Escolar Documentos
Profissional Documentos
Cultura Documentos
SESSION
PREFACE
1
This is to certify that Mr.VIPUL Doing BBA at Maharaja Agrasen Institute
Of Management Studies, ROHINI has done a project entitled CASH
MANAGEMENT at INDIAN OIL CORPORATION LTD.
Ms.Kakoli Bose
Asst.Manager (F)
Acknowledgement
People must have guidance in doing their work and know where
to turn for help & guidance.
- Anonymous
2
It is said no learning is possible without any proper guidance and no research endeavor
is a solo exercise, some contribution is performed by various individuals.
This project work, which is a step in the field of professionalism, has been successfully
accomplished only because of the timely support of well-wishers. We would like to pay
our sincere regards and thanks to those, who directed us at every step in this project work.
We would like to thanks Ms Kakoli Bose , who allowed us to undertake this project and
provided his valuable guidance in doing it and supporting throughout the term of the
project. It was a learning experience to work under her guidance.
VIPUL
3
LIST OF TABLES/FIGURES
FIGURES
Marketing design 25
Refineary 37
Pipelines 38
Marketing 39
Marketing Network 40
TABLE OF CONTENTS
Sl.NO. Page No.
CHAPTER-1 INTRODUCTION
4
1.1 Overvie of industry as a whole 6
1.2 Profile of the organization 8
1.3 Competition information 13
1.4 S.W.O.T Analysis 14
2.1 Significance 19
2.2 Mangerial usefulness of study 20
2.3 Objective 26
2.4 Scope of study 30
2.5 Methodology 31
CHAPTER-5 ANNEXURES 86
CHAPTER-6 CONCLUSION 90
CHAPTER-7 LIMITATIONS 91
CHAPTER-8 RECCOMENDATION 92
CHAPTER-9 BIBLOGRAPHY 93
CHAPTER-10 GLOSSARY 94
INTRODUCTION
The Beginning
5
Oil is one of the most important factors contributing to the economic
development of a country. The production and consumption of oil in a country has
become a barometer of the countrys economic growth and prosperity.
When India became independent, it had just one refinery at Digboi. This refinery,
owned by the Assam Oil Company, processed the entire production of less than 0.3
million tones. The countrys annual oil consumption was less than 3 million tones. For
over 90% of its needs, it was dependent on imports. But the thrust of Indias rapid
economic growth and quick pace of industrialization demanded more and more
petroleum products.
With the advent of economic planning three refineries were set up, to process
crude oil, by international oil companies; two at Bombay in 1954 and 1955 and the third
at Vishakhapatnam in 1957. But, this wasnt enough. India had to build up her own
resources to minimize her dependence on foreign imports.
Prime Minister, Pundit Jawaharlal Nehru declared in Indias Parliament on May
26,1956 Oil is of vast importance in the world today. A country that does not produce its
own oil today is in a weak position. From the point of view of defence, the absence of oil
is a fatal weakness.
So, in order to protect national interest, the Government of India decided to
establish a nationally owned and controlled oil industry in India under the Ministry of
Petroleum and Chemicals. The Oil and Natural Gas Commission and Oil India Limited
were formed to search for oil in 1956 and 1959 respectively. To refine crude oil, Indian
Refineries Limited was set up in August 1958. To market it, government set up
the Indian Oil Company in July 1959 as state owned oil-marketing company.
6
1.2 PROFILE OF THE ORGANISATION
Vision
A major diversified, transnational, integrated energy company, with national leadership and a
strong
environment conscience, playing a national role in oil security & public distribution.
Distinctions
7
Indian Oil Corporation Ltd. (IndianOil) is India's largest commercial enterprise, with a sales
turnover of Rs. 2,47,479 crore (US $ 61.70 billion) and profits of Rs. 6,963 crore
(US $ 1.74 billion) for the year 2007-08. IndianOil is also the highest ranked Indian company
in
the prestigious Fortune 'Global 500' listing, having moved up 19 places to the 116th position
in
8
Indias Downstream Major
capacity in India.
For the year 2007-08, the IndianOil group sold 59.29 million tonnes of petroleum products,
including
1.74 million tonnes of natural gas, and exported 3.33 million tonnes of petroleum products.
The IndianOil Group of companies owns and operates 10 of India's 19 refineries with a
combined refining capacity of 60.2 million metric tonnes per annum (MMTPA, .i.e. 1.2
million barrels
per day). These include two refineries of subsidiary Chennai Petroleum Corporation Ltd.
(CPCL) and
The Corporation's cross-country network of crude oil and product pipelines, spanning about
9,300 km
and the largest in the country, meets the vital energy needs of the consumers in an efficient,
9
economical
IndianOil is investing Rs. 43,393 crore (US $10.8 billion) during the period 2007-12 in
augmentation
of refining and pipeline capacities, expansion of marketing infrastructure and product quality
IndianOil operates the largest and the widest network of petrol & diesel stations in the
country,
numbering over 17,600. It reaches Indane cooking gas to the doorsteps of over 50 million
households
in nearly 2,700 markets through a network of about 5,000 Indane distributors.
IndianOil's ISO-9002 certified Aviation Service commands over 62% market share in aviation
fuel
business, meeting the fuel needs of domestic and international flag carriers, private airlines
10
and the
Indian Defence Services. The Corporation also enjoys a dominant share of the bulk consumer
business,
including that of railways, state transport undertakings, and industrial, agricultural and
marine sectors.
Customer First
At IndianOil, customers always get the first priority. New initiatives are launched round-the-
yearfor the
convenience of the various customer segments.
Exclusive XTRACARE petrol & diesel stations unveiled in select urban and semi-urban
markets offer
a range of value-added services to enhance customer delight and loyalty. Large format
Swagat brand
outlets cater to highway motorists, with multiple facilities such as food courts, first aid, rest
rooms and
dormitories, spare parts shops, etc. Specially formatted Kisan Seva Kendra outlets meet the
diverse
needs of the rural populace, offering a variety of products and services such as seeds,
fertilisers,
pesticides, farm equipment, medicines, spare parts for trucks and tractors, tractor engine oils
and
pump set oils, besides auto fuels and kerosene. SERVOXpress has been launched recently as a
one-stop shop for auto care services.
To safeguard the interest of the valuable customers, interventions like retail automation,
vehicle
tracking and marker systems have been introduced to ensure quality and quantity of
petroleum products.
