Finance Treasury Loan

8/14/2019 Finance Treasury Loan

1/32

Project Report Power Finance Corporation Ltd

Project Report

Working of Treasury

Loans & Disbursement Department

In

Power Finance Corporation

Submitted by Jayant Menon

Roll Number: 031069Wave-12b

FORE SCHOOL OF MANAGEMENTMAY 2004

Page 1


2/32


Acknowledgement

I would like to express my deep sense of gratitude to Mr. R.K.Malhotra for being

extremely Co-operative and for guiding me very patiently at every stage of my

project.

I am thankful to Mr. Milind Dafade who was very supportive, encouraging and

without whose guidance this project could not have been completed.

I would like to convey my heartfelt thanks to Mr. Ruzbeh Bodhanwala who was a

constant source of inspiration and valuable inputs.

Finally, a sincere thanks to Mr. Om without whome I would not have got the

opportunity to work at Power Finance Corporation Ltd.

Mr. R.K.Malhotra: Manager Treasury PFC Ltd.

Mr. Milind Dafade: Assistant Manager PFC Ltd.

Mr. Ruzbeh Bodhanwala : Professor Finance FORE School of Management

Mr. Om Prakash : Manager HR PFC Ltd.

Page 2


3/32


Letter of Transmittal

The overall experience of the project has been a wonderful

and enlightening. It was for first time that I got an

opportunity to have a close ringside view of the functioning

of a department in a professional organisation. Since I am

going to specialize in Finance, it became even more

important for me to make the best of this opportunity

bestowed upon me. While observing the Treasury

Department the very first fact that I realised was the

difference between theory and practice. One thing is for sure

that if you want expertise in this field then its only hands on

experience thats going to help you. The staff in the

organisation was very helpful in explaining to me the

intricacies of the trade. Without the help of Mr.

R.K.Malhotra and Mr. Milind Dafade it would have almost

impossible for me to get a grab of things. The project was

completed in one month and the scope of the project included

the Estimation of future Disbursements, Investment Policy of

the Organisation with regards to the surplus funds and last but

not the least, suggestions by yours truly for improving the

short-term investment by throwing some light on the

Page 3


4/32


available avenues for investment overlooked by the

Department.

Executive Summary:The objective of the project was to develop an understanding about the working of a

Treasury Management Unit. The report throws some light on the investment policies

of the department. The areas that were studied in detail were the estimation of Cash

Flows and the possible investment opportunities that the company has been

overlooking for some reason or the other. The Treasury Management Unit at PFC

generally invests in short term instruments due to the liquidity requirements of the

company. Public Deposit Account of RBI has been, traditionally the preferred

investment option for the Department. It has a return of 6 % p.a., but the interest

income from this source is taxable @ 35% which effectively reduces the yield to a

meager 3.9%. it is recommended that the department considers Money Market

Mutual Funds as a viable avenue for investment as the average return in Liquid

Mutual funds vary between 4.4% - 5 %. The Cash Flow estimation methods of the

department were also found to be faulty. The yearly disbursement target was

distributed evenly throughout the year. But, the empirical data reveals that

disbursements are low in the initial part of the year and pick up towards the year end.

Past trends were used to predict the disbursement pattern for the year 2004-05. Such

an estimation would help in predicting the disbursements more accurately which in-

turn would assist in the accurate estimation of Cash Flows.

Page 4


5/32


Table of ContentsS.no Topic Page no

1 Company Background

2 Introduction

3 Scope of Activities of the Organisation

.

4 Resource Mobilization

5 Working of Treasury Management Unit

5.1 Functions of Treasury Management Unit

..

5.2 How it Actually Works!

..

6 Investment Policy of Treasury Management Unit

1

1

2

3

4

4

5

8

11

11

16

20

23

24

25

Page 5


6/32


..

7 Observations at the Organisation

7.1 Major Deviation in Estimated and Actual Cash Flows .

...

7.1.1 Suggestions to improve Cash Flow estimation .

.

7.2 Investment of Surplus funds

..

7.2.1 Taxability of Mutual Funds

..

7.3 Gilt Short-Term Funds

.

7.4 Debt Ultra Short Term Funds

8 Annexures..

.

