Dejected, ONGC to park its funds with SBI

After fighting the system for over nine months, the $24-billion public sector entity Oil and Natural Gas Corporation (ONGC) has finally given up to the finance ministry?s demand to prefer public sector banks for investing its cash surplus and discontinue the bidding process for investing bulk deposits.

ONGC, the country?s biggest PSU in terms of market cap, profit and net worth, currently has over Rs 23,000 crore in surplus. So far, it has been following the practice of inviting bids from banks (public and private) to place its cash deposits. However, with the finance ministry insisting on discontinuation of the process, ONGC has been forced to park its entire cash surplus with its principal banker SBI.

Under a directive issued in January, the finance ministry had asked all ministries, government departments and CPSEs to place 60% of their surplus funds with public sector banks. The practice of inviting competitive bids has to be discontinued and bulk deposits have to be parked with banks with which the concerned organisation has a regular course of business, it added.

The directive faced strong opposition from the ONGC board. Also, the corporation wrote to the petroleum ministry saying it will lose approximately Rs 400 crore annually on interest revenue if it followed the finance ministry?s directive.

?This is because funds would have to be deposited with PSU banks that would probably pay their prevailing card rates, lower by about 200 bps compared with the rates obtained via competitive bidding,? said a letter written by the ONGC chairman and managing director RS Sharma to the petroleum ministry.

Petroleum ministry officials said the issue raised by ONGC was taken up with the finance ministry. The latter, however, wrote back saying there is no change in the stand as mentioned in the directive.

?Although under the finance ministry?s directive, its is mandatory for CPSEs to place 60% of their cash surplus with the PSU banks but as calling for bids has been discontinued, ONGC cannot park funds with private sector banks as this would make the investment process non-transparent. As a result, starting September 2008, ONGC has started parking its entire cash surplus with SBI,? said a senior ONGC official.

ONGC has informed the petroleum ministry that dispensing with the bidding process might lead to undesirable and unethical practices ?The process of making decisions for investment of short-term surplus funds without inviting competitive bids would lack transparency and is liable to come in conflict with the approach of the Central Vigilance Commission and the comptroller and auditor general,? Sharma had said in his letter to the ministry.

On how this directive will have an adverse impact, ONGC told the ministry that during 2007-08, an average of Rs 17,000 crore remained invested in term deposits (TDRs). The weighted average yield obtained on TDRs through competitive bidding was 9.995% per annum, about 230 basis points above the prevailing SBI card rates (7.699% per annum).

?Thus if in line with the finance ministry?s directive, bidding for investment of short-term surplus funds is discontinued and funds are invested with its sole banker SBI, which probably will give interest at their prevailing card rates, ONGC would suffer a loss of interest income of around Rs 400 crore,? it said.

ONGC also reminded the petroleum ministry that the Joint Parliamentary Committee (JPC) constituted to enquire into the irregularities in securities transactions had adversely commented on some investment decisions made by a section of PSEs. JPC had also desired that government should lay down clear guidelines governing investment of surplus funds by PSEs to avoid recurrence of instances of misuse of funds.

Sharma said the existing investment procedures of ONGC has been evolved over a period of time based on the principles laid down under DPE detailed guidelines issued on December 14, 2004. These guidelines for investment of surplus funds were based on the recommendations of the JPC and the requirement of dispensing with bidding process may be against the recommendations of the JPC, ONGC told the ministry.