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“WORKING CAPITAL MANAGEMENT OF ONGC”
Submitted to
ALL INDIA MANAGEMENT ASSOCIATION
CENTRE FOR MANAGEMENT EDUCATION
MANAGEMENT HOUSE, 14 INSTITUTIONAL AREA,
LODHI ROAD, NEW DELHI – 110003
FEBRUARY 2012
By
MohdMazhar
Registration No. – 421020371
Guided By
************************
For the partial fulfillment of
Post Graduate Diploma in Management
“PROJECT REPORT SYNOPSIS”
Name : MOHD MAZHAR
Registration Number : 421020371
Address of Correspondence : ITO NEW DELHI
Name of Project Guide :
Designation and Address :
Title of the Project : “WORKING CAPITAL MANAGEMENT
OF ONGC (OIL AND NATURAL GAS
CORPORATION)”
“HISTORY OF ONGC”
Foundation to 1961
During the pre-independence period, the Assam Oil Company in the northeastern
and Attock Oil company in northwestern part of the undivided India were the only
oil companies producing oil in the country, with minimal exploration input. The
major part of Indian sedimentary basins was deemed to be unfit for development of
oil and gas resources.
After independence, the national Government realized the importance oil and gas
for rapid industrial development and its strategic role in defense. Consequently,
while framing the Industrial Policy Statement of 1948, the development of
petroleum industry in the country was considered to be of utmost necessity.
Until 1955, private oil companies mainly carried out exploration of hydrocarbon
resources of India. In Assam, the Assam Oil Company was producing oil at Digboi
(discovered in 1889) and Oil India Ltd. (a 50% joint venture between Government
of India and Burmah Oil Company) was engaged in developing two newly
discovered large fields Naharkatiya and Moraan in Assam. In West Bengal, the
Indo-Stanvac Petroleum project (a joint venture between Government of India and
Standard Vacuum Oil Company of USA) was engaged in exploration work. The
vast sedimentary tract in other parts of India and adjoining offshore remained
largely unexplored.
In 1955, Government of India decided to develop the oil and natural gas resources
in the various regions of the country as part of the Public Sector development.
With this objective, an Oil and Natural Gas Directorate was set up towards the end
of 1955, as a subordinate office under the then Ministry of Natural Resources and
Scientific Research. The department was constituted with a nucleus of
geoscientists from the Geological survey of India.
A delegation under the leadership of Mr. K D Malviya, the-then Minister of
Natural Resources, visited several European countries to study the status of oil
industry in those countries and to facilitate the training of Indian professionals for
exploring potential oil and gas reserves. Experts from Romania, the Soviet Union,
the United States and West Germany subsequently visited India and helped the
government with their expertise. Soviet experts later drew up a detailed plan for
geological and geophysical surveys and drilling operations to be carried out in the
2nd Five Year Plan (1956-57 to 1960-61).
In April 1956, the Government of India adopted the Industrial Policy Resolution,
which placed mineral oil industry among the schedule 'A' industries, the future
development of which was to be the sole and exclusive responsibility of the state.
Soon, after the formation of the Oil and Natural Gas Directorate, it became
apparent that it would not be possible for the Directorate with its limited financial
and administrative powers as subordinate office of the Government, to function
efficiently. So in August, 1956, the Directorate was raised to the status of a
commission with enhanced powers, although it continued to be under the
government. In October 1959, the Commission was converted into a statutory body
by an act of the Indian Parliament, which enhanced powers of the commission
further. The main functions of the Oil and Natural Gas Commission subject to the
provisions of the Act, were "to plan, promote, organize and implement
programmes for development of Petroleum Resources and the production and sale
of petroleum and petroleum products produced by it, and to perform such other
functions as the Central Government may, from time to time, assign to it ". The act
further outlined the activities and steps to be taken by ONGC in fulfilling its
mandate.
