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 : MOHD MAZHAR

Registration Number : 421020371

Address of Correspondence : ITO NEW DELHI

Name of Project Guide :

Designation and Address :

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 India’s 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 inter-

relationship 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 firm’s 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 inter-

changeable 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 firm’s

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-à-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 owner’s 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 short-

term 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 today’s business environment: Effective working capital

management is especially important in today’s 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 ratio’s 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.