REPORT ON

TREASURY MANAGEMENT

OF

RITES LIMITED

INTRODUCTION

1

Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management.

For non-banking entities, the terms Treasury Management and Cash Management are sometimes used interchangeably, while, in fact, the scope of treasury management is larger (and includes funding and investment activities). In general, a company's treasury operations come under the control of the CFO, Vice-President / Director of Finance or Treasurer, and are handled on a day to day basis by the organization's treasury staff, controller, or comptroller.

OBJECTIVE OF STUDY

RITES LTD is the cash rich company, and this is further substantiated by looking its financial performance for last 10 years.

2003-2004

2004-205

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2010-2011

2011-2012

2012-2013

0

50

100

150

200

250

300

PAT (crores)

PAT (crores)

Fig.1

So it is important to study how RITES LTD manages its cash or treasury, where does it invest by following DPE guidelines in order to maximize cash availability and interest income on idle funds without any risk exposure to its treasury.

The goals of cash management include:

2

To maximize yields on surplus liquidity. To minimize idle surplus. To reduce internal administrative cost. To control foreign exchange and interest rate exposure risks.

ABOUT RITES LIMITED

Rail India Technical & Economic Services (RITES) Limited was incorporated in India in 1974 under the Companies Act, 1956 for rendering consultancy services for railways in India and abroad. The company soon transformed itself from a mere railway consultancy firm to the activities connected with other modes of transport, with multidimensional activities and its names had been changed from Rail India Technical & Economic Services to RITES LIMITED. Today RITES Ltd. is a multi-disciplinary organization as it provides services as consultant, engineers and project managers in railways, highways, airports, ports, ropeways, urban transport, and inland waterways areas in India and abroad.

RITES, an ISO 9001 and a “Mini Ratna” Schedule “A “company, provides comprehensive array of services under a single roof and believes in transfer of technology to client organizations. In overseas projects, RITES actively pursues and develops cooperative links with local consultants/ firms both as means of maximum utilization of local resources and as an effective instrument of sharing its expertise.

RITES is internationally recognized as a leading consultant with operational experience in over 62 countries in Africa, Middle East, South East Asia and Latin America. The company would aim at leadership in every business by synergizing values, integrity, and drive for technology and innovative spirits. They have always ensured value for money to its clients and benefits to society at large.

DPE GUIDELINES FOR INVESTMENT OF SURPLUS FUNDS OF CPSEs

3

RITES LTD is CPSE (Central Public Sector Enterprise) so its investment policy is guided by DPE guidelines (Department of Public Enterprise). Various DPE guidelines are cited below:

• Maximum safety investment instrument.

• No element of speculation.

• Interest rate on investment > borrowing interest rate

• Maximum investment Tenor

– For term deposits with banks: 3 years

– Other investments: 1 year

• Surplus availability at management discretion in consultation with ministry.

• Investment tenor in Govt securities, Treasury bill increased to 3 year.

• Removed restriction on investment in Units/Scheme of UTI.

• Investment in Call Money Market was allowed.

• For short term investment no consultation with ministry required, ministry to be informed only.

• Asset-liability mismatch at management discretion.

• CPSE can invest surplus funds in mutual funds.

• Nirvana/Miniratna is allowed to invest in Public sector mutual fund.

• At least 60% of the funds should be placed with Public Sector Banks.

• Practice of competitive bid should be discontinued for parking funds.

• Limit of 30% of available surplus funds is for investment in Public Sector Mutual Funds as a whole and not for only equity schemes of Public Sector Mutual Funds.

• Central Public Sector Enterprises can park surplus funds in term deposits with any scheduled commercial bank (i.e. banks incorporated in India) with a paid up capital of at least Rs. 100 crores, fulfilling the capital adequacy norms, as prescribed by the RBI from time to time.

CURRENT FINANCIAL PERFORMANCE (Highlights)

4

During the year 2012-2013, Company has achieved highest ever operating turnover of Rs 953 crores as against Rs 836 crores of previous year, which is higher by 14%.