1961 to 2000
Since its inception, ONGC has been instrumental in transforming the country's
limited upstream sector into a large viable playing field, with its activities spread
throughout India and significantly in overseas territories. In the inland areas,
ONGC not only found new resources in Assam but also established new oil
province in Cambay basin (Gujarat), while adding new petroliferous areas in the
Assam-Arakan Fold Belt and East coast basins (both inland and offshore). ONGC
went offshore in early 70's and discovered a giant oil field in the form of Bombay
High, now known as Mumbai High. This discovery, along with subsequent
discoveries of huge oil and gas fields in Western offshore changed the oil scenario
of the country. Subsequently, over 5 billion tonnes of hydrocarbons, which were
present in the country, were discovered. The most important contribution of
ONGC, however, is its self-reliance and development of core competence in E&P
activities at a globally competitive level.
A turning point in the history of India’s oil sector was in 1994. While the oil sector
was on the backburner of India's political realm for some time, it was brought to
the forefront by the privatization of India's leading oil E&P organization, the
ONGC. Simultaneously, there were steps taken for the enhancement of production
on the Bombay High oil fields as the result of a INR 150 billion development
investment.
One of Asia's largest oil E&P companies, ONGC became a publicly held company
as of February 1994, following the Indian government's decision to privatize.
Eighty percent of ONGC assets were subsequently owned by the government, the
other 20% were sold to the public. At this time, ONGC employed 48,000 people
and had reserves and surpluses worth INR 104.34 billion, in addition to its
intangible assets. The corporation's net worth of INR 107.77 billion was the largest
of any Indian company.
After its initial privatization, ONGC had authorized capital of INR 150 billion: it
also met its need to raise INR 35 billion to invest in viable oil and gas projects. The
Asian Development Bank (ADB) had also set a deadline for privatizing and
restructuring at 30 June 1994, if loans were to be granted for development of two
ONGC projects. As a consequence of the successful privatization, the loans were
granted - US$267 million for development of Gandhar Field, and US$300 million
for the gas flaring reduction project in the Bombay Basin. The successfully
formulated and implemented privatization strategy put ONGC at par with other
large multinational and domestic oil companies.
2000 to present
In 2006 a commemorative Coin set was issued to mark the 50th anniversary of the
founding of ONGC, making it only the second Indian company (alongside State
Bank of India) to have such a coin issued in its honour.
In 2011, ONGC applied to purchase of 2000 acres of land at Dahanu to process
offshore gas.
“WORKING CAPITAL MANAGEMENT OF ONGC”
INTRODUCTION
Oil and Natural Gas Corporation Limited (ONGC) (NSE: ONGC,
BSE: 500312) is an Indian state-owned oil and gas company headquartered in New
Delhi, India. It is one of the largest Asia-based oil and gas exploration and
production companies, and produces around 77% of India's total crude oil
production (and around 30% of total demand) and around 81% of natural gas
production. ONGC is one of the largest publicly traded companies by market
capitalization in India and the largest India-based company measured by profits.
ONGC was founded on 14 August 1956 by the Indian state, which currently holds
a 74.14% equity stake. It is involved in exploring for and exploiting hydrocarbons
in 26 sedimentary basins of India, and owns and operates over 11,000 kilometres
of pipelines in the country. In 2010, it was ranked 18th in the Platts Top 250
Global Energy Company Rankings and 413th in the Fortune Global 500.
ONGC Videsh Limited (OVL) is the international arm of ONGC. It was
rechristened on 15 June 1989. It currently has 14 oil and projects across 15
countries. Its oil and gas production reached 8.87 MMT of O+oEG in 2010, up
from 0.252 MMT of O+OEG in 2002/03.
MEANING OF WORKING CAPITAL MANAGEMENT
Working capital management is treated as driving seat of a finance manager. It is
important in a business firm as a blood in a human life. A firm should have an
adequate fund to meet day-to-day expenses and to finance current assets. This fund
is known as working capital funds. Proper management of working capital is
necessary to maintain both liquidity and profitability. Liquidity is necessary for the
survival of the firm. A firm having no profit may be treated as sick but not having
liquidity may die over a period of time. In this way the working capital
management involves deciding upon the amount and composition of current assets
and how to finance these assets. It has become an important tool to judge the
performance of a firm. It is concerned with problems of managing the inter-
relationship of current assets and current liabilities. Firm should maintain
sufficient level of working capital to produce up to a given capacity and maximize
the return on investment in fixed assets. Shortage of working capital leads to lower
capacity utilization, lower turnover and hence lower profits. Hence the dictum
“adequacy is a virtue, surfeit is not.” 7 Louis Brandt observes: “we need to know
when to look for working capital funds, how to use them and how to measure, plan
and control them.”
