I

A PROJECT REPORT

ON

Funds Management and Risk Management at GAIL (India) Ltd.

For GAIL (India) Ltd.

Submitted to

C K SHAH VIJAPURWALA INSTITUTE OF MANAGEMENT

IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF THE AWARD FOR THE DEGREE

MASTER OF BUSINESS ADMINISTRATION

Under

Gujarat Technological University

UNDER THE GUIDANCE OF

Faculty Guide Company Guide Mrs.Ishita Asara Mrs.Rashmi Das Prof. Finance Manager Finance CKSVIM GAIL (India) Ltd.

Submitted by HEMANSHI SHAH

Enrolment No.: 117050592013 M.B.A- SEMESTER III

C K Shah Vijapurwala Institute of Management

M.B.A PROGRAMME

Affiliated to Gujarat Technological University

Ahmedabad

July 2012

II

PREFACE

Passing the theoretical subjects is not the way to become a manager in

future. “True learning is born out of experience and observation.” The subjects

are the bases for our career from which we can strengthen our knowledge to

apply it in the real world. This project provides the platform to know the

current corporate world situation and the behaviour of its environment. It gives

the opportunity where I can apply the theoretical knowledge in real world and

so that I can be a successful manager in future.

The preparation of a report like this is one such part of the practical studies.

For this purpose I was required to select a particular industry or organisation

and prepare a report through this study. I could successfully get an insight in

various aspects, which are necessary for a student to pursue the MBA course.

It has thoroughly been my pleasure to be a part of GAIL (India) Ltd. and study

the funds and risk management of the company. When there are surplus

funds available in the organization it is always a very prudent decision to

invest these funds elsewhere to earn some returns on them even if the funds

are available for a very short period of time.

III

ACKNOWLEDGEMENT

Every project is the synthesis of knowledge and experience of students and

experts in their related field. However, the guidance and help extended by the

experts to the students with the sole benevolent purpose of intellectual

development generates a feeling of profound respect for them. I hereby take

this opportunity to thank all those who made my training, a knowledge

gathering experience for me.

I am sincerely thankful to the Director of my college, Mr. Rajesh Khajuria, for

giving this great opportunity to actually work on a project, which helped me

enhancing my knowledge for the subject.

I would like to acknowledge my heartfelt thanks to my mentors Mrs. Rashmi

Das, Manager (Finance), GAIL (India) Ltd., Vadodara- RPNHQ and

Mrs Ishita Asara, Faculty of Finance at CKSVIM to whom I owe a great

debt of gratitude for not only guiding me throughout the project, but also

providing valuable suggestions which helped me in better understanding of

the different aspects of the topic and making this project a successful one.

I am also thankful to “GUJARAT TECHNOLOGICAL UNIVERSITY” for

providing me this opportunity to pursue my summer internship project and for

providing me with sufficient help whenever required.

Lastly, I thank all the officers, staff at VADODARA-RPNHQ for their extended

guidance and sharing information with me during my project work.

IV

DECLARATION

I, Hemanshi Shah, hereby declare that the report for “Summer Training

Project” entitled “Funds Management and Risk Management at GAIL (India)

Ltd.” is a result of my own work and my indebtedness to other work

publications, references, if any, have been duly acknowledged.

Place: Vadodara

Date: HEMANSHI SHAH

V

EXECUTIVE SUMMARY

GAIL (India) Limited is a “Navratna” endeavour of Government of India. It is

an integrated energy Company along the natural gas value chain with global

footprints. GAIL sprang up over the years by ramping up a huge network of

natural gas pipelines and a successful foray into various segments like

Petrochemicals, LPG, LPG Transmission, City Gas Distribution, etc. The

company has ambitious capex plans of over Rs.28,641crores from 2012-

2015. When the pipelines are commissioned across 16 states, the gas

transmission capacity would increase from 150 MMSCMD to 300 MMSCMD

which requires huge amount of funds.

The prime objective of this project is that given the large capex requirements

(Rs.28,641 Cr. approx.), to find out the various sources of funds that are

available to GAIL. Finding an optimum resource mix that would be suitable for

GAIL and would help minimize the cost of funding has also been worked out. .

GAIL makes its investment of surplus funds according to the guidelines

specified by DPE (Department of Public Enterprises) and Ministry of Finance.

GAIL for investing its surplus funds considers only term deposits and CLTD as

there is zero risk factor involved in them. Apart from these two, the study

involves a complete analysis on Public Sector Mutual Funds investment as an

option. Investment can be made for less than 7 days which is not possible

with FDs or CLTDs and also returns earned on them are tax-free. I studied

and analyzed the performance of three public sector Mutual Funds- UTI, SBI

and LIC.

Currency market is closely affected by the movement in commodity prices,

crude prices and financial papers. Given the volatilities and uncertainties in

the Global Foreign Exchange markets, GAIL is exposed to substantial risks in

the event of adverse currency movements. Further, the company is also

exposed to interest rate risk on its long term loans and credit risk on its

transmission business. The proposed project outlines the process of

identifying risks faced by GAIL and implementing the process of mitigation

from these risks.

VI

INDEX

SR. NO. PARTICULARS PAGE NO.

PART-I GENERAL INFORMATION

1. ABOUT THE INDUSTRY

1.1 Introduction to the Industry 1

1.2 History of GAIL (India) Ltd. 2

1.3 Indian Market & Global Market 4

1.4 Growth of GAIL (India) Ltd. 6

2. PROFILE OF GAIL (INDIA) LTD.

2.1GAIL’s Vision and Mission 7

2.2 Major Milestones 8

2.3 Major Products and Brands 10

2.4 Subsidiaries and Joint Ventures 13

2.5 SWOT Analysis of GAIL (India) Ltd. 17

2.6 Financial Highlights of GAIL (India) Ltd. 19

PART – II PRIMARY STUDY

3. FUNDS MANAGEMENT

3.1 Literature Review 28

3.2 Objectives of the study 29

3.3 Introduction to Funds Management 30

3.4 Managing Funds through Cash Flow and

Fund Flow

32

3.4.1 GAIL’s Cash Flow Statement 35

3.4.2 Funds Management Process at GAIL 39

3.5 Long-term funding options available with

GAIL (India) Ltd.

41

3.5.1 Market Borrowings 42

3.6 Ministry of Petroleum and Natural Gas

Guidelines

46

3.7 Investment Policy 47

3.7.1 Investment Options for GAIL (India)

Ltd.

49

VII

3.7.2 GAIL Investment Policy Scenario 56

3.7.3 SWOT Analysis of different

Investments

57

3.7.4 Fund Houses 59

4. RISK MANAGEMENT

4.1 Risk Classification 62

4.2 Identification of Forex Risk 66

5. RESEARCH METHODOLOGY

5.1 Research Design 67

5.2 Sources of Data 67

5.3 Data Collection Method 67

6. DATA ANALYSIS AND INTERPRETATION 68

7. RESULTS AND FINDINGS 77

8. LIMITATIONS OF THE STUDY 78

9. CONCLUSION 79

10. ABBREVATIONS 80-81

VIII

LIST OF TABLES

SR.

NO.

PARTICULARS TABLE NO. PAGE NO.

1. Major Balance-sheet Items 1 21

2. Future Outlook of GAIL (India) Ltd. 2 27

3. Major Items of Cash-flow

statement

3 35

4. Investment options open for GAIL 4 49

5. Computation of Investment in

Term Deposits

5 69

6. Calculation of Profit from CLTD 6 69

7. Investment in Mutual Funds of

SBI, UTI and LIC (< 7 Days)

7 70

8. Investment in Mutual Funds of

SBI, UTI and LIC (7 Days)

8 70

9. Investment in Mutual Funds of

SBI, UTI and LIC (1 Month)

9 71

10. Investment in Mutual Funds of

SBI, UTI and LIC (3 Months)

10 71

11. Criteria for Impact of Risk on GAIL 11 72

12. Criteria for assigning of Risk 12 72

13. Risk Scores for the Debtors 13 72

14. Foreign Loan Scenario 14 74

15. Indian Loan Scenario 15 75

16. Optimum Resource Mix (for Loan) 16 78

IX

LIST OF GRAPHS

SR.

NO.

PARTICULARS GRAPH NO. PAGE NO.

1. Revenue Breakup 1 12

2. Shareholding Profile 2 19

3. Breakup of Turnover 3 19

4. Breakup of PBT 4 20

5. Segmental Physical

Performance

5 22

6. Financial Performance 6 23

7. Projected Capex 7 24

8. Projected Capex Funding 8 25

CHAPTER 1

ABOUT THE INDUSTRY

1

1.1 INTRODUCTION TO THE INDUSTRY

The natural gas sector in India is progressively becoming competitive in

nature due to changes in policies and also on the regulatory front across the

entire value chain. Other causative factors are presence of multiple players in

upstream, midstream and downstream segments of the industry and

alignment of customers towards a market determined gas pricing regime. Due

to the changes in pricing policies, fertilizer plants are expected to shift from

other liquid fuels to natural gas. Also natural gas is expected to command a

significant share in retail market in the form of Compressed Natural Gas

(CNG) in automotive sector and piped natural gas in domestic households.

GAIL has played a significant role in economic development of the country in

general and in power and fertilizer sector in particular by development of

natural gas pipeline infrastructure. The gas pipeline infrastructure laid by GAIL

and its efforts in development of gas market besides providing a choice to

customers in the form of an alternative environmental friendly fuel has also

helped in monetization of the gas reserves and reduction in erstwhile flaring of

gas. The natural gas demand in India is at an inflection point and several

forces are at work that could dramatically increase the natural gas demand.

The present sources of natural gas are projected to deplete in the coming

years and therefore, there is a need to look at new sources that are coming

up. GAIL is aggressively pursuing gas sourcing options both from the new

domestic sources as well as through international sources by way of pipelines

and LNG route. Collectively, a rapid rise is expected in demand and re

alignment of sources of gas supply will interact to determine the robust future

gas industry structure.

2

1.2 HISTORY

Gas Authority of India Limited (GAIL) was incorporated on August 16, 1984 as

a public limited company under the Companies Act, 1956. The name of the

company was changed after requisite approval under the Companies Act, to

GAIL (India) limited on November 22, 2002. At the time of incorporation all the

shares were held by the government of India (GOI). Currently government of

India (GOI) holds approximately 57.3449% equity shares as on 30 June,

2012. GAIL is Government of India (GOI) public sector enterprise with net

worth of Rs.18,406crores as on 30 June, 2012 based on limited review. GAIL

was established to lay an onshore pipeline from Hazira on the west coast to

supply natural gas to facilitate in the states of Gujarat, Madhya Pradesh and

Uttar Pradesh. Construction work on this pipeline began in 1986 and Gail

executed and commissioned the 1700kms Hazira-Vijaipur-Jagdishpur (HVJ)

gas pipeline system (the longest in India) in 1987-88 and its first project.

Subsequently extensions and spur lines have been added and the HVJ

pipeline is currently over 2300 km in length. The total length of the pipeline

network including regional pipeline is over 7850 km.

GAIL commissioned the 2,800 km Hazira-Vijaipur-Jagdishpur (HVJ)

pipeline in 1991. During 1991-93, three liquefied petroleum gas (LPG) plants

were constructed and some regional pipelines acquired, enabling GAIL to

begin its gas transportation in various parts of India.

GAIL began its city gas distribution in New Delhi in 1997 by setting up

nine compressed natural gas (CNG) stations.

In 1999, GAIL set up northern India's only petrochemical plant at Pata. GAIL

became the first Infrastructure Provider Category II Licensee and signed the

country's first Service Level Agreement for leasing bandwidth in the Delhi-

Vijaipur sector in 2001, through its telecom business GAILTEL. In 2001, GAIL

commissioned world's longest and India's first Cross Country LPG

Transmission Pipeline from Jamnagar to Loni.In order to secure Gas for its

3

mainstream business Exploration and Production department was created.