11
Table 1.1
12
Table 1.2
For a long time the company had monopoly in the downstream sector but with the
changing time, more and more private and multinational companies are entering the
14
sector, IOC is facing competition. But with the vast distribution and pipeline network, it
will have an edge over them. The following analysis throws light on the various facets of
the present position of IndianOil.
STRENGTHS
Most powerful player- IOC being the only Indian Company to be listed and
ranked 191 in the fortune global 500 companies holds a strong brand image. It is
the most powerful petroleum corporate in the downstream sector. It owns 7 out of
the 17 refineries of the country in public sector contributing to 55% of the nations
requirements.
Experience- IndianOil has been in the petroleum sector for the past 41 years.
During these years it has gathered a lot of valuable expertise and learned the trick
of trade, the tougher way. It has enjoyed unlimited protection and nurturing from
the government, which helped it grow and gain a substantial hold of the market.
This experience will be valued more as and when it will face competition with the
upcoming firms in the sector.
Pipeline network- IndianOil has a pipeline network of 6268 kms throughout the
country running right from Guwahati in the East to Kanda in the West. It also
reaches the Northern Region to Jallandar and plans to extend till Udhampur. This
decreases the transportation
cost to a great extent for the company. This is a major advantage as the other
private refineries coming up will have very little or no
15
transporting both crude oil as well as finished products. So IndianOil has a
natural edge over these companies.
Rural reach- in rural areas it has 231 multipurpose distribution centers. IndianOil
has over 100 Indane LPG distributorship commissioned in rural and semi-rural
areas. This helps to cater to the need of population of rural, remote and far flung
areas constituting about 75% of the countrys population.
WEAKNESSES
Large size- IndianOil is a huge organization having its head office at Mumbai, 4
regional offices, 15 state offices, 44 divisional offices and 33 area offices. It
employs 30162 employees in various levels of organizational hierarchy. This
leads to slowing down of processes and inefficient performance due to numerous
16
departmental layers. Handling such large pool of human resource and
channelizing their skills in a direction same as that of the organization is not an
easy task. This hinders the fast growth required by the organization.
Retail market share- Even though IOC controls most of the retail outlets it has
market share of only 33.8% in petrol and 39.6% in diesel registering an increase
of 0.5% and 0.3% respectively over the last year. This is comparatively very small
as compared to its size, reach and production. This is because of the fact that its
retail outlets are concentrated more in semi-urban areas and rural areas
OPPORTUNITIES
More revenue- with the dismantling of APM by 2002, IOC will be able to fix the
prices of its products without government intervention resulting in an upsurge in
the revenue earned. Firstly, the new players will use the infrastructure facilities
provided by IOC and pay for the services rendered; for example, IOCL has signed
the marketing rights agreement for 10 years with RPL. Secondly, by reducing the
existing prices to the permissible extent and providing better facilities. This will
help them capture more market share making it harder for the new players to grab
the market.
Modernization- The liberation of the economy has attracted many foreign players
to invest in our country. Again, with the liberalization of the oil economy, more
and more MNCs are entering the sector. They will bring with them the latest
17
technology available. IOCL can utilize their services by means of joint ventures,
collaborations and tie-ups, for modernization and capacity augmentation of its
plants and refineries increasing the quality as well as the quantity of its product
Intensifying infrastructure- the competitors entering the sector are still not fully
operational. While they are building up there infrastructure IOC should grab the
opportunity to extend and strengthen it in deficient areas. It can modernize its
plants and augment its capacity, extend pipelines to central and southern regions
facilitating cheaper transport in those areas. Also more jubilee retail outlets, which
are state-of-the-art, should be commissioned in different parts of the country for
greater customer satisfaction.
THREATS
Price wars- In this free market operation, where all the firms have the full liberty
to control the prices of their products, a price war is certain to happen in the near
future, since this will be a major factor in determining their market share. If
MNCs with deep pockets decide to enter this sector then they may be able to
make this war tougher by cutting down prices even below the permissible level,
initially to capture market share.
18
Better-equipped competitors- The new players will give tough competition, as
they will have latest technology and more advanced research and development
resources, skills and expertise. They will have better and more efficient machines
capable of producing more and better. They will have easy access to foreign
markets due to their global presence and standards
2.1 SIGNIFICANCE
19
2.2 MANAGERIAL USEFULLNESS OF STUDY
MODEL FOLLOWED:
1. Strategy
2. Style
3. Skills
1. STRATEGY:
20
Strategies can be defined as the policies or the guidelines, which are being used in any
organization. Strategies of any company can be changed with the change in business
atmosphere or the increase in the competition. But there can be some strategies in the
organization, which will remain the same over a period of time because of their nature.
Internal Strategies:
Broad Area:
IOCL has been developed all over the country. There is no area left in
the country where Indian Oil doesnt have its retail outlets. It has its retail outlets
not only in urban area but also in rural areas .It has its retail outlets in under
developed areas like J&K, Himachal Pradesh, Leh etc. where the means of
transportation is very costly as well as rare. In J&K in spite of terrorism and
Kargil war, Indian Oil has provided the required oil without fear. So it has helped
in nations security and integration also.
21
Indian Oil is providing its services to Airlines also. Aviation is one of the major
customers of the company and it is providing the best quality product to Airlines.
It is providing the facility inside the Airport only so that the requirements can be
met at any time.
EXPORTS:
IndianOil exports its products mainly to Kenya, Bangladesh, and Dubai etc. Most
of the times the NAPHTA is being exported to these countries. But the company
has to face losses on these exports. Though it has a big domestic market, at times
in case of excess the products are exported.It also exports Lubricants to Dubai,
Kenya etc. with profits because of regular dealings with these countries.
2. STYLE:
Since with the increase in the competition and new inventions, training has become the
necessity of any organization. IndianOils employees are being trained from time to time
as per requirement. The various measures of training adopted in IOC are:
22
Since all these measures of training are indirect and less motivating because the
employees are not actually put into work. So the company should try to adopt the system
of On the Job Training where the employees are actually given hands on work for what
they are being trained. This system is more effective and motivating than any other
system
3. SKILLS:
The term Recruitment means to attract the potential employees to apply in the
organization. It is also one of the most important systems in any organization. The
success of any company depends on its employees. In IOC people are being recruited on
the basis of the qualification required for the particular job.