27

Page 6


7/32


Introduction

India is a developing economy and in the past decade has it has emerged as one of the

leading economies of the world. This has been possible due to the successes that India

has achieved be it the field of Manufacturing, Information Technology,

Telecommunications, Refining, Biotechnology, Business Process Outsourcing and the

list is endless. But we cant just sit on our past laurels and hope for future growth.

India as an economy is already short on infrastructure and in order to move to the next

higher trajectory of growth, it is but imperative to revamp our infrastructural facilities.

Power being one such major infrastructure. Our country has always been facing an

acute shortage of power and this problem exists since times immemorial.

Company Background

Power Finance Corporation (PFC) was established in July 1986 as a Development

Financial Institution (FI) dedicated to the Power Sector. The Government of India

wholly owns it but very soon it will be coming out with an Initial Public Offer as a

part of the disinvestment program. Power Finance Corporation is a Public Financial

Institution (PFI) under Section 4A of the Companies Act, 1956. It has been accredited

with the title of Mini-Ratna (category-1) for Public Sector Undertakings. PFC's

mission is to excel as a pivotal developmental financial institution in the power sector

committed to the integrated development of the power and associated sectors by

channeling the resources and providing financial, technological and managerial

services for ensuring the development of economic, reliable and efficient systems and

institutions.

Page 7


8/32


Scope of activities of the Organisation Financing:

1. Power Generation projects particularly thermal and hydroelectric projects.

2. Power transmission and distribution works

3. Renovation and modernisation of power plants aimed at improving performance

of such plants.

4. System improvement and energy conservation schemes.

5. Survey and investigation of power projects.

6. Maintenance and improvement of capital equipment including facilities for repair

of such equipment, training of engineers and other personnel employed in

generation, transmission and distribution of power.

7. Studies, schemes, experiments and research activities associated with various

aspects of technology in power development and supply in Power sector.

8. Promotion and development of other energy sources including alternate and

renewable energy sources; and

Consultancy:

To promote, organize or carry on Consultancy Services in the related activities of

PFC.

Page 8


9/32


Resource MobilizationIn order to undertake the above-mentioned activities effectively and efficiently timely

funds are required that too in appropriate quantum. These funds are raised through

Domestic as well as External sources.

Domestic Sources:

1. Equity contribution by the Government of India

2. Issue of Tax-free bonds, SLR bonds and Taxable bonds with different coupon

rates.

3. Fixed Deposit Schemes

4. Issue of Commercial Paper and Inter Corporate Deposits.

5. Term Loans of various periods from banks/ financial institutions.

6. Cash Credit/ loan against FDs.

External Sources:

1. Bilateral and commercial credit.

2. Complementary loan from Asian Development Bank.

3. Loan from World Bank

4. Lines of credit, syndicated loans

5. External Commercial Borrowings: etc.

Page 9


10/32


Working of Treasury Management Unit:Treasury Management Unit

Treasury Management Unit (TMU) is one of the most pivotal departments of Power

Finance Corporations. TMU has to ensure that funds are not kept idle and the same is

invested in instruments as per the existing Investment Policy. The objectives of TMU

are:

1. Optimum utilization of resources.

2. Investment of surplus funds keeping in view the liquidity position and yield.

3. Availing of cash credit/loan against FD in case of deficit of funds.

4. Projecting the requirement for raising of funds by Resource Mobilisation Unit

(RMU).

5. Ensuring timely availability of funds for meeting payment commitments.

Functions of Treasury Management Unit1. TMU shall collect information in the fourth week of every month relating to cash

inflow and outflow from various sections for the next three months.

2. Based on the assessment of liquidity position, TMU shall indicate the funds to be

raised to meet the liquidity requirements of the Corporation.

3. TMU shall ensure availability of funds on the date of requirement.

4. TMU shall invest surplus funds as per the investment policy of the Corporation

and arrange funds by way of cash credit/ loan against FDs in case of deficit of

funds. For this TMU shall perform the following functions:

a) Empanellment of Institutions.

b) Review of exposure limit.

c) Assessment of surplus/deficit.

Page 10


11/32


d) Obtaining approval of the competent authority for investment/ placement of

surplus funds.

e) Making investments / availing of cash credit/ loan against FD.

f) Verification of instruments with regard to adequacy of stamping and

enforceability.

g) Safe custody of deposit / investment receipts and investment records.

h) Submit monthly investment reports to Board of Directors.

i) Submit daily Funds Flow Statement to HOU.

j) Ensuring encashment of investments on the date of maturity, repayment of

cash credit/ loan against FDs and payment of interest on cash credit /loan

against FD.