Today GAIL is a partner in the Dawoo-OVL led consortium in two offshore

block in Myanmar which has made a gas discovery. Bulk of its blocks are

located in India in the prolific basins of Cambay, Assam-Arakan, Mahanadi,

Krishna Godavary Deep water and onland, Cauvery onland and deep water

and western offshore. It is actively scouting for foreign blocks both exploratory

or discovery.

GAIL today has reached new milestones with its strategic diversification into

Petrochemicals, Telecom and Liquid Hydrocarbons besides gas

infrastructure. The company has also extended its presence in Power,

Liquefied Natural Gas re-gasification, City Gas Distribution and Exploration &

Production through participation in equity and joint ventures. Incorporating the

new-found energy into its corporate identity, Gas Authority of India was

renamed GAIL (India) Limited on November 22, 2002.

GAIL (India) Limited has shown organic growth in gas transmission through

the years by building large network of trunk pipelines covering length of

around 11,000 km. Leveraging on the core competencies, GAIL played a key

role as gas market developer in India for decades catering to major industrial

sectors like power, fertilizers, and city gas distribution. Currently GAIL

transmits more than 160 MMSCMD of gas through its dedicated pipelines and

have more than 70% market share in both gas transmission and marketing.

The 218-kilometre-long Chainsa-Sultanpur-Neemrana pipeline became

operational in April 2011. GAIL is currently implementing pipeline projects to

lay additional 6,900 km of pipelines.

4

1.3 INDIAN MARKET

GAIL, after having started as a natural gas transmission company during the

late eighties, has grown organically by building large network of Natural Gas

Pipelines covering over 9500 Km with a capacity of around 172 MMSCMD;

two LPG Pipelines covering 2040 Km with a capacity of 3.3 MMTPA of LPG;

seven gas processing plants for production of LPG and other Liquid

Hydrocarbons, with a production capacity of 1.4 MMTPA; and a gas based

integrated Petrochemical plant of 410,000 TPA polymer capacity which is

further being expanded to a capacity of 900,000 TPA. The Company also has

70% equity share in Brahmaputra Cracker and Polymer Limited (BCPL) which

is setting up a 280,000 TPA polymer plant in Assam. Further, GAIL is a co-

promoter with 17% equity stake in ONGC Petro-additions Limited (OPaL)

which is implementing a green field petrochemical complex of 1.1 MMTPA

Ethylene capacity at Dahej in the State of Gujarat. GAIL has 31.52% stake

along with NTPC as equal partner in JV company, RGPPL at Dabhol which

operates largest gas based power generation facility in the country and is also

setting up 5 MMTPA LNG terminal.

Keeping in mind the requirement of growth and consolidation as well as

opportunities arising out of New Exploration Licensing Policy (NELP) of

Government of India, the company has moved into upstream of gas value

chain i.e. Exploration & Production and currently has stakes in 31 E&P blocks

including 2 blocks overseas (in Myanmar).

GAIL is a pioneer in City Gas Distribution (CGD) business in India, with

Indraprastha Gas Limited (IGL) in Delhi and Mahanagar Gas Limited (MGL) in

Mumbai being its biggest success stories. Besides IGL and MGL, GAIL has

set up several JVs for CGD to supply gas to households, transport sector &

commercial consumers in various cities including Hyderabad, Agartala,

Kanpur, Indore, Vadodara, Lucknow, Agra and Pune. In 2008, GAIL

incorporated a wholly owned subsidiary, GAIL Gas Ltd (GGL) to exclusively

focus on city gas distribution business. GGL has been authorized for

5

implementation of CGD projects in four cities namely Kota, Dewas, Sonepat&

Meerut in the 1st round of bidding by Petroleum & Natural Gas Regulatory

Board (PNGRB).

As a part of its initiative towards reducing carbon footprint and creating a path

of sustainable growth, GAIL is building a portfolio of renewable businesses.

GLOBAL MARKET

As a strategy of going global and further expanding global footprint, GAIL has

formed a wholly-owned subsidiary company, GAIL Global (Singapore) Pte

Ltd. in Singapore for pursuing overseas business opportunities including LNG

& petrochemical trading. GAIL has also established a wholly owned

subsidiary, GAIL Global (USA) Inc. in Texas, USA. The US subsidiary has

acquired 20% working interest in an unincorporated joint venture with Carrizo

Oil & Gas Inc in the Eagle Ford shale acreage in the state of Texas. In

addition to having two wholly owned subsidiaries in Singapore & USA, GAIL

has a representative office in Cairo, Egypt to pursue business opportunities in

Africa and Middle East.

GAIL is also an equity partner in two retail gas companies in Egypt, namely

Fayum Gas Company (FGC) and National Gas Company (Natgas). Besides,

GAIL is an equity partner in a retail gas company involved in city gas and

CNG business in China – China Gas Holdings Limited (China Gas). Further,

GAIL and China Gas have formed an equally owned joint venture company –

GAIL China Gas Global Energy Holdings Limited for pursuing gas sector

opportunities primarily in China.

GAIL is a part of consortium in two offshore E&P blocks in Myanmar and also

holds participating interest in the joint venture company – South East Asia

Gas Pipeline Company Limited incorporated for transportation of gas to be

produced from two blocks in Myanmar to China.

6

1.4 GROWTH OF GAIL (INDIA) LTD.

QUICK FACTS ABOUT GAIL

About 3/4th of the Total Natural Gas Transmitted though pipelines in India

More than 1/2 of the natural gas sold in India

Almost 1/5th (21%) of Poly-ethelene produced in country

LPG produced for every 10th LPG cylinder in the country

Pipeline Transmission of around 1/4th of country’s total LPG

Gas Supply for about 1/2 of the country’s Fertilizer produced

Gas Supply for about 1/2 of the country’s gas based power generation

Operating more than 2/3rd of country’s CNG stations

More than 1/2 of country’s piped natural gas supply 16%+ 10 year Turnover CAGR 12%+ 10 year PAT CAGR 3900+ Manpower Asset

CHAPTER 2 PROFILE OF GAIL (INDIA) LTD.

7

2.1 GAIL’s VISION AND MISSION

VISION

Be the leading company in natural gas and beyond with global focus,

committed to customer care, value creation for all the stakeholders and

environment responsibility.

MISSION

To accelerate and optimize the effective and economic use of Natural Gas

and its fractions to the benefit of the national economy.

PROFILE

GAIL is one of the largest LPG producers in India with a liquid hydrocarbon

production exceeding 1 million metric tonnes per annum and it operates the

country’s largest gas based LPG extraction plant at Vijaipur. Further, GAIL

has established north India’s only gas based integrated petrochemicals plant

at Pata, Uttar Pradesh with a capacity of producing 4,10,000 TPA of polymers

i.e. HDPE/LLDPE. Expansion of the polymer capacity of the petrochemicals

complex from 4,10,000 TPA to 8,00,000 TPA is under progress. In addition to

marketing and distribution of gas through Trunk and Regional Transmission

Systems, GAIL has formed wholly owned subsidiary company namely GAIL

Gas Ltd. for gas supplies to household, commercial users and for the

transport sector in various cities. GAIL is an equity participant in E&P Blocks

and 1 CBM blocks as a consortium partner with national and international oil

and gas majors. Crude oil production is in progress in Cambay Basin on land

block GAIL is also operator of 2 on land lock.

8

2.2 MAJOR MILESTONES OF GAIL

1984 – Birth of GAIL

1987 – HVJ pipeline commissioned

1989 – First year of profits

1990 – LPG plant at Vijaipur commissioned

1992 – Gas marketing functions transferred to GAIL

1994 – Mahanagar Gas Limited incorporated

1996 – Listing at NSE, BSE, DSE

1997 – Navratna status

1998 – Indraprastha Gas Limited incorporated

9

1999 – Petrochemical plant at Pata commissioned

2000 – 2 blocks awarded underNew Exploration Licensing Policy (NELP-I)

2001 - Jamnagar – Loni LPG pipeline; LPG plant at Gandhar commissioned

2003 - Discovery of oil and gas in the Cambay block

2004 – Dahej – Vijaipur pipeline commisioned

2007 – MOPNG authorisation for 5 new pipelines received

2007-08 – Dahej – Panvel – Dabholpipline commissioned

2009 – GAIL Gas Limited incorporated; DUPL & DPPL pipelines completed

2010 – DVPL/GREP II compressors 6th furnace

2011- Office of GAIL Global (Singapore) Pte Ltd. opened in Singapore

2012- GSPA signed between GAIL and TurkrnenGaz for Turkmenistan –

Afghanistan- Pakistan- India (TAPI) Gas Pipeline Project

10

2.3 MAJOR PRODUCTS AND BRANDS

GAIL has interests in the business of Natural gas, LPG, Liquid hydrocarbons

and petrochemicals, exploration & production, city gas distribution and offers

a wide range of value added products i.e. Naptha, Pentane, Propane, SBP

and various petrochemical products to maximize the economic value in India.

In the process of transmission, GAIL extracts certain fractions from the gas

(primarily, C2/C3 for petrochemicals and C3,C4 for LPG) for conversion to

more profitable, value added products are less regulated therefore GAIL is

producing value added products by processing the gas at its LPG and

petrochemical plants and generating profit by selling these value added

products in the domestic market which is not regulated.

NATURAL GAS

Major focus of the company is to maintain its dominant position in the gas

business, especially the transmission segment and continue the relationship

with existing customers and also to add more customers. Therefore the

company plans to build about 7500 km of pipeline to transport and supply

natural gas to various customers in power, fertilizer, refinery, CGD projects

etc.

Sector Natural gas is used

� Generation of electricity by

utilities

As fuel for base load power plants in combined cycle/co-generation power plants.

� Fertilizer Industry As feed stock in the production of ammonia and urea.

� Industrial As an under boiler fuel for raising steam as fuel in furnaces and heating applications.

� Domestic and commercial For heating of spaces and water for

cooking.

� Automotive As a non-polluting fuel.

� Petrochemicals As a raw material from which a variety of chemical products are derived.

11

Natural gas comes in 4 basic forms:-

• Liquefied natural gas (LNG)

• Regasified liquefied natural gas (RLNG)

• Compressed natural gas(CNG)

• Piped natural gas (PNG)

NATURAL GAS PIPELINE PROJECTS

GAIL is executing various pipeline projects for about 7500 km of pipeline

passing through 15 states. GAIL is the first company in India to own and

operate pipelines for LPG transmission. It has 1900 km LPG pipeline network,

1300 km of which connects the western and northern parts of India and 600

km of networks is in the southern part of the country connects eastern coast.

The LPG transmission system has a capacity to transport 3.8 MMTPA of LPG.

LPG & LIQUID HYDROCARBONS

GAIL produces million tonnes of LPG. Its 1922 km LPG transmission Pipeline

connects the western, northern and southern part of India and has capacity to

transport 3.8 million metric tonnes per annum (MMTPA)

PETROCHEMICALS

GAIL Produces ethylene with a capacity of 310000 TPA and Polymers (HDPE

& LLDPE) with a capacity of 300000 TPA. GAIL sells HDPE & LLDPE under

the brand name G-lex and G-lene.

12

POWER

GAIL has a joint venture with Gujarat State Petroleum Corporation- Gujarat

state energy generation, where it has installed capacity of 156 MW. GAIL has

also a joint venture with NTPC, Indian Financial Institutions (IFIS) and MSEB

Holding Company Ratnagiri Gas and Power (RGPPL) which has power

generation capacity of 2150 MW.

GAILTEL

GAIL has optic fibre network extending over 13000 km across 200 cities. It

leases SCADA, ERP AND ISP services to telecom operators including Hutch,

Tata communications, Airtel, Idea cellular, Reliance communications and

Tata.

EXPLORATION & PRODUCTION [E&P]

GAIL has a total of 27 exploration blocks in basins such as Mahanadi,

Mumbai, Cambay, Assam- Akaran, Tripura Fold Belt and Cauvery.

