Finance Treasury Loan

Project Report

Power Finance Corporation Ltd

Project Report

Working of Treasury Loans & Disbursement Department In

Power Finance Corporation

Submitted by Jayant Menon

Roll Number: 031069 Wave-12b

FORE SCHOOL OF MANAGEMENT MAY 2004

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Power Finance Corporation Ltd

Acknowledgement I would like to express my deep sense of gratitude to Mr. R.K.Malhotra for being extremely Co-operative and for guiding me very patiently at every stage of my project. I am thankful to Mr. Milind Dafade who was very supportive, encouraging and without whose guidance this project could not have been completed. I would like to convey my heartfelt thanks to Mr. Ruzbeh Bodhanwala who was a constant source of inspiration and valuable inputs. Finally, a sincere thanks to Mr. Om without whome I would not have got the opportunity to work at Power Finance Corporation Ltd.

Mr. R.K.Malhotra:

Manager Treasury PFC Ltd.

Mr. Milind Dafade:

Assistant Manager PFC Ltd.

Mr. Ruzbeh Bodhanwala : Professor Finance FORE School of Management Mr. Om Prakash :

Manager HR PFC Ltd.

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Power Finance Corporation Ltd

Letter of Transmittal The overall experience of the project has been a wonderful and enlightening. It was for first time that I got an opportunity to have a close ringside view of the functioning of a department in a professional organisation. Since I am going to specialize in Finance, it became even more important for me to make the best of this opportunity bestowed upon me.

While observing the Treasury

Department the very first fact that I realised was the difference between theory and practice. One thing is for sure that if you want expertise in this field then its only hands on experience that’s going to help you.

The staff in the

organisation was very helpful in explaining to me the intricacies of the trade.

Without the help of Mr.

R.K.Malhotra and Mr. Milind Dafade it would have almost impossible for me to get a grab of things. The project was completed in one month and the scope of the project included the Estimation of future Disbursements, Investment Policy of the Organisation with regards to the surplus funds and last but not the least, suggestions by yours truly for improving the short-term investment by throwing some light on the

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Power Finance Corporation Ltd

available avenues for investment overlooked by the Department.

Executive Summary: The objective of the project was to develop an understanding about the working of a Treasury Management Unit. The report throws some light on the investment policies of the department. The areas that were studied in detail were the estimation of Cash Flows and the possible investment opportunities that the company has been overlooking for some reason or the other. The Treasury Management Unit at PFC generally invests in short term instruments due to the liquidity requirements of the company.

Public Deposit Account of RBI has been, traditionally the preferred

investment option for the Department. It has a return of 6 % p.a., but the interest income from this source is taxable @ 35% which effectively reduces the yield to a meager 3.9%.

it is recommended that the department considers Money Market

Mutual Funds as a viable avenue for investment as the average return in Liquid Mutual funds vary between 4.4% - 5 %. The Cash Flow estimation methods of the department were also found to be faulty. distributed evenly throughout the year.

The yearly disbursement target was But, the empirical data reveals that

disbursements are low in the initial part of the year and pick up towards the year end. Past trends were used to predict the disbursement pattern for the year 2004-05. Such an estimation would help in predicting the disbursements more accurately which inturn would assist in the accurate estimation of Cash Flows.

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Power Finance Corporation Ltd

Table of Contents S.no

1

2

3

4

5

5.1

5.2

Page no

Topic Company Background…………………………………………

1

…

1

Introduction……………………………………………………

2

…

3

Scope of Activities of the Organisation………………………

4

….

4

Resource Mobilization…………………………………………

5

…

8

Working of Treasury Management Unit…………………… …

11

…

11

Functions of Treasury Management Unit……………………

16

……..

20

How it Actually Works!…………………………………………

23

24

…….. 6

25

Investment Policy of Treasury Management Unit……………

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Power Finance Corporation Ltd

….. 7

27

Observations at the Organisation……………………………… …

7.1

Major Deviation in Estimated and Actual Cash Flows……. …...

7.1.1

Suggestions to improve Cash Flow estimation……………………………. ….

7.2

Investment of Surplus funds…………………………………… ……..

7.2.1 Taxability of Mutual Funds………………………………………………… ……..

7.3

Gilt Short-Term Funds………………………………………………… ……….

7.4 Debt Ultra Short Term Funds…………………………………… … 8

Annexures……………………………………………………..…

….