The written examinations are conducted as per the requirements and the selected
candidates are called for an interview. There are no direct placements in the company.
First division professional degree holders and Post Graduates from relevant disciplines
are recruited as management/engineering trainees, officers, accountants, medical officers,
lab officers, system officers, communication officers, scientists etc.
MARKETING
23
AVIATION L.P.G PETROL
AIRLINES AIRFORCE
Fig 1.1
There are only 2 major customers for aviation products namely airlines and air force.
After the deregulations of aviation products in 1992, maintaining high market share has
been a challenging task for the company.
For marketing of L.P.G , the company has divided the total market into various areas
headed by respected area officers .
24
2.3 OBJECTIVES
FINANCIAL OBJECTIVES
To develop long term corporate plans to provide adequate growth of the activities
of the corporation.
25
To continue to make an effort in bringing reduction in the cost of production of
petroleum products by means of systematic cost control.
FINANCIAL GOALS
26
]
SPECIFIC OBJECTIVE
27
GENERAL OBJECTIVES
28
The study has been conducted in the Indian oil corporation (marketing division), New
Delhi. It covers the preparation of the reconciliation in the I.O.C.L and the problems
encountered ion the preparation of the same. The study is mainly done to found out
various causes of the unmatching of the reconciliation. It covers the perception of various
respondents (mostly officers), through interview on the system of reconciliation and
various other activities included in it. The study is limited to the Northern Region of IOC
only.
2.5 METHODOLOGY
The study requires majority of primary data for the completion of the project. Viewing
the work done by the various staff and the executives of the organization has collected
29
primary data. Executives were chosen on the basis of their in depth knowledge and work
experience in the company and in the Banking section.
The second source of data collection is the secondary data, which is collected from the
past-recorded files, annual reports of the company and also from some other financial
statements. The monthly magazines published by the company Indian Oil News and
Parivar is also one of the most important sources of data collection.
RESEARCH DESIGN
This study has been conducted in New Delhi (IOCL) Northern Region. I
had taken the required information from the officers related to the
banking section.
31
TOTAL CAPITAL
V = value of firm
33
Higher the leverage, higher the profits and vice versa. But a
higher leverage obviously implies higher outside borrowings and
hence riskier if the business activity of the firm suddenly takes a
dip. But a low leverage does not necessarily indicate prudent
financial management, as the firm might be incurring an
opportunity cost for not having borrowed funds at a fixed cost to
earn higher profits.
Operating Leverage
Operating leverage is concerned with the operation of any firm.
The cost structure of any firm gives rise to operating leverage
because of the existence of fixed nature of costs. This leverage
relates to the sales and profit variations.
Operating Contribution
Leverage = EBIT
34
Firms cost structure and nature of the firms business affects
operating leverage. A degree change in sales volume results in
more than proportionate change (+/-) in operating (or loss) can
be observed by use of operating leverage.
Financial Leverage
Financial EBIT
Leverage = EBT
35
Firm U Firm L
Both firms have same operating leverage, business risk, and EBIT
of 3,000. They differ only with respect to use of debt.
Firm U Firm L
(Fig. in Rs000)
EBIT 3,000 3,000
Interest 0 1,200
EBT 3,000 1,800
Taxes (40%) 1, 200
720
NI 1,800 1,080
ROE 9.0% 10.8%
U: NI = Rs.1,800.
Taxes paid:
U: Rs.1,200; L: Rs.720.
36
Now consider the fact that EBIT is not known with certainty.
Determining the impact of uncertainty on stockholder
profitability and risk for Firm U and Firm L
Firm U: Unleveraged
Economy
(Fig. in Rs000)
Firm L: Leveraged
Economy
(Fig. in Rs000)
37
Prob.* 0.25 0.50 0.25
EBIT* 2,000 3,000 4,000
Interest 1,200 1,200 1,200
EBT 800 1,800 2,800
Taxes (40%) 320 720 1,120
NI 480 1,080 1,680
*Same as for Firm U.
U L
Profitability Measures:
E(BEP) 15.0% 15.0%
E(ROIC) 9.0% 9.0%
E(ROE) 9.0% 10.8%
Risk Measures:
38
sROIC 2.12%
2.12%
sROE 2.12%
4.24%
Conclusions
Basic earning power (EBIT/TA) and ROIC
(NOPAT/Capital = EBIT(1-T)/TA) are unaffected by
financial leverage.
U: sROE = 2.12%.
L: sROE = 4.24%.
39
For leverage to be positive (increase expected ROE), BEP
must be > rd.
40
EBIT being 37,273,800;
Assuming that the firms expects zero growth
225,557,810 shares outstanding; rs = 12%;
T = 35%; b = 1.0; rRF = 6%;
RPM = 6%.
0% -
20% 8.0%
30% 8.5%
40% 10.0%
50% 12.0%
41
bL = bU [1 + (1 - T)(D/S)]
wd D/S bL rs
0% 0.00 1.00 12.00%
20% 0.25 1.16 12.98%
30% 0.43 1.28 13.67%
40% 0.67 1.43 14.60%
50% 1.00 1.65 15.90%
WACC = wd (1-T) rd + we rs
WACC = 0.2 (1 0.35) (8%) + 0.8 (12.98%)
42
WACC = 11.42%
Repeat this for all capital structures under consideration.
43
50% 11.85% Rs.204,455,443.04
0% 0
Rs.201,899,750.00
20% Rs.42, 430,770.58
Rs.169,723,082.31
30% Rs.64, 737,394.79
Rs.151,053,921.18
40% Rs.85, 309,753.52
Rs.127,964,630.28
50% Rs.102, 227,721.52
Rs.102,227,721.52
44
Wealth of Shareholders
The firm issues debt, which changes its WACC, which changes
value.
The firm then uses debt proceeds to repurchase stock.
Stock price changes after debt is issued, but does not change
during actual repurchase (or arbitrage is possible).
# Repurchased = (D - D0) / P
# Rep. = (Rs.42,430,770.58 0) / Rs.94.06
= 45,116.
# Remaining = n = S / P
n = Rs.169,723,082.31 / Rs.94.06
= 1,804,462.
# shares # shares
wd P Repurch.
