ACKNOWLEDGEMENT

I would like to acknowledge the efforts and contributions made by many individuals who helped me in various ways for the successful completion of my project on the topic “Fund Management”

Firstly, I would like to thank Mr. J. Jaya Raj (chief manager H.R) for giving me the opportunity to undertake this project at HPCL Kolkata. I would like to extend my gratitude to my project guide Mrs. Shweta Bagaria Sarawgee (Deputy Manager-Finance) for her encouragement and supporting me during the course of the project. Special thanks to Mrs. Archana Agarwal (Senior Manager-Finance) for consistently guiding me on this topic. Her deep interest in the subject helped me to refine my thoughts and ideas for reflection on the topic. I am immensely indebted to all the people who shared their thoughts with me and gave me valuable sight to the study .Also greatly thankful to Mr.S.W.Kiro (Senior Manager-Operation & Distribution) for being a mentor and guide. I would also like to thank all the finance officers and staff in the Zonal Office (Church Lane, Kolkata), Regional Office (Camac Street), Terminal Office(Budge Budge), Aviation Office (Dum Dum) for giving their precious time, relevant information and for sharing their experiences.

I would like to extend my thanks to Professor A.P.Mondal for his guidance and valuable suggestion at every stage of the project. I would also like to express my gratitude to all the faculty members of St. Xavier’s College, my family, my friends and well wishers for their guidance and support.

It has been a memorable period of one month of continuous learning at Hindustan Petroleum Corporation Limited which gave me a practical exposure to the present office working environment. I am sure that whatever knowledge I have gathered in this period will lead me to a better future.

Contents

Section 1- Introduction1. Definition2. Why taking up the study of funds?3. Sources of funds in a business.4. Importance of funds in a business.5. Flow of Funds

Section 2- Fund Management1. What is Fund Management?2. Relevance of Fund Management

Section 3- About Petroleum Industry1. Its History2. Key Factors Affecting the Growth Of Petroleum Industry In India3. Petroleum Planning & Analysis Cell (PPAC)4. India’s Top Ten Oil Companies

Section 4- About Hindustan Petroleum Corporation Limited (HPCL) 1. Products, Refineries, International Ranking, On-Going Project 2. Operating & Non-Operating Account 3. Memorandum of instructions to the branches 4. Money Insurance Policy 5. Managing Payment risk in commercial transaction 6. International Trade Export 7. International Trade Import 8. Pricing 9. Balance sheet of HPCL (Last 5yrs) 10. Profit & Loss Account Statement of HPCL (Last 5 years)

Section 5- SWOT Analysis of Oil & Energy Industries 1.Strength 2.Weakness 3.Oppurtunities 4.Threats

Section 6- Conclusion & Webliography

Fund Management

Introduction

When an organization becomes serious about raising funds to support budgetary needs and/or capital projects it is vital to establish realistic goals based on sound research and thorough planning. Realistic goals are a reflection of the organization’s understanding of its financial structure and its capability to challenge existing funders and prospective donors.

A professional feasibility study or planning assessment is one way to assess the viability of funding goals. In a professionally directed study, confidential interviews are conducted with organizational and community leaders, donors, potential donors, constituents, vendors and others to determine the viability and level of acceptance of the priorities and goals. After careful evaluation of the data, a realistic goal can be set that is based upon personal opinion, a strong case for support, identified volunteer leadership and potential donors.

It is good to aim high – to challenge those who care about the organization’s mission to stretch themselves to new levels of support – while remaining realistic. Challenges that are successfully met engender renewed commitment. With that fresh energy comes enthusiasm, involvement, and interest. Meeting challenges ignites positive energy within people. Setting challenging goals that are realistic enough to be met, is the first step to achieving those goals. As CDS President, David Phillips, has said, “Nothing is more discouraging than running a great campaign and coming up a few thousand dollars short of the minimum goal.”

When setting funding goals, the first consideration should be the organizational needs. Are the program goals going to require funds that are far too great – or are the program goals too small to warrant a capital campaign? The wisest leaders will budget to a plan rather than plan to a budget. Establish the goals of the organization then determine what resources are needed to achieve those objectives. From there, the picture of funding needs begins to emerge.

Consider how much money is needed to fund specific new projects, such as land acquisition, new construction, renovations, programs and endowment. Preliminary costs should be established as accurately as possible. What portion of current income can be allocated to the new projects? Which income sources are most reliable? Which are least reliable? Which income sources have the most growth potential? When you understand your budgetary strengths, and weaknesses, you are better prepared to initiate a fundraising campaign to reach specific funding goals.

1.1)Definition of fund- Fund may be defined as “A stock or capital; a sum of money appropriated as the foundation of some commercial or other operation undertaken with a view to profit; that reserve by means of which expenses and credit are supported; as, the fund of a bank, commercial house, manufacturing corporation, etc.” In other words it also can be stated as “An aggregation or deposit of resources from which supplies are or may be drawn for carrying on any work, or for maintaining existence.” Fund is generally created with the view that to provide and appropriate a fund or permanent revenue for the payment of the interest of; to make permanent provision of resources (as by a pledge of revenue from customs) for discharging the interest of or principal of; as, to fund government notes.

1.2) Why taking up the study of funds?Funds form the backbone for the survival of any type of business. All the major and minor operations performed by a firm are largely dependent on the availability of funds in that particular firm. Funds generated from both capital as well as revenue profit acts as a catalyst for the companies further growth and expansion. A sound source of ensures the steady progress of the business and gives it a commanding positions.Thus, one could clearly enumerate the scope of fund in sustainability and growth of any type of business. It is this scope and importance that has been a base on which I have tried to explore and get a close watch of the actual functioning of fund in an organization through this project of mine.