How it actually works!Initially at the beginning of the day TMU holds certain amount cash and bank balance

in the form of Public Deposit Account (PDA) or normal deposits in scheduled banks.

Then comes a request for disbursement. If TMU has the required funds with it in the

form of bank deposit or PDA then it immediately clears the disbursement.

But if it does not have the requisite funds then it makes a request to the Resource

Mobilisation Unit to make the funds available for disbursement. As soon as the funds

arrive they are disbursed off to the concerned party.

Apart from this TMU also has to make note of the loan repayment schedule, interest

accrued etc on a daily basis.

At the end of the day if there are funds available with TMU above a specified limit

then it has to be invested as per the investment policy of the Organisation

Page 11


12/32


Page 12

Make thedisbursement

Request RMUto arrange for

funds

Funds at the end

Invest as per policy

Keep theamount in banks

Closing balanceof cash

OpeningBalance of cash

Request for disbursement

If fundsavailable

If exceedsspecified

limit


13/32


Specified limit of Funds to be maintained in Bank Accounts

S.no BANK MAXIMUM BALANCE1 Reserve Bank of India Rs 10 lakhs2 Bank of India

(Janpath Branch)

Rs 5 lakhs

3 State Bank of India

(Parliament Street)

Rs 5 lakhs

4 State Bank of India

(Chandralok Building)

Rs 30 lakhs in the 1 st and 4 th week; and Rs 5 lakhs

in the 2 nd and 3 rd week of the month5 Canara Bank

(Janpath)

Rs 5 lakhs

6 HDFC Bank

(HT House)

Rs 5 lakhs

7 ICICI Bank

(9A, Connaught Place)

Rs 5 lakhs

8 IDBI Bank

(Surya Kiran Building)

Rs 5 lakhs

The maximum balances are kept in order to meet routine and also unforeseen small

establishment / misc. expenses, besides meeting the minimum balance requirements in

the current account of the respective bank.

If the daily cash balance exceeds the maximum limit then the surplus funds have to be

invested in short-term instruments, which will ensure safety of the funds along with

adequate interest rate and liquidity.

Investment policy

Objectives:

Page 13


14/32


1. Adequate number of Banks for empanelment in order to obtain attractive/

competitive interest rates.

2. Fixing the ceiling for investment in Banks depending upon their Net Worth &

Capital Adequacy Ratio.

3. Excluding the investment options in Call Money and UTI schemes.

4. Considering the safety aspect of deposits.

5. Maintaining adequate liquidity.

6. Achieving optimum yield.

Avenues for investment

1. Fixed Deposits with scheduled commercial banks.

2. Certificate of Deposits with scheduled commercial banks.

3. Public Deposit Account of Govt. of India.

4. Inter Corporate Deposits with Central PSUs.

5. Inter Corporate Deposits with Primary Dealers.

6. Certificate of Deposit, Inter Corporate Deposits and other deposits of Financial

Institutions.

Fixed Deposits:

Power Finance Corporation may place funds in Fixed Deposits with scheduled

Commercial Banks with a minimum networth of Rs 100 crores and having Capital

Adequacy Ratio (CAR) as per requirement of RBI from time to time (at present 9%).

Further PFC may place funds in Fixed Deposits with Public Sector Banks without

credit rating for them. However PFC may continue to insist highest safety rating

Page 14


15/32


either for FDs or CDs from Credit Rating Agencies (like CRISIL, CARE, ICRA etc.)

for placement of funds in FDs with Private Banks. The combined exposure limit of

Certificate of Deposit and Fixed Deposit with Public Sector banks and Private Sector

banks will be fixed as under:

Networth of the Bank Capital Adequacy Ratio

( CAR )

10% of Networth subject to

Maximum Exposure given belowRs 100 - 250 Crs 1) 9% & below 11%

2) 11%& above

Rs 10 Crs.

Rs 25 CrsAbove

Rs 250 - 300 Crs.

1) 9% & below 11%

2) 11% & above

Rs 25 Crs

Rs 50 CrsAbove

Rs 500 Crs

1) 9% & below 11%

2) 11% & above

Rs 50 Crs

Rs 100 Crs

The maximum number of empanelled banks may be restricted to 20 based on the net

worth of the banks for the previous year ending 31 st March.