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Power Finance Corporation Ltd

Introduction India is a developing economy and in the past decade has it has emerged as one of the leading economies of the world. This has been possible due to the successes that India has achieved be it the field of Manufacturing, Information Technology, Telecommunications, Refining, Biotechnology, Business Process Outsourcing and the list is endless. But we can’t just sit on our past laurels and hope for future growth. India as an economy is already short on infrastructure and in order to move to the next higher trajectory of growth, it is but imperative to revamp our infrastructural facilities. Power being one such major infrastructure. Our country has always been facing an acute shortage of power and this problem exists since times immemorial.

Company Background Power Finance Corporation (PFC) was established in July 1986 as a Development Financial Institution (FI) dedicated to the Power Sector. The Government of India wholly owns it but very soon it will be coming out with an Initial Public Offer as a part of the disinvestment program. Power Finance Corporation is a Public Financial Institution (PFI) under Section 4A of the Companies Act, 1956. It has been accredited with the title of Mini-Ratna (category-1) for Public Sector Undertakings. PFC's mission is to excel as a pivotal developmental financial institution in the power sector committed to the integrated development of the power and associated sectors by channeling the resources and providing financial, technological and managerial services for ensuring the development of economic, reliable and efficient systems and institutions.

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Power Finance Corporation Ltd

Scope of activities of the Organisation Financing: 1. Power Generation projects particularly thermal and hydroelectric projects. 2. Power transmission and distribution works 3. Renovation and modernisation of power plants aimed at improving performance of such plants. 4. System improvement and energy conservation schemes. 5. Survey and investigation of power projects. 6. Maintenance and improvement of capital equipment including facilities for repair of such equipment, training of engineers and other personnel employed in generation, transmission and distribution of power. 7. Studies, schemes, experiments and research activities associated with various aspects of technology in power development and supply in Power sector. 8. Promotion and development of other energy sources including alternate and renewable energy sources; and

Consultancy: To promote, organize or carry on Consultancy Services in the related activities of PFC.

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Power Finance Corporation Ltd

Resource Mobilization In order to undertake the above-mentioned activities effectively and efficiently timely funds are required that too in appropriate quantum. These funds are raised through Domestic as well as External sources. Domestic Sources: 1. Equity contribution by the Government of India 2. Issue of Tax-free bonds, SLR bonds and Taxable bonds with different coupon rates. 3. Fixed Deposit Schemes 4. Issue of Commercial Paper and Inter Corporate Deposits. 5. Term Loans of various periods from banks/ financial institutions. 6. Cash Credit/ loan against FD’s.

External Sources: 1. Bilateral and commercial credit. 2. Complementary loan from Asian Development Bank. 3. Loan from World Bank 4. Lines of credit, syndicated loans 5. External Commercial Borrowings: etc.

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Power Finance Corporation Ltd

Working of Treasury Management Unit: Treasury Management Unit Treasury Management Unit (TMU) is one of the most pivotal departments of Power Finance Corporations. TMU has to ensure that funds are not kept idle and the same is invested in instruments as per the existing Investment Policy. The objectives of TMU are: 1. Optimum utilization of resources. 2. Investment of surplus funds keeping in view the liquidity position and yield. 3. Availing of cash credit/loan against FD in case of deficit of funds. 4. Projecting the requirement for raising of funds by Resource Mobilisation Unit (RMU). 5. Ensuring timely availability of funds for meeting payment commitments.

Functions of Treasury Management Unit 1. TMU shall collect information in the fourth week of every month relating to cash inflow and outflow from various sections for the next three months. 2. Based on the assessment of liquidity position, TMU shall indicate the funds to be raised to meet the liquidity requirements of the Corporation. 3. TMU shall ensure availability of funds on the date of requirement. 4. TMU shall invest surplus funds as per the investment policy of the Corporation and arrange funds by way of cash credit/ loan against FDs in case of deficit of funds. For this TMU shall perform the following functions: a)

Empanellment of Institutions.

b)

Review of exposure limit.

c)

Assessment of surplus/deficit.

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d)

Power Finance Corporation Ltd

Obtaining approval of the competent authority for investment/ placement of surplus funds.

e)

Making investments / availing of cash credit/ loan against FD.

f)

Verification of instruments with regard to adequacy of stamping and enforceability.

g)

Safe custody of deposit / investment receipts and investment records.

h)

Submit monthly investment reports to Board of Directors.

i)

Submit daily Funds Flow Statement to HOU.

j)

Ensuring encashment of investments on the date of maturity, repayment of cash credit/ loan against FDs and payment of interest on cash credit /loan against FD.