GRAPH NO.1

REVENUE BREAK-UP AS ON 30 JUNE 2012

(Source: http://gail.online.com)

73.17%

0.25%

13.43%

13.10%

Natural Gas Trading

Gail-Tel

Petro-Chemicals

LPG & Liquid Hydrocarbons

13

The pie-chart for revenue breakup of GAIL (India) Ltd. as on 30th June 2012

indicates that the maximum revenue comes from the Natural Gas

transmission business, i.e. 73.17%. The petro-chemicals business comprises

the revenue of 13.43% of total revenue. The LPG and Liquid Hydrocarbons

business revenue comprises of 13.10% and only 0.25% of the total revenue

comes from GAIL’s telecom business.

14

2.4 SUBSIDIARIES AND JOINT VENTURES

SUBSIDIARIES

GAIL has formed Subsidiaries and Joint Venture companies for City Gas

Distribution and Petrochemicals. GAIL is one of the pioneers to introduce City

Gas Projects in India for gas supplies to households, commercial users and

for the transport sector by forming Subsidiaries/ Joint Venture Companies.

GAIL presently has 3 subsidiaries i.e. GAIL Global (Singapore) Pvt Ltd,

(GGSPL), GAIL Gas Ltd. (GGL) and Brahmaputra Cracker & Polymer Ltd.

(BCPL).

Brahmaputra Cracker and Polymer Limited (BCPL)

GAIL has 70% equity share in BCPL, a subsidiary, with Oil India Limited

(OIL), Numaligarh Refinery Limited (NRL), Govt. of Assam, each having 10%

equity share. Feedstock Supply Agreements have been signed between

BCPL and all the three suppliers, viz., Oil and Natural Gas Corporation

Limited, Oil India Limited and Numaligarh Refinery Limited. Technology

license agreements have been signed for cracker, polyethylene and

polypropylene units.

Entire land for the project has been acquired by BCPL. Civil & structural works

for the main process units, namely, Ethylene cracker unit, Polyethylene unit

(HDPE/LLDPE), Polypropylene unit, C2+ extraction unit, Gas de-hydration

unit and Gas sweetening unit of BCPL have commenced. Contract has been

awarded for captive power plant for Lepetkata& gas turbine driven

compressor for Duliajan station.

BCPL is setting up a 2,80,000 TPA polymer plant at an investment of

Rs.5,460 crores. Financial commitment to the extent of Rs.3,000crores has

been made and project execution is in progress.

15

GAIL Gas Limited

GAIL Gas is a wholly owned subsidiary of GAIL. GAIL Gas has been selected

for implementation of City Gas Distribution (CGD) projects in four cities,

namely, Kota, Dewas, Sonepat& Meerut in the 1st round of bidding by

Petroleum & Natural Gas Regulatory Board (PNGRB). GAIL Gas has already

started supply of CNG & PNG (Industrial Customers) in the city of Dewas from

December, 2009. Steel Pipeline laying work is in progress in the cities of

Meerut, Sonepat& Kota. The gas supplies will commence shortly in these

cities. The total approved investment in all these cities is approx. Rs.435

crores in phase-I.

GAIL Global (Singapore) Pte Limited

GAIL has a wholly owned subsidiary, namely, GAIL

Global (Singapore) Pte Ltd., to manage investments abroad. GAIL is looking

for further business opportunities through this subsidiary company.

JOINT VENTURES

Avantika Gas limited

A Joint Venture comapany of GAIL (India) Limited and

Hindustan Petroleum Corporation Limited (HPCL)

Bhagyanagar Gas Limited(BGL)

GAIL has 22.5% stake in the Company along with HPCL as equal partner.

Central U.P Gas Limited (CUGL)

GAIL has 22.5% stake in the Company along with BPCL as equal partner.

Green Gas Limited (GGL)

GAIL has 22.5% stake in the Company along with IOCL as equal partner.

16

Indraprastha Gas Limited (IGL)

GAIL has 22.5% stake in the Company along with BPCL

as equal partner.

Mahanagar Gas Limited (MGL)

GAIL has 49.75% stake in the Company along with British Gas as equal partner.

Maharashtra Natural Gas Limited (MNGL)

GAIL has 22.5% stake in the Company along with BPCL as equal partner.

ONGC Petro-additions Limited (OPal)

A Joint Venture of GAIL with Oil and Natural Gas Corporation Ltd. and Gujarat State Petroleum Corporation Ltd.

Petronet LNG Limited (PLL)

GAIL has 12.5% equity stake in PLL, along with BPCL, ONGC and IOCL as equal partners.

Ratnagiri Gas and Power Private Limited (RGPPL)

GAIL has 32.88% stake in the Company along with

NTPC as equal partner.

Tripura Natural Gas Company Limited (TNGCL)

GAIL has 29% stake in the Company.

GAIL China Gas Global Energy Holdings Limited

GAIL has 50% equity interest in the company along with China Gas as equal partner.

17

2.5 SWOT ANALYSIS OF GAIL (INDIA) LTD.

Strengths a. GAIL is a state owned company. So it presents GAIL with all the

support it needs directly from the government to lay from the

government to lay its distribution network and grow its capacity by

transmitting various products across the country.

b. GAIL has a strong Infrastructure which consists of pipelines and

various offices inIndia. This increases its capacity to serve more people

and also improves its efficiency as it can supply different products

across to users in less time through the pipelines.

c. As GAIL has much a wide distribution network of pipelines across the

country, it leaves its competitors with little choice. It makes the Industry

hard for the competitor to enter making, better service to customers,

better vendor management, seamless and faster information sharing

quick response time better and faster communication.

Weaknesses

a. GAIL does not have a gas supply of its own. It takes gas from ONGC &

OIL. So in future it can face hard times, if GAIL doesn’t find out secured

supply lines of Natural gas soon. So, though GAIL is secure today,

unless it beefs up its gas supplies at good prices, it could lose some

competitive advantage to Reliance in the coming years.

b. Since it is a state owned company, it has to follow certain guidelines

laid by the state or the government. The prices of the gas are fixed &

GAIL has to sell the gas at that fixed price.

Opportunities

a. Market is expected to grow at a very fast rate with economy growth.

b. Stringent environmental policy could further enhance the growth.

c. There is a good opportunity coming up in City Gas Distribution Sector.

d. Relaxation of govt. regulation would give a big chance of making good

profits.

18

Threats

a. There is a major threat of shortage of long term sustainable supplies of

natural gas.

b. Threat of high competitive rivalry is there with big players like reliance

going intodownward integration.

c. Threat of substitute alternate sources of energy is there but it is not

very high in short run.

19

2.6 FINANCIAL HIGHLIGHTS OF GAIL (INDIA) LTD.

GRAPH NO. 2

SHAREHOLDING PROFILE

Source:(http://gail.online.com)

GRAPH NO. 3

BREAKUP OF TURNOVER FOR FY 2012

SOURCE: (http://gail.online.com)

From the pie chart given on the previous graph (no.3), it can be inferred that

the maximum turnover for GAIL(India) Ltd. comes from trading of Natural Gas

20

with 74% (i.e. Rs.29808 crores) and the minimum is from LPG transmission

with turnover of 1%(i.e. Rs.402.81 crores). So the company should go for

increased sale of Natural Gas and plan for its expansion.

GRAPH NO. 4

BREAKUP OF PBT FOR FY 2012

SOURCE: (http://gail.online.com)

The above Pie chart shows that 38% PBT (i.e. Rs.2029 Crores) is from

Natural Gas Transmission business. This is so, because there is huge

turnover of Natural Gas Transmission.

21

TABLE NO.1

MAJOR BALANCE-SHEET ITEMS

SOURCE: (http://gail.online.com)

The above table highlights the major balance sheet items of GAIL (India) Ltd.

for the years 2010-11 and 2011-12. It shows that there is an increase in every

item.

• The net worth has increased to Rs.21,449 Cr. In FY 2011-12 from

Rs.19,054 Cr. in FY 2010-11. Thus, there is an increase by of

approx.13%.

• The gross block is increased from Rs.22,144 Cr. in FY 2010-11 to

Rs.26,307 Cr. in FY 2011-12.

• Hence, there is an increase of approx. 19%.

• The Capital Employed has been increased by 24%.

• The company’s outstanding Loan has also registered an increase by

Rs.3037 Cr.

• Debt-Equity ratio has been increased in FY 2011-12 and it is 0.25:1.

22

GRAPH NO.5

SEGMENTAL PHYSICAL PERFORMANCE FY 2011-’12 (SALES)

SOURCE: (http://gail.online.com)

The Bar graph of segmental Physical Performance shows the

following data:

� For Gas Transmission, it shows a bit decrease, i.e. from Rs.117.91

Crores in FY 2010-11 to Rs.117.62 Crores in FY 2011-12.

� The Gas Trading, LPG Transmission, Petrochemicals, Oil and Liquid

Hydrocarbons show an increase as compared to the previous year.

23

GRAPH NO.6

FINANCIAL PERFORMANCE FOR FY 2011-12

SOURCE: (http://gail.online.com)

The above graph shows an incremental trend in the financial performance of

GAIL (India) Ltd. for the FY 2011-12 as compared to FY 2010-11.

� It becomes clear from the graph that the annual sales have increased

by 24% from the previous year (i.e. from Rs.32,459 Crores in FY 2010-

11 to Rs.40,281 Crores in FY 2011-2012)

� The Gross margin (PBDIT) has also been increased from Rs.5973

Crores in FY 2010-11 to Rs.6247 Crores in FY 201-12 (i.e. 5%

increase).

� Likewise, PBT and PAT of the company also shows an increase of 2

and 3% respectively from the previous year.

24

GRAPH NO.7

PROJECTED CAPEX FROM 2012-13 TO 2014-15

SOURCE: (http://gail.online.com)

The percentage Bar graph given above shows the following:

� The planned Capex of GAIL (India) Ltd. for 2012-13 is Rs.7,354 Cr.

and in that the highest is on the petrochemicals business, next to that

is the capex on pipeline and minimum capex in Exploration and

production.

� In the year 2013-14, the total planned capex is Rs.7,260 Cr. which

comprises of maximum on petrochemicals business and minimum on

Exploration and production.

25

� For the year 2014-15, the planned capex is of Rs.3,772 Cr. which

comprises of maximum part in gas pipelines and small part of capex on

petrochemicals, E&P and others.

� Overall, the planned capex for coming three years comprises of 8% in

E&P, 16% in Petrochemicals, 36% in pipelines and 40% on others.

GRAPH NO.8

PROJECTED CAPEX FUNDING

SOURCE: (http://gail.online.com)

The percentage bar diagram mentioned above gives the following

interpretation about the planned borrowings of GAIL India Ltd.:

� In the FY 2012-13, the planned borrowings are of Rs.4500 Cr. and in

FY 2013-14, the borrowings of Rs.3600 Cr. is planned.

26

� The borrowings will comprise of 46% from ECA/ECB, 25% from OIDB,

18% from Bonds and

11% from Term Loan. This way, GAIL (India) Ltd. will borrow Rs.8100

Cr. in the coming two Financial Years.

27

TABLE NO.2

FUTURE OUTLOOK OF GAIL (INDIA) LTD.

SOURCE: (http://gail.online.com)

CHAPTER 3 FUNDS MANAGEMENT

28

3.1 LITERATURE REVIEW

Since my project deals with managing the funds and risk of GAIL (India) Ltd.,

most of the literature review consists of annual reports and website of the

company (gailonline.com) where they have mentioned the existing risks of the

company. Reading the reports and going through the website gave me the

direction in which the solution for the policy framework of GAIL (India) Ltd. to

be done.

The Sales and Purchases data of Gail (India) Ltd., Vadodara-RPNHQ for the

quarters of 2010 and 2011 are taken from the official of the RPNHQ and the

availability of funds is computed from that. The Debtor’s report as on 31st

March 2012 is also referred to compute the probability and Impact of Credit

Risk. The Foreign Loan and India Loan scenario has been compared and the

recommendations are given for the same.

Most of my work is quoted from the information I got from the RPNHQ office

of GAIL (India) Ltd. which gave me great insights for my project.

I have also gone through websites of Department of Public Enterprises,

Ministry of Petroleum and Natural Gas and Association of Mutual Funds of

India for better understanding of the same.