Certificate of Deposit:

Power Finance Corporation may place funds in CDs with scheduled commercial

banks. In regard to the placement of funds in Certificate of Deposits, the other terms

and conditions will be the same as applicable in case of placement of funds in Fixed

Deposit which are mentioned above for Fixed Deposits.

Public Deposit Account:

Power Finance Corporation was permitted by the Ministry of Power to operate Public

Deposit Accounts (PDA/c) with State Bank of India. At present the rate of interest on

Public Deposit Account is 6% p.a. There is no restriction on the number of

Page 15


16/32


withdrawal/ deposits and period of deposit in PDA/c but subject to a minimum

balance of Rs 1 Crores.

Inter Corporate Deposit:

Power Finance Corporation may place funds in Inter Corporate Deposit (ICD) of any

Central PSU having head office in Delhi with networth of Rs 500 Crs or more with

highest rating. The maximum amount of investment in a single company will be

restricted to exposure of Rs 100 crores. The funds may be invested in ICDs upto a

maximum period of six months.

Certificate of Deposit, Inter Corporate Deposits and other Deposits of FIs:

PFC may make investments in Certificate of Deposits, Inter Corporate Deposits and

other Deposits Schemes of other FIs, if they have obtained highest safety rating from

one of the Credit Rating Agencies. The maximum amount of investment may be

restricted to the extent of 30% of the networth of the company or Rs 100 cr.

whichever is less.

Inter corporate Deposits with Primary Dealers:

PFC may place funds in short-term Deposit / Inter Corporate Deposit for a maximum

period of 6 months with Primary Dealers who have not been promoted by private

sector.

Page 16


17/32


Observations at the Organization

During my one-month stint at the Treasury Management Unit of Power Finance

Corporation Ltd. there were two major observations which are explained in detail

below along with the remedial course of action. These observations are very serious

in nature and if not taken careoff in due course of time could lead to major problems

in the future.

1.) Major Deviation in the Estimated and Actual Cash FlowsOne of the major functions of Treasury Management Unit is to correctly estimate the

future cash flows, so that adequate fund can be made available if any deficit is

forecasted. This function becomes even more important as wrong estimation leads to

the inefficient use of funds. Presently, in order to estimate the cash flows the

disbursement target for the year is divided equally for all the months, assuming equal

disbursement throughout the year. Because of this very assumption there has been a

significant deviation in the actual and the estimated cash flows. The following graph

gives a very clear indication of the extent of deviation.

Page 17


18/32


The above graph clearly depicts the fact that as the months pass-by the gap between

the estimated and actual cash flows widens. This means that, due to the faulty

assumption of evenly distributed disbursements, the error in estimation of cash flows

magnifies and takes gigantic proportions towards the year-end.

In order to correct the deviation it is very important to have a look at the cash flow

statement (Annexure 1). Out of all the major entries in the Cash Flow Statement its

only the disbursement of Working Capital Loans and the Term Loans that are variable.

The rest of the items are more or less known before hand as certainty. Analyzing the

Disbursement pattern on a monthly basis brings out startling revelations.

Page 18

Actual & Estimated Cash Flows2003-04

-2000

-1500

-1000

-500

0

500

1000

1500

apr May jun jul aug sep oct nov dec jan feb mar

Month

Estimated

Actual

Poly.(Estimated)Poly. (Actual)


19/32


Table of Disbursements:

MONTH 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Apr 84.56 132.35 178.22 267.88 524.39May 239.77 153.4 225.88 322.06 436.07Jun 189.54 106.39 125.21 257.86 737.56Jul 139.1 290.78 341.27 571.54 576.92Aug 165.39 262.3 201.25 425.95 657.16Sep 286.88 176.26 349.58 803.72 944.75Oct 166.94 188.34 320.6 532 808.05

Nov 235.66 298.91 248.81 582.1 307.28Dec 251.41 287.2 229.29 645.37 520.65Jan 211.44 245.95 533.78 954.92 1002.93Feb 330.46 134.76 601.58 695.78 568.22Mar 1212.16 916.58 1769.48 1282.22 1847.51

Page 19

Yearly Disbursements

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Month

1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

Disbursements for 2001-02

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Month

2001-2002

Poly. (2001-2002)


0

200

400

600

800

1000

1200

1400

1600

1800

2000


Month


0

200

400

600

800

1000

1200

1400


Month


20/32


The disbursement graphs for the previous 5 years point towards one thing only i.e.

disbursements remain more or less constant upto December, but shoot up alarmingly

for the months of January, February and March. This phenomenon can be reasoned

with the help of two major points:

1.) Inclination to show better performance by PFC.