How it actually works! Initially at the beginning of the day TMU holds certain amount cash and bank balance in the form of Public Deposit Account (PDA) or normal deposits in scheduled banks. Then comes a request for disbursement. If TMU has the required funds with it in the form of bank deposit or PDA then it immediately clears the disbursement. But if it does not have the requisite funds then it makes a request to the Resource Mobilisation Unit to make the funds available for disbursement. As soon as the funds arrive they are disbursed off to the concerned party. Apart from this TMU also has to make note of the loan repayment schedule, interest accrued etc on a daily basis. At the end of the day if there are funds available with TMU above a specified limit then it has to be invested as per the investment policy of the Organisation

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Power Finance Corporation Ltd

Opening Balance of cash

Request for disbursement

Make the disbursement

If funds available

Request RMU to arrange for funds

Funds at the end

Invest as per policy

If exceeds specified limit

Keep the amount in banks

Closing balance of cash

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Power Finance Corporation Ltd

Specified limit of Funds to be maintained in Bank Accounts S.no 1 2

BANK Reserve Bank of India Bank of India

MAXIMUM BALANCE Rs 10 lakhs Rs 5 lakhs

3

(Janpath Branch) State Bank of India

Rs 5 lakhs

4

(Parliament Street) State Bank of India

Rs 30 lakhs in the 1st and 4th week; and Rs 5 lakhs

5

(Chandralok Building) Canara Bank

in the 2nd and 3rd week of the month Rs 5 lakhs

6

(Janpath) HDFC Bank

Rs 5 lakhs

7

(HT House) ICICI Bank

Rs 5 lakhs

8

(9A, Connaught Place) IDBI Bank

Rs 5 lakhs

(Surya Kiran Building) The maximum balances are kept in order to meet routine and also unforeseen small establishment / misc. expenses, besides meeting the minimum balance requirements in the current account of the respective bank.

If the daily cash balance exceeds the maximum limit then the surplus funds have to be invested in short-term instruments, which will ensure safety of the funds along with adequate interest rate and liquidity.

Investment policy Objectives:

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Power Finance Corporation Ltd

1. Adequate number of Banks for empanelment in order to obtain attractive/ competitive interest rates. 2. Fixing the ceiling for investment in Banks depending upon their Net Worth & Capital Adequacy Ratio. 3. Excluding the investment options in Call Money and UTI schemes. 4. Considering the safety aspect of deposits. 5. Maintaining adequate liquidity. 6. Achieving optimum yield.

Avenues for investment 1. Fixed Deposits with scheduled commercial banks. 2. Certificate of Deposits with scheduled commercial banks. 3. Public Deposit Account of Govt. of India. 4. Inter Corporate Deposits with Central PSUs. 5. Inter Corporate Deposits with Primary Dealers. 6. Certificate of Deposit, Inter Corporate Deposits and other deposits of Financial Institutions.

Fixed Deposits: Power Finance Corporation may place funds in Fixed Deposits with scheduled Commercial Banks with a minimum networth of Rs 100 crores and having Capital Adequacy Ratio (CAR) as per requirement of RBI from time to time (at present 9%). Further PFC may place funds in Fixed Deposits with Public Sector Banks without credit rating for them. However PFC may continue to insist highest safety rating

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Power Finance Corporation Ltd

either for FDs or CDs from Credit Rating Agencies (like CRISIL, CARE, ICRA etc.) for placement of funds in FDs with Private Banks. The combined exposure limit of Certificate of Deposit and Fixed Deposit with Public Sector banks and Private Sector banks will be fixed as under:

Networth of the Bank

Capital Adequacy Ratio

10% of Networth subject to

Rs 100 - 250 Crs

( CAR ) 1) 9% & below 11%

Maximum Exposure given below Rs 10 Crs.

Above

2) 11%& above 1) 9% & below 11%

Rs 25 Crs Rs 25 Crs

Rs 250 - 300 Crs. Above

2) 11% & above 1) 9% & below 11%

Rs 50 Crs Rs 50 Crs

2) 11% & above

Rs 100 Crs

Rs 500 Crs

The maximum number of empanelled banks may be restricted to 20 based on the net worth of the banks for the previous year ending 31st March.