29

3.2 OBJECTIVES OF THE STUDY

• To compute the surplus funds available with GAIL.

• To identify the various sources of finance that are available to GAIL

(India) ltd and analyze these sources in terms of cost, structure, legal

and procedural aspects.

• To manage surplus funds of GAIL in cost effective manner with the

possibility of increasing returns and identifying various ways to optimize

these sources (options) available.

• To determine the risk involved in the different investment options.

• To analyse the returns from the various investment options available to

GAIL.

• To decide on an optimum resource mix to reduce the overall cost of

funding by identifying the types of risk & tools to be used for Risk

Mitigation.

• To identify the risks to which the company is exposed to, due to the

nature of business activity and decide on the process of management

of these risks.

30

3.3 INTRODUCTION TO FUNDS MANAGEMENT

THE CONCEPT OF FUNDS At one extreme the word funds is synonymous with cash so that a funds

statement is nothing but an enumeration of the net effects of various kinds of

business events on the cash. On the other extreme is the view that funds refer

to economic values expressed in money measurements which are subject to

firm’s jurisdiction. This is known as all financial resources concept of funds. In

between the two extreme views on the concept of funds, the most acceptable

view is the one relating to “Net working capital”. There are two concepts of

working capital, namely, gross concept and net concept. Gross working

capital refers to the firm’s investment in current assets, while the term net

working capital means excess of current assets over current liabilities. The

fund’s manager ensures that he maturity schedules of the deposits coincide

with the demand for loans. A fund manager must also pay close attention to

cost and risk in order to really capitalize on the cash flow opportunities. Funds

management can also refer to the management of fund assets.

The task of funds management is to-

� Safeguard the estimated values for revenue and expenditures recorded

in financial budget.

� Identify impending shortage of funds or funds surplus.

� Control payments in right of profitability and liquidity.

Features: Funds management enables to keep a precise check on:

� Revenues and expenditures of funds relevant transactions in a

business.

� The budget with following questions in mind:

� What funds will the responsibility areas to receive?

� Where do the funds come from (sources of funds)?

� What are the funds used for (uses of funds)?

31

� The financial equilibrium of a business by comparing commitment and

actual balance with thecurrent budget.

RAISING OF FUNDS

The traditional approach simply meant to raise of funds. It was during the

major events such as promotion, re-organization, expansion or diversification

in the form that the finance manager was called upon to raise funds. Raising

of funds is to see that the firm has enough funds or cash to meet its

obligations. It includes instruments, institutions and practices through which

funds are obtained.

ALLOCATION OF FUNDS The central issue of financial policy is the wise use of funds and the central

process involved is a rational matching of advantages of potential uses

against the cost of alternative potential sources so as to achieve the broad

financial goals which an enterprise sets for itself. Thus, there is a need to

emphasize on three main decisions:

o Investment (short and long term) decision.

o Financing decision.

o Dividend decision.

SOURCES OF FUNDS

Sourcing money may be done for a variety of reasons. Traditional areas of

need may be for capital asset requirement, new machinery or the construction

of a new building or depot. Normally, such developments we financed

internally, whereas capital for the acquisition of machinery may come from

external sources.

Types of funds:

There are two types of funds that a firm can raise:

� Equity funds

� Borrowed funds

32

3.4 MANAGING FUNDS THROUGH CASH FLOW AND

FUND FLOW

A. CASH FLOW

• Cash flow is the movement of cash in or out of business, project or

financial product. Here cash is used in broader sense of the term,

where it includes bank deposits. It is the cycle of cash inflows and

outflows that determine the solvency position of a business.

• It is usually measured during a specified, finite period of time.

USES OF CASH FLOW

� To determine a project’s rate of return or value. The time of cash flows in

and out of projects are used as inputs in financial models such as Internal

Rate of Return and Net Present value.

� To determine problems with a business’s liquidity being profitable does not

mean being liquid. A company can fail because of shortage of cash even

while profitable.

� As an alternative measure of business’s profits when it is believed that

accrual accounting concepts do not represent economic realities.

� Cash flow can be used to evaluate the quality of income generated by

accrual accounting. When net income is composed of large non-cash

items it is considered liquidity.

� To evaluate the risks within a financial product, e.g. matching cash

requirements, evaluating default risk, reinvestment requirements etc.

STATEMENT OF CASH FLOW IN GAIL’S FINANCIALS The (total ) net cash flow of GAIL over a period ( typically a quarter or a full

year ) is equal to the change in cash balance over this period : Positive, if the

cash balance increases ( more cash becomes available ), Negative if cash

balance decreases.

The total net cash flow is a sum of cash flows that are classified in 3 areas:

33

a) Operational cash flows

Cash received or expended as a result of the company’s internal business

activities. It includes cash earnings plus changes to working capital over the

medium term (this must be net positive if the company is to remain solvent).

b) Investment cash flows

Cash received from the sale of long-life assets, or spent on capital

expenditure (Investments, Acquisitions or Long-life assets).

c) Financing cash flows

Cash received from the issue of debt and equity, or paid out as dividends,

share repurchases or debt repayments.

CASH FLOW MANAGEMENT

1. For cash flow management, there arises the need to perform cash flow

analysis on a regular basis and use cash flow forecasting in order to take the

steps necessary to head off cash flow problems.

2. The second step of cash flow management is to develop & use strategies

that will maintain an adequate cash flow for a business.

3. One of the most important strategies to manage cash flows is to shorten

the cash flow conversion period, so that a business can bring in money faster.

STEPS TO SHORTEN CASH FLOW CONVERSION PERIOD

I. Preparing customer invoices immediately upon delivery of your goods

or services to the customer. If you wait to prepare your invoices at the

end of the month, for example, you may be adding as many as 30 extra

days to your cash flow conversion period.

II. Monitoring your customers' use of credit and adjusting their credit limits

accordingly.

III. Offering customers a discount for paying their invoices early. For

instance, if your policy is to have payments due in 30 days, offer a

small discount such as 2 % to customers who pay within 14 days.

34

IV. Establishing a deposit policy for work in progress. For example, if you

deliver a service, such as software development, home repair, or

landscaping, you can adopt a policy that customers pay a certain

percentage of the total invoice up front before the job begins.

V. Tracking the past-due accounts and actively pursuing collections. Most

accounting software programs let you easily track past-due accounts,

but you also need to have a clear process for pursuing collections.

VI. Such a process might involve sending out a series of letters letting your

customer know that his or her account is past due and what steps will

follow if he or she does not pay, such as turning the account over to a

collection agency.

35

3.4.1 CASH FLOW STATEMENT OF GAIL (INDIA) LTD.

TABLE NO. 3

MAJOR ITEMS OF CASH FLOW STATEMENT

(Rs. in crores)

Particulars Mar'11 Mar'10 Mar'09 Mar'08 Mar'07

Profit Before Tax 5,239.99 4,578.47 4,204.02 3,855.00 2,859.78

% Change in PBT 183.23 160.10 147 134.81 100

Net Cash Flows from Operating Activity

3,077.25 4,677.43 2,577.88 3,412.15 1,484.43

% Change in Operating Activity 207.30 315.10 173.66 229.86 100

Net Cash Used in Investing Activity

-4,729.49 -3,416.21 -2,252.15 -852.30 -1,668.82

% Change in Investing Activity 283.40 204.71 134.95 51.07* 100

Net Cash Used in Financing Activity

-387.92 -545.86 -1,342.57 -747.27 -1,651.16

% Change in Financing Activity 23.49* 33.05* 81.31* 45.26* 100

Net Increase/Decrease in Cash and Cash Equivalent

-2,040.16 715.36 -1,016.84 1,812.58 -1,835.55

Cash and Cash Equivalent - Beginning of the Year

4,171.51 3,456.15 4,472.99 2,660.41 4,495.94

% Change in Cash and Cash Equivalent - Beginning of the Year

92.78* 76.87* 99.49* 59.17* 100

Cash and Equivalent - End of the Year

2,131.35 4,171.51 3,456.15 4,472.99 2,660.39

% Change in Cash and Cash Equivalent - End of the Year

80.11* 156.80 129.91 168.13 100

* indicates decrease in percentage

Source: (http://moneycontrol.com)

36

B. FUND FLOW

A fund flow statement is a valuable aid to financial manager or a creditor in

evaluating the uses of funds by a firm and in determining how these uses are

financed. Such a statement provides an efficient method for the financial

manager to access the growth of the firms and its resulting financial needs

and to determine the best ways of financing those needs. In the nutshell,

funds statements are very useful in planning intermediate and long term

financing. It is an important tool of working capital analysis also.

MEANING OF FLOW OF FUND

The term “flow” means change and the term “flow of funds” means change

in funds or change in working capital. In other word any increase or

decrease in working capital means “fund flow”.Viewed from the angle of

working capital concept of funds, the flow of funds refers to movement of

funds involving “inflow” and “outflow” in the working capital area. This

happens when changes occur in Non-current accounts such as fixed assets,

share capital, long term debts etc. and are offset by corresponding changes in

current account such as current asset or current liabilities and vice versa.

FUND FLOW STATEMENT Fund flow statement is a technical device designed to highlight the changes in

the financial position of the business enterprise between two balance sheets.

Fund statement depicts the source from where additional funds during the

current year as compared to the previous year have been received and to

what uses these funds have been applied.

Various titles are used for the fund flow statement. They include the following:

1. Statement of sources and application

2. Statement of changes in financial position

3. Statement of sources and uses of fund

4. Where got and where gone statement

37

OBJECTIVES OR USES OF THE FUND FLOW STATEMENT

Fund flow statement is an important tool in the armoury of the Finance

manager. It helps in the planning, deployment and controlling of funds year

after year. The following are the benefits or uses of fund flow:

• To help to understand the changes in assets and asset sources which are

not readily evident in the Income statement or Financial statement.

• It provides a detailed analysis and understanding of changes in the

distribution of financial resources between two balance sheet dates.

• It shows how the funds were obtained and used during a period.

• The sources from which funds were obtained are useful in computation of

cost of capital of the business.

• It gives indication of any weakness or strength in the general financial

position of a firm.

• It throws light on the financial consequences of business operations.

• It can be compared with the relevant budgets to assess the usage of funds

as per plans.

• Working capital and the causes for changes in working capital are

highlighted. This can help in the formulation of sound policy for liquidity

and short term solvency of the firm.

LIMITATIONS OF FUNDS FLOW STATEMENT

The funds flow statement has a number of uses, however, it has certain

limitations also, and they are:

• It should be remembered that a funds flow statement is not a substitute of

an income statement or a balance sheet. It provides only some additional

information as regards changes in working capital.

• It cannot reveal continuous changes.

• It is not an original statement but simply are arrangement of data given in

the financial statements.

• It is essentially historic in nature and projected fund flow statement cannot

be prepared with much accuracy.

• Changes in cash are more important and relevant for financial

management than the working capital.

38

MODERN TECHNIQUES OF PREPARING FUND FLOW STATEMENT

The document needed for constructing a fund flow statement are the

comparative balance sheets at the beginning and at the end of the period for

which it is prepared. The effect of conduct of the business is reflected in its

balance sheets by increase or decrease in the various assets and liabilities

and in the proprietary equity or capital.

The fund flow statement involves the preparation of two statements. They

are as follows:

1. Schedule of change in working capital, and

2. Statement of source and application of funds.

1. SCHEDULE OF CHANGES IN WORKING CAPITAL

The first part of the fund flow analysis is the schedule of changes in working

capital. It is prepared in order to measure the increase or decrease in the

working capital over a period of time. This schedule is prepared with the help

of only current asset and current liabilities. The difference is recorded for each

individual current asset and current liability.

� An increase in current assets increases working capital.

� A decrease in current assets decrease working capital.

� An increase in current liabilities decrease working capital.

� A decrease in current liabilities increases working capital.