The basic objective of any financial organization is to lend as much as possible and,

Power Finance Corporation is no exception to that. Knowingly or unknowingly it

happens that towards the end of the financial year the management in its attempts to

show better & improved performance, lends more than it would do at any other time

of the year.

Page 20


0

100

200

300

400

500

600

700

800

9001000


Month


0

200

400

600

800

1000

1200

1400


Month


21/32


Also, towards the end of the year when the organisation is left with funds to be

utilized, the disbursement rate accelerates.

2.) Window Dressing by loan seeker

Power utility companies normally dont raise debt at the beginning of the year. They

raise the debt towards the end of the year so as to decorate their Balance Sheets by

reporting new projects commenced. This improves the investor outlook towards the

Power Utility Company. Moreover, for the past two three years the interest rates have

been steadily falling. Power companies expecting the interest rates to fall dont

undertake debt in the initial part of the year, but as time runs out they are forced to

raise funds during the latter part of the year.

Suggestions to improve cash flow predictions:Monthly Disbursements for the years 1999-2004

MONTH 1999-00 % 2000-01 % 2001-02 % 2002-03 % 2003-04 %Apr 84.56 2.41 132.35 4.14 178.22 3.48 267.88 3.65 524.39 5.87May 239.77 6.82 153.4 4.80 225.88 4.41 322.06 4.39 436.07 4.88Jun 189.54 5.39 106.39 3.33 125.21 2.44 257.86 3.51 737.56 8.26Jul 139.1 3.96 290.78 9.11 341.27 6.66 571.54 7.79 576.92 6.46Aug 165.39 4.71 262.3 8.21 201.25 3.93 425.95 5.80 657.16 7.36Sep 286.88 8.17 176.26 5.52 349.58 6.82 803.72 10.9 944.75 10.58Oct 166.94 4.75 188.34 5.90 320.6 6.26 532 7.25 808.05 9.05

Nov 235.66 6.71 298.91 9.36 248.81 4.85 582.1 7.93 307.28 3.44Dec 251.41 7.16 287.2 8.99 229.29 4.47 645.37 8.79 520.65 5.83Jan 211.44 6.02 245.95 7.70 533.78 10.4 954.92 13 1002.93 11.23Feb 330.46 9.41 134.76 4.22 601.58 11.7 695.78 9.48 568.22 6.36Mar 1212.16 34.5 916.58 28.7 1769.48 34.5 1282.22 17.4 1847.51 20.69TOTAL 3513.31 100 3193.22 100 5124.95 100 7341.4 100 8931.49 100Our objective is to arrive at proportional monthly disbursements by using previous

years data. For this purpose there are two methods available:

a.) Arithmetic Average Method

b.) Weighted Average Method

Page 21


22/32


Arithmetic Average Method:

Arithmetic Average Method gives equal weightage to all the previous years. This

would lead to faulty conclusions as since 1999-2000 there has been a sea change in

the Financial, Economic, Political, Legal and Social environment. To list a few

changes:

Change in Interest rates

Number of players in the market have increased

Change in the Central and State Governments

Demand for funds has increased manifold

Change in legal requirements etc.

Weighted Average Method:

Weighted Average Method gives appropriate weights to the data for different years.

The year closest to the current year would be given the maximum weight and the

initial years would be given lesser weights. The rational behind this is the fact that

market conditions were totally different in comparison to the current situation. But

then those early years data is not totally redundant and, hence given some minimal

weights.