Certificate of Deposit: Power Finance Corporation may place funds in CDs with scheduled commercial banks. In regard to the placement of funds in Certificate of Deposits, the other terms and conditions will be the same as applicable in case of placement of funds in Fixed Deposit which are mentioned above for Fixed Deposits.

Public Deposit Account: Power Finance Corporation was permitted by the Ministry of Power to operate Public Deposit Accounts (PDA/c) with State Bank of India. At present the rate of interest on Public Deposit Account is 6% p.a.

There is no restriction on the number of

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Power Finance Corporation Ltd

withdrawal/ deposits and period of deposit in PDA/c but subject to a minimum balance of Rs 1 Crores.

Inter Corporate Deposit: Power Finance Corporation may place funds in Inter Corporate Deposit (ICD) of any Central PSU having head office in Delhi with networth of Rs 500 Crs or more with highest rating. The maximum amount of investment in a single company will be restricted to exposure of Rs 100 crores. The funds may be invested in ICDs upto a maximum period of six months.

Certificate of Deposit, Inter Corporate Deposits and other Deposits of FIs: PFC may make investments in Certificate of Deposits, Inter Corporate Deposits and other Deposits Schemes of other FIs, if they have obtained highest safety rating from one of the Credit Rating Agencies. The maximum amount of investment may be restricted to the extent of 30% of the networth of the company or Rs 100 cr. whichever is less.

Inter corporate Deposits with Primary Dealers: PFC may place funds in short-term Deposit / Inter Corporate Deposit for a maximum period of 6 months with Primary Dealers who have not been promoted by private sector.

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Power Finance Corporation Ltd

Observations at the Organization During my one-month stint at the Treasury Management Unit of Power Finance Corporation Ltd. there were two major observations which are explained in detail below along with the remedial course of action. These observations are very serious in nature and if not taken care–off in due course of time could lead to major problems in the future.

1.) Major Deviation in the Estimated and Actual Cash Flows One of the major functions of Treasury Management Unit is to correctly estimate the future cash flows, so that adequate fund can be made available if any deficit is forecasted. This function becomes even more important as wrong estimation leads to the inefficient use of funds.

Presently, in order to estimate the cash flows the

disbursement target for the year is divided equally for all the months, assuming equal disbursement throughout the year. Because of this very assumption there has been a significant deviation in the actual and the estimated cash flows. The following graph gives a very clear indication of the extent of deviation.

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Power Finance Corporation Ltd

Actual & Estimated Cash Flows2003-04 1500 1000 500 0 apr

May

jun

jul

aug

sep

oct

nov

dec

jan

feb

mar

-500 Estimated -1000 -1500 -2000

Actual Poly. (Estimated) Poly. (Actual) Month

The above graph clearly depicts the fact that as the months pass-by the gap between the estimated and actual cash flows widens. This means that, due to the faulty assumption of evenly distributed disbursements, the error in estimation of cash flows magnifies and takes gigantic proportions towards the year-end. In order to correct the deviation it is very important to have a look at the cash flow statement (Annexure 1). Out of all the major entries in the Cash Flow Statement its only the disbursement of Working Capital Loans and the Term Loans that are variable. The rest of the items are more or less known before hand as certainty. Analyzing the Disbursement pattern on a monthly basis brings out startling revelations.

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Power Finance Corporation Ltd

Table of Disbursements:

Disbursements for 2003-04 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Month

MONTH Apr May Jun 2000 Jul 1800 Aug 1600Sep 1400Oct 1200Nov 1000Dec 800Jan 600Feb 400Mar

1999-2000

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

2000-2001

2001-2002

2002-2003

2003-2004

84.56 239.77 Yearly 189.54 139.1 165.39 286.88 166.94 235.66 251.41 211.44 330.46 1212.16

132.35 178.22 153.4 225.88 Disbursements 106.39 125.21 290.78 341.27 262.3 201.25 176.26 349.58 188.34 320.6 298.91 248.81 287.2 229.29 245.95 533.78 134.76 601.58 916.58 1769.48

267.88 322.06 257.86 571.54 425.95 803.72 532 582.1 645.37 954.92 695.78 1282.22

524.39 436.07 737.56 576.92 657.16 944.75 808.05 307.28 520.65 1002.93 568.22 1847.51