2. STATEMENT OF SOURCES AND APPLICATION OF FUNDS

This is the second important part of fund flow analysis. It is also known as

fund flow statement. It is prepared on the basis of the change in fixed asset,

long term liabilities and share capital ascertained on the basis of values of

these items shown in the balance sheets. Increase in fixed asset is an

application of funds and decrease in fixed asset on account of sale is a source

of fund. Increase in long term liabilities is a source of fund and decrease in

long term liabilities is an application of fund.

39

3.4.2 FUNDS MANAGEMENT PROCESS AT GAIL

The fund management at GAIL (India) Ltd., Vadodara-RPNHQ is done in the

following manner using SAP:

1) Take the requirements of the funds from all the departments.

2) Sum up all the funds in one excel sheet.

3) Decide the date on which fund is required. If possible, take the exact date.

Otherwise take the tentative date, but see that it is most reliable, so that, the

fund does not remain idle.

4) Then, ask for the fund on the basis of information collected from diff. depts.

5) Demand or request for the funds from corp. office or HQ.

6) Manage the date accordingly by considering holidays.

7) If the fund is excess, transfer to HQ or Corporate office or else,

8) Put the instruction to the bank for transferring the excess funds after

determining the fund requirement. Otherwise open the new account or put in

the collection account.

INTERPRETATION FOR THE FUNDFLOWS

GAIL as an entity involved into cross company pipelines, injects gas from few

locations which are considered as purchase points and sells gas through

pipeline route at various locations. In order to maintain overall bal. in cash

flows, majority of purchases are paid centrally from corporate office in Delhi.

Similarly, cash collection are either remitted directly by the customers to their

corporate office at Delhi or balance collections made at site are also

transferred to corporate office account on daily basis through auto transfers

at day end instructed to the local banks.

Therefore, diff. in cash flows reflected at local sites gets evened up at corp.

level. This enables GAIL to maintain a positive cash bal. which at corp. level

can be utilized for project payments or short term investments generating

interest incomes.

40

Generally, GAIL provides 3 days credit to customers for making payment and

takes 15 days credit from the vendors to pay the amount of the gas

purchased. It gets enough time to maintain its funds. But, the time limit may

differ from company to company.

41

3.5 LONG TERM FUNDING OPTIONS AVAILABLE WITH GAIL

FINANCE THROUGH INTERNAL GENERATION

Gail uses its internally generated funds to make payments for the dividends.

The funds left over and above that are utilized for the funding of capex

requirement of the company. In the recent past DUPL and DPPL pipeline

projects have been funded through internal generation and GAIL had not

raised any funds from themarket to meet the capex requirement of the

company. These funds are normally lying in-

1. FDR

2. Current accounts

ISSUE OF FRESH EQUITY

Equity financing is less risky in the sense of cash flow commitments, but

results in a dilution of ownership, control and earnings. Being a central

government PSU GAIL cannot resort to equity financing without government

financing hence it is left with the option of debt financing alone.

42

3.5.1 MARKET BORROWINGS

Presently GAIL balance sheet is fundamentally strong. It has comfortable

Debt Equity levels (0.25:1) as on March 2012. The net worth of the company

as on march 2012 is Rs.21,449 Cr. Given an acceptable debt equity ratio of

2:1 in capital intensive industry and an outstanding debt as mentioned above

GAIL has a leverage capacity of `28000~ Cr. (i.e. the amount it can raise in

market).

Borrow with the objective to-

� Meet Capex

� Obtain competitive rates

� Managing acceptable Debt Equity ratio

Raising funds from the market would depend upon the prevailing market

conditions and interest rates. In present scenario of liquidity crunch the cost of

funding would naturally be a little higher than usual.

The various options that GAIL has in the market are:

A. DOMESTIC MARKET BORROWINGS

Funding options for Indian corporate-

i. OIDB (Oil Industry and Development Board)

ii. INR bonds

iii. Term loans

i. OIDB

The Oil Industry Development Act, 1974 was enacted following successive

and steep increase in the international prices of crude oil and petroleum

products since early 1973, when the need of progressive self-reliance in

petroleum and petroleum based industrial raw materials assumed great

importance.

The following objects were included in the statement of Objects and Reasons

for the OIL INDUSTRY DEVELOPMENT BILL, 1974:

43

• The programs for securing self-reliance in petroleum &Petroleum

based raw materials should be rapidly stepped up.

• Necessary resources for execution of such programs must be assured.

• For these purposes cess belevied on crude oil and natural gas to

create an Oil Industry Development Fund.

• The fund would be used exclusively to provide financial assistance to

the organizations engaged in development programs of oil industry.

Preamble to the Oil Industry Development Act clarifies that the purpose

of the Act is to provide for the establishment of a Board for

development of oil industry and for that purpose to levy duty of excise

on crude oil and natural gas and for matters connected therewith.

ii. INR Bonds

GAIL has earlier raised two series of bonds. It has issued bonds series - I at

the rate of 6.10% to the tune of 500 Cr. for the period of 12 years in 2003.

Bond series – II are issued at the rate of 5.85% to the tune of 600 Cr. forthe

period of 10 years in 2004. Both the series are non- convertible redeemable

bond series.

The INR bond market

• Provides regular market access to highly rated borrowers.

• Mostly secured with nominal security (due to stamp duty considerations).

• Rating (AA and above) necessary as potential base of investors shrinks

dramatically otherwise bullet drawdown/ repayment, though amortization

option is also available.

• Most liquid tenor remains 10 years

• For repeat issuers, transactions can be closed within a week.

• Upon completion of listing and rating process, GAIL can issue bonds

frequently and at short notice.

• However, market access largely limited to highest rated public sector/

bank issuers.

• GAIL will fit into issuer profile to access this market for tenor funding.

44

iii. TERM LOAN

Rupee term loan for a period of 10 years

� The INR syndicated loan marketstructurecan support long tenors (>10

years) and availability periods (up to 3 years).

� Banks typically prefer amortizing structures to match cash flows.

� INR banks require tangible security for long tenor funding.

� Ratings are being preferred even for this investor segment, given the

implementation of Basel II.

B. INTERNATIONAL MARKET BORROWINGS

Funding options for Indian corporate:

i. External commercial borrowing

ii. Export credit agency

iii. US private placement

iv. Foreign currency convertibility bonds.

v. Bilateral & Multilateral agencies (like World Bank, ADB)

i. External commercial borrowings are sources of funds for corporate from

abroad with advantage of-

• Lower rates of interest prevailing in the international financial markets

• Longer maturity period

• For financing expansion of existing capacity as well as for fresh

investment.

It includes commercial loans [in the form of bank loans, buyers’ credit,

suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate

bonds, CP)availed from non-resident lenders with minimum average maturity

of 3 years.

ii. Export Credit Agency

Itis also termed as ECA or investment insurance agency. These are financial

service providers that function as funding institutions for private business

enterprises of a particular country that are carrying out their commercial

activities overseas. The export credit agencies offer insurance (for example,

45

Trade Credit Insurance), guarantees and loans supported by government.

The insurance policies offered by the ECAs provide protection from both

political and commercial risk. The majority of industrially developed countries

have minimum one export credit agency. It commonly functions in the form of

a public, national or publicly authorized administrative body, which generally

backs organizations from their domicile nations.

iii. USPP

US Private Placement are unregistered debt securities that are exempt from

public registration requirements; the market offers a term funding alternative

to borrowers which do not wish to (or cannot) access the public bond markets.

Private Placement market features:

– Longer term funding (10 years+) than the bank loan market

– Greater consistency than public bond markets

– Structural flexibility

– New investor base

– No rating requirement

– Ability to delay drawdown of funds

– Can provide withholding tax efficiency

iv. FCB

FCCBs/FCBs are unsecured; carry a fixed rate of interest and an option for

conversion into a fixed number of equity shares of the issuer company.

Interest and redemption price (if conversion option is not exercised) is payable

in dollars. Interest rates are very low by Indian domestic standard. FCCBs

shall be denominated in any freely convertible Foreign Currency. However, it

must be kept in mind that FCCB issue proceeds need to conform to ECB end

user requirements. Foreign investors also prefer FCCBs because of the Dollar

denominated servicing, the conversion option and, the arbitrage opportunities

presented by conversion of the FCCBs into equity at a discount on prevailing

Indian market price. In addition, 25% of the FCCB proceeds can be used for

general corporate restructuring.

46

3.6 MINISTRY OF PETROLEUM AND NATURAL GAS

Ministry of Petroleum And Natural Gas is a branch of the Govt. of India. It has

the responsibility of Exploration and Production of Oil and Natural Gas, their

refining, distribution and marketing, import, export and conservation of

petroleum products and liquefied Natural Gas in India. The Ministry Of

Petroleum And Natural Gas along with the Department Of Public Enterprises

(PSEs) makes guidelines for different PSEs.

Given below are some of the circulars sent by Ministry Of Petroleum

And Natural Gas and DPE:

� On 31st Jan 2008, a circular was issued that preference should be given

to Public Sector Banks for handling Govt. transactions and there should be

no discontinuation of bids by the PSEs to avoid competition among the

banks to get the investment. The banks raise their interest rates to get the

PSU to deposit its money there and this leads to increase in bank rates.

� On 2nd Jan 2009, another circular was released in which it was mentioned

that CPSEs should place surplus funds with PSBs to the extent of 60% or

more and at the same time prohibiting them to invite bids for the same.

� On 12th Jan 2009, a circular was issued which has led to the removal of

the prohibition on investment of surplus funds of CPSEs in Mutual Funds.

47

3.7INVESTMENT POLICY

GAIL (India) Ltd. has to follow the guidelines and policies as prescribed by the

ministry of finance, dept. of public enterprises and ministry of petroleum and

natural gas regarding investment of its funds.

GUIDELINES FOR INVESTMENT OF SURPLUS FUNDS BY PUBLIC

SECTOR

ENTERPRISES

When there are surplus funds available in the organization, it is always a

prudent decision to invest those funds elsewhere to earn some returns on

them even if the funds are available for a very short period of time. GAIL

makes its investment of surplus funds according to the guidelines specified by

DPE and MINISTRY OF FINANCE. As per the guidelines, all the CPSEs

(central public sector enterprises) should invest only in treasury bills, govt.

securities, term deposits, CDs, commercial papers, inter-corporate deposits

and public sector mutual funds.

GAIL for investing its surplus funds considers only term deposits and CLTD

account as there is zero risk factor involved in them.

Principles concerning Investments

a. Investments should be made only in instruments with maximum safety.

b. There should be no element of speculation on the yield obtaining from the

investment.

c. There should be a proper commercial appreciation before any investment

decision of surplus funds is taken. The surplus availability may be worked

out for a period of one year at any point of time.

d. Investment decision should be based on sound commercial judgment. The

availability should be worked out based on cash flow estimates taking into

account working capital requirements, replacement of assets and other

foreseeable demands.

48

e. The remaining period of maturity of any instrument of investment should

not exceed one year from the date of investment where the investment is

made in an instrument already issued. Where investment is made in an

instrument newly issued, the final maturity of the instrument should not

exceed one year. However, only in the case of term deposits with banks, it

can be up to three years.

ELIGIBLE INVESTMENTS

Investments can be made in one or more of the following instruments subject

to the principles outlined in the previous paragraph.

I.TERM DEPOSITS with any scheduled commercial bank(i.e., banks

incorporated in India) and with a paid up capital of at least Rs.100 crores,

fulfilling the capital adequacy norms as prescribed by the R.B.I from time to

time. The adequacy norms should be reflected in the last public balance

sheet.

II. INVESTMENTS which have been rated by an established Credit Rating

Agencyand have been accorded the highest credit rating signifying highest

safety e.g. certificates of deposits, deposits schemes or similar instruments

issued by scheduled commercial banks/term lending institutions including

their subsidiaries, as well as commercial paper of corporate.

III. INTER-CORPORATE LOANS are permissible to be lent only to central

PSEs, which have obtained highest credit rating, awarded by one of the

established credit rating agencies for borrowings for the corresponding period.

IV. ANY DEBT INSTRUMENT which has obtained highest credit rating from

an established Credit Rating Agency.

