of this project report.
I am thankful to Mr. Ashish Saigal, Sr. Manager Finance for giving me opportunity to work and get valuable learning‟s regarding professional and corporate world from this prestigious organization. I also express my gratitude and than ks to Mr. Anil Gaba my company guides for their invaluable guidance and inspiring suggestion. They provided me an insight for the project and helped me to merge my theoretical concepts with their practical application.
I pay my sincere thanks to Dr. Pratibha Wasan Faculty JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA for her invaluable suggestions in completing the p roject. I would like to thank her for her constant attention and for motivating me during the preparation of the project.
I also thank my colleagues and friends who helped me in this project by providing their valuable suggestion and help.
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INTRODUCTION This project is divided into 2 parts. 1
TREASURY MANAGEMENT:
One of the most important functions of Finance manager is optimum utilization of ideal funds so as to get good returns for his company. My project includes
Finding out How much ideal fund is available in NHPC and for how many days.
Finding out various investment options available to NHPC.
Comparison of NHPC‟S investment pattern with other PSU and P rivate Sector Power companies.
2
Determining whether NHPC‟s current investment pattern is good?
Banking Function:
The most important aspect of treasury department is its Banking func tion. Banking is always an important part of treasury department in big organisations. This section is responsible for making Payments to various suppliers, employees, various projects of NHPC. This project involves finding out
How Banking department works?
What are its functions and its importance in Cash Man agement?
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Objective of the Project: The objective of the project is to determine How NHPC invests its surplus cash and comparing NHPC‟S investment pattern with other power sector companies so as to provide a clear picture whether NHPC‟S investment portfolio needs amendment or not. It will help the company to assess its present policy regarding investment and provide a base to change its policy if there will be a need to do so.
After that Determining whether investing in FDs is sound o ption or not by comparing it with different schemes of UTI Liquid fund. This project helps the company in knowing whether its cash management is efficient or not? It will help the company in making its investment decision by providing important data about various mutual fund schemes their performance in past.
Limitations of the Study: Since this project involves getting knowledge abou t all the aspects of treasury management in just 8 weeks so it is not possible to get knowledge about each and every aspect in detail. Therefore TIME LIMIT is a limitation of my study.
As I have to compare NHPC‟s investment pattern with other power sector compan ies and determining whether NHPC‟s decision of investing in FDs is good o r not and for that getting complete data for such a study is not easy which again is a limitation of my study. Past data is collected for comparing FD return and MF returns which is a limitation of m y study because for making investment decision past data is not considered as reliable source.
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METHODOLOGY TREASURY MANAGEMENT
To know how to prepare daily rolling cash flow
How to calculate minimum cash balance
To know for how many days surplus cash is available to the company
To know what are the various sources where surplus cash can be invested.
Comparison of NHPC‟s investment pattern with other companies.
Is Investing in FD a sound Decision?
Selecting various liquid schemes of UTI. NAV for year 2009-10 and 2010-11 is taken to calculate the return generated by a particular scheme in a particular period.
Average rate of interest is taken for FDs for a pa rticular time period.
Comparison of return from different schemes of UTI with return from FDs.
BANKING:
To know what are the functions of banking section.
To know how Banking section helps in efficient utilization of funds?
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In India, electricity is produced in various sector h ydro, tidal, winds, geothermal &gas potential. NHPC is the power organization in the field of hydro sector. It was established in 7th
November 1975.NHPC is a schedule „an‟ enterprise of the government of India. With an authorized share capital of Rs. 15,000 crore and an investment base of about Rs. 25,000 crore. NHPC is ranked as a premier organization in the country for development ofhydropower.
NHPC is among the TOP TEN companies in the country in terms of investment. A credited with ISO-9001:2000 &ISO-14001:2004 certificates for its quality system & environment concerns. NHPC Corporate officeis in F ARI DABAD. The saga of NHPC is replete with many challenges. To begin with NHPC took over three most difficult & almost abandoned projects in geologically weak Himalayan Ranges from the erstwhile central hydroelectric projects Control Board. These projects were the 180MW Baira Siul in Himachal Pradesh, 105 MW Loktak in Manipur & the 345 MW Salal Stage-1 in J&K. The initial mandate given to the corporation to complete these three projects were fulfilled with the commissioning of Baira Siul in 1981, Loktak in 1983 & Salal Stage-1 in1987.The successful completion of these projects in most difficult areas & their operation is a testimony to NHPC‟s success. So far, NHPC has completed 12 projects with a total installed capacity of 5175 MW which includes 1000MW.Indira Sager project &520 MW Omkareshwar 2 P roject through Narmada Hydroelectric Development Corporation Ltd. (NHDC)-a joint Venture of NHPC with government of Madhya Pradesh. Besides this; NHPC has commissioned the 14.1 MW Devi hat
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projects in Nepal, 60MW Kurichu project in Bhutan, 5.25 MW Kalpong project in Andaman & Nicobar Islands &4MW Sippi projects in Arunachal Pradesh as deposit work. At present 12 projects with a total installed capacity of 5132MW are under execution.