Jun

Aug

Dec

Feb

200 0 Apr

May

Jul

Sep

Month

Oct

Nov

Jan

Mar

Disbursements for 2001-02

Disbursements for 2002-03

2000

1400

1800

2001-2002

1200 1600

Poly. (2001-2002)

1400

1000

1200 800 1000

800 600 600

400

400

200 200

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0

0

Apr Apr

May May

Jun Jun

Jul Jul

Aug Aug

Sep Sep

Oct Oct

Month Month

Nov Nov

DecDec

JanJan

Feb Feb

Mar Mar

Project Report

Power Finance Corporation Ltd

Disbursements for 2000-01 1000 900 800 700 600 500 400 300 200 100 0 Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Jan

Feb

Mar

Month

Disbursements for 1999-00 1400 1200 1000 800 600 400 200 0 Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Month

The disbursement graphs for the previous 5 years point towards one thing only i.e. disbursements remain more or less constant upto December, but shoot up alarmingly for the months of January, February and March. This phenomenon can be reasoned with the help of two major points: 1.)

Inclination to show better performance by PFC.

The basic objective of any financial organization is to lend as much as possible and, Power Finance Corporation is no exception to that. Knowingly or unknowingly it happens that towards the end of the financial year the management in its attempts to show better & improved performance, lends more than it would do at any other time of the year.

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Power Finance Corporation Ltd

Also, towards the end of the year when the organisation is left with funds to be utilized, the disbursement rate accelerates. 2.)

Window Dressing by loan seeker

Power utility companies normally don’t raise debt at the beginning of the year. They raise the debt towards the end of the year so as to decorate their Balance Sheets by reporting new projects commenced. This improves the investor outlook towards the Power Utility Company. Moreover, for the past two three years the interest rates have been steadily falling. Power companies expecting the interest rates to fall don’t undertake debt in the initial part of the year, but as time runs out they are forced to raise funds during the latter part of the year.

Suggestions to improve cash flow predictions: Monthly Disbursements for the years 1999-2004 MONTH 1999-00 Apr 84.56 May 239.77 Jun 189.54 Jul 139.1 Aug 165.39 Sep 286.88 Oct 166.94 Nov 235.66 Dec 251.41 Jan 211.44 Feb 330.46 Mar 1212.16 TOTAL 3513.31 Our objective is to

% 2000-01 % 2001-02 % 2002-03 % 2003-04 % 2.41 132.35 4.14 178.22 3.48 267.88 3.65 524.39 5.87 6.82 153.4 4.80 225.88 4.41 322.06 4.39 436.07 4.88 5.39 106.39 3.33 125.21 2.44 257.86 3.51 737.56 8.26 3.96 290.78 9.11 341.27 6.66 571.54 7.79 576.92 6.46 4.71 262.3 8.21 201.25 3.93 425.95 5.80 657.16 7.36 8.17 176.26 5.52 349.58 6.82 803.72 10.9 944.75 10.58 4.75 188.34 5.90 320.6 6.26 532 7.25 808.05 9.05 6.71 298.91 9.36 248.81 4.85 582.1 7.93 307.28 3.44 7.16 287.2 8.99 229.29 4.47 645.37 8.79 520.65 5.83 6.02 245.95 7.70 533.78 10.4 954.92 13 1002.93 11.23 9.41 134.76 4.22 601.58 11.7 695.78 9.48 568.22 6.36 34.5 916.58 28.7 1769.48 34.5 1282.22 17.4 1847.51 20.69 100 3193.22 100 5124.95 100 7341.4 100 8931.49 100 arrive at proportional monthly disbursements by using previous

year’s data. For this purpose there are two methods available: a.)

Arithmetic Average Method

b.)

Weighted Average Method

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Power Finance Corporation Ltd

Arithmetic Average Method: Arithmetic Average Method gives equal weightage to all the previous years. This would lead to faulty conclusions as since 1999-2000 there has been a sea change in the Financial, Economic, Political, Legal and Social environment. To list a few changes: •

Change in Interest rates

•

Number of players in the market have increased

•

Change in the Central and State Governments

•

Demand for funds has increased manifold

•

Change in legal requirements etc.

