Synopsis

WORKING CAPITAL MANAGEMENT OF ONGC

Submitted to ALL INDIA MANAGEMENT ASSOCIATION CENTRE FOR MANAGEMENT EDUCATION MANAGEMENT HOUSE, 14 INSTITUTIONAL AREA, LODHI ROAD, NEW DELHI 110003

FEBRUARY 2012

By MohdMazhar Registration No. 421020371

Guided By

************************ For the partial fulfillment of Post Graduate Diploma in Management

PROJECT REPORT SYNOPSIS Name Registration Number Address of Correspondence Name of Project Guide Designation and Address : MOHD MAZHAR : 421020371 : ITO NEW DELHI : :

Title of the Project

: WORKING CAPITAL MANAGEMENT OF ONGC (OIL AND NATURAL GAS

CORPORATION)

HISTORY OF ONGC Foundation to 1961

During the pre-independence period, the Assam Oil Company in the northeastern and Attock Oil company in northwestern part of the undivided India were the only oil companies producing oil in the country, with minimal exploration input. The major part of Indian sedimentary basins was deemed to be unfit for development of oil and gas resources. After independence, the national Government realized the importance oil and gas for rapid industrial development and its strategic role in defense. Consequently, while framing the Industrial Policy Statement of 1948, the development of petroleum industry in the country was considered to be of utmost necessity. Until 1955, private oil companies mainly carried out exploration of hydrocarbon resources of India. In Assam, the Assam Oil Company was producing oil at Digboi (discovered in 1889) and Oil India Ltd. (a 50% joint venture between Government of India and Burmah Oil Company) was engaged in developing two newly discovered large fields Naharkatiya and Moraan in Assam. In West Bengal, the Indo-Stanvac Petroleum project (a joint venture between Government of India and Standard Vacuum Oil Company of USA) was engaged in exploration work. The vast sedimentary tract in other parts of India and adjoining offshore remained largely unexplored. In 1955, Government of India decided to develop the oil and natural gas resources in the various regions of the country as part of the Public Sector development.

With this objective, an Oil and Natural Gas Directorate was set up towards the end of 1955, as a subordinate office under the then Ministry of Natural Resources and Scientific Research. The department was constituted with a nucleus of geoscientists from the Geological survey of India. A delegation under the leadership of Mr. K D Malviya, the-then Minister of Natural Resources, visited several European countries to study the status of oil industry in those countries and to facilitate the training of Indian professionals for exploring potential oil and gas reserves. Experts from Romania, the Soviet Union, the United States and West Germany subsequently visited India and helped the government with their expertise. Soviet experts later drew up a detailed plan for geological and geophysical surveys and drilling operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61). In April 1956, the Government of India adopted the Industrial Policy Resolution, which placed mineral oil industry among the schedule 'A' industries, the future development of which was to be the sole and exclusive responsibility of the state. Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that it would not be possible for the Directorate with its limited financial and administrative powers as subordinate office of the Government, to function efficiently. So in August, 1956, the Directorate was raised to the status of a commission with enhanced powers, although it continued to be under the

government. In October 1959, the Commission was converted into a statutory body by an act of the Indian Parliament, which enhanced powers of the commission further. The main functions of the Oil and Natural Gas Commission subject to the provisions of the Act, were "to plan, promote, organize and implement programmes for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it ". The act further outlined the activities and steps to be taken by ONGC in fulfilling its mandate. 1961 to 2000 Since its inception, ONGC has been instrumental in transforming the country's limited upstream sector into a large viable playing field, with its activities spread throughout India and significantly in overseas territories. In the inland areas, ONGC not only found new resources in Assam but also established new oil province in Cambay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast basins (both inland and offshore). ONGC went offshore in early 70's and discovered a giant oil field in the form of Bombay High, now known as Mumbai High. This discovery, along with subsequent discoveries of huge oil and gas fields in Western offshore changed the oil scenario

of the country. Subsequently, over 5 billion tonnes of hydrocarbons, which were present in the country, were discovered. The most important contribution of ONGC, however, is its self-reliance and development of core competence in E&P activities at a globally competitive level. A turning point in the history of Indias oil sector was in 1994. While the oil sector was on the backburner of India's political realm for some time, it was brought to the forefront by the privatization of India's leading oil E&P organization, the ONGC. Simultaneously, there were steps taken for the enhancement of production on the Bombay High oil fields as the result of a INR 150 billion development investment. One of Asia's largest oil E&P companies, ONGC became a publicly held company as of February 1994, following the Indian government's decision to privatize. Eighty percent of ONGC assets were subsequently owned by the government, the other 20% were sold to the public. At this time, ONGC employed 48,000 people and had reserves and surpluses worth INR 104.34 billion, in addition to its intangible assets. The corporation's net worth of INR 107.77 billion was the largest of any Indian company. After its initial privatization, ONGC had authorized capital of INR 150 billion: it also met its need to raise INR 35 billion to invest in viable oil and gas projects. The Asian Development Bank (ADB) had also set a deadline for privatizing and