TREASURY MANAGEMENT Treasury management (or treasury operations ) includes management of an enterprise'
holdings in and trading in government and corporate bonds, currencies, financial futures, options and derivatives, payment systems and the associated financial risk management. It involves optimum utilization of surplus cash available in a compa ny for a particular time period. Today in every big organization Treasury Department is responsible for this function. At NHPC there is also Treasury Department which does this function very efficiently. Being a PSU it has to follow certain guidelines issued by DEPARTMENT FOR PUB LIC ENTERPRISES for investing its surplus cash in various sources. The guidelines are:
D.P.E GUIDELINES FOR INVESTMENT OF SHORT TERM CASH SURPLUS 1) The surplus availability should be worked out for a maximum period of one year at any point of time. 2) In the present scenario as applicable to NHPC the surplus arising are only cash surplus and not fund surplus, i.e. to say that the corporation is resorting to short term borrowings and any short term cash surplus does not offset such short term borrowings, thus in actuality NHPC holds surplus cash and not surplus funds. However in order to gainfully utilize such excesses rather than to keep the funds idle there is a need to formulate the system for utilizing such cash surplus to the benefit of the Corporation.
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3) NHPC can invite bids for deposit of surplus cash from only those banks with which it has commercial interest. 4) The exposure limit for individual banks for NHPC is as follows:
Sl. Net worth No. 1. Between Rs. 500 Crs. and Rs. 5000 Crs. 2. Above Rs. 5000 Crs a) Private Bank
Maximum amount of Investment with one single Bank/Financial Institution at a time
10% of Net Worth Rs. 500 Crs. Without any limit
a) Nationalised Bank 5) While allocating investment to the banks within the prescribed exposure limit it shall be necessarily ensured that the 60:40 ratio amongst public sector banks and private sector banks as stipulated in recent DPE Guidelines is strictly adhered to. 6) NHPC can invest in Mutual Funds floated by Public Units.
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INVESTMENT OF SURPLUS CASH When the company anticipates the condition of surplus cash, the treasury management of the company looks for the avenue available for the investment of this cash in such a way that the return can be maximized and the investment can be converted into cash as and when required without any loss of time. Investing surplus cash involves two basic problems: 1. DETERMINATION OF SURPLUS CASH
The determination of amount of surplus cash can be done only after calculating the minimum cash level that is required by the company termed as “safety level of cash”. The safety level of cash is determined by the finance department separately for normal and peak period. In both the cases, the two basic factors are to be decided which are, first the desired days of cash the minimum number of days for which cash balance should be sufficient to cover pa yments, second is „average daily cash outflow‟
Safety level of cash during periods = Desired days of cash * Average daily cash outflows
Safety level of cash during peak periods = Desired days of cash at the business period * Average of highest daily cash outflows.
2. DETERMINATION OF CHANNELS OF INVESTMENT
The finance manager can determine the amount of surplus cash by comparing the actual amount of cash available with the highest safety level of cash. Such surplus cash may be of two type temporary or permanent surplus. Temporary cash surplus consist of funds which are available for investment on a short term basis maximum for a period of six months, since they are required to meet regular obligations like taxes, dividends etc. permanent cash surplus consists of funds which are kept by the firm to use in some unknown or unforeseen profitable opportunity of expansion or acquisition of some assets. Such funds are available for investment for a period ranging from six months to a year.
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ELIGIBLE INSTRUMENTS
Investments may be made in one or more of the following instruments:
Public Deposit Account of Govt. of India.
Term Deposits with any Scheduled Commercial Bank (i.e. banks incorporated in India) and with a NET WORTH (Paid up Capital plus Free Reserves) of atleast Rs. 500 Crores, fulfilling the Capital Adequacy norms as prescribed by the R BI from time to time.
Instruments which have been rated by an established Credit Rating Agency and have been accorded the highest investment grade credit rating signifying highest safety e.g. certificates of Deposit, deposit Schemes or similar instruments issued by scheduled commercial Private Sector banks/term lending institutions including their subsidiaries as well as commercial paper of corporate and eligible schemes o f UTI. Investment of funds in Fixed/Term deposits of Public Sector Banks may be made without credit rating for them.
Any other Debt Instrument which has obtained hi ghest credit rating from one of the established Credit Rating agencies.