Remaining
0% Rs.89.51 0 2,255,578
20% Rs.94.06 451,116 1,804,462
30% Rs.95.67 676,673 1,578,905
40% Rs.94.55 902,231 1,353,347
50% Rs.90.64 1,127,789 1,127,789
46
Optimal Capital Structure
wd = 30% gives:
Highest corporate value
Lowest WACC
Highest stock price per share
But wd = 40% is close. Optimal range is pretty flat.
Assumptions of MM Theory
The MM Theory is based on the following assumptions:
Perfect capital markets exist where individuals and
companies can borrow unlimited amounts at the same rate of
interest.
There are no taxes or transaction costs.
47
The firms investment schedule and cash flows are assumed
constant and perpetual.
Firms exist with the same business or systematic risk at
different levels of gearing.
The stock markets are perfectly competitive.
Investors are rational and except other investors to behave
rationally.
MM Theory: No Taxation
The debt is less expensive than equity. An increase in debt
will increase the required rate of return on equity. With the increase
in the levels of debt, there will be higher level of interest payments
affecting the cash flow of the company. Then equity shareholders
will demand for more returns. The increase in cost of equity is just
enough to offset the benefit of low cost debt, and consequently
average cost of capital is constant for all levels of leverage as
shown in Figure 1.
Cost of
Cost of
Debt
Level of leverage
48
Vu = Market value of ungeared company i.e. company
with 100% equity financing.
Vg = Market value of a geared company i.e. capital
structure of the company includes both debt and
equity capital.
D = Market value of debt in a geared company.
Ve = Market value of equity in a geared company.
Vg = Ve + D
Ku = Cost of equity in an ungeared company.
Kg = Cost of equity in a geared company.
Kd = Cost of Debt.
M M Theory: Proposition I
The market value of any firm is independent of its capital
structure, changing the gearing ratio cannot have any effect on
the companys annual cash flow. The assets in which the
company has invested and not how those assets are financed
determine the market value. Thus, the market value of a firm is
unaffected by its financing decisions, its capital structure, or its
debt-equity ratio.
In simple words, M & M theory views the value of the company
as a whole pie. The size of the pie does not depend on how it is
sliced i.e. the firms capital structure but rather the size of the
pie pan i.e. the firms present value based on its future cash
flows and its asset base.
The value of the geared company is as follows:
Vg = Vu
Vg = Profit before interest
WACC
Vg = Vu = Earnings in ungeared company
Ku
49
WACC is independent of the debt / equity ratio and equal to the
cost of capital which the firm would have with no gearing in its
capital structure.
Proof by example -
Consider holding 1% of stock in an all-equity
firm with value VU.
Then your wealth is 0.01VU.
Also, you receive a cash flow of 0.01CFt every
period.
Alternatively, consider holding 1% equity and 1%
debt in levered version of the same firm with
value Vg=E+D.
Your wealth then is [0.01E+0.01D] = 0.01Vg.
Cash Flows each period? [0.01(Int)+0.01(CF t-
Int)]=0.01CFt.
As the inherent risk of the firm is the same, then
the discounted value of the cash flows must be the
same, i.e., Vg= VU.
WACC Prop. I
M&M
Traditional
B
E
50
MM Theory: Proposition I
M M Theory: Proposition II
The rate of return required by shareholders increases linearly as
the debt / equity ratio is increased i.e. the cost of equity rises
exactly in line with any increase in gearing to precisely offset
any benefits conferred by the use of apparently cheap debt.
MM went on arguing that the expected return on the equity of a
geared company is equal to the return on a pure equity stream plus
a risk premium dependent on the level of capital structure.
The premium for financial risk can be calculated as debt / equity
ratio multiplied by the difference between the cost of equity for
ungeared company and risk free cost of debt.
D
Kg Ku K Kd
Vg u
RE Prop. II
M&M
Slope = RA RD
Traditional
RA
B
E
MM Theory: Proposition II
M M Theory: Proposition III
MM theorys third proposition asserts that the cut-off rate for new
investment will in all cases be average cost of capital and will be
un affected by the type of security used to finance the investments.
M M Theory: Arbitrage
The cost of equity will rise by an amount just sufficient to offset
any possible saving or loss. The lenders determine the supply of
debt. The optimal level is simply the maximum amount of debt
which lenders are prepared to subscribe in any given circumstances
e.g. level of inflation, rate of economic growth, level of profits etc.
the investors will exercise their own leverage by mixing their own
portfolio with debt and equity. The investors call this the arbitrage
process. Under these conditions of investment the average cost of
capital is constant.
52
If two different firms with same level of business risk but different
levels of gearing sold for different values, then shareholders would
move from over valued firm to the under value firm and adjust
their level of borrowing through the market to maintain financial
risk at the same level. The shareholders would increase their
income through this method while maintaining their net investment
and risk at the same level. This process of arbitrage would drive
the price of the two firms to a common equilibrium total value.
The word arbitrage is a technical term referring to a situation
where two identical commodities are selling in the same market for
different prices, then the market will reach equilibrium by the
dealers start at the lower price and sell at the higher price, thereby
making profit. The increase in demand will force up the price of
the lower priced goods and increase in supply will force down the
price of the high priced commodities.
The arbitrage in MM theory shows that the investors will move
quickly to take advantage and will make profit in an equilibrium
capital market, then this would represent an arbitrage opportunity.
Slope = TC
VL
PV of Tax Shield
VU M&M Value
B
MM Theory: Corporate Taxation
54
Kg = Ku + (1 T) (Ku Kd)
Bankruptcy Costs
56
Costs associated with a firm experiencing financial
distress (creditors, bankers, customers, employers, etc.)
Bankruptcy costs = direct costs + indirect costs
V = X + DT BC
R
Where,
V = Value of leverage firm
X = Anticipated net operational cash flows
R = Capitalisation Rate
D = Market Value of Debt
T = Corporate tax rate
BC = Anticipated costs of bankrupting
Cost of Debt
V PV of Bankruptcy Cost
PV of Tax Shield
VU
Cost of Equity
Optimum Capital
Structure
57 B
Figure: Optimum Capital Structure and Costs of Financial
Distress
The existence of tax benefit for modest amounts of debt, and the
need to avoid the costs of financial distress, suggest that there is an
optimal capital structure as illustrated in figure which shows that
there is an optimal capital structure at the point where the market
value of the firm is maximized, that is where (DT BC) is
maximized.