restructuring at 30 June 1994, if loans were to be granted for development of two ONGC projects. As a consequence of the successful privatization, the loans were granted - US$267 million for development of Gandhar Field, and US$300 million for the gas flaring reduction project in the Bombay Basin. The successfully formulated and implemented privatization strategy put ONGC at par with other large multinational and domestic oil companies. 2000 to present In 2006 a commemorative Coin set was issued to mark the 50th anniversary of the founding of ONGC, making it only the second Indian company (alongside State Bank of India) to have such a coin issued in its honour. In 2011, ONGC applied to purchase of 2000 acres of land at Dahanu to process offshore gas.

WORKING CAPITAL MANAGEMENT OF ONGC INTRODUCTION Oil and Natural Gas Corporation Limited (ONGC) (NSE: ONGC,

BSE: 500312) is an Indian state-owned oil and gas company headquartered in New Delhi, India. It is one of the largest Asia-based oil and gas exploration and production companies, and produces around 77% of India's total crude oil production (and around 30% of total demand) and around 81% of natural gas production. ONGC is one of the largest publicly traded companies by market capitalization in India and the largest India-based company measured by profits. ONGC was founded on 14 August 1956 by the Indian state, which currently holds a 74.14% equity stake. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometres of pipelines in the country. In 2010, it was ranked 18th in the Platts Top 250 Global Energy Company Rankings and 413th in the Fortune Global 500. ONGC Videsh Limited (OVL) is the international arm of ONGC. It was rechristened on 15 June 1989. It currently has 14 oil and projects across 15 countries. Its oil and gas production reached 8.87 MMT of O+oEG in 2010, up from 0.252 MMT of O+OEG in 2002/03.

MEANING OF WORKING CAPITAL MANAGEMENT Working capital management is treated as driving seat of a finance manager. It is important in a business firm as a blood in a human life. A firm should have an adequate fund to meet day-to-day expenses and to finance current assets. This fund is known as working capital funds. Proper management of working capital is necessary to maintain both liquidity and profitability. Liquidity is necessary for the survival of the firm. A firm having no profit may be treated as sick but not having liquidity may die over a period of time. In this way the working capital management involves deciding upon the amount and composition of current assets and how to finance these assets. It has become an important tool to judge the performance of a firm. It is concerned with problems of managing the interrelationship of current assets and current liabilities. Firm should maintain

sufficient level of working capital to produce up to a given capacity and maximize the return on investment in fixed assets. Shortage of working capital leads to lower capacity utilization, lower turnover and hence lower profits. Hence the dictum adequacy is a virtue, surfeit is not. 7 Louis Brandt observes: we need to know

when to look for working capital funds, how to use them and how to measure, plan and control them.

CONCEPT OF WORKING CAPITAL MANAGEMENT There are two concepts of working capital namely, Gross concept and Net concept. GROSS WORKING CAPITAL According to this concept, working capital refers to the firms investment in current assets. The amount of current liabilities is not deducted from the total of current assets. This concept views Working Capital and aggregate of Current Assets as two interchangeable terms. This concept is also referred to as Current Capital or Circulating Capital. Working capital means total of all the current assets of a business. It is also called circulating capital. When individual current assets are to be managed, gross concept of working capital is used. There are difference on opinions among different authors about the definition of working capital. According to J.S.Mill: The sum of current assets is the capital of business. According to Mead, Malott&Field Working means current assets

According to Bonneville Any acquisition of fund which increases the current assets increases working capital, for they are one and the same. Gross Working Capital = Total Current Assets This concept focuses attention on two aspects of current assets management: a. Optimum investment in current assets: The investment in current assets should avoid two danger points-excessive and inadequate investments in current assets. The investment should not more or not less to the need of the business. Excessive investment in current assets should be avoided because it impairs firms profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten the solvency of the firm, if it fails to meet current obligations. b. Financing of current assets: Another concept is financing of current assets. Whenever a need for working capital fund arises due to increasing level of enterprise activity, or for any other reason, the arrangement should be made quickly. Similarly some surplus funds arise they should not be allowed to remain idle, but should be invested in short term securities. NET WORKING CAPITAL

