ONGC says it will lose about Rs 400 crore annually on interest revenue, if it followed this directive and discontinued the practice of inviting bids for bulk deposits.
This is because funds would have to be placed with PSU banks, who would probably pay their prevailing card rates which are lower by about 200 basis points as compared with the rates obtained through competitive bidding, said the ONGC chairman and managing director, RS Sharma in a recent letter to the petroleum ministry.
The finance ministry has directed all ministries, government departments and CPSEs that 60% of their surplus funds will have to be placed with the public sector banks. Further, the practice of inviting competitive bids has to be discontinued and the concerned organizations should place their bulk deposits with banks, with whom they have a regular course of business including public sector banks. In case of ONGC, SBI is its principal banker.
Explaining how this directive will have an adverse financial impact, ONGC said that during 2007-08, an average of Rs 17,000 crore of its funds remained invested in term deposits (TDRs). The weighted average yield obtained on TDRs through competitive bidding, according to ONGC, was 9.995% per annum which was about 230 basis points above the prevailing SBI card rates (7.699% per annum).
Thus if in line with the finance ministrys directive, bidding for investment of short-term surplus funds is discontinued and funds are invested by ONGC with its sole banker SBI, which probably will give interest at their prevailing card rates, ONGC would suffer a loss of interest income amounting to about Rs 400 crore, ONGC said.
ONGC is the countrys biggest PSU in terms of market cap, profit and net worth. Currently, about 86% of ONGCs deposits are with public sector banks and 88% of the total exposure has been allocated to public sector banks. ONGC told the petroleum ministry that the finance ministrys directions on doing away with competitive bidding process, besides having an adverse financial impact on ONGC, will also make the process of investment of short-term surplus funds of the company non-transparent.
Towards this ONGC told 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 said in his letter to the ministry.
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.
The existing procedure that being followed by ONGC for investment is that it works out investible surpluses based on the availability of funds as per he weekly cash forecast. If investible surplus is available for a period of less than seven days, investment is made in UTIL liquid plan and if the surplus is available for seven days or more, investment is made in TDRs/STDRs of banks and deposits with CPSEs through competitive bidding process i.e inviting bids from eligible banks/CPSEs subject to institution wise exposure limits. Funds are invested with the bank quoting the highest rate of interest.