PVBC + PVAC
V
PV of Tax Shield
VU
Signaling Theory
59
expenditures, under normal circumstances, are covered by
internal accruals.
3. Dividends tend to be sticky in the short run. Dividends are
raised only when the firm is confident that the higher
dividend can be maintained; dividends are not lowered unless
things are very bad.
4. If a firms internal accruals exceed its capital expenditure
requirements, it will invest in marketable securities, retire
debt, raise dividends, resort to acquisitions, or buyback its
shares.
5. If a firms internal accruals are less than its non-postponable
capital expenditure, it will first draw down its marketable
securities portfolio and then seek external finance.
Noting the inconsistencies in the trade off theory, Myers
proposed a new theory, called the signalling, or asymmetric
information, theory of capital structure. The main points of the
theory are:
Managers often have better information.
Sell stock if stock is overvalued.
Sell bonds if stock is undervalued.
Investors understand this, so view new stock sales as a
negative signal.
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Interest on debt finance is a tax deductible expense. Hence
finance scholars and practitioners agree that debt financing
gives rise to tax shelter which enhances the value of the firm.
Preserve Flexibility
Flexibility implies that the firm maintains reserve borrowing
power to enable it to raise debt capital to respond to
unforeseen changes in business and political environment.
Hence the firm must maintain some unused debt capacity as
an insurance against adverse future developments.
61
Issue innovative Securities
Thanks to SEBI guidelines introduced in 1992, issues have
considerable freedom in designing financial instruments.
There is greater scope for employing innovative securities to
the advantage of the firm. The important securities
innovations have been as follows: floating rate bonds (or
notes), collateralised mortgage obligations, dual currency
bonds, extendible notes, medium term notes.
Widen the Range of Financing Sources
In as dynamically evolving financial environment, traditional
sources of financing may diminish in importance. They may
not be adequate or optimal. Hence, it behoves on a firm to
employ new modes of finance like commercial paper,
factoring, Euro issues, and securitisation.
62
Capital expenditure: an
overview
Factors Of Capex
Operational Factors
I. To meet future requirements based on market
forecast.
II. To maintain coordination with the vision of the
company as Ranbaxy vision Garuda states to be top
five generic players in the world by 2012 and
achieve sales of 5 billion. To achieve this target
company has to incur heavy expenditure on
acquisition of fixed assets.
III. To increase market penetration.
IV. To maintain, renew, expand, upgrade existing
physical assets that helps to facilitate and enhance
revenue-generating capacity.
V. To create, acquire and develop revenue generating
activities/ capacities that is imperative for an
organizations healthy growth and existence.
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Financial Factors
In deciding which assets to create, acquire or develop, the
benefits to be gained from the expenditure have to be
weighed against the costs that will be incurred. While costs
can always be expressed in financial terms, the benefits may
or may not be similarly quantifiable. Nevertheless, an
attempt must be made to express the benefits expected, in a
manner that facilitates comparison with costs and helps
formulate a rational basis for the decision making process.
Following are the financial tools that are taken into account
for approving capital expenditure.
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However, by the same logic it cannot be used as a principal
tool for analysis because it ignores any substantial cash
flows arising after the pay back period.
65
IV. Profitability Index (PI)
The Profitability Index essentially measures the Present
value of benefits times the initial investment. Under
unconstrained conditions, the profitability index will accept
and reject the same projects as the NPV criterion.
It is possible that a project may have no critical risks. Or the
financial are extremely favorable (high NPV, high IRR, high
PI, low DPP etc.) and the occurrence of consequent risks
may not compromise the success of the project. It is also
possible that there is a conscious corporate decision to
accept certain risks. In such cases, no measures are required.
These risks, in any case, must be explicitly stated in the
Quantitative assessment of Risk Capital investments are
essentially committed in expectation rather than in certainty,
which implies that investments are subject to risk contribute
to removing the shortcomings of an unstructured workings.
INTRODUCTION
The term 'Capital expenditure' refers to expenditure
intended to yield returns over a period of time, usually
exceeding one year. This basically implies that any
expenditure, which results in the creation of a new asset or
substantially increases the capacity/benefits of an existing
asset and is of a "long term" nature, should be classified as
Capital expenditure.
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Expenditure would be deemed to be capital, if incurred
for
Initiation of business
Shifting of plants
67
Since the analysis for appraisal of the proposed capital
expenditure will largely depend upon the kind of
investment, it is necessary to classify capital investments
into the following categories:
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6) Quality, Good Manufacturing Practices, Safety, Health
and Environment.
Expenditures necessary to upgrade quality, compliance of
GMPs, government regulations, labour agreements,
insurance policy terms, and environmental safety
requirements. Financial evaluation/benefits from such
expenditure may to the extent quantifiable, be provided.
8) Information Technology
Expenditure on procurement of IT infrastructure (Hardware)
and/or application software. Financial evaluation/benefits
from such expenditure may to the extent quantifiable, be
provided.
9) Others
This includes office buildings, vehicles, furniture, office
equipment, InfoTech related equipment and utilities, and all
such assets, which provide infrastructures support. This also
includes any capital expenditure not explicitly covered in
the above classifications.
1] Employee entitlements
Capital expenditure necessary to meet the commitments in
respect of provision of assets to the employees in terms of
personnel policies. Financial evaluation of such expenditure
is not required. Assets purchased by employees against their
hard/soft furnishing entitlements do not fall within the scope
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of this manual and hence, will not be included here as they
are per policy.
Date Of Capitalisation
Date of Capitalisation would be the date when the assets is
certified by the concerned Engineering / E&F Department
as ready to use or GRN date in case of assets which do not
need commissioning (that is computers, furniture, fixtures
etc.). Authority for fixing date of capitalisation would be
with E&F department.
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Lead-time between certification and Commencement of
commercial production will not normally exceeds 30 days
In case of lead-time exceeding 30 days to take specific
approvals from the Plant Head.
Capex Numbering
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The numbering scheme is as under
Entity/Division/Cost Center No./ Year/ Serial No. of
CEP raised by that RCC/ Running Serial No. of Capex of
the Division/ Plant, to be given by the Accounts department.
In case of Head Office, H.O will appear against division's
name.