INVESTMENT PRIORITY OF GAIL

1. Conformance to DPE guidelines

2. Security and safety

3. Transparency

4. Maximization of returns

49

3.7.1 INVESTMENT OPTIONS AVAILABLE TO GAIL

TABLE NO. 4

INVESTMENT OPTIONS

Besides all these instrument GAIL is also allowed to invest in public sector

Mutual fundsas per the amendment of DPE guideline on 14th February,

1997. In the 182nd board meeting of GAIL held on 9th October 2002, the

BOD granted opening of CORPORATE LIQUID TERM DEPOSIT ACCOUNT

(CLTD a/c) with SBI.

In the 230th meeting held on 27th October 2005, Director (finance) was

authorized to open/close & CLTD A/c with HDFC Bank, ICICI Bank or any

other nationalized or scheduled commercial banks in India.CLTD A/c shall

enable GAIL to earn interest on the funds received during the second-

half of the day.

Currently GAIL invests only in fixed deposits or corporate liquid term deposits

(CLTD).

TERM/FIXED DEPOSITS

A deposit held at a financial institution that has a fixed term. These are

generally short-term with maturities ranging anywhere from a month to a few

years. When a term deposit is purchased, the lender (the customer)

understands that the money can only be withdrawn after the term has ended

50

or by giving a pre-determined notice(no. of days). Term deposits are an

extremely safe investment and are therefore very appealing to conservative,

low risk investors. By having the money tied up, generally a higher rate can

be received with a term deposit compared with a demand deposit.

ADVANTAGES OF TERM DEPOSITS

� Short-term deposits are generally convenient because these have tenure

of a few months to a couple of years. The customer can generally choose

the exact term that he is most comfortable with based on various options

provided by the bank.

� Short-term deposits offer relatively higher rate of interest.

� In fact short-term deposits are the perfect blend of high interest rates

without the necessity of blocking money for a long period of time.

CORPORATE LIQUID TERM DEPOSIT (CLTD)

Corporate Liquid Term Deposit (CLTD) scheme for corporate, institutions &

firms with its unique facility of the partial withdrawals (unitized break up) to the

depositors without the need for premature encashment of the entire deposit.

Thus the product provides liquidity to the depositors with high return and

convenience.

� Customer has the flexibility to choose the period of deposit from 15 days to

3 years.

� Rate of interest for CLTD will be the card rate applicable for the contracted

tenure of the deposit. No differential rate of interest will be applicable.

� Minimum amount of deposit to be maintained is Rs.25,000/-. Subsequent

deposit in multiples of 5000/- with the minimum of Rs.25,000/-. Maximum

cap is Rs.4.95 crores.

� Whenever any cheque is presented by the customer in case of inadequate

balance in the current account for the payment of the cheque the shortfall

amount is broken in multiples of Rs.5000/- in ‘last in first out’ basis from

the CLTD and the cheque is honored without any hassle to the customer.

� No loan / overdraft facility is available under the scheme.

� Rules applicable for premature withdrawal for fixed deposit are applicable

for the part amount of deposit broken for withdrawal.

51

� Usual formalities applicable for opening current account and TDR/STDR

account including KYC procedure are applicable for opening accounts

under the scheme.

CLTD RATES

NAME OF THE BANK INTEREST RATE

SBI 8%*

HDFC MIBOR+0.35%*

ICICI MIBOR+0.35%*

*Amount deposit rates in short term deposits by GAIL

TREASURY BILLS

These are money market instruments to finance the short term requirement of

the govt. of India. These are discounted securities and thus are issued at a

discount to face value. The return to the investor is the difference between the

maturity value and issue price.

TYPES OF TREASURY BILLS

There are different types of treasury bills based on the maturity period and the

utility of the issuance like, ad-hoc treasury bills, three months, six months and

12 months treasury bills etc.

In India, at present, the treasury bills are issued for the following tenures 91-

days, 182- days and 364 – days’ treasury bills.

BENEFITS OF INVESTMENT IN TREASURY BILLS

• No tax deducted at source.

• Zero default risk being sovereign paper.

• Highly liquid money market instrument.

• Better returns especially in the short term.

• Transparency.

• Simplified settlement.

• High degree of tradability and active secondary market facilitates meeting

unplanned fund requirements.

52

TREASURY BILLS – AN EFFECTIVE CASH MANAGEMENT PRODUCT

Treasury bills are very useful instruments to deploy short term surpluses

depending on the availability and requirement. Even funds which are kept in

current accounts can be deployed in treasury bills to maximize returns.

Treasury bills can be purchased for any number of days depending on the

requirements. This helps in deployment of idle funds for very short periods as

well. Further, since every week there is a treasury bills auction one can

purchase treasury bills of different maturities as per requirements so as to

match with the respective outflow of funds. At times when the liquidity in the

economy is tight, the returns on treasury bills are much higher as compared to

bank deposits even for longer term. Besides, better yields and availability for

very short tenors, another important advantage of the treasury bills over bank

deposits is that the surplus cash can be invested depending upon the

staggered requirements.

GOVERNMENT SECURITIES (G-SECS)

There are sovereign securities which are issued by the Reserve Bank of India

on behalf of Government of India, in lieu of the central government’s market

borrowing programmed.

The term Government Securities includes:

� Central government securities.

� State government securities.

� Treasury bills.

The central government borrows funds to finance its ‘fiscal deficit’. The market

borrowing of the central government is raised through the issue of dated

securities and 364 days treasury bills either by auction or by floatation of

loans.

GOVERNMENT SECURITIES ARE OF THE FOLLOWING TYPES:

• Dated securities are generally fixed maturity and fixed coupon securities

usually carrying semi-annual coupon.

• Zero coupon bonds are bonds issued at discount to face value and

redeemed at par.

53

• Partly Paid Stock is stock where payment of principal amount is made in

instalments over agiven time frame. It meets the needs of investors will

regular flow of funds and the need of government when it does not need

funds immediately.

• Floating Rate Bonds are bonds with variable interest rate with a fixed

percentage over abenchmark rate. There may be a cap and a floor rate

attached thereby fixing a maximum and minimum interest rate payable on

it.

• Bonds with Call/Put Option.

• Capital indexed Bonds are bonds where interest rate is a fixed percentage

over the wholesale price index. These provide investors with an effective

hedge against inflation.

BENEFITS OF INVESTING IN GOVERNMENT SECURITIES:

� No tax deducted at source.

� Additional Income Tax benefits u/s 80L of the Income Tax Act for

Individuals.

� Qualifies for SLR purpose.

� Zero default risk being sovereign paper.

� Highly liquid.

� Transparency in transactions and simplified settlement procedures through

CSGL/NSDL.

CERTIFICATE OF DEPOSIT (CD)

CD is a fixed-deposit investment option offered by banks and lending

institutions. It offers higher interest rates than conventional savings accounts

because it requires investors to deposit funds for a specified term ranging

from one month to more than five years. However, like savings accounts,

CD’s are a secure form of investment, as they are insured by government

agencies.

54

The major features are:

Who can issue: Scheduled commercial banks (except RRBs) and All India

Financial Institutions within their ‘Umbrella limit’.

Maturity: Min. 7 days Max: 12 Months (in case of FI’s minimum one year and

maximum 3 years).

Amount: Min: Rs.1 Lac, beyond which in multiple of Rs.1 Lac.

Interest rate: Depending on the market; Fixed or Floating.

Pre-mature cancellation: Not allowed.

Conditions:

• If payment day is holiday, to be paid on next preceding business day.

• Issued at a discount to face value.

• Duplicate can be issued after giving a public notice and obtaining

indemnity.

COMMERCIAL PAPER

Commercial paper is an unsecured and discounted promissory note issued

to finance the short-term credit needs of large institutional buyers. Banks,

corporations and foreign governments commonly use this type of funding.

• An unsecured, short-term debt instrument issued by a corporation,

typically for the financing of accounts receivable, inventories and meeting

short-term liabilities. Maturities on commercial paper rarely range any

longer than 270 days. The debt is usually issued at a discount, reflecting

prevailing market interest rates.

• An unsecured and unregistered short-term obligation issued by an

institutional borrower to investors who have temporarily idle cash.

• Short-term, unsecured, discounted and negotiable notes sold by one

company to another in order to satisfy immediate cash needs. CP, as a

privately placed instrument, was introduced in India in 1990 with a view to

enabling highly rated corporate borrowers to diversify their sources of

short-term borrowings and to provide an additional instrument to investors.

55

INTER CORPORATE DEPOSITS

Inter corporate deposits are deposits made by one company to another

company, and usually carry a term of six months. They are secured loans

extended by corporate with excess funds to other corporate bodies. The rates

in this market are higher as compared to that of other markets. The three

types of inter-corporate deposits are: three month deposits, six month

deposits, and call deposits.

The inter-corporate deposits market shows a number of interesting

characteristics:

1. The biggest advantage of inter-corporate deposits is that the transaction

is free from bureaucratic and legal hassles. The business world is

otherwise regulated by a number of rules and regulations.The existence of

the inter-corporate deposits market shows that the corporate world can be

regulatedwithout rules.

2. The markets of inter-corporate deposits maintain secrecy. The brokers

in this market never reveal their lists of lenders and borrowers, because

they believe that if proper secrecy is not maintained the rate of interest can

fall abruptly.

3. The market of the inter-corporate deposits depends crucially on

personal contacts.

4. The decisions of lending in this market are largely governed by personal

contacts.

56

3.7.2 GAIL INVESTMENT POLICY PRESENT SCENARIO

Currently GAIL invests its temporary surplus funds in term deposits with

schedule commercial banks and in CLTD account, fulfilling the requirement as

specified in DPE guidelines. GAIL is not considering options of inter corporate

deposits as not many companies in public sector are AAA rated which is a pre

requisite for the option to take place and another thing is that those

companies which are in need of funds and those that are ready to accept

deposits from GAIL require it at more than 365 days. GAIL does not consider

mutual fund investment as the company has not given any guarantee on the

principal amount on the returns. Moreover, it is subject to market risk and it is

more of a speculation which is taking place.

Currently mutual funds are not considered by GAIL.

57

3.7.3 SWOT ANALYSIS OF DIFFERENT INVESTMENTS

1. FIXED DEPOSITS

Strengths

- Investment is secure and there is no risk involved.

- Returns are assured.

- Returns are not affected by market fluctuations.

Weakness

- Low rate of return.

- The principal has to be deposited for a fixed period up to maturity of the

scheme. Some penalty is levied if it is withdrawn before the due date.

- Investment cannot be instantly liquefied.

Opportunities

- Due to the assured returns it provides, Fixed Deposits are favored by risk

averse people.

- When stock market conditions are volatile, Fixed Deposits are preferred.

Threats

- Other forms of investment instruments have come in the market, like: stocks,

bonds, mutual

funds, forex, etc. that provide higher returns.

- They offer less returns that other instruments.

58

2. CORPORATE LIQUID TERM DEPOSITS

Strengths

- Returns are comparable with Fixed Deposits

- Interest is earned on investment every seventh day.

- Funds can be liquefied as and when required without any changes.

Weakness

- Returns are fixed but lesser than some other investment instrument like

Mutualfunds.

Opportunities

- As they give interest after seven days, they are a good investment

instrument for very short periods.

Threats

- They are threatened by mutual funds liquefied schemes that provide higher

returnsthan them.

3. MUTUAL FUNDS

Strengths

- High returns on investments than Fixed Deposits.

- Investment does not have a maturity date - the open ended funds and liquid

funds.

- Funds can be liquefied as and when required.

- They provide interest on very short term investments, also less than a week.

Weakness

- Returns are not fixed but variable.

- Some risk factor is ignored.

- There is uncertainty in returns at times.

Opportunities

- As they give high returns, they are preferred by most of the investors.

- Some schemes offer tax benefits also in form of dividends.

Threats

- Due to uncertain returns, some people shy away from them.

59

3.7.4 FUND HOUSES

According to the guidelines issued by DPE and the amendments made to it

thereafter, GAIL is allowed to invest its surplus funds only in the SEBI

regulated public sector Mutual Funds.

