letting go and keeping control: the right amount of ... · essar group treasury is a centralised...

Letting Go And Keeping Control: The Right Amount Of Centralization

Aashish Pitale

Group Treasurer, Essar Group, India

May 21, 2014

Euro Finance Singapore

Agenda

• Centralization v/s decentralization of treasury

– Understanding centralization and decentralization

– Case Study: Procter & Gamble

– Case Study: Tata Group

• Introduction to Essar Group and Essar Group Treasury

– Size, scale and complexity of operations

– Key functions of Essar Group Treasury

• Advantages and disadvantages of a centralized treasury

• Implementation of centralization

– Barriers to centralization

– Implementation and automation

Essar Group Treasury 2

Centralization v/s decentralization of treasury

Centralized treasury refers to

• One that either operates as the only treasury for all markets across the globe,

• Or ultimately combines all regional or local treasuries into a central treasury for pooling risks, for policies and strategies

Decentralized treasury refers to

• One where each business unit treasury is a self-contained local unit dictated purely by the needs of the local business


No one size fits all! The right amount of centralization depends on each corporate’s

needs and can be done in various ways

Representation of centralized treasury operations


Global

Treasury

Case Study: Procter & Gamble

P&G’s treasury has centralised operations

• The main centralised trading activity takes place in head quarters - Cincinnati, USA

• Some smaller operations take place in Brussels, Caracas, Geneva, Guangzhou and Singapore that deal with specific regional and local nuances

Rationale for choosing a centralized structure

• Enhanced risk management – Direct linkage seen between internal risk management targets and predictability of their earnings stream that the shareholders are looking at

• Ability to leverage scale – Through pooling of activities their operations have become more efficient


$84 bn sales (FY13)

135,000+ Employees

300+ brands

Operations in 70+

countries

Representation of decentralized treasury operations


Global

Head

Quarters

Case study: Tata Group


India’s oldest and largest

private sector business entity

100+ companies

across sectors – steel,

automotive, chemicals, IT

consultancy, retailing and

hotels

Prolific acquirer –

Tetley Tea, in 2000,

Steelmaker Corus by in 2007,

Jaguar Land Rover in 2008

Tata Group’s treasury has decentralised operations

• All the companies are independent from each other and have separate treasury units

Rationale for choosing a decentralized structure

• High appetite for mergers / acquisitions Frequent changes in the organisation structure, lines of responsibilities and people management make decentralisation more favourable

• Diverse culture at different companies

About Essar group – Essar group is a USD 39 bn conglomerate…


Size, scale and diversity

73,000 people

25 countries worldwide

39 billion revenue (USD)

Presence in

• Oil & Gas

• Power

• Steel

• Ports

• Projects

• Shipping

• IT/ITES

• Telecom services

…with a wide international footprint…


…and significantly complex operations


Transactions/day

150+

Number of active group companies

15+

Economic exposure in FX, Commodities & Interest rates; raising funds from overseas money & credit markets

Financial complexity

FX flows/annum across 10+ currencies

$80bn+

Number of banking relationships globally

60+

Essar group treasury overview

Essar group treasury is a centralised function that provides treasury & market risk management services to all group companies in India and to offshore companies


Key Functions

• Market Risk Management

• FX

• Rates

• Commodities

• Structured Finance & Trade Finance

• Investment Management

• Operational Risk & Compliance

• Risk Management Policies

Key advantages of a centralized treasury • Overall view of the company’s cash position and risk readily available

• Optimisation of liquidity across the group

– Cash surpluses in one part of the business can be used to finance deficits in another

• Common pool of skill & knowledge of markets available at a single place

• Leveraging of gross volume of various group companies & the brand

• Economy of scale achieved


Lower transaction costs across various products and

Better operational efficiency and overall control

Disadvantages of a centralized treasury • Communication Gap

– It takes additional time for information to flow up the organisation as an input to centralised decisions

– It takes longer for action points to be implemented across all business units.

• Country specific regulations

– Tight FX controls in key markets can make unexpected payments in certain markets more complicated

• Increased dependence and vulnerability

– Total reliance on a single information system

– Greater technical complexity that makes problems harder to diagnose

– Higher impact of data security breaches


Barriers to centralisation

In-spite of the many advantages of centralisation; many companies have not been able to do so due to the various challenges faced.

Challenges to implementation

• Large costs involved

– IT infrastructure has to be implemented across the group by using an Enterprise Resource Planning system such as SAP or Oracle

• Non aligned business cultures and goals

– Ensuring alignment of individual business unit goals with the wider group vision

• Reorganization of resources

– Bring people with focused expertise on providing risk solutions in each area

• Turf Issues

– Elimination of turf issues needs to take place through collaborative leadership


Implementing centralization at Essar


What was done?

• IT infrastructure was built – SAP FICO & Treasury Module implemented for efficient data & risk management

• Formulation of risk management policies and strategies in collaboration with businesses

– Definition of dealer-wise and company-wise risk limits

– Policies adopted by Board of Directors

• Preparation of SOPs for the execution of risk management strategies

– Disciplined adherence to SOPs was ensured

• Automation of risk reports were enabled for daily reporting of exposures and positions

• Dedicated Mid-office for policy, risk control, monitoring, regulatory compliance & MIS & a dedicated Back-office for deal confirmations, settlements & MIS has been set up.

SAP TM was implemented

Automation in exposure generation & mapping in SAP TM

Service agreements with group

companies for SAP use & ownership

SAP put in active use by all verticals and for all treasury products

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Completely integrated

and automated

treasury

Essar Group Treasury

Building IT infrastructure – Road map to automation

• Integrated Treasury across all asset classes

• Cutting edge technology and infrastructure

• Best in class risk management processes

• Experienced team of markets professionals

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Disclaimer • Data/numbers used in the presentation are based on sources believed to be reliable in nature, however,

Essar expressly does not validate the correctness or accuracy thereof.

• We caution you that any statement reflects only our belief at the time the statement is made. We undertake no obligation to update any of the statements to reflect events or developments after the date of this presentation.

• All/some of the information contained in this presentation could be of confidential and sensitive nature and all recipients of this presentation are obligated to respect the confidential nature of this information. The divulgence of such information means disclosure, copying, multiplying, publishing of this confidential information or disclosure of any other data, synthesis or information that may harm, directly or not, the Essar Group or their associates, no matter if the information is used in a commercial way or not. Divulgence means use of this kind of data without permission from Essar Group. The recipients shall hold in confidence, and shall not divulge any confidential information for any other purpose without Essar’s prior written consent. Any breach of these confidentiality obligations shall entitle Essar to exercise all legal and equitable rights and remedies against the recipients.


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