Total revenue of Rs1076 crores as against Rs 934 crores of the previous year, which is higher 15%.

Income has increased from all streams of business activities; the net worth has increased from Rs 1001 crores to Rs 1195 crores.

Company has spent Rs 6.4 crores towards corporate social responsibility. Total foreign exchange earnings during the year under review were Rs342.14 crores,

previous year it was Rs 310.15 crore , rise by 10%. Net foreign exchange earnings are Rs 317.47 crores compared to Rs 281.58 crores, leds to

rise 13%. Current investment has increased from Rs 5 crores to Rs 122 crores.

TREASURY RISK & LIQUIDITY MANAGEMENTExecution of foreign projects necessitates balancing of inflows and outflows of foreign exchange rate fluctuations. In order to mitigate this risk, foreign exchange movement are constantly monitored. To cope up with challenges posed by continuous changing external environment Rites has sound currency risk management policy in place. Policy covers various aspects of currency risk management approach, benchmarking, hedging and risk appetite, permissible instrument, hedging policy, structure of risk management committee and treasury group.

Company has committee comprising of Director (Finance), three executive directors of operations units, general manager (treasury), additional general manager (treasury) and an external consultant. Committee provides guidance for day to day decisions with regards to efficient treasury operation. Company has continued to optimize the returns from investment of surplus funds by adhering to efficient decision process through which funds are invested in the instruments of highest safety and yielding high returns, by following DPE guidelines.

Inline with DPE guidelines, company invest its surplus funds in deposits with banks, mutual funds and corporate bonds etc. To enhance the yield from short term investments, RITES has also started investing in public sectors mutual funds with strong financials, in addition to UTI mutual fund. The investments made by the company are being reported to the Board of Directors on periodic basis.

RITES POLICY

1) Banks Qualifying Criteria

5

• Scheduled Commercial Bank i. Excluding cooperative and foreign banks

• Net Worth = 1000 Cri. 100 Cr in DPE guidelines

• Minimum CAR of 10%

As per DPE guidelines minimum of 9%

• NPA <= SBI NPA

Not mentioned in DPE guidelines

• Profitable for last 3 years

Not mentioned in DPE guidelines

• Investment in single bank should not exceed the 50% of the total investment. Sub ceiling of maximum investment in Public sector bank is `200Cr and in private sector bank is `75 Cr

2) Mutual fund qualifying criteria

Investment in Mutual Fund is generally done to maintain Short Term Liquidity.

a. Maximum Investment Limit = 150 Cr or 5% of the Fund Sizeb. Mutual Fund Qualifying Criteriac. Must be a SEBI Regulated Public Sector Mutual Fundd. Minimum Total Assets under Mutual Fund Company (as on 31st

march) = `5000 Cre. Minimum Funds Size (as on 31st march) = `500 Crf. Fund must have only Debt instruments in its portfoliog. Fund should have the highest credit rating

RITES LTD PROCEDURES AND INVESTMENTS

6

1. Deposit in banks

1) Fixed deposit

2) Flexi deposit

FDR from banks (procedure)

a) Estimation of Surplus fund

b) Information of interest rates from banks -via e-mail or Fax

c) Bank providing maximum rate for desired duration is selected

d) Approval of GM/F is required

e) Fund is transferred through RTGS to the A/C specified by the bank

CONCEPT OF POOLING IN RITES LIMITED

RITES LTD uses unique concept of pooling account, under which Axis Bank is given instruction for making Flexi Deposit if the balance in pool A/C is above a certain limit.

Interest can be earned only after 7 days & Interest on Flexi Deposits = MIBOR – 0.4 %

Balance in Pool A/C can be used by any of the POs or Regions. At the end of the Day, debit/ credit balance in POs & Regions is transferred to pool A/C at corporate office. In case the amount in Pool A/C is more than required, it is transferred to Flexi Deposits.