Weights Assigned to different Years

Year Weight1999-00 12000-01 22001-02 32002-03 42003-04 5

Page 22


23/32


Estimated Disbursement for the Year 2004-2005

Month Proportional Disbursements

Apr 4.34% ***May 4.77%Jun 4.98%Jul 7.04%Aug 6.19%

Sep 9.09%

Oct 7.30%

Nov 5.93%Dec 6.86%

Jan 10.72%Feb 8.19%

Mar 24.59%TOTAL 100.00%

*** Proportional Disbursement for the month of April has been arrived as: Estimate Apr 2004-05 = (Weight for 1999-00 * %Figure for Apr) + (Wgt for 2000-01 * % Fig ) + (Wgt for 2001-02 * %Fig ) + (Wgt for 2002-03 * %Fig ) +(Wgt for 2003-04 * %Fig )

Now having arrived at the proportionate disbursement for different months, the only

step left is to estimate the projected annual disbursement target for the year 2004-05

as divide the annual figure into monthly disbursements.

Estimation of Annual Disbursement Target:

Year Amount 1999-2000 3513.31

2000-2001 3193.22

2001-2002 5124.95

2002-2003 7341.40

2003-2004 8931.49

The table shows the amount disbursed for the previous 5

years. Using the Microsoft Excel Growth Function which

uses regression method, we can estimate the disbursements

for 2004-05.

Page 23

( ) ( ) ( ) ( ) ( )%34.4

78.5565.3448.33%14.42%41.21=

++++= figure Apr


24/32


Forecasted Disbursement for the Year 2004-05 amounts to 10116.24 cr.

Now, this forecasted amount is broken up in to 12 monthly disbursements by using

the proportionate disbursement calculated above.

Estimated Disbursement for the Year 2004-05MONTH Disbursement % AmountApr 4.34% 438.91382May 4.77% 482.97875Jun 4.98% 503.97296Jul 7.04% 712.08967Aug 6.19% 626.62481Sep 9.09% 919.55501Oct 7.30% 738.73618

Nov 5.93% 599.63574Dec 6.86% 693.81341Jan 10.72% 1084.7557Feb 8.19% 828.05416Mar 24.59% 2487.1058TOTAL 100.00% 10116.24

Page 24

Yearly Disbusements

0

2000

4000

6000

8000

10000

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Amount


25/32


These figures have been arrived at, by taking into consideration the previous years

trends in monthly disbursements. This is a superior method of estimation of monthly

disbursements. It may not be 100% accurate due to the changing business

environments, but it surely is a measure that would take the process of Cash Flow

estimation much closer to efficiency and effectiveness from its present levels.

2.) Investment of Surplus FundsLike any rational investor it is one of the prime objectives of Power Finance

Corporation to invest the surplus funds in the best possible instruments available in

the market, and also giving due diligence to the risk factor. The following table

shows the surplus funds that were available with Power Finance Corporation for the

past 5 years.

Surplus Funds:

Month 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004Apr 301.65 224.3 995.97 367.84 187.67May 187.28 169.01 332.33 165.72 403.65Jun 325.57 307.67 484.5 242.11 204.09Jul 545.88 266.8 702.81 123.42 1149.76Aug 448.73 144.32 130.15 124.5 415.31Sep 220.95 48.91 7.1 68.77 257.78Oct 69.96 278.4 100.69 355.54 212.65Nov 248.34 784.95 276.94 107.17 382.44Dec 520.76 1108.1 109.73 199.34 378.1Jan 520.36 1102.82 1.14 248.19 433.31Feb 312.94 1226.17 213.07 69.35 302.76

Mar 206.1 298.99 43.13 5.7 99.32

Page 25


26/32


As per the Investment Policy of Power Finance Corporation, the surplus funds are

invested in Public Deposit Account. The Public Deposit Account yields a return of 6

% before tax. The rate of interest on PD A/c is determined by the Govt. of India.

Power Finance Corporation being a corporate entity has a tax slab of 35 %.

Therefore, the net yield on the PA A/c comes out to be

6 % X 0.65 = 3.9 %

This yield of 3.9 % can be improved if Power Finance Corporation looks out of its

limited avenues of investment and searches for better deals.

Taking into account the liquidity and safety requirements for the investments made by

PFC, the best option available is that of Mutual Funds.

Mutual Fund schemes are of four types:

1.) Equity Scheme

2.) Debt Scheme

3.) Balanced Scheme

4.) Liquid Scheme

Of the above its only the Liquid Mutual Funds that adheres to the investment needs of

PFC. Equity Schemes are an extremely risky proposition. With the uncertainty in the

Stock Markets there is a risk of loosing the principle investment.