CONCEPT OF WORKING CAPITAL MANAGEMENT
There are two concepts of working capital namely, Gross concept and Net concept.
GROSS WORKING CAPITAL
According to this concept, working capital refers to the firm’s investment in
current assets. The amount of current liabilities is not deducted from the total of
current assets.
This concept views Working Capital and aggregate of Current Assets as two inter-
changeable terms. This concept is also referred to as ‘Current Capital’ or
‘Circulating Capital’. Working capital means total of all the current assets of a
business. It is also called circulating capital. When individual current assets are to
be managed, gross concept of working capital is used. There are difference on
opinions among different authors about the definition of working capital.
According to J.S.Mill: “The sum of current assets is the capital of business.”
According to Mead, Malott&Field “Working means current assets”
According to Bonneville “Any acquisition of fund which increases the current
assets increases working capital, for they are one and the same.”
Gross Working Capital = Total Current Assets
This concept focuses attention on two aspects of current assets management:
a. Optimum investment in current assets: The investment in current assets
should avoid two danger points-excessive and inadequate investments in current
assets. The investment should not more or not less to the need of the business.
Excessive investment in current assets should be avoided because it impairs firm’s
profitability, as idle investment earns nothing. On the other hand, inadequate
amount of working capital can threaten the solvency of the firm, if it fails to meet
current obligations.
b. Financing of current assets: Another concept is financing of current assets.
Whenever a need for working capital fund arises due to increasing level of
enterprise activity, or for any other reason, the arrangement should be made
quickly. Similarly some surplus funds arise they should not be allowed to remain
idle, but should be invested in short term securities.
NET WORKING CAPITAL
The Net Working Capital refers to the difference between Current Assets and
Current Liabilities or the excess of Current Assets over Current Liabilities.
Net Working Capital = Current Assets – Current Liabilities
Net working capital means the excess of current assets over current liabilities. If
current assets are equal to current liabilities then according to this concept working
capital will be zero and in case current liabilities are more than current assets, the
working capital will be called negative working capital. Modern economist
considers this concept as more suitable. Net concept of working capital emphasizes
on how much current assets have been financed out of long term funds. Under this
concept the relationship between current assets and current liabilities is established
or their liquidity is determined. It indicates the liquidity portion of enterprise and
suggests the extent to which working capital need may be financed by permanent
sources of fund. Current assets should be sufficiently in excess of current liabilities
to constitute a margin of buffer for maturing obligations within the ordinary
operating cycle of an enterprise. The quality of current assets should be considered
in determining the level of current assets vis-à-vis current liabilities. A weak
liquidity position poses a threat to the solvency of the company and makes it
disastrous for the enterprise. Excessive liquidity is also bad. It may be due to
mismanagement of current assets. Therefore, prompt and timely action should be
taken by management to improve and correct the imbalance in the liquidity
position of the enterprise.
“The net working capital concept also covers the question of judicious mix of long
term and short term funds for financing current assets.” For every enterprise there
is a minimum amount of net working capital which is permanent. Therefore, a
portion of the working capital should be financed with the permanent sources of
funds such as owner’s capital, debentures, long term debt, preference capital or
retained earnings. Management must, therefore, decide the extent to which current
assets should be financed with equity capital and/or borrowed capital.
According to Dr. Colin Park and professor John W.Gladson, “Most commonly
working capital is defined as the excess of current assets of a business e.g. (cash,
accounts receivable, inventories,) over current items owed to employees and
others (such as salaries and wages payable, accounts payable, taxes owed to
government).”
According to professor R.D. Keneddy and professor S.Y. Mcmullen, “A working
capital deficit exists if current liabilities exceed current assets.”