Treasury Bills and Government of India securities. Though DPE guidelines permit investment upto 3 years in this instrument but investment shall not b e made for a period exceeding one year.
AMOUNT & AUTHORITY COMPETENT TO INVEST
APPROVING AUTHORITY
1. For amount upto Rs.1000 crores 2. For amount above Rs. 1000 cr.upto Rs.2000 crores
3. Beyond Rs. 2000 Crore without any limit
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Director (Finance) Chairman & Managing Director Board of Directors
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PROCEDURE ADOPTED FOR INVESTING SURPLUS CASH AT NHPC First of all investment committee is formed which take decisions regarding Where the investment is to be done among available options, DPE guidelines are being met. Treasury Department from the monthly budget prepares a Daily rolling cash flow.
Whenever a case of cash surplus arises it will firstly be used to o ffset the debit balances appearing in the Cash Credit accounts maintained with different Banks as well as offset of WCDL account/MIBOR linked loans etc. at the earliest available opportunity.
Finding the minimum cash balance that is required to be maintained during normal working hours.
The next step is to work out the expected number of days for which the excess cash will remain available. The investment of the same will depend upon the number of days for which such amount would be available.
After this NHPC invites bids from various banks with which it is has commercial int erest.
Quotations from various banks along with the amoun t and the number of days the cash is available is sent to the investment committee for their approval.
After getting the approval from the committee surplus cash is invested in that bank which offers the highest rate of interest.
MINIMUM CASH BALANCE REQUIRED = 10 Crores
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COMPARISION OF NHPC‟S INVESTMENT PATTERN WITH OTHER POWER COMPANIES
INVESTMENT PATTERN OF NHPC All the investments of NHPC during the period w ere in only one kind out of the various options provided, namely term deposits with scheduled banks. It can be said that the investment policy being followed is- to avoid an y kind of hassles or tricky situation and place the surplus funds in the safest possible option without paying much heed to the maximization of returns by meticulously choosing from the available avenu es.
TOTAL INVESTMENT: 4230 CRORE Among the investments made in financial year 2009-10 the following points were noticed:More than 80% of the investments made by NHPC exceeded an amount of RS 85 CRORE The range of investments varied from a minimum of Rs.4 cr to a staggering maximum of Rs 300 cr. Average investment through the year being a remarkable Rs. 50 Cr per investment.
Among the investment made in the current financial year 2010-11 the following points were noticed.
TOTAL INVESTMENT: 5212.9 CRORE Among the investments made in financial year 2010-11 the following points were noticed:More than 70% of the investments made by NHPC exceeded an amount of RS 100 CRORE
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The range of investments varied from a minimum of Rs.1 cr to a staggering maximum of Rs 216 cr. Average investment through the year being a remarkable Rs. 75 Cr per investment.
NTPC‟S INVESTMENT PATTERN IN YEAR 2009 & 2010 TOTAL INVESTMENT IN 2009-10 = 2701.13 CRORES FIGURES IN CR.
NTPC 2009 0 59.2
244.6
BONDS 909.2
1488.13
Invstmnt in JV INVST IN SUBSIDIRES SURPLUS CASH IN VARIOUS INST ON BEHALF OF CUSTOMERS
TOTAL INVESTMENT IN 2010-11 = 3352.98 CRORES
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NTPC 2010
19.3 850.8 BONDS 30.4
Invstmnt in JV
1770.68
INVST IN SUBSIDIRES 681.8
SURPLUS CASH IN VARIOUS INST ON BEHALF OF CUSTOMERS
TATA POWER‟S INVESTMENT PATTERN IN YEAR 2009 & 2010 FIGURES IN CR.
TOTAL INVESTMENT IN 2009-10 = 2313.39 CRORES TATA POWER (2009-2010) 41.72 203.57 contigency reserve investments 397.43 defferd taxatn liability fund invstmnt 1367.35
Mutual funds other securities
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TOTAL INVESTMENT IN 2010-11 = 2010.07 CRORES
TATA POWER (2010-2011)
215.39
203.57 contigency reserve investments 397.43 defferd taxatn liability fund invstmnt Mutual funds
1497 other securities
RELIANCE ENERGY LTD‟S INVESTMENT PATTERN IN YEAR 2009 & 2010 TOTAL INVESTMENT IN 2009-10 = 485.06 CRORES
Reliance Energy Ltd. 2009
75.46
0
150
goi- bonds covrtble pref shares unquoted equity shares 45.05
214.55
redeemable preferance shares mutual funds
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TOTAL INVESTMENT IN 2010-11 = 1042.67 CRORES
Reliance Energy Ltd. 2010
206 417.67
goi- bonds 88.64
covrtble pref shares unquoted equity shares redeemable preferance shares
285.33
mutual funds
45.05
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Analysis and Investment Pattern For the purpose of comparison of investment prac tices data of last two years of each company is taken into account. As it is already discussed for the purpose of investment four things are considered mainly which are security, liquidity, maturity and yield.