The Net Working Capital refers to the difference between Current Assets and Current Liabilities or the excess of Current Assets over Current Liabilities. Net Working Capital = Current Assets Current Liabilities Net working capital means the excess of current assets over current liabilities. If current assets are equal to current liabilities then according to this concept working capital will be zero and in case current liabilities are more than current assets, the working capital will be called negative working capital. Modern economist considers this concept as more suitable. Net concept of working capital emphasizes on how much current assets have been financed out of long term funds. Under this concept the relationship between current assets and current liabilities is established or their liquidity is determined. It indicates the liquidity portion of enterprise and suggests the extent to which working capital need may be financed by permanent sources of fund. Current assets should be sufficiently in excess of current liabilities to constitute a margin of buffer for maturing obligations within the ordinary operating cycle of an enterprise. The quality of current assets should be considered in determining the level of current assets vis--vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it disastrous for the enterprise. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be

taken by management to improve and correct the imbalance in the liquidity position of the enterprise. The net working capital concept also covers the question of judicious mix of long term and short term funds for financing current assets. For every enterprise there is a minimum amount of net working capital which is permanent. Therefore, a portion of the working capital should be financed with the permanent sources of funds such as owners capital, debentures, long term debt, preference capital or retained earnings. Management must, therefore, decide the extent to which current assets should be financed with equity capital and/or borrowed capital. According to Dr. Colin Park and professor John W.Gladson, Most commonly working capital is defined as the excess of current assets of a business e.g. (cash, accounts receivable, inventories,) over current items owed to employees and

others (such as salaries and wages payable, accounts payable, taxes owed to government). According to professor R.D. Keneddy and professor S.Y. Mcmullen, A working capital deficit exists if current liabilities exceed current assets. According to Quote V.L. Gole, Whenever working capital is mentioned, it brings o mind current assets and currents liabilities with a general understanding that working capital is the difference between the two.

CURRENT ASSETS are assets, which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle. The Current Assets are acquired with the intention of sale or conversion into cash. They include: Cash Inventories Bills Receivable Prepaid Expenses Accrued Income Marketable Securities CURRENT LIABILITIES represent the obligations of the business and arise in the ordinary course of operating business. They are expected to be payable within one year. These liabilities are generally said to have claim over Current Assetsand must be discharged out of Current Assets. They include: Creditors Bills Payable

 Short term Loans Advance Payments Net Working Capital can be positive or negative. A positive Net Working Capital would arise when Current Assets exceed Current Liabilities. A negative Net Working Capital occurs when Current Liabilities are in excess of Current Assets. Net Working Capital is a qualitative concept, which indicates the liquidity position of the firm and the extent to which Working Capital needs may be financed by permanent sources of funds. Current Assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for obligations maturing within the ordinary operating cycle of a business. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe. Excessive liquidity is also bad. It may be due to mismanagement of Current Assets. Therefore, prompt and timely action should be taken by the management to improve and correct the imbalance in the liquidity of the firm. Thus the gross and net concepts of working capital are two important facts of the working capital management. There is no precise way to determine the exact amount of gross or net working capital for every enterprise. The data and problem of each company should be analyzed to determine the amount of working capital.

There is no specific rule in which current assets should be financed. It is not feasible, in practice, to finance current assets by short-term sources only. Keeping in view the constraints of the individual enterprise a judicious mix of long-term and short-term finance should be invested in current assets. Both the concepts of working capital have their own uses. If the objective is to measure the size and extent to which current assets are being used to optimize productivity of the concern, Gross concept is useful; whereas in evaluating the liquidity position of an undertaking, Net concept becomes pertinent and preferable.

WORKING CAPITAL POLICY FOLLOWED AT ONGC There are three types of working capital policies which a firm may adopt i.e, Moderate working capital policy, Conservative working capital policy and Aggressive working capital policy. These policies describe the relationship between sales level and the level of current assets. CURRENT ASSETS Conservative

Moderate

Agressive

Different types of Working Capital policies

ONGC follows the MODERATE Working Capital policy, as the increase in sales result in proportionate change in current assets. This means that percentage increase in sales is nearly equal to increase in current assets.