According to Quote V.L. Gole, “Whenever working capital is mentioned, it brings
o mind current assets and currents liabilities with a general understanding that
working capital is the difference between the two.”
CURRENT ASSETS are assets, which are reasonably expected to be realized in
cash or sold or consumed during the normal operating cycle.
The Current Assets are acquired with the intention of sale or conversion into cash.
They include:
Cash
Inventories
Bills Receivable
Prepaid Expenses
Accrued Income
Marketable Securities
CURRENT LIABILITIES represent the obligations of the business and arise in
the ordinary – course of operating business. They are expected to be payable
within one year. These liabilities are generally said to have claim over Current
Assetsand must be discharged out of Current Assets.
They include:
Creditors
Bills Payable
Short term Loans
Advance Payments
Net Working Capital can be positive or negative. A positive Net Working Capital
would arise when Current Assets exceed Current Liabilities. A negative Net
Working Capital occurs when Current Liabilities are in excess of Current Assets.
‘Net Working Capital’ is a qualitative concept, which indicates the liquidity
position of the firm and the extent to which Working Capital needs may be
financed by permanent sources of funds.
Current Assets should be sufficiently in excess of current liabilities to constitute a
margin or buffer for obligations maturing within the ordinary operating cycle of a
business. A weak liquidity position poses a threat to the solvency of the company
and makes it unsafe. Excessive liquidity is also bad. It may be due to
mismanagement of Current Assets. Therefore, prompt and timely action should be
taken by the management to improve and correct the imbalance in the liquidity of
the firm.
Thus the gross and net concepts of working capital are two important facts of the
working capital management. There is no precise way to determine the exact
amount of gross or net working capital for every enterprise. The data and problem
of each company should be analyzed to determine the amount of working capital.
There is no specific rule in which current assets should be financed. It is not
feasible, in practice, to finance current assets by short-term sources only. Keeping
in view the constraints of the individual enterprise a judicious mix of long-term
and short-term finance should be invested in current assets. Both the concepts of
working capital have their own uses. If the objective is to measure the size and
extent to which current assets are being used to optimize productivity of the
concern, ‘Gross concept’ is useful; whereas in evaluating the liquidity position of
an undertaking, ‘Net concept’ becomes pertinent and preferable.
WORKING CAPITAL POLICY FOLLOWED AT ONGC
There are three types of working capital policies which a firm may adopt i.e,
Moderate working capital policy, Conservative working capital policy and
Aggressive working capital policy. These policies describe the relationship
between sales level and the level of current assets.
CURRENT ASSETS
Conservative
Moderate
Agressive
Different types of Working Capital policies
ONGC follows the MODERATE Working Capital policy, as the increase in sales
result in proportionate change in current assets. This means that percentage
increase in sales is nearly equal to increase in current assets.
Importance of Working Capital Management in ONGC
Management of working capital has greater significance for achieving the
objective of an organization and also for the generation of surplus .Working capital
management is an integral part of overall financial management. Working capital
is the lifeblood of ONGC. The importances of working capital management are
discussed below:
1. Meets short-term finance requirements: The working capital meets the short-
term financial requirements of a business enterprise. It is a trading capital, not
retained in the business in a particular form for longer than a year. The money
invested in it changes form and substance during the normal course of business
operations. The need for maintaining an adequate working capital can hardly be
questioned.
2. Necessary to maintain business: Just as circulation of blood is very necessary
in the human body to maintain life, the flow of funds is very necessary to run a
business. If it becomes weak, the business can hardly prosper and survive.
Working capital starvation is generally credited as a major cause. The success
of a firm depends ultimately, on its ability to generate cash receipts in excess of
disbursements.
3. Important in today’s business environment: Effective working capital
management is especially important in today’s business environment. In order
to survive, an organization must be able to compete. In order to compete, firms
will need to have cash available for growth, advertising and research and
development of new products. In order to have cash available, a company needs
to manage its working capital. Managing working capital is a delicate balance.