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NHPC‟S INVESTMENT PATTERN:
The investment pattern followed at NHPC is ver y simple. More than 50% of surplus cash is available for period 46 to 180 days. As shown in the graph all the surplus cash is invested in Term Deposits which shows that it is very much con cerned about SECURITY. The reason why NHPC goes for this pattern is: The guidelines issued by DPE for investing surplus cash. It does not want to take risk. It is very easy and most secured way of investing surplus cash. This investment pattern is giving NHPC good return i.e. in 2009-10 8.5% and in 20010-11 (8.6%)
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NTPC‟S INVESTMENT PATTERN:
It can be noticed clearly that NTPC is very high on security point as it has its 92% of investment in the Government bonds; also the reason behind its major investment in government bonds is that it has to abide by the rules and regulation set by DPE which gives most preference to the safety. So the investment of NTPC being a PSU is mainly into Government Bonds. The Average return for NTPC in 2009-10 is 8.45%. In 2010-11 8.8%.
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TATA POWER‟S INVESTMENT PATTERN:
If the investment pattern of Tata power is considered it had its 65% of investment in the Mutual Funds in 2009-10. , the investment in other securities is decreased by Tata Power in year
2008. It has most aggressive practice of investment as its major part of investment is MFs schemes which include Debt and some part of it in Gold ETFs.
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RELIANCE‟S INVESTMENT PATTERN:
The investment pattern of Reliance Energy is completely different from NHPC, NTPC and Tata power. Its major investments are in mutual funds. In the year 2010, it has maximum investments in Shares Mutual funds and Government Bonds b ut it has changed its strategy in the year 2011 by increasing its investment in mutual funds up to 87% and decreasing its investment in government bonds and shares. This move of reliance energy indicates that safety and yield are on the top priority for the company as by increasing its investment in mutual
funds they have diversified their investments thereby decreasing their risk o n the other hand they reduce the %age of investment in the shares and debentures which shows they have maintained balance between security and yield. Another reason for investing in mutual funds may be saving tax. Avg. Return in 2009-10 is 9.45% Avg. Return in 2010-11 is 10.2%
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RECOMMENDATIONS:
Policies adopted by NHPC for the investment purpose are quite stringent, if compared with that of the policies adopted by Tata Power and Reliance Energy. NHPC doesn‟t have liberty to invest in many instruments which can yield much better returns. They have investment mainly in Government security which are better option from security point of view but yield is relatively low, here it c an be recommended that surplus money can be invested in the mutual funds which will diversify risk as well as it will increase return ratio. The reason for investing in FDs is because o f Tax Advantage that NHPC enjoy being a Power sector company but this advantage remains only for 2 years from now which will reduce the effective rate of interest from FDs. So in that situation investing in mutual funds will also be a good option because dividend received from MF is exempted from tax. It can also look for other investment options like CP, T-Bills etc. Investment in bonds can also be considered as good investment option keeping in mind the present scenario where the interest rates on Deposits are decreasing and chances are that it will decrease further.
IS INVESTING IN T.Ds A SOUND DECISION? Various liquid schemes of UTI are selected because the guideline issued by DPE has to be followed.
NAV for year 2009-10 and 2010-11 taken to calculate the return generated by a particular scheme in a particular period.
Return from MF = st
st
NAV on last day + Dividend (for that period if any) – NAV on 1 day / NAV on 1 day
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Average rate of interest is taken for FDs for a particular time period.
Comparison of return from different schemes of UTI with return from FDs.
Finding correlation of various UTI schemes and FDs rates.
Those schemes whose correlation is +ve and S.D is low is selected for analysis
WHY UTI LIQUID FUND SCHEMES? The reason why I have selected liquid schemes of UTI is that:
They conform to the guidelines issued by DPE.
LIQUID schemes are considered as one of the safest mutual fund schemes.
The portfolio of UTI schemes has positive relationship with FD rates.
No entry load and exit load on many of the schemes.