What's so special about Liquid Schemes:

Liquid funds are special for three reasons:

1. Safety The instruments that these funds invest in are by and large some of the

most stable and safe investments. Money-market instruments provide a fixed

return with short maturity. By purchasing debt securities issued by banks, large

Page 26


27/32


corporations, and the government, money market funds carry a relatively low

default risk while still offering high returns in comparison to similar low-

risk/liquid products.

2. Low Initial Investment Money market instruments generally have large

minimum purchase requirements, thereby disqualifying the majority of personal

investors from buying them. Money market funds, on the other hand, have

substantially lower requirements, which are sometimes even lower than average

mutual fund minimum requirements. Without necessarily requiring copious

amounts of cash for their purchases, money market funds allow you to take

advantage of the safety related to money market instruments.

3. Fixed Net Asset Value The NAV for money market funds is usually fixed at a

constant value of Rs. 10 /- per unit, giving investors more flexibility than most

mutual funds, which have a transaction-day-plus-three (T+3) settlement. Money

market funds offer investors a same-day settlement similar to regular money

market instruments.

Taxability of Mutual Funds

Dividend TaxMutual funds can be a tax efficient instrument for investing. With effect from Budget

2003-04(subject to clearance of finance bill), Dividend Income from the Debt

schemes will attract the dividend distribution tax @ 12.5% instead of marginal tax

rate, hitherto applicable to the investors. However the dividends declared from the

Equity schemes will not be tax-free.

Short Term Capital Gains

Page 27


28/32


If the units are held for a period of less than one year they will be treated as short-term

capital gains and the investor will be taxed depending on the income tax rate

applicable to him.

Long Term Capital GainsThe investor has to pay long-term capital gains on the units held by him for period of

more than 1 year. In this case the investor will

Pay tax at a flat rate of 10 % (plus surcharge @ 5% of the applicable tax

rate)on the capital gains without indexation or

Avail cost indexation on capital gains and pay 20 % tax (plus surcharge @

10% of the applicable tax rate) whichever is lower.

Units held under the scheme of the fund are not treated as assets as defined by the

Wealth Tax Act, 1957 and therefore will not be liable for any wealth tax.

Some schemes that are available in the market:

Gilt Short term funds:Scheme

Name Returns (%) RankingOn

Date1

Month3

Month6

Month1

year Since

Launch1

Mon3

Mon6

Mon1

year Since

LaunchChola GiltSavings-DividendMonthly

0.51 1.40 2.15 7.21 9.23 1 1 1 1 1 11 Oct02

FT India GiltLiquid Fund-DividendMonthly

0.29 0.87 1.77 4.47 6.93 2 2 2 2 221 May04

HSBC GiltShort-term-Dividend

-0.25 0.81 N/A N/A 1.17 3 3 N/A N/A 3 21 May04

Details of Cholamandalam Gilt savingsQUICK STATS

Nav (Rs) 10.13 (As on 30-

Sep-2002)Face Value Rs.10.00

Page 28


29/32


Current Corpus (Rs Lakh) 0.00Initial Corpus (Rs Lakh) N/AEntry Price (Rs) 12.46Exit Price (Rs) 12.46Entry Load (%) 0.00Exit Load (%) 0.00