Weighted Average Method: Weighted Average Method gives appropriate weights to the data for different years. The year closest to the current year would be given the maximum weight and the initial years would be given lesser weights. The rational behind this is the fact that market conditions were totally different in comparison to the current situation. But then those early years data is not totally redundant and, hence given some minimal weights. Weights Assigned to different Years Year 1999-00 2000-01 2001-02 2002-03 2003-04

Weight 1 2 3 4 5

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Power Finance Corporation Ltd

Estimated Disbursement for the Year 2004-2005 Month

Proportional Disbursements

Apr May Jun Jul Aug

4.34% *** 4.77% 4.98% 7.04% 6.19%

Sep

9.09%

Oct

7.30%

Nov Dec

5.93% 6.86%

Jan Feb

10.72% 8.19%

Mar TOTAL

24.59% 100.00%

*** Proportional Disbursement for the month of April has been arrived as: Estimate Apr 2004-05 = (Weight for 1999-00 * %Figure for Apr) + (Wgt for 2000-01 * % Fig ) + (Wgt for 2001-02 * %Fig ) + (Wgt for 2002-03 * %Fig ) + (Wgt for 2003-04 * %Fig ) Apr figure = (1× 2.41% ) + ( 2 × 4.14% ) + ( 3 × 3.48) + ( 4 × 3.65) + ( 5 × 5.78) = 4.34 % Now having arrived at the proportionate disbursement for different months, the only step left is to estimate the projected annual disbursement target for the year 2004-05 as divide the annual figure into monthly disbursements.

Estimation of Annual Disbursement Target: Year 1999-2000

2001-2002

Amount The table shows the amount disbursed for the previous 5 3513.31 years. Using the Microsoft Excel Growth Function which 3193.22 5124.95 uses regression method, we can estimate the disbursements

2002-2003

7341.40 for 2004-05.

2003-2004

8931.49

2000-2001

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Power Finance Corporation Ltd

Yearly Disbusements 10000 8000

Amount

6000 4000 2000 0 1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

Forecasted Disbursement for the Year 2004-05 amounts to 10116.24 cr. Now, this forecasted amount is broken up in to 12 monthly disbursements by using the proportionate disbursement calculated above.

MONTH Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar TOTAL

Estimated Disbursement for the Year 2004-05 Disbursement % Amount 4.34% 438.91382 4.77% 482.97875 4.98% 503.97296 7.04% 712.08967 6.19% 626.62481 9.09% 919.55501 7.30% 738.73618 5.93% 599.63574 6.86% 693.81341 10.72% 1084.7557 8.19% 828.05416 24.59% 2487.1058 100.00% 10116.24

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Power Finance Corporation Ltd

These figures have been arrived at, by taking into consideration the previous years trends in monthly disbursements. This is a superior method of estimation of monthly disbursements.

It may not be 100% accurate due to the changing business

environments, but it surely is a measure that would take the process of Cash Flow estimation much closer to efficiency and effectiveness from its present levels.

2.) Investment of Surplus Funds Like any rational investor it is one of the prime objectives of Power Finance Corporation to invest the surplus funds in the best possible instruments available in the market, and also giving due diligence to the risk factor. The following table shows the surplus funds that were available with Power Finance Corporation for the past 5 years.

Surplus Funds: Month Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

1999-2000 301.65 187.28 325.57 545.88 448.73 220.95 69.96 248.34 520.76 520.36 312.94 206.1

2000-2001 224.3 169.01 307.67 266.8 144.32 48.91 278.4 784.95 1108.1 1102.82 1226.17 298.99

2001-2002 995.97 332.33 484.5 702.81 130.15 7.1 100.69 276.94 109.73 1.14 213.07 43.13

2002-2003 367.84 165.72 242.11 123.42 124.5 68.77 355.54 107.17 199.34 248.19 69.35 5.7

2003-2004 187.67 403.65 204.09 1149.76 415.31 257.78 212.65 382.44 378.1 433.31 302.76 99.32

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Power Finance Corporation Ltd

As per the Investment Policy of Power Finance Corporation, the surplus funds are invested in Public Deposit Account. The Public Deposit Account yields a return of 6 % before tax. The rate of interest on PD A/c is determined by the Govt. of India. Power Finance Corporation being a corporate entity has a tax slab of 35 %. Therefore, the net yield on the PA A/c comes out to be

6 % X 0.65 = 3.9 % This yield of 3.9 % can be improved if Power Finance Corporation looks out of its limited avenues of investment and searches for better deals. Taking into account the liquidity and safety requirements for the investments made by PFC, the best option available is that of Mutual Funds. Mutual Fund schemes are of four types: 1.)

Equity Scheme

2.)