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These head can be divided into following categories
Production
Engineering
Personnel/security
Safety/ETP
QA/QC
Stores
CAPITAL EXPENDITURE
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Regulation
GMP (Goods Manufacturing Practices)
EHS (Environment Health Safety)
Replacement
Capacity
Upgradation
Additional
REVENUE EXPENDITURE
Operating Expenses
Stores
Repairs Building
Repairs and Maintenance
Staff Welfare
VED is a management science tool, which is used by
various department depicting vitality of particular need
raised at operational level where
V stands for VITAL
E stands for ESSENTIAL
D stands for DESIRABLE
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Personnel/security -> Division ->
Personnel/security
Division Management
Division Accounts
Capital Expenditure
When top authorities approve the Capex requirement then
an internal order number is created by Plant department.
After the creation of internal order number finance
department inform respective accounts department about the
same. On receipt of the IO, indenter will create the purchase
requisition that subsequently go to purchase department.
Purchase department will float enquires and prepare
comparative charts for at least 3 vendors. After selecting the
vendor, purchase department will place a purchase order
(PO) on the vendor for supply of the asset. In case, as per
the terms of the PO, any advance is to be given to vendor,
the same is released by accounts department, after passing
the necessary entries in the vendor account under respective
business area (BA). The purchase department while
preparing the PO would ensure to mention complete name
as RANBAXY LABORATORIES LIMITED, API
MANUFACTURING and address/ location of delivery of
the asset. On receipt of the goods, the
Stores department will arrange to prepare the GRN and get
the same approved by the user department. On approval of
the GRN, the stores department will send the bill to
accounts for invoice verification. The accounts department
will verify the invoice with PO and release the balance
payment to vendor.
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Material Cost
The purchase requisition (PR) for domestic materials i.e.
Solvents, Chemicals and other Consumables required for
project completion will be raised by scientists after obtaining
approval from the respective head, the purchase requisition
(PR) will be send to purchase department for procurement of
the material. Purchase department will float enquires and
prepare comparative charts for at least 3 vendors. The purchase
department will place the PO on the vendor for supply of the
materials. In case, as per the terms of the PO, any advance is to
be given to vendor, the same will be released by accounts
department after passing the necessary entries in the vendor
account under Business Area (BA). The purchase department
while preparing the PO would ensure to mention complete
name as RANBAXY LABORATORIES LIMITED, API
MANUFACTURING and address/ location of delivery of the
asset. On receipt of the goods, the stores department will
arrange to prepare the GRN and do the respective head approve
the same. On approval of the GRN, the stores department will
send the bill to accounts department for invoice verification.
The accounts department verifies the invoice with PO and
releases the balance payment to vendor. The cost of material
will be booked in the API MANUFACTURING cost center
under Business Area 1000.
In case of imported material on receipt of approved PR from
the API MANUFACTURING, purchase department, Mohali
will send the PR to international purchasing department (ID
Purchase) at Devika Tower, Delhi. The ID Purchase, while
preparing the PO would ensure to mention the complete as
RANBAXY LABORATORIES LIMITED, API
MANUFACTURING and address/ location of delivery of the
asset.
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On receipt of the material, the purchase department will arrange
to prepare the GRN and do the respective head approve the
same. On approval
Of the GRN, the ID Purchase department will send the bill to
accounts department will only verify for invoice verification.
The accounts department will verify the invoice with PO .the
verification of Custom duty; Overseas fright etc. will be done
by ID accounts and will arrange to release the payment to
vendor. The cost of material will be booked in the API
MANUFACTURING cost center under Business Area 1000.
In the SAP system, a separate storage location (Storage
Location 1075 plant 1030) for material required by API
MANUFACTURING should be created so that at any given
point the material purchased & consumed may be identified.
Physically, the capital assets as well as the materials purchased
for API MANUFACTURING should be stored in a separate
storage preferably within API MANUFACTURING storage
location.
Revenue Expenditure
Apart from material, to carry on the API MANUFACTURING,
certain expenses will be incurred under various accounting
heads. These expenses either may be incurred directly by API
MANUFACTURING, or may be incurred by other locations.
The accounting of these expenses would be made as under:
The manpower i.e. lab technician and other supporting staff
working for the API MANUFACTURING should be identified.
All direct & indirect expenses incurred in connection with
recruitment, salaries, allowances and other benefits related the
said manpower be charged to the cost center for API
MANUFACTURING e.g. Repairs & maintenance of building,
AMCs housekeeping, Horticulture, Books & Periodicals,
Conference & Meeting, training, traveling lab assistant, Gifts &
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presents etc, should be charged to the cost center of API
MANUFACTURING.
Utilities cost such as Electricity, Water, Power, and Stream etc,
incurred for API MANUFACTURING, based upon the actual
bills received from the supplier. In case the utilities are
provided by any of the existing manufacturing facilities, the
supply should be monitored by separate meter/sub meter etc,
and charges for the same based upon the actual units consumed
should be debited to the cost center of API
MANUFACTURING.
The other supplies/facilities such as Telephone, Fax, Telex etc.,
should be directly in the name of API MANUFACTURING. In
case, any common facility is used, charges on reasonable basis
should be debited to the cost center of API
MANUFACTURING, Mohali. The supplies from common
canteen should also be charged on a reasonable basis i.e. linked
to the number of employees working in API
MANUFACTURING. The charges for Tea, coffee, snakes etc,
consumed by API MANUFACTURING. Guest would be
charged on reasonable basis to the Cost Center of API
MANUFACTURING.
In case any materials/consumables are provided by any of the
manufacturing location to the API MANUFACTURING. A
stock transfer note will be raised on API MANUFACTURING.
Similarly if any services are provided by marketing facility to
API MANUFACTURING, cost there of at arms length basis
will be debited to the API MANUFACTURING.
Statutory Compliances (For Duties & Taxes):
[a] Excise:
1. The CENVAT credit shall not be available in respect
of the Inputs received from the vendors.
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2. Transfer of any excisable inputs as such or
intermediate from manufacturing locations the same
should be on payment/reversal of appropriate duty,
on which CENVAT is not applicable
[b] Sales Tax:
1. The premises stand already declared for the purpose
of sales tax registration.
2. As no direct sale activity is involved from the
premises, hence no payment on account of sales
taxes.
[c] Other taxes:
As applicable on the items procured for the purpose
(Octroi, etc.)