UTI LIQUID FUND CASH PLAN- GROWTH MEAN
.15
S.D
.02
CORRELATION
.04
SHARP RATIO
2.20
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UTI LIQUID FUND CASH PLAN- MONTHLY DIVIDEND MEAN
.11
S.D
.12
CORRELATION
-.39
SHARP RATIO
.03
UTI LIQUID FUND CASH PLAN- WEEKLY DIVIDEND MEAN
.14
S.D
.14
CORRELATION
-.06
SHARP RATIO
.09
The correlation is between T.Ds and MF return where as Sharp ratio is calculated for determining how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. The result above shows that out of the available 3 schemes only UTI LIQUID FUND CASH PLAN- GROWTH is selected because it has least risk associated with it and also the SHARPE RATIO is high for this fund which again is good from risk point of view.
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OPPORTUNITY COST OF NOT INVESTING IN LIQUID FUND CASH PLAN GROWTH FOR YEAR 2009-10 Fig in lakhs
NO OF DAYS 1 TO 7
Return from F.D in lakh
Return from M.F in lakhs
NET PROFIT/LOSS
0
0
8 TO 14
647.2219
710.95
-63.7281
15 TO 30
1506.091
1380.73
125.361
31 TO 45
2501.301
2150.675
350.6264
46 TO 60
8637.458
6466.91
2170.548
61 to 90
4549.256
4664.46
-115.204
91 TO 135
2419.614
2425.302
-5.68775
136 to 180
3362.591
3342.201
20.38971
180 TO MORE
2184.595
2003.3
181.295
TOTAL
FOR YEAR 2010-11
PERIOD IN DAYS
2663.6
Fig in lakhs
Return from F.D in lakh
Return from M.F in lakhs
NET PROFIT/LOSS
1 TO 7
57.031
62.632
-5.601
8 TO 14
612.418
683.520
-71.102
15 TO 21
1210.843
1381.950
-171.107
22 TO 30
1877.123
1903.865
-26.742
31 TO 45
1256.188
1221.760
34.428
46 TO 90
3317.016
3003.654
313.362
91 TO 180
3826.944
3578.784
248.160
180 TO MORE
6735.592
6534.180
201.412
TOTAL
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522.809
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INTERPRETATION The total profit that NHPC had generated by not investing in UTI Liquid Growth Plan scheme FOR FY 2009-10 is 2663.6 Crores FOR FY 2010-11 is 522.809 Crores Therefore it can be said that NHPC‟s decision of investing in Term Deposits was right. But
here one point needs to be mentioned i.e. NHPC enjoys TDS exemption on its interest income on Term Deposits and because of that so far it is able to fetch good return in comparison to UTI Liquid plan. But this Tax exemption will remain valid for the nex t two years and after that the effective
Rate of Return will decrease and it might make investing in Term Deposit less attractive.
The next part of my report will focus on IF NHPC did not enjoy this tax advantage then
could it be able to earn better return than UTI Liquid plan.
COMPARISON OF EFFECTIVE ROI ON TDs AND UTI LIQUID FUND CASH PLAN GROWTH RETURN Being a Power Sector Public Unit NHPC enjoys advantage of not paying any TDS on interest income earned on its Term Deposits which makes its decision of investing in Deposits a right one. But NHPC can enjoy this advantage for the next two years only after that it has to pay TDS on its TERM DEPOSITS with any bank i.e. @ of 22.6% which will reduce the effective rate of return on FDs. Therefore an attempt is made to find out if NHPC does not enjoy this tax advantage then would it be able to earn more return than those offered by UTI Liquid Growth Plan scheme.
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FOR F.Y. 2009-10
GRAPH SHOWING T.D ANNUAL RATE AND UTI LIQUID SCHEME ANNUAL RETUNS
GRAPH SHOWING EFFECTIVE T.D RATE AND UTI LIQUID SCHEME RETUNS
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FOR F.Y. 2010-11
GRAPH SHOWING T.D ANNUAL RATE AND UTI LIQUID SCHEME ANNUAL RETUNS
GRAPH SHOWING EFFECTIVE T.D RATE AND UTI LIQUID SCHEME RETUNS
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FOR F.Y. 2009-10
PERIOD IN DAYS
Return from F.D in lakh
1 TO 7
Return from M.F in lakhs
NET PROFIT/LOSS
44.142
62.632
-18.490
8 TO 14
474.011
683.52
-209.509
15 TO 21
937.192
1381.95
-444.758
22 TO 30
1452.893
1903.865
-450.972
31 TO 45
972.289
1221.76
-249.471
46 TO 90
2567.370
3003.654
-436.284
91 TO 180
2962.055
3578.784
-616.729
180 TO MORE
5236.119
6534.18
-1298.061
TOTAL
-3724.273
FOR F.Y. 2010-11
NO OF DAYS
Effective TD ROI
UTI LIQUID PLAN RET.