Debt Scheme

3.)

Balanced Scheme

4.)

Liquid Scheme

Of the above its only the Liquid Mutual Funds that adheres to the investment needs of PFC. Equity Schemes are an extremely risky proposition. With the uncertainty in the Stock Markets there is a risk of loosing the principle investment.

What's so special about Liquid Schemes: Liquid funds are special for three reasons: 1. Safety – The instruments that these funds invest in are by and large some of the most stable and safe investments. Money-market instruments provide a fixed return with short maturity. By purchasing debt securities issued by banks, large Page 26

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Power Finance Corporation Ltd

corporations, and the government, money market funds carry a relatively low default risk while still offering high returns in comparison to similar lowrisk/liquid products. 2. Low Initial Investment – Money market instruments generally have large minimum purchase requirements, thereby disqualifying the majority of personal investors from buying them. Money market funds, on the other hand, have substantially lower requirements, which are sometimes even lower than average mutual fund minimum requirements. Without necessarily requiring copious amounts of cash for their purchases, money market funds allow you to take advantage of the safety related to money market instruments. 3. Fixed Net Asset Value – The NAV for money market funds is usually fixed at a constant value of Rs. 10 /- per unit, giving investors more flexibility than most mutual funds, which have a transaction-day-plus-three (T+3) settlement. Money market funds offer investors a same-day settlement similar to regular money market instruments.

Taxability of Mutual Funds Dividend Tax Mutual funds can be a tax efficient instrument for investing. With effect from Budget 2003-04(subject to clearance of finance bill), Dividend Income from the Debt schemes will attract the dividend distribution tax @ 12.5% instead of marginal tax rate, hitherto applicable to the investors. However the dividends declared from the Equity schemes will not be tax-free. Short Term Capital Gains

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Power Finance Corporation Ltd

If the units are held for a period of less than one year they will be treated as short-term capital gains and the investor will be taxed depending on the income tax rate applicable to him. Long Term Capital Gains The investor has to pay long-term capital gains on the units held by him for period of more than 1 year. In this case the investor will •

Pay tax at a flat rate of 10 % (plus surcharge @ 5% of the applicable tax rate)on the capital gains without indexation or

•

Avail cost indexation on capital gains and pay 20 % tax (plus surcharge @ 10% of the applicable tax rate) whichever is lower.

Units held under the scheme of the fund are not treated as assets as defined by the Wealth Tax Act, 1957 and therefore will not be liable for any wealth tax. Some schemes that are available in the market: Gilt Short term funds: Scheme Returns (%) Name 1 3 6 1 Since 1 Month Month Month year Launch Mon Chola Gilt Savings0.51 1.40 2.15 7.21 9.23 1 Dividend Monthly FT India Gilt Liquid Fund0.29 0.87 1.77 4.47 6.93 2 Dividend Monthly HSBC Gilt Short-term- -0.25 0.81 N/A N/A 1.17 3 Dividend

On Date

Ranking 3 6 1 Since Mon Mon year Launch 1

1

1

1

11 Oct 02

2

2

2

2

21 May 04

3

N/A

N/A 3

21 May 04

Details of Cholamandalam Gilt savings QUICK STATS 10.13 (As on 30Nav (Rs) Sep-2002) Face Value Rs.10.00

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Project Report

Power Finance Corporation Ltd

Current Corpus (Rs Lakh) Initial Corpus (Rs Lakh) Entry Price (Rs) Exit Price (Rs) Entry Load (%) Exit Load (%)

0.00 N/A 12.46 12.46 0.00 0.00

PERIODIC RETURNS of the scheme Returns Return Scheme Benchmark type period 1 Day N/A 0.03 Short 1 Week 0.14 0.03 Term 1 Month 0.51 0.27 Medium Term Long Term

3 months

1.40

1.02

6 Months 1 Year 1 year 3 Year 5 Year

2.15 7.21 7.21 N/A N/A

2.15 4.65 4.65 6.29 7.79

Debt Ultra Short Term Scheme Name

IL&FS Liquid Account Call Plan Deutsche Insta Cash PlusDaily Dividend HSBC Cash Fund-Daily Dividend Alliance Cash ManagerDividend Weekly Birla Cash Plus Sweep Plan-Daily Dividend Reliance Liquid Treasury Plan-Bonus Prudential ICICI Liquid Plan-Dividend Weekly Chola Liquid Institutional-Dividend Daily Kotak Mahindra Liq. Regular Scheme-Div. Weekly HDFC Cash Management Call Plan-Daily Dividend