DPE clarifies Public Sector Mutual Funds as Mutual government of India, its

financial institutions and public sector banks holds/hold individually or

collectively more than 50% of equity/shares in the Asset Management

Company of that Mutual Fund.

Considering 3 fund houses using the guidelines prescribed by DPE:

Mutual funds investment, considering liquid funds is a good option, because

they match the purpose of investing for Short-term.

LIQUID FUNDS

Liquid funds are ultra short-term debt funds, which invest in money market

instruments such as certificates of deposit, commercial papers and treasury

bills, on an overnight basis or for few days or months.

Liquid funds basically invest in short-term debt with maturities of less than a

year, treasury securities and money market instruments. These instruments

60

are held for a period of three to six months or even lower time period such as

for few days or months. This type of funds does not invest in the debt

securities having maturity period of more than one year.

Many investors find these funds attractive as they provide the prevailing yield

in the market, good liquidity and low interest rate risk because of 10% or less

mark-to-market component as per SEBI guidelines.

Some of the key advantages of this type of mutual funds can be summarized

as follows:

- Investors can park their short term cash in these funds to earn good return.

- Lower tax on interest earned by the investors.

- No entry and exit load is charged on the investment amount.

- Low annual fee of 0.30 to 0.70% is applicable to manage the funds.

- Redemption time within 1 day.

- Minimum investment requirement is Rs.5000.

LIQUID FUND V/s FIXED DEPOSIT

Liquid funds are attractive for the investors wishing to earn a good return in

short time periods.

Now the key question is whether liquid plus funds are safe than the bank

savings accounts. In case of liquid plus funds, neither the principal is

protected nor there is any fixed percentage of return. Liquid plus funds have

higher exposures (30%) in long term debt securities, which have the interest

rate risk and also the credit risk. So, liquid plus funds are more risky than the

bank Fixed Deposit.

Again, liquid funds are short-term debt funds that invest their corpus in T-Bills,

Money Market Instruments, Certificate of Deposits, Commercial Papers,

Corporate bonds and Debentures. These instruments are traded in the market

and hence, their prices fluctuate. So they are a bit risky, at the same time they

offer higher returns than a bank savings account.

61

Advantages of investing in LIQUID FUNDS over FIXED DEPOSITS in

short-term Periods

Investors can park their idle cash balances in liquid funds for earning interest

for very short time periods like 7-20 days. But this is not possible with bank

FD. Even bank savings account provides interest on average quarterly

balances maintained in the savings account. But in case of the liquid fund,

investor can earn interest on daily basis upon the exact balances maintained

in the fund. As there is no entry or exit load one can withdraw fund whenever

requirement arises or put more money into the fund if there is short term cash

surplus.

CHAPTER 4 RISK MANAGEMENT

62

4.1 CLASSIFICATION OF RISKS

The risks can be majorly classified under two heads:

A.Business risks

B. Financial risks

A. BUSINESS RISKS

These business risks are further classified as –

• Strategic - High level goals.

• Operations - Effective and efficient utilization of resources.

• Reporting - Reliability of reporting.

• Compliance - With applicable laws and regulations.

ASSIGNING PROBABILITIES

For each risk, its likelihood of occurrence is assigned a probability of either

high, medium or low based on the following criteria:

ASSIGNING IMPACT

For each risk, an impact is assigned as either high, medium or low based on

the following criteria:

63

RISK CLASSIFICATION

Risk classification (risk score) is product of probability and impact assigned to

the risk based on the criteria explained above. Risk classification has been

arrived on the basis of criteria given in the table below:

A. FINANCIAL RISKS

Financial risks include Credit Risk, Market Risk, Liquidity Risk and

Operational Risk.

i. Credit Risk

The risk of the issuer not being able to make payments on his liabilities is

termed as default risk or credit risk. It includes consumer credit risk.

64

ii. Market Risk

The prices and interest rate start varying a lot if the market conditions are

volatile and not stable. But this change is more pronounced in stocks than

bonds. Bonds are not affected by volatility ofshare markets. It

ncludesInterest Rate Risk, Currency Risk and Equity Risk.

iii. Liquidity Risk

Money market funds are primarily exposed to REINVESTMENT RISK- the risk

that money has to be reinvested at a lower rate due to decline in interest rate

at times or the risk that the earnings from the bond might increase after it has

been redeemed by the investor. This risk can be reduced by investing the

funds for extremely short durations so that investment is safe and not

exposed to volatilities.

iv. Operational Risk

It includes Legal Risk, Political Risk and risk related to day to day operations.

GAIL (India) Ltd., Vadodara- RPNHQ facescredit riskat the finance

department. So, they have their own terms and conditions for their customers

mentioned in the Letter of Credit. The customer has to provide LC approved

by recognised Bank, then only GAIL (India) Ltd. transmits the required gas to

the customers. This is how it secures the credit risk.

GAIL (India) Ltd. has a policy of collecting the payment within three days and

four days in case of e-payment. But if, the payment is not received within the

stipulated time then through LC it recovers its payment.

The company has to follow certain payment conditions when the purchases

are done by it. Some of the conditions are given below.

If the purchase is made from Petronet LNG Ltd.(PLL), then the payment is to

be done after 7 days from the date of invoices.

For Reliance, payment is to be done no later than 4 business days after the

day on which e-delivery of invoices and debit notes occur. Failure would

amount to interest at the rate per annum equal to SBIPLR+2% points for each

day.

For Oil India Ltd (OIL), the payment is made after 30 days from date of

invoice. If not made in the required period, then interest at the rate of 1% over

65

and above SBIPLR. There is a purchase of around Rs.3 crores every fortnight

from OIL.

GAIL purchases spot gas from companies such as Merubani where payment

is done within 8 business days; for Sonatrach, the payment period is 7 days

from receipt of invoice; for M/s Focus it is 15 days of receipt of invoice.

Suppose GAIL purchases gas from ONGC, then the payment period is of

fortnight. The payment is done generally on 22nd of current month which is its

1st billing and 7th of the succeeding month which is its 2nd billing.

66

4.2 IDENTIFICATION OF FOREX RISK

The various departments of GAIL (India) Ltd. are exposed to different types of

risks based on their working. However, following are the common risks

attached to all the departments –

a. Currency Risk - The primary risk to any company having a foreign

exchange exposure is the risk of fluctuation in the currency rate. There are

two types of currency risk. Single currency risk i.e. USD/INR and secondly,

dual currency risk which is calculated in Indian Rupee through USD/ X

currency rate. For example if USD/INR rate is 56.11 and EURO/USD rate is

1.2087 then to derive INR/EURO rate the basis would be USD/INR (56.11) *

EURO/USD (1.2087) = EURO/INR (67.756).

b. Interest Rate Risk - Across the globe, lending and borrowing takes place

either at Fixed Rate or Floating Rate of interest. In majority of the trade the

benchmark for floating rate of interest is LIBOR (London Inter-Bank Offer

Rate) of respective currencies. Usually the cost of fixed interest rate is higher,

thus companies prefer floating rate and as a consequence carry interest rate

fluctuation Risk.

c. Operational Risk - Both the above mentioned risks are known risks or

market risk; however every organization is also vulnerable to the risk of loss

from inadequate or failed internal processes, people and systems. This risk is

known as operational risk.

This risk may arise due to deficiencies in information systems or inaction by

designated personnel at the appropriate time. Effective management of

operational risk is extremely important in over- all framework designed to

support managerial decision making. It is a very broad concept including fraud

risks, legal risks, physical or environmental risks, etc.

The afore said risks are common in every department of GAIL

CHAPTER 5 RESEARCH

METHODOLOGY

67

5.1 RESEARCH DESIGN

� A descriptive research is conducted here as the requirement here was

to find out the characteristics, features, advantages and disadvantages,

the risk involved, related performance of various funding options

available to GAIL and to study the potential adverse currency

movements and analyzing the risk management framework for the

same.

� The various sources of finance have been identified by going through

company reports for previous years and looking into the options

resorted by GAIL and the by studying the new options available in

market.

� The optimum resource mix has been arrived at by calculating the

minimum cost of funding to the company and the effect of the loans on

the company balance sheet and its profitability.

5.2 SOURCES OF DATA

� The present study is based on secondary published and unpublished

data collected from financial documents, Annual reports of GAIL,

MINISTRY of OIL and PETROLEUM and NATURAL GAS etc.

5.3 DATA COLLECTION METHOD

� Information was also collected from concerned officials of the

Company.

� The website of GAIL, DPE, Finance Ministry, Investment Commission

of India, Association of Mutual funds of India is also referred.

CHAPTER 6 DATA ANALYSIS AND

INTERPRETATION

68

COMPARATIVE CALCULATION OF RETURNS ON THE

INVESTIBLE OPTIONS AVAILABLE TO GAIL (INDIA) LTD.

At GAIL (India) Ltd., Vadodara-RPNHQ, the surplus funds available with are

Rs.26,57,62,76,181.59 and calculating the income with these surplus funds

can generate income for the short period of time if they are lying utilized.

Following the Guidelines of DPE, three major investment options for investing

this surplus fund are being focused here-

a. Fixed/Term Deposits

b. CLTD

c. Public Sector Mutual Fund.

The maximum amount that can be invested in CLTDs is Rs.4.95 Cr.

Eventhough, there are surplus funds available with GAIL, I have assumed the

investment of Rs.4.95 Cr. in the above mentioned options. Thus the

comparison between the three can be made easily having the same base (of

Rs.4.95 Cr.).

Calculating the interest earned on these funds –

Simple Interest = Principal x Rate x Time

Where,

‘Interest’ is the total amount of interest earned,

‘Principal’ is the amount Deposited,

‘Rate’ is the interest rate (%) per annum,

‘Time’ is the time period.

69

1. Investment in Term Deposits

TABLE NO. 5

COMPUTATION OF INVESTMENT IN TERM DEPOSITS

PRINCIPAL AMOUNT (Rs.)

NAME OF THE BANK

RATE OF RETURN

DURATION (DAYS)

AMOUNT (Rs.)

TAX @10%

PAT

4,95,00,000 SBI 0.02 30 81,369 8,137 73,233

4,95,00,000 0.03 90 3,66,164 36,616 3,29,548

4,95,00,000 0.035 180 8,54,384 85,438 7,68,946

4,95,00,000 0.045 270 16,47,740 1,64,774 14,82,965

4,95,00,000 0.09 365 44,55,000 4,45,500 40,09,500

If Rs.4.95 Cr. are invested in the term deposit of SBI for 365 days, then the company would earn a profit of Rs.40,09,500 and if the sum is invested for a month then the company will earn a profit of Rs.73,233.

2. Investment in Corporate Liquid Term Deposits (CLTD)

TABLE NO. 6

CALCULATION OF PROFIT FROM CLTD FOR 15 DAYS AND 365 DAYS

Principal Amount (Rs.)

Name of the Bank

No. of days

Rate of Interest

Amount (Rs.)

Tax Rate

Profit (Rs.)

4,95,00,000 SBI 15 8% 1,62,740 10% 1,46,466 4,95,00,000 SBI 365 8% 39,60,000 10% 35,64,000

*Rs.4.95 Crores being the maximum limit for CLTD

*For deposit in CLTD, the minimum period of deposit is 15 Days.

If the investment of Rs.4.95 Cr. is to be made for 365 days, then the company

should opt for term deposit of SBI which gives profit or Rs.40,09,500,

because it has higher profit than in the CLTD of the same bank which is

Rs.35,64,000.

70

3. Investmentin Mutual Funds:

� Returns for less than 7 days

TABLE NO. 7

INVESTING IN MUTUAL FUNDS OF UTI, SBI AND LIC

PRINCIPAL AMOUNT (Rs.)

NAME OF SCHEME

DURATION RATE OF RETURN

PROFIT (Rs.)