1 TO 7
NET LOSS/PROFIT 0
8 TO 14
500.9497644
710.95
-210.0002356
15 TO 30
1090.409854
1380.73
-290.3201458
31 TO 45
1810.942192
2150.675
-339.7328082
46 TO 60
6253.519453
6466.91
-213.3905468
61 to 90
3293.661265
4664.46
-1370.798735
91 TO 135
1751.800715
2425.302
-673.5012855
136 to 180
2434.515656
3342.20098
-907.6853241
180 TO MORE
1581.647127
2003.300445
-421.6533179
Total
JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA
-4427.082399
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INTERPRETATION It is clear from the above table and graph that if NHPC didn‟t have the Tax advantage then NHPC‟s decision of investing in FDs was proved wrong because the data above shows that the opportunity cost of not investing in UTI Liquid plan Growth In F.Y 09-10 would be ---- 373 crores. In F.Y.10-11 would be ---- 443 Crores.
Therefore it can be said that NHPC has to look for other investment option other than T.D because after 2 years when it doesn‟t have Tax advantage the result could be same as it has come now. So here it can be suggested that investing in this scheme can be a good option and while looking for other investment options in future this scheme can be a good option. Though decision regarding future investment cannot be taken solely on the basis of this data because of different market and economic condition at that time but this data can be very helpful for the management while taking investment decision in future.
INTEREST THAT COULD HAVE BEEN EARNED IF SURPLUS CASH INVESTED IN UTI LIQUID FUND SCHEME NHPC at present doesn‟t invest its surplus cash for less than 7 days because no bank accepts deposit for less than 7 days. Therefore a lot of surplus cash remain idle. The table below shows amount of surplus cash available to NHPC which remain idle and generating no returns. This table is not exhaustive and contains surplus cash not for the complete year. It is just to show if the amount could have been invested in UTI LIQUID PLAN GROWTH then NHPC would be able to earn handsome amount of return on it.
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FOR F.Y 2009-10
INVESTMENT DATE
MATURITY DATE
NO OF DAYS
AMOUNT
27-03-09 17-04-09 17-04-09 14-05-09 05--06-2009 03--12-2009 17-12-09 14-01-10 14-01-10
31-03-09 22-04-09 20-04-09 19-05-09 09--06-2009 07--12-2009 22-12-09 19-01-10 20-01-10
4 5 3 5 4 4 5 5 6
250,000,000.00 320,000,000.00 90,000,000.00 100,000,000.00 50,000,000.00 150,000,000.00 800,000,000.00 200,000,000.00 150,000,000.00
MF RATE (p.a)
INTEREST COULD HAVE EARNED
8.98 8.16 8.11 8.48 8.23 8.21 8.48 7.67 7.65 TOTAL
24,603,288.65
228,868,960.98
35,789,187.73 6,000,516.98 11,616,944.90 4,507,463.95 13,500,203.56 92,966,184.31 21,014,907.04 18,870,263.86
For F.Y 2010-11
INVEST. DATE
MATURITY DATE
DAYS
AMOUNT
MF Rate (p.a)
INTEREST COULD HAVE EARNED
27-Mar-10
2-Apr-10
6
800,000,000.00
9.00
118,417,441.32
17-Apr-10
22-Apr-10
5
200,000,000.00
8.16
22,368,242.33
14-May-10
17-May-10
3
250,000,000.00
8.49
17,436,569.62
11-Jun-10
15-Jun-10
4
340,000,000.00
8.31
30,968,605.78
11-Jun-10
16-Jun-10
5
250,000,000.00
8.33
28,527,973.56
11-Jun-10
14-Jun-10
3
20,000,000.00
8.31
1,366,151.20
11-Jun-10
16-Jun-10
5
60,000,000.00
8.33
6,846,713.65
12-Jun-10
18-Jun-10
6
100,000,000.00
8.39
13,796,533.66
17-Jun-10 12-Aug-10
20-Jun-10 16-Aug-10
3 4
50,000,000.00 100,000,000.00
8.40
3,451,645.93
8.53
9,349,549.12
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9-Jan-11
14-Jan-11
5
90,000,000.00
7.95
9,804,598.52
9-Jan-11
15-Jan-11
6
210,000,000.00
7.92
27,333,687.41
14-Jan-11
18-Jan-11
4
50,000,000.00
7.71
4,222,978.90
14-Jan-11
17-Jan-11
3
150,000,000.00
7.71
9,501,965.65
TOTAL
303,392,656.66
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Conclusion
After considering all the points above it can be said that investment decision making process at NHPC is very simple and here Security is given priority over yield. That is the reason why NHPC invest only in Term Deposits with banks. Though investment in mutual fund can be a good option from return point of view but it involves more risk as compared to investing in FDs and it also needs a good forecasting skills and constant watch over economic condition because MFs are subject to market fluctuation.