Returns (%) Ranking on Date 1 3 6 1 Since 1 3 6 1 Since On Date Month Month Month year Launc Mont Mont Mont year Launch h h h h 0.42 1.2 2.23 4.4 6.56 1 1 5 9 5 21-May-04 0.37

1.11

2.24 4.89

5.53

2

5

4

3

0.36

1.11

2.24 4.88

5.16

3

4

3

5

21-May-04

0.36

1.12

2.28

5

7.77

4

2

2

2

21-May-04

0.35

1.12

2.48 5.62

5.22

5

3

1

1

7

21-May-04

0.35

1.08

2.22 4.88

7.36

6

6

6

4

3

21-May-04

0.35

1.05

2.09 4.57

7.88

7

7

7

7

1

21-May-04

0.34

0.98

4.5

6.3

8

9

9

8

6

21-May-04

0.33

1.02

2.08 4.59

6.9

9

8

8

6

4

21-May-04

0.29

0.95

1.82 3.94

4.65

10

10

10

10

10

21-May-04

2

9

21-May-04

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Project Report

Power Finance Corporation Ltd

Details of IL & FS Liquid Account Call Plan: QUICK STATS Nav (Rs) Face Value Current Corpus (Rs Lakh) Initial Corpus (Rs Lakh) Entry Price (Rs) Exit Price (Rs) Entry Load (%) Exit Load (%)

PERIODIC RETURNS Returns type Short Term Medium Term Long Term

11.17 (As on 28-May-2004) Rs.10.00 0.09 1,832.50 11.18 11.18 0.00 0.00

Return period 1 Day 1 Week 1 Month 3 months 6 Months 1 Year 1 year 3 Year 5 Year

Scheme N/A 0.10 0.42 1.20 2.23 4.40 4.40 N/A N/A

Benchmark 0.03 0.03 0.27 1.02 2.15 4.65 4.65 6.29 7.79

Calendar Monthly Returns of Il & FS Scheme

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Project Report

Power Finance Corporation Ltd

Looking at the Liquidity and the return of the above discussed Mutual Fund Schemes it is best for Power Finance Corporation to invest the surplus funds they have in such schemes, rather than investing in PD A/c.

Bibliography: www.economictimes.com www.investopedia.com www.pfcindia.com

ANNEXURES Annexure 1: CASH FLOW STATEMENT INFLOW BANK BALANCE/PDA FD/CD/ICD/STD etc MATURITIES Equipment Financing OVERDRAFT HDFC/SBOP/CBI/CANARA BANK GOI LOAN/ Interest Subsidy BORROWING - BANKS PREPAYMENTS OF LOAN BY BORROWER RECOVERIES -SEBs WORKING CAPITAL REPAY/PREPAYMENT - Actual dues/receipt ANTICIPATED RECOVERY OF DUES UP to 31.03.04 BILL DISCOUNTING / LEASING Less. PROJECTED DEFAULT (10%) INTT SUBSIDY / GRANTS/

AMOUNT(Rs.)

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Project Report

Power Finance Corporation Ltd

PDA INTT BOND ISSUE/CP ERAF BUYERS LINE OF CREDIT FCL OTHER RECEIPTS:GUARANTEE/Upfront FEE , Call Money Int. & others TOTAL OUTFLOW INTT ON STL INTT ON BONDS/GUARANTEE/TRUSTEE FEE BONDS REDEMPTION INTT ON TERM LOAN OVERDRAFT REPAYMENT REPAYMENT - TERM LOAN/CP/STL FCL PAYMENTS ESTT./ADMN. EXPENSES STAMP DUTY TDS/SALES TAX ADVANCE TAX DIVIDEND TAX DIVIDEND PAYMENT REPAYMENT STL ADVANCE TO ERAF SUBSCRIPTION IN EQUITY OF PTC GRANTS / INTEREST SUBSIDY REFUND INTEREST REBATE/INCENTIVE DISBURSEMENT - W.C.L. Actual Anticipated including rollovers DISBURSEMENT - TERM LOAN BUYERS LINE OF CREDIT LOAN INVESTMENT IN FD/CD/ICD REPAYMENT - LOAN AGAINST FD/overdraft CASH BALANCE TOTAL SURPLUS

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