Importance of Working Capital Management in ONGC Management of working capital has greater significance for achieving the objective of an organization and also for the generation of surplus .Working capital management is an integral part of overall financial management. Working capital is the lifeblood of ONGC. The importances of working capital management are discussed below: 1. Meets short-term finance requirements: The working capital meets the shortterm financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than a year. The money invested in it changes form and substance during the normal course of business

operations. The need for maintaining an adequate working capital can hardly be questioned. 2. Necessary to maintain business: Just as circulation of blood is very necessary in the human body to maintain life, the flow of funds is very necessary to run a business. If it becomes weak, the business can hardly prosper and survive. Working capital starvation is generally credited as a major cause. The success of a firm depends ultimately, on its ability to generate cash receipts in excess of disbursements. 3. Important in todays business environment: Effective working capital management is especially important in todays business environment. In order to survive, an organization must be able to compete. In order to compete, firms will need to have cash available for growth, advertising and research and development of new products. In order to have cash available, a company needs to manage its working capital. Managing working capital is a delicate balance. If cash levels are too low a company risks running out of money and not being able to meet its obligations or stay solvent. If cash levels are too high, the company is not utilizing assets efficiently. The failure to effectively utilize assets can cost organizations money in lost opportunity for sales and investment. Additionally, managers who are constantly worried about whether or not bills will be paid on time have little time for innovation.

4. Decrease the risk of business: Many people are putting their dreams of owning a small business to work with the opportunities. Today, one can greatly decrease the risk of business failure with good working financial programs and can start their business with strong financial resources. 5. Protect a company from unexpected circumstances: proper Utilization protects a company from unexpected circumstances. Working capital helps to decide new strategy for development of business Working capital financing gives a business strength, flexibility, and stability. 6. Building of inventories and purchase of raw-material: New businesses and small firms often find themselves in working capital crunches. Without adequate working capital, they cannot build inventory or purchase raw materials. As a result, the company cannot sell enough products to generate the profits needed to rectify this situation. This is extremely dangerous and can be destabilizing for the company or even cause it to collapse. 7. Creating flexible working capital loan programs: The availability of credit or financing is therefore a key determinant in the likelihood and ability of a small firm in expanding and succeeding. To lessen problems for startup and pre existing businesses, some private lenders have created flexible working capital loan programs.

8. Influence the character and scope of the business: The working capital influences the character and scope of the business. It also infers the stability of a company. Proper utilization of fund is necessary for making positive character of business in market. 9. Helpful in dynamic development of business: Today it is essential for each entrepreneur to turn his fabulous ideas into a fabulous reality for dynamic development of business. a new breed of innovative companies that has emerged can give excellent working capital loan programs to pre existing company. The prospects for today's businesses have grown dynamically 10.Safety in financial backing: The proper management of Working capital gives safety to business. The effective financial planning of working capital fulfills the needs of our business and faces the challenges from unexpected situation. With the help of proper working capital management we can run our business with sound financial position in the global market.

Objective of study Fixing the objective is like identifying the star. The objective decides where we want to go, what we want to achieve and what is our goal or destination. Every study is carried out for the achievement of certain objectives. i. To analyze the various components of working capital of ONGC.

ii. To study the financing of working capital of ONGC. iii. To study and analyze the ratios of ONGC.

Scope of the study This study covers the different aspects of working capital management in ONGC in INDIA. This study is important to find out the increase or decrease in components of working capital of approx. 5-6 years. The study and the research will be taken in INDIA.

Research methodology Selection of samples: Samples will be selected by simple random sampling techniques. Data collection: The methodology which will be used for carrying out the report includes the primary as well as secondary data sources. Various statistical tools will be used to suggest and analyze the primary and secondary data. Primary source will include the questionnaire and interview methods. Questionnaire will include range of response questions, close ended questions, providing limited answers to specific responses or on a numeric scale.

Secondary data will be collected from annual reports of the sample units under study for the period from 2005-06 to 2010-11. Data will also be collected from various journals, periodical and newspapers. Web search will be done for the information related to the outside region (other part of India and globe) Sampling like records, reports, operation log, data entry documents, complaints, and various types of forms will be collected for the study. Analysis of data: To analyze the working capital management, various techniques of financial management will be used in the study, such as ratio analysis with graphs, inventory management, cash management, etc.

Hypothesis The study intends to test the hypothesis that Mismanagement of working capital has been at root of industrial sickness prevailing in the ONGC in INDIA.

Frame work of the study: Chapter scheme The research work will be presented in 9 chapters. Chapter I include the Introduction to study. Chapter II includes the company profile. Chapter III includes the management of working capital in ONGC. Chapter IV includes the review of

literature. Chapter V includesthe management of inventory in ONGC. Chapter VIincludes the management of receivables of ONGC.Chapter VII includes the management of cash. Chapter VIII includes ratio analysis of ONGC. Chapter IX Includes the Summary, findings of study and offers suggestions for the efficient management of working capital and conclusion. Chapter X includes Bibliography and index.