NHPC can invest in Liquid Schemes of UTI but so far it has restricted itself from doing that because till now it has generated good returns from FDs and the main advantage that NHPC enjoys is that it doesn‟t have to pay any TDS on interest income because being a POWER
sector PSU it is exempted . But NHPC can enjoy this exemption for the next 2 years and after that returns from FDs will not be as good as compared to now therefore keeping this thing in mind NHPC has to look for other investment options so as to earn better returns. UTI LIQUID PLAN GROWTH can be considered as an investment option because the return from this fund has outperformed the returns that NHPC had generated if TDS has been deducted from it.
The best option that is available to NHPC for investing its surplus cash for period ranging less than 7 days is MFs or C.P because at present NHPC doesn‟t invest its money for less
than 7 days because no bank pays interest on deposits for less than 7 days which means that the money lies ideal and it is not earning any income But if NHPC invest that money in Liquid schemes of UTI than it can earn a reasonable amount of money which so far it is not earning.
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Banking Function at NHPC Cash and banking section is another important department of TD which is responsible for making payments to suppliers and projects. As the name suggest this department involves all aspects of Funds Utilization. The following are the functions o f this department:
PAYMENT FUNCTION Making timely payment to various suppliers and emplo yees is the main function of Banking section of NHPC. NHPC has adopted E-payment system for achieving this. Various modes of E-payment adopted by NHPC are:
Real Time Gross Settlement (RTGS)
National Electronic Fund Transfer (NEFT)
Electronic Clearing System (ECS)
Direct Payment (DP)
Internet Banking (IB)
Inland letter of credit
For making payment through RTGS and NEFT IFSC is required. Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely identify
the bank-branches in India. This is 11 digit code with first 4 characters representing the bank s code, the next character reserved as control character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch. The MICR code has 9 digits to identify the bank-branch.
RTGS: RTGS system is a funds transfer mechanism where transfer of mone y takes place from
one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. The minimum amount that NHPC can send through RTGS is Rs. 1 lakh. The party receives the payment within 2hr of making the payment. All payments through RTGS is done through their SBI CAG account and Axis bank account.
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NEFT:
It is a nationwide funds transfer system to facilitate transfer of funds from any bank b ranch to any other bank branch. The maximum amount that can be sent through NEFT is Rs. 2 lakhs. The party gets the credit on the same Day or the next Day depending on the time of settlement. All the NEFT is done through their SBI CAG account. ECS:
It is a mode of electronic funds transfer from one b ank account to another bank account using the services of a Clearing House. This is normally for bulk transfers from one accou nt to many accounts or vice-versa. NHPC can send only 1 file of ECS in a day. The party gets credit after 4 days of sending the ECS file to the bank. The file is sent to RBI for processing and from there the amount is credited to party‟s account. NHPC has tie up AXIS BANK for sending its ECS file. Max amount that can be send through ECS in a single file is Rs 5 lakhs. DP:
When payment is done within the same bank but in a different account then Direct payment is used. NHPC used this mode of payment for making payments like Salary, Convenience allowances, Lease Payment etc . IB:
This mode of payment is used by NHPC when sending the amount to its projects. NHPC has used this facility with the help of SBI and make all their payments to their projects with the help of Internet Banking. Letter of credit :
A Letter of credit is a document issued by bank, guaranteeing that a buyer‟s payment to a seller will be received on time and for the correct amount on presentation of certain set of documents within a given time frame. A Letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a Letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified timeframe once the terms and conditions outlined in the Letter of credit are met. The Letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A Letter of credit provides the exporter or seller with the greatest degree of safety when extending credit. It is
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useful when the importer or buyer is not well known and when exchange restrictions exist or are possible. Beneficiaries are required to open LC in favour of NHPC with the beneficiaries bank. The dates on which LC becomes operational are predecided and mentioned in the LC. CO has bank accounts with the bank branch in which the LC is opened by the beneficiary and the funds credited on operating the LC are immediately transferred to the bank account in CO. In normal course, collection from beneficiaries is received through chequ e/ DD. In case the payment is not made by the beneficiary on due date, NHPC can operate the LC and collect payment directly from the bank
Types of Letter Of Credit Banks may issue several types of letters of credit . It is best for importers and exporters to meet with their banking officer to determine which type o f credit best suits their needs. The most common type of letters of credit are described follows:
Revocable:
A revocable letter of credit allows for amendments, modifications and cancellation of the terms outlined in the letter of credit at any time and without the consent of the exporter or beneficiary. Because this places the exporter at risk, revocable letters of credit are not generally accepted and are regarded as worthless.