If cash levels are too low a company risks running out of money and not being
able to meet its obligations or stay solvent. If cash levels are too high, the
company is not utilizing assets efficiently. The failure to effectively utilize
assets can cost organizations money in lost opportunity for sales and
investment. Additionally, managers who are constantly worried about whether
or not bills will be paid on time have little time for innovation.
4. Decrease the risk of business: Many people are putting their dreams of owning
a small business to work with the opportunities. Today, one can greatly
decrease the risk of business failure with good working financial programs and
can start their business with strong financial resources.
5. Protect a company from unexpected circumstances: proper Utilization
protects a company from unexpected circumstances. Working capital helps to
decide new strategy for development of business Working capital financing
gives a business strength, flexibility, and stability.
6. Building of inventories and purchase of raw-material: New businesses and
small firms often find themselves in working capital crunches. Without
adequate working capital, they cannot build inventory or purchase raw
materials. As a result, the company cannot sell enough products to generate the
profits needed to rectify this situation. This is extremely dangerous and can be
destabilizing for the company or even cause it to collapse.
7. Creating flexible working capital loan programs: The availability of credit or
financing is therefore a key determinant in the likelihood and ability of a small
firm in expanding and succeeding. To lessen problems for startup and pre
existing businesses, some private lenders have created flexible working capital
loan programs.
8. Influence the character and scope of the business: The working capital
influences the character and scope of the business. It also infers the stability of a
company. Proper utilization of fund is necessary for making positive character
of business in market.
9. Helpful in dynamic development of business: Today it is essential for each
entrepreneur to turn his fabulous ideas into a fabulous reality for dynamic
development of business. a new breed of innovative companies that has
emerged can give excellent working capital loan programs to pre existing
company. The prospects for today's businesses have grown dynamically
10.Safety in financial backing: The proper management of Working capital gives
safety to business. The effective financial planning of working capital fulfills
the needs of our business and faces the challenges from unexpected situation.
With the help of proper working capital management we can run our business
with sound financial position in the global market.
Objective of study
Fixing the objective is like identifying the star. The objective decides where we
want to go, what we want to achieve and what is our goal or destination.
Every study is carried out for the achievement of certain objectives.
i. To analyze the various components of working capital of ONGC.
ii. To study the financing of working capital of ONGC.
iii. To study and analyze the ratio’s of ONGC.
Scope of the study
This study covers the different aspects of working capital management in ONGC
in INDIA. This study is important to find out the increase or decrease in
components of working capital of approx. 5-6 years. The study and the research
will be taken in INDIA.
Research methodology
Selection of samples: Samples will be selected by simple random sampling
techniques.
Data collection: The methodology which will be used for carrying out the report
includes the primary as well as secondary data sources. Various statistical tools
will be used to suggest and analyze the primary and secondary data.
Primary source will include the questionnaire and interview methods.
Questionnaire will include range of response questions, close ended questions,
providing limited answers to specific responses or on a numeric scale.
Secondary data will be collected from annual reports of the sample units under
study for the period from 2005-06 to 2010-11. Data will also be collected from
various journals, periodical and newspapers. Web search will be done for the
information related to the outside region (other part of India and globe) Sampling
like records, reports, operation log, data entry documents, complaints, and various
types of forms will be collected for the study.
Analysis of data: To analyze the working capital management, various techniques
of financial management will be used in the study, such as ratio analysis with
graphs, inventory management, cash management, etc.
Hypothesis
The study intends to test the hypothesis that Mismanagement of working
capital has been at root of industrial sickness prevailing in the ONGC in
INDIA.
Frame work of the study: Chapter scheme
The research work will be presented in 9 chapters. Chapter I include the
Introduction to study. Chapter II includes the company profile. Chapter III includes
the management of working capital in ONGC. Chapter IV includes the review of
literature. Chapter V includesthe management of inventory in ONGC. Chapter
VIincludes the management of receivables of ONGC.Chapter VII includes the
management of cash. Chapter VIII includes ratio analysis of ONGC. Chapter IX
Includes the Summary, findings of study and offers suggestions for the efficient
management of working capital and conclusion. Chapter X includes Bibliography
and index.
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