PERIODIC RETURNS of the schemeReturns

typeReturnperiod Scheme Benchmark

ShortTerm

1 Day N/A 0.031 Week 0.14 0.031 Month 0.51 0.27

Medium

Term

3 months 1.40 1.02

6 Months 2.15 2.151 Year 7.21 4.65

LongTerm

1 year 7.21 4.653 Year N/A 6.295 Year N/A 7.79

Debt Ultra Short TermScheme Name Returns (%) Ranking on Date

1Month

3Month

6Month

1year

SinceLaunc

h

1Mont

h

3Mont

h

6Mont

h

1year

SinceLaunch

On Date

IL&FS Liquid AccountCall Plan

0.42 1.2 2.23 4.4 6.56 1 1 5 9 5 21-May-04

Deutsche Insta Cash Plus-Daily Dividend

0.37 1.11 2.24 4.89 5.53 2 5 4 3 9 21-May-04

HSBC Cash Fund-DailyDividend

0.36 1.11 2.24 4.88 5.16 3 4 3 5 21-May-04

Alliance Cash Manager-Dividend Weekly

0.36 1.12 2.28 5 7.77 4 2 2 2 21-May-04

Birla Cash Plus SweepPlan-Daily Dividend

0.35 1.12 2.48 5.62 5.22 5 3 1 1 7 21-May-04

Reliance Liquid TreasuryPlan-Bonus

0.35 1.08 2.22 4.88 7.36 6 6 6 4 3 21-May-04

Prudential ICICI LiquidPlan-Dividend Weekly

0.35 1.05 2.09 4.57 7.88 7 7 7 7 1 21-May-04

Chola LiquidInstitutional-DividendDaily

0.34 0.98 2 4.5 6.3 8 9 9 8 6 21-May-04

Kotak Mahindra Liq.Regular Scheme-Div.Weekly

0.33 1.02 2.08 4.59 6.9 9 8 8 6 4 21-May-04

HDFC Cash ManagementCall Plan-Daily Dividend

0.29 0.95 1.82 3.94 4.65 10 10 10 10 10 21-May-04

Page 29


30/32


Details of IL & FS Liquid Account Call Plan:QUICK STATSNav (Rs) 11.17 (As on 28-May-2004)Face Value Rs.10.00Current Corpus (Rs Lakh) 0.09

Initial Corpus (Rs Lakh) 1,832.50Entry Price (Rs) 11.18Exit Price (Rs) 11.18Entry Load (%) 0.00Exit Load (%) 0.00

PERIODIC RETURNSReturns type Return period Scheme Benchmark

Short Term1 Day N/A 0.03

1 Week 0.10 0.031 Month 0.42 0.27

Medium Term3 months 1.20 1.026 Months 2.23 2.15

1 Year 4.40 4.65Long Term

1 year 4.40 4.653 Year N/A 6.295 Year N/A 7.79

Calendar Monthly Returns of Il & FS Scheme

Page 30


31/32


Looking at the Liquidity and the return of the above discussed Mutual Fund Schemesit is best for Power Finance Corporation to invest the surplus funds they have in suchschemes, rather than investing in PD A/c.

Bibliography:www.economictimes.comwww.investopedia.comwww.pfcindia.com

ANNEXURES

Annexure 1:CASH FLOW STATEMENT

INFLOW AMOUNT(Rs.)BANK BALANCE/PDAFD/CD/ICD/STD etc MATURITIESEquipment FinancingOVERDRAFT HDFC/SBOP/CBI/CANARA BANK GOI LOAN/ Interest SubsidyBORROWING - BANKSPREPAYMENTS OF LOAN BY BORROWER RECOVERIES -SEBsWORKING CAPITAL REPAY/PREPAYMENT - Actual dues/receiptANTICIPATED RECOVERY OF DUES UP to 31.03.04BILL DISCOUNTING / LEASING

Less. PROJECTED DEFAULT (10%)INTT SUBSIDY / GRANTS/

Page 31
http://www.economictimes.com/http://www.investopedia.com/http://www.pfcindia.com/http://www.economictimes.com/http://www.investopedia.com/http://www.pfcindia.com/


32/32


PDA INTTBOND ISSUE/CP

ERAFBUYERS LINE OF CREDITFCLOTHER RECEIPTS:GUARANTEE/Upfront FEE , Call Money Int. & othersTOTALOUTFLOWINTT ON STLINTT ON BONDS/GUARANTEE/TRUSTEE FEEBONDS REDEMPTIONINTT ON TERM LOANOVERDRAFT REPAYMENTREPAYMENT - TERM LOAN/CP/STLFCL PAYMENTSESTT./ADMN. EXPENSESSTAMP DUTYTDS/SALES TAXADVANCE TAXDIVIDEND TAXDIVIDEND PAYMENTREPAYMENT STLADVANCE TO ERAFSUBSCRIPTION IN EQUITY OF PTCGRANTS / INTEREST SUBSIDY REFUNDINTEREST REBATE/INCENTIVEDISBURSEMENT - W.C.L. Actual

Anticipated including rolloversDISBURSEMENT - TERM LOANBUYERS LINE OF CREDIT LOAN

INVESTMENT IN FD/CD/ICDREPAYMENT - LOAN AGAINST FD/overdraftCASH BALANCETOTAL

SURPLUS

Finance Treasury Loan

Documents

Transcript of Finance Treasury Loan