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RAW MATERIAL 3******
PACKING MATERIAL 5******
WORK IN PROGRESS 8******
FINISHED GOODS 1******
STORE AND SPARES 4******
Organization structure
Client
Company code
Business Area
Plant
Controlling area
Operating concern
Cost center
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Business Area
Line of Business: e.g. API Manufacturing, Pharmaceuticals.
Plant
A plant is an organizational unit within a company. A plant
produces goods; render services, or makes goods available for
distribution. A plant can be one of the following types of
locations
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Controlling Area
This is organizational controlling unit. Transactions within
Controlling area is possible
Operating Concern
Top-level logical unit in SAP. It is superset of all Cost Center,
Business Area and Controlling Area etc
Cost Center
Cost center is the smallest unit in Phase I. In SAP for handling
various costs, there are different types of cost centers.
Examples, Personal Cost Center, Amoxy Cost Center, Utility
Cost Center. For Financial purposes Cost Center are classified
into various heads such as administrative cost center, works
cost center, Utility / Production cost center.
SAP Route
SAP functioning in the system begins by creating internal order.
Internal order number is created by finance department by
using SAP command is
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General data, Applicant, Person Responsible, Processing group,
Estimated costs, Application data, Department, Control data,
System status, User status, Assignments, Company code,
Business area, Plant, Object class
86
CAPEX-IO
RFQ type
Language key
RFQ date
87
Quotation deadline
RFQ
Organizational data
Purchase organization
Purchasing group
Default data for items
Item category
Delivery date
Plant
Material Group
Storage location.
88
Balance sheet
Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04
Sources of funds
Owner's fund
Equity share capital 210.19 186.54 186.34 186.22 185.89
Share application money 175.66 1.18 0.88 0.28 2.83
Preference share capital - - - - -
Reserves & surplus 3,330.92 2,350.68 2,162.79 2,190.80 2,320.79
Loan funds
Secured loans 162.07 365.07 224.29 353.49 133.37
Unsecured loans 3,563.30 3,137.96 2,954.31 676.31 2.49
Total 7,442.14 6,041.42 5,528.61 3,407.10 2,645.38
Uses of funds
Fixed assets
Gross block 2,386.75 2,261.48 2,133.57 1,799.32 1,402.79
Less : revaluation reserve - - - - -
Less : accumulated depreciation 930.07 791.96 699.54 599.35 525.21
Net block 1,456.68 1,469.52 1,434.03 1,199.97 877.58
Capital work-in-progress 428.77 327.42 301.88 432.84 264.16
Investments 3,618.03 3,237.55 2,679.95 762.78 679.07
Net current assets
Current assets, loans & advances 6,509.97 2,922.42 2,620.99 2,409.08 2,366.89
Less : current liabilities & provisions 4,571.31 1,915.49 1,508.24 1,397.56 1,542.33
Total net current assets 1,938.67 1,006.93 1,112.76 1,011.52 824.57
Miscellaneous expenses not written - - - - -
Total 7,442.14 6,041.42 5,528.61 3,407.10 2,645.38
Notes:
Book value of unquoted investments 3,372.60 3,106.69 2,659.94 762.77 679.07
Market value of quoted investments - 280.46 14.27 0.01 0.01
Contingent liabilities 252.85 201.00 159.40 202.40 307.95
Number of equity sharesoutstanding (Lacs) 4203.70 3730.71 3726.87 3724.42 1858.91
89
Capital structure
Paid Up
From To Class Of Authorized Issued Paid Up Paid Up
Face
Year Year Share Capital Capital Shares (Nos) Capital
Value
Equity
2008 2008 299.00 210.18 420369753 5 210.18
Share
Equity
2007 2007 299.00 186.54 373070829 5 186.54
Share
Equity
2006 2006 299.00 186.34 372686964 5 186.34
Share
Equity
2005 2005 299.00 186.22 372442190 5 186.22
Share
Equity
2004 2004 199.00 185.89 185890742 10 185.89
Share
Equity
2003 2003 199.00 185.54 185543625 10 185.54
Share
Equity
2002 2002 199.00 185.45 185452098 10 185.45
Share
Equity
2001 2001 150.00 115.90 115895478 10 115.90
Share
Equity
2000 2000 150.00 115.90 115895478 10 115.90
Share
Equity
1999 1999 150.00 115.90 115895250 10 115.90
Share
Equity
1997 1998 69.00 53.73 53726252 10 53.73
Share
Equity
1996 1997 69.00 49.41 49414717 10 49.41
Share
Equity
1995 1996 69.00 48.13 43132253 10 43.13
Share
Equity
1995 1996 69.00 48.13 5000000 3 1.25
Share
Equity
1994 1995 69.00 43.13 43132253 10 43.13
Share
Equity
1993 1994 69.00 35.33 35330269 10 35.33
Share
Equity
1992 1993 49.00 21.79 21793050 10 21.79
Share
Flagships Brands
90
Servo
IndianOil's SERVO is the largest selling
lubricant brand in India, with one of the largest ranges
of automotive and industrial lubricants. Developed
exclusively at IndianOil's world-class R&D Centre at Faridabad, there is a SERVO
lubricant for virtually every single application. With over 42% market share and 450
grades, the country's leading SERVO brand lubricants from IndianOil are sold through
over 8,100 IndianOil petrol/diesel stations, over 1,300 SERVO Shops and a countrywide
network of bazaar traders.
Indane
Indian Oil reaches Indane brand cooking gas to
the doorsteps of over 35 million households in over
2,000 markets through the country's largest network of
over 4,000 distributors. The Corporations 82 LPG
plants bottle about 3,380 thousand tonnes of LPG per annum. Compact 5 kg Indane
cylinders were launched in 75 rural and hilly markets of 11 states, i.e. J & K, Himachal
Pradesh, Punjab, Uttar Pradesh, Arunachal Pradesh, Meghalaya, Assam, Orissa, West
Bengal, Madhya Pradesh and Tamil Nadu, with plans to introduce them in 500 markets in
rural areas.
Premium Fuel
The launch of premium fuels - XtraPremium and
XtraMile (originally IOC Premium and Diesel Super
91
respectively), marks a new beginning for IndianOil and its customers.
XtraPremium is, in fact, the only petrol in India with 91 Octane and doped with
Multifunctional Additives. The maiden launch of these branded fuels took place in Delhi
on Sept. 24, 2002. Subsequently, XtraPremium sales have been extended to 200 cities and
750 petrol & diesel stations, and XtraMile to 850 cities and 1750 petrol and diesel
stations by the end of the financial year 2003 2004.