4,95,00,000 UTI Liquid Cash Plan –Growth

1 Day 0.011 1,492

4,95,00,000 UTI Liquid Cash Plan - IP–Growth

1 Day 0.012 1,627

4,95,00,000 UTI Liquid Cash Plan –Growth

2Days 0.022 5,967

4,95,00,000 UTI Liquid Cash Plan - IP–Growth

2Days 0.025 6,781

4,95,00,000 UTI treasury AdvantageFund

5Days* 0.054 36,616

4,95,00,000 SBI Magnum Insta cash- cashplan

1Day 0.013 1,763

*Treasury advantage fund is Liquid plus fund which has a minimum lock in

period of 5 days.

� Returns for 7 days

TABLE NO. 8

INVESTING IN MUTUAL FUNDS OF UTI, SBI AND LIC

PRINCIPAL AMOUNT (Rs.)

NAME OF THE SCHEME

DURATION RATE OF RETURN

PROFIT (Rs.)

4,95,00,000 UTI Liquid cash Plan –Growth

7Days 0.0812 77,084

4,95,00,000 UTI Liquid cash Plan – IPGrowth

7Days 0.1556 1,47,713

4,95,00,000 UTI treasury advantagefund

7Days 0.0866 82,210

4,95,00,000 SBI Magnum Insta Cash –cash plan

7Days 0.9828 9,32,986

4,95,00,000 LIC MF Liquid Fund –growth

7Days 0.0961 91,229

71

� Returns for more than 7 days (i.e. for 1 month & 3 months)

TABLE NO. 9 INVESTING IN MUTUAL FUNDS OF UTI, SBI AND LIC

(For 1 month)

PRINCIPAL AMOUNT (Rs.)

NAME OF THE SCHEME

DURATION RATE OF RETURN

PROFIT (Rs.)

4,95,00,000 UTI Liquid cash plan – Growth

1 MONTH 0.35 14,43,750

4,95,00,000 UTI Liquid cash plan – IP – Growth

0.39 16,08,750

4,95,00,000 UTI treasury Advantage Fund

0.43 17,73,750

4,95,00,000 SBI Magnum Insta Cash – Cash plan

0.4 16,50,000

4,95,00,000 LIC MF Liquid fund growth

0.39 16,08,750

TABLE NO. 10

(For 3 months) PROFIT FOR 3 MONTHS INVESTMENT

PRINCIPAL AMOUNT (Rs.)

NAME OF SCHEME

DURATION RATE OF RETURN

PROFIT (Rs.)

4,95,00,000 UTI Liquid cash plan – Growth

3 MONTHS 0.99 1,22,51,250

4,95,00,000 UTI Liquid cash plan – IP – Growth

1.11 1,37,36,250

4,95,00,000 UTI treasury Advantage Fund

1.23 1,52,21,250

4,95,00,000 SBI Magnum Insta Cash – Cash plan

1.14 1,41,07,500

4,95,00,000 LIC MF Liquid fundgrowth

1.06 1,31,17,500

72

The above computations for investing in Mutual Funds of SBI, UTI and LIC

shows that the returns are much higher as compared with CLTDs and Term

Deposits. Even if the company wants to invest for less than 7 days, Mutual

Funds are a good option to invest in.

RISK ANALYSIS

TABLE No. 11

CRITERIA FOR IMPACT OF RISK ON GAIL (INDIA) LTD.

Less than 30 Lacs Low Impact

Between 30 Lacs to 50 Lacs Medium Impact

Above 50 Lacs High Impact

TABLE NO. 12

CRITERIA FOR ASSIGNING PROBABILITIES

Range Probability

Dues greater than 6 months/ Disputed High

Legal Medium

Beyond Limit/ within Limit Low

TABLE NO. 13

RISK SCORES FOR THE DEBTORS OF GAIL

Name of debtors

(Companies)

O/s Amount (Rs.)

Impact Probability (of Risk)

Risk score

ALEMBIC

52,56,752.00

High Low Medium Risk

BANCO AL.

30,90,724.00

Medium Low Low Risk

BELL CERAM

23,52,562.00

Low Low Low Risk

ATMIYA CHE

81,06,567.82

High Medium Medium Risk

CLEAN GLAS 5,26,07,371.25 High High High Risk

73

GACL

14,49,246.00

Low Low Low Risk

GNFC

2,32,12,986.00

High High High Risk

RELIANCE

25,83,47,682.00

High High High Risk

GUJ.BOROSI

13,40,194.00

Low Low Low Risk

GSPCL

3,04,00,000.00

High Low Medium Risk

CALICO

6,38,428.54

Low Medium Medium Risk

BHAGWATI

9,81,320.00

Low Medium Medium Risk

IOC

3,15,784

Low High Medium Risk

HINDALCO

1,72,56,721.48

High Low Medium Risk

APOLLO TYR

3,14,87,452.00

High Low Medium Risk

NIRMA

19,15,992.00

Low Low Low Risk

GIBRALTAR

13,87,728.00

Low Low Low Risk

GSFC

2,24,81,301.00

High Low Medium Risk

HALDYN

41,71,828.37

Medium Low Low Risk

TRANSPEK

38,52,489.00

Medium Low Low Risk

Source: [GAIL (India) Ltd., Vadodara-RPNHQ]

The above analysis is done taking into consideration the credit risk at GAIL

(India) Ltd., Vadodara-RPNHQ. Here, only twenty debtors are taken for the

purpose of computation.

74

COMPARISON OF FOREIGN AND INDIAN LOAN FOR GAIL

(INDIA) LTD.

TABLE NO. 14

TABLE NO. 15

75

TABLE NO. 15

TABLE NO. 16

OPT TABLE NO. 15

TABLE NO. 15

76

TABLE NO. 16

OPTIMUM RESOURCE MIX FOR TAKING LOAN

CHAPTER 7 RESULTS AND FINDINGS

77

RECOMMENDATION FOR BORROWINGS (LOAN)

It can be inferred from the above that USD borrowings are cheaper than the

INR borrowings as the total interest outgo in USD borrowings is 20.57 which

is less than the INR borrowings i.e. Rs.26.54 , but with subject to potential ad

verse currency fluctuations, it is advisable to choose an efficient-mix

considering such currencymovements. Therefore, considering 5 options to

find out the efficient mix – the option with a mix of 50% USD LOAN &50% INR

LOAN is found to be the best of all the options. As, the interest out go is less

and also the risk in it is meagre which proves to be effective and rewarding.

Even though 75% USD LOAN & 25% INR LOAN option is evident to be

cheapest of all the considerable options available it is not effective due the

HIGH RISK involved in it.

RECOMMENDATION FOR SURPLUS FUNDS It is inferred that during last one year, the returns of public mutual funds are

comparatively higher than CLTD returns with risks being meagre but in

accordance with the DPE and MINISTRY OF FINANCE guidelines, it is

advisable to invest 30% of the surplus funds in public mutual funds.

CHAPTER 8 LIMITATIONS OF THE

STUDY

78

• Time Constraint

Six weeks had been found to be inadequate to gather much information

about the financial operations of the all business areas of the company.

• Unable to Extract actual Data

This is because of management constraint to extend all the details due to

paucity of time.

• DPE Guidelines

As per the DPE guidelines, GAIL is allowed to invest only in Public

sector MF where it is true that the volatility is less and therefore much less

riskier than other Mutual funds. Had GAIL been allowed to invest in other

Mutual funds it could have earned much higher returns. As a 90 days FD

with SBI will help GAIL earn an interest return of 3% p.a., but the same

amount for the same period if invested in some other mutual funds would

have earned almost double returns.

CHAPTER 9 CONCLUSION

79

After analyzing the topic under the study, it has been concluded that:

i. Public Sector Enterprises (PSEs) may place their surplus funds, in the

mutual funds of public sector Fund Management houses such as LIC

Nomura, SBI MF and UTI MF rather than traditional term deposits (short-

term as well as long-term). The quantum of these funds may range up to

40% depending upon the guidelines of the DPE and Ministry of Finance as

well as the respective Company’s Boards objective.

ii. As it has been observed on the basis of hypothetical loan situation, that it

would be beneficial for the PSEs to borrow from international sources in an

efficient mix keeping in consideration the currency fluctuations which may

hinder the benefits that may accrue from such a loan mix.

iii. The credit risk of GAIL (India) Ltd. is being mitigated through the issue of

Letter of Credit by the customer’s bank by which GAIL can secure its

receivable payment.

CHAPTER 10 ABBREVATIONS

80

BCPL – Brahmaputra Cracker and Polymer Limited

CAGR -- Cumulative Annual Growth Rate

CAPEX – Capital Expenditure

CBM – Cold Bed Methane

CLTD – Corporate Liquid Term Deposit

CNG – Compressed Natural Gas

CPSE – Central Public Sector Enterprise

DPPL – Dhabol – Panvel Pipeline

DPE – Department of Public Enterprises

DUPL – Dahej – Uran Pipeline

DVPL – Dahej – Vijaipur Pipeline

E&P -- Exploration and Production

ECA – Export Credit Agency

ECB – External Commercial Borrowing

ED – Exercise Duty

FCCB – Foreign Currency Convertible Bond

FD -- Fixed Deposit

FOREX – Foreign Exchange

GGL – GAIL Gas Limited

HDPE – High Density Polyethylene

HVJ – Hazira – Vijaipur Pipeline

INR – Indian National Rupee

IRS – Interest Rate Swap

JLPL – Jamnagar – Loni Pipeline

JVC’s – Joint VentureCompanies

KYC – Know Your Customer

LHC – Liquid Hydrocarbon

LIBOR – London Inter-Bank Offer Rate

LNG – Liquefied Natural Gas

LPG – Liquefied Petroleum Gas

MIBOR – Mumbai Inter Bank Offer Rate

MMSCMD – Million Metric Standard Cubic Meters per Day

MMTPA – Million Metric Tons per Annum

MOPNG – Ministry of Petroleum and Natural Gas

81

MOF – Ministry of Finance

NAV – Net Asset Value

OIDB – Oil Industry Development Board

OTC – Over the Counter

OLHC – Other Liquid Hydro – Carbon

PAT – Profit after Tax

PBIDTA – Profit Before Interest Depreciation Tax and Amortization

PBIT – Profit Before Interest and Tax

PBT – Profit Before Tax

PNG – Piped Natural Gas

PSU – Public Sector Units

RLNG – Re-gasified Liquefied Natural Gas

ROCE – Return On Capital Employed

ROIC – Return On Invested Capital

RONW – Return On Net Worth

SBI – State Bank of India

TPA – Tonnes Per Annum

UTI – Unit Trust of India

USD – United States Dollar

USPP – United States Private Placement

ANNEXURE

82

83

84

85

86

Format for Funds management under SAP at GAIL (India) Ltd.,

Vadodara- RPNHQ

87

SAP Format for Funds requirement at GAIL (India) Ltd., Vadodara-

RPNHQ

88

Excel sheet showing calculation for total funds available at the end of

the year 2011

Excel sheet showing calculations for funds available at GAIL (India) Ltd.,

Vadodara-RPNHQ for Q2 FY 2010 and 2011

89

Excel sheet showing calculations for funds available at GAIL (India) Ltd.,

Vadodara-RPNHQ for Q4 FY 2010 and 2011

90

Excel Sheet showing Debtors Report as on 31st March 2012

91

Terms and Conditions of Letter of Credit at GAIL (India) Ltd. for its

customers of Re-gasifiedLiquified Natural Gas.

92

Terms and Conditions of Letter of Credit at GAIL (India) Ltd. for its

customers ofAdministered Pricing Mechanism(APM) Natural Gas.

BIBLIOGRAPHY

93

1. http://gail.nic.in/final_site/index.html

2. http://www.fedprimerate.com/libor/libor_rates_history.htm

3. http://petroleum.nic.in/ng.htm

4. http://www.amfiindia.com/

5. http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7

068481

6. http://www.google.co.in/

7. http://www.investorwords.com/

8. http://www.kshitij.com/

9. http://www.managementparadise.com/

10. http://www.moneycontrol.com/stocksmarketsindia/

11. http://www.mutualfundsindia.com/

12. http://www.nseindia.com/

13. http://www.wikipedia.org/

14. http://www.gailonline.com/final_site/pdf/Presentation(mumbai_

may2012).pdf

15. http://www.indorebank.org/cltd.htm