Irrevocable :
An irrevocable letter of credit requires the consent of the issuing bank, the beneficiary and applicant before any amendment, modification or cancellation to the original terms can be made. This type of letter of credit is commonly used and preferred by the exporter or beneficiary because payment is always assured, provided the documents submitted comply with the terms of the letter of credit . Irrevocable letters of credit can be both confirmed and unconfirmed. Such creditors cannot be withdrawn by the issuing ban ker without the consent of the beneficiary even if his customer i.e. buyer requires to do so.
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Expenditures and collections at the accounting unit TD has a Drawing limit system which is an arrangement with State Bank of India under which st
the funds are deposited by TD on 1 and 15th of every month (and on any day on need basis) for enabling SBI to issue instructions to all its specified branches at projects to make payment, up to specified limit, on behalf of SBI. The project is simultaneously informed about the limit / revised limit up to which the cheques can be issued and funds can be drawn by authorized signatory on monthly basis. The unutilized limit as per bank statement at month end is not carried over to next month and is transferred to separate a „collection account‟.
Important Factors to be taken into consideration It is imperative that drawing limit is to be judiciously identified as it involves bloc king of the costly funds. Remittance to collection account during the course of month does not earn any interest to the Corporation unless the money is actually drawn and deployed elsewhere.
Accordingly, any major remittance into collection account is to be specifically brought to the notice of the Corporate Office for effective deplo yment. Drawing limit is fixed/ revised after a careful review of the anticipated cash flow estimate based
on budget provisions, site requirements, progress of work, manpower depl oyment, un-encashed cheques of the earlier period etc. Any increase in this limit is authorized on the requirement of unit and recommendation of concerned Director.
Monthly permanent drawing limit is authorised by Cash an d bank section with the approval of Director (Fin) on the basis of requirement from the units/ projects.
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Collections from Beneficiaries The payment for sale of energy is received at any of the following units: • Corporate Office • Liaison office • ED office • Project • Regional office As per the existing system the receipts against sale of energy are being received from beneficiary states through the following modes: • Through “Cash Management Product” service • Through cheques • Through Letter of Credit • Through collection account from project
Operation of collection account The collection account is an arrangement with SBI for centralized receipts. All the projects and units are required to remit the cheque/draft into respective collections account. Receipts on account of sale of energy from SEBs are preferably received through `Cash Management Product` Services. It is the duty of the Head of Finance of the unit to verify weekly that the branch has complied with this arrangement and not allowed the credit balance to accumulate .
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EQUITY FROM GOI An annual plan is prepared by the planning section and sent to Ministry of Power, GoI for approval, which provides project wise detail of funds required during the year. These funds can be utilized only for the purpose for which they are being approved/ sanctioned for by the GoI. Revision for the annual requirement for current year is done by the end of October by way of an application along with the fresh requirement with project wise break up and reasons for the same The equity is drawn on quarterly basis from Ministry of Power against the sanctioned
annual plan. Cash and bank section writes the request letter to Ministry of Power on quarterly basis in format prescribed by the Ministry along with necessary enclosures which generally contains following details: • Project-wise details of amount/budgetary support sanctioned, expenditure incurred in the previous quarter, expected requirement of fund and net requirement for the current quarter in the prescribed format • Cash flow statement • Milestones achieved and proposed • Activity wise financial requirement • Status of Government approval/PIB clearance of the projects etc
Cash credit and short terms loans
An arrangement for cash credit facility by wa y of sanction of cash credit limits is entered into with the banks. The cash credit facility entitles the company to utilize funds to the extent of the limits sanctioned by the banks for financing the working capital requirement of the compan y. Cash credit account is operated like a normal bank account. In NHPC efforts are made to minimize the interest cost on these cash credit limits and short term loans. In lieu of this NHPC has negotiated with the banks to provide the interest rate on these short term deposits and cash credit limits linked with Mumbai Interbank Overnight Average (MIBOR).
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NHPC has Rs.5000cr Cash Credit limit with SBI. NHPC has Rs.1000cr Cash Credit limit with IOB Faridabad. NHPC has taken loan worth 9000 Crores from different banks and financial institutions. NHPC has raised Rs. 600 Crores from Bonds issue.
Recommendations
All the payments should be done on the next day for the smooth functioning of department. It will help in making timely payment of customers and employees because certain modes of payment like RTGS has to be done before a particular time so to avoid any misplacing of VOUCHERS it is essential that all payments has to b e made on the next day.
The cash section should avoid dealing with customers while making payments. So there has to be a fix time for customer‟s queries i.e. 2pm to 3pm. It will help not onl y the organisation but also customers for better redressal of their complaints.
Reconciliation of accounts has to be done weekly.
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