Aviation Service
Indian Oils ISO-9002 certified Aviation Service,
with 68% market share, meets the fuel and lubricants needs
of domestic and international flag carriers, Defence
Services and private aircraft operators through 93 aviation
fuelling stations. Between one sunrise and the next, IndianOil refuels over 900 aircrafts.
In fact, the refuelling never stops and neither does our customer service, which is round
the clock. The wings foreign exchange earnings during the year 2002-03 touched Rs. 898
crore.
Auto Gas
92
DATA ANALYSIS
93
Project Cost: Rs. 5,693 crore
Expected Commissioning: January 2010
Benefit: The project envisages setting up of a number of units like VGO-HDT, ATF-Merox,
FCC-Merox, LPG-Merox, ISOM, Coker, DHDT, HGU (PDS) and SRU.
Brief Description: The objectives of the project are multifold. It shall ensure meeting
product quality requirement of MS/HSD to EURO-III/IV levels, processing increased
quantity of high sulphur crude and improvement in distillate yield.
Last Updated: August 09, 2007
Brief Description: The project envisages setting up of a Naphtha Cracker based on captive
utilisation of naphtha from Panipat, Mathura and Koyali refineries of IndianOil. With a
capacity of 800,000 MT/year of ethylene production, the Cracker complex will have
associated units viz. hydrogenation, butadiene extraction, benzene extraction etc. besides
downstream polymer units like swing unit (LLDPE/HDPE), a dedicated HDPE unit,
Polypropylene unit and MEG unit.
94
transportation of petroleum products to Bangalore-fed areas in a cost-effective manner.
Brief Description: The proposed R-LNG pipeline would provide for an economical means
of feeding natural gas to Panipat refinery.
95
Project Cost: Rs.186.72 crore
Expected Commissioning: August 2008
Benefit: The pipeline with feed IndianOil's LPG bottling Plants at Nabha and Jalandhar in a
cost-effective manner.
Brief Description: Project consists of laying a 10" diameter 275 KM long LPG pipeline
from Kohand (near Panipat refinery) in Haryana to Jalandhar via Nabha in Punjab.
66
STATEMENT OF PURPOSE
Indian oil is a public sector company and has a broad area of working .it has a
continuosly increasing turnover. The debtors and inventories are increasing at a higher
rate due to increase in sales. The study will cover the preparation of reconciliation of
I.O.C.L. A single mistake in the preparation of the reconciliation can cause a big problem
in the future.
96
DATA ANALYSIS & INTERPRETATION :
97
Industry
Analysis:
This graph shows us just how unaware each industry is, of the "True Cost" of
downtime. For example it has been calculated in some paper facilities, that a corrugator
down cost $10K per hour. One might construed the bar for paper industry indicates the
corrugator has not been down for more than an hour the entire year! The graph indicates
the Automotive, Food and Metal industries are most aware of "True Cost" of downtime.
98
Once the tools and articles at bin95.com are used to calculate, track, and
benchmark the "True Cost" of downtime, this information should be used in daily
management decisions. (Such as repair or replace.)
99
_ = Highest Maximum time reported by any one facility, waiting on OEM to respond.
Analysis:
100
Note: These are averages among industry of maximum respond time. Not average
respond time of OEM. This graph is just to show extreme cases, to bring attention to cost
involved.
For example if you calculated your true cost of down time as $1,000 per hour,
some instances cost as much as $50,000. If that breakdown was a bottle neck, the hourly
cost could escalate to over a half a million!
This is yet another example of why you should take out insurance against costly
downtime, and subscribe to Business Industrial Network's technical resources.
(If you only shave 10% off one instance, with our services, you could see a ROI of more
than 500%.)
101
Annual OEM Cost
Analysis:
With an increase in outsourcing, industry wide, $100K a year is not bad. If you dig deeper,
you'll find these figures to be actual dollars paid out. Not actual cost of downtime related to OEM
service.
You will find that service is not the only OEM related cause for downtime cost. Most
facilities do not track downtime cost related to OEM warranty work, and OEM new
installations/upgrades.
The first step is to accurately track cost related OEM service, warranty, and installations. Then
you will see the "True Cost", and potential for savings. (Lack of standards for dealing with OEMs is
the primary reason for cost ten times the scale in the graph above. BIN95 is working on a set of tools
and standards you can use to save thousands.)
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.
Analysis:
Its amazing to find out how many don't know exactly how many PLCs are in their
facility. Injection Molding was the lowest in our survey. But with just about every
Molding machine and extruder having some flavor of PLC in it, I suspect the numbers are
a lot higher than surveyed.
TIPS:
1. Take an inventory of all machines.
2. Insure you have manuals and preferably software on hand, for each brand
Business Industrial Network has personnel who will inventory for you, and make
back up copies of all programs.
103
.
Analysis:
The Automotive, metal and paper industries reported monthly averages where off
by an average of 30% of what they reported for an annual downtime. One of 2 conclusion
can be drawn from this fact.
2. They had one or more major break downs that where not calculated in monthly
averages
104
CONCLUSION
After undergoing an in-depth study of the report, one can easily recognize that
Indian Oil ensures proper accounting for each and every rupee transacted through
bank.
Utmost care is taken while implementing all the control measures and there is no
deviation from the laid down procedures. Various checklists of control have
been made as exhaustive as possible in dealing with the banking transactions.
The functions, activities, roles and responsibilities of the concerned work groups
are also being performed very smoothly.
105
LIMITATIONS
106
RECOMMENDATIONS
The CMP facility has been administered at nearly about 85% of the total number
of branches of IOCL. This is because rest of the 15% of the branches is yet to be
computerized. The facility should be extended to all of its branches because that
would results in saving interest on bank borrowings.
Since cost of financing is an important and major component of the over all
expenditure, there is a need to exercise due control and take suitable measures to
reduce the burden of financing cost which comprises of interest on bank
borrowings and bank charges.
In case of holidays for IOCL but working day for bank, it should be ensured that
the DCR is deposited in the bank even on such day.
BIBLIOGRAPHY
107
Banking manual of IOCL
IOCL NEWS
www.indianoilcorp.com
www.iocl.com
www.google.com
www.indianoilcorporation.com
GLOSSARY
108
IOC- Indian Oil Corporation
109