Pool a/c adjustments

• Pool A/C adjustments is done at the corporate office

• Bank has been given instructions to provide MIS

• Statement containing all the receipts/payments pertains to unit concern is sent by corporate office

– Showing net amount debited/credited to units

• Voucher is passed accordingly by using A/C code 5556 by units

• Corporate office will use the specific A/C code of units.

7

• Balance is confirmed or discrepancy in corporate office statement is informed immediately by the units

• All transaction should be rooted through corporate office

RETURN ON BANK DEPOSIT

2009-2010 2010-2011 2011-2012 2012-20130.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%

return

return

Fig-2

Return on bank deposit is quite steady, hovering around the level of three percent. In 2012-2103 return was 4%. Average return on bank deposit for last four years is 54.78 crore on the investment of 1493.24 crore i.e. return of 3.78% annually.

2. Mutual funds

8

Rites ltd is currently investing in:

Mutual funds Amount

   

SBI Mutual Fund 23 crore

UTI liquidity cash plan 24 crore

CANARA Robeco liquid fund 74 crore

Total Rs 122 crore are invested in various mutual funds

Mutual fund (procedures)

a) Assess the investable surplus

b) Proposal is initiated by 2 AGMs

c) After approval of GM/F, the proposal is sent to the investment committee for approval

d) If approved, the funds are transferred to the A/C of UTI mutual fund

3.IRFC Bonds

9

To maximise the yield from RITES investment portfolio, the funds are placed in Corporate Bonds, if providing higher returns then any other investment option available.

Corporate Bond - Qualifying Criteria

a. Bond must be a issued by a Public Sector Undertaking

b. Bond should have the highest credit rating

c. Should have an Exit Option (Listed in Stock Exchange)

Bonds AmountINDIAN RAILWAY FINANCE COPRPORATION 50 crore(7 year secured redeemable 6.30% Tax free bonds) INDIAN RAILWAY FINANCE COPRPORATION 50 crore(7 year secured redeemable 6.32% Tax free bonds) INDIAN RAILWAY FINANCE COPRPORATION 25 crore(10 year secured redeemable 7.55% Tax free bonds) INDIAN RAILWAY FINANCE COPRPORATION 30 crore(10 year secured redeemable 7.21% Tax free bonds) INDIAN RAILWAY FINANCE COPRPORATION 10 crore(10 year secured redeemable 7.22% Tax free bonds) INDIAN RAILWAY FINANCE COPRPORATION 10 crore(10 year secured redeemable 7.18% Tax free bonds)

So overall Rs 175 crore are invested in IRFC of total non current investment i.e. Rs 195 crore.

Corporate bond & Deposit (procedure)

a) Proposal is initiated by Banking Cell

b) After approval of GM/F, the proposal is sent to the investment committee for approval

c) Approval of BOD is also sought for the same.

10

d) In case investment is for more than 3 years, ministry of railway is informed

RETURN ON IRFC BONDS

2009-2010 2010-2011 2011-2012 2012-20130.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

return

return

Fig-3

Above graph shows return on IRFC bonds for last four years. In 2009 -2010 it was below percent but after that there is significant rise in return constantly hovering around five percent.

Average return for last 4 years is 5.33 crore from investment of 112.5 crore yearly i.e. 4.7% annually.

SUGGESTIONS

11

RITES LTD needs to make sure that they have a clear view of the true cash position at any point of time. They are using effective concept of pooling account with axis bank, which led to avoiding in dealing with multiple banks.

Since RITES LTD has presence in 60 and more countries so there should be parallel convergence in international trade towards open account, electronic payment and the automation of information flows. This will reduce the time of the transaction and will enhance the safety and authenticity.

Investment should be more in other mutual funds apart from UTI; to improve return on investment.

Return on bank deposits is quite low so firm should look out for more options in accordance DPE guideline for bank deposit.

12