1.3)Sources of Funds for a BusinessEvery business needs money to get up and running. Where an organization gets the money from will ultimately depend on its financial and market situation. The first source on which the company can look upon is the partners and the members who have formed the company in other word through internal sources. If the company uses its internal sources as funds supply then it won’t have to go through the lengthy process of securing funds elsewhere. Following is a list of other sources that a company and its founders may be able to approach.Friends and FamilyThis is often called “love money” and is usually available on a very informal basis. A written agreement documenting details of the arrangement is a good idea. The more businesslike a person is in his/her financial dealings, the better off he/she will be.BanksBanks and other financial institutions are the most common sources of funds for financing. Lending to new small businesses is risky for banks since there is no track record to judge performance and likelihood of payback. The company must be prepared to present a thorough business plan, have a good personal credit record, and sufficient collateral to secure the loan before being considered by a bank. The Business Development Bank is in business to provide funding to business.Community FuturesCommunity Futures is located in many rural communities with a mandate to help small businesses get up and running. A Company must be aware that Community Futures can typically not get financially involved until it has have been turned down by two financial institutions.

AngelsAngels are private investors with funds to invest in business start-ups or growth oriented businesses and are usually not connected to a financial organization. Often they are willing to risk their money in exchange for involvement or ownership in the business. They are looking for a good return on their investment and often have a lot of expertise to share. The company should be well prepared before you start looking. Although finding angels can be difficult, they are out there.LeasingThe company can usually lease its asset such as vehicles or equipment directly from the original equipment manufacturer or through an agent. Leasing can quite often involve no down payment.Trade CreditSuppliers may offer up to 30 days to pay for goods and services the company receives. Usually, the company will be required to pay cash to establish a credit rating. A credit application is necessary for most suppliers.

1.4) Importance of FundIn any business' plans for raising funds, the actual business plan plays a very important role. In order for investors and fund providers to invest their capital in your business, it is vital that they be presented with feasible business plans.

A sustainability plan for a business is a plan that is designed for a certain project which completely describes the justification of the project, the incurring costs, the revenue that is expected to be generated from that project, the financial performance and most importantly, whether the project was a success for the business or a failure that needs to be avoided in the future. In order to raise funds, all of these figures need to be completely accurate and totally up to the mark. The prerequisite schedule consists of several very important elements without which the investor would certainly remain unconvinced about the sustainability of your business.

The initial phase of the sustainability plan should provide an introduction about the project and what is the scope of the project. The scope of the project deals with all the deliverables of the project, the reasons for undertaking the project and all the pertaining features of the project. The required figure of investment needs to be present as well, which would show whether the project is a viable investment or not. The success of any sustainability plan for any project depends heavily on the project's features, and whether the project would be able to sustain itself in the longer term and be able to generate the expected number of returns.

In the second part of the sustainability plan, an explanation should be given as to how the project would be beneficial to the community and how the society would be able to take advantage of this project. All the requirements of the project should be detailed, and a complete risk analysis should be made. The risk analysis or risk assessment portion of a sustainability report would deal with all the possible constraints that might be faced by the project and what is the likelihood of the occurrence of such a risk.

Moreover, the risk analysis or the risk assessment should also detail solutions that have been cited for the pertaining risks, because if the plan does not have a solution for any risk, then that risk becomes a potential threat to the integrity of the sustainability plan of that project without it having any defense or counter action against it.

The next phase of the sustainability report should deal with how the project shall be undertaken and a complete activity list should be drawn up which would show how the project would be developed until it is ready. All the financial implications of the project should be enlisted in the sustainability report, and a thorough analysis should be made of all the major activities of the project and whether any of them might be a risky option for the project. Other additions that can be made to the sustainability report is the analysis of the dealings of the competitor, which would depict all the actions that are being taken by the closest competitor and which might affect the sustainability of the project. These are the basic requirements of a sustainability report.

1.5)FLOW OF FUNDS

In accounting, the term "funds" has two distinct meanings: (1) cash and (2) the access of current assets over current liabilities, which are called "net working capital." Current assets refer to anything of value that a company will sell, use, or otherwise obtain cash for during the current year or operating cycle, whichever is longer, such as cash, inventories, and debt owed to a company. Current liabilities are obligations a company owes within the same period, such as money a company owes another party, insurance, taxes, and wages. Besides these two meanings, the term "funds" also can refer to a combination of cash and working capital.

The flow of funds, therefore, denotes the earning and spending of cash or the growth and reduction of working capital—i.e., fund inflows and outflows. Fund inflows include activities designed to produce revenues, such as selling products, services, investments, and other company assets, as well as issuing stocks and bonds. On the other hand, fund outflows include paying wages, obtaining insurance, purchasing company assets and materials, making long-term investments, and paying dividends and taxes. At one point, companies gauged their flow of funds by using any definition of funds and included a financial statement reporting these activities in their annual reports.

The original statements depicting the flow of funds had a number of different names, including: statement of sources and uses of funds, statement of sources and applications of funds, and statement of changes in financial position. These statements also were called "funds statements" for short. Stated in cash and cash-equivalents, the statement of changes in financial position demonstrated either the sources or uses of working capital and changes in each working capital account, or changes in cash. When preparing a funds statement, an accountant would obtain much of the needed information from the beginning and ending balance sheets, the income statement, and statement of retained earnings for the designated accounting period.

Investors, creditors, and financial managers monitor the flow of funds in order to determine how effectively management plans and controls the quantity and types of its resources, how it has invested and plans to invest company resources, and what methods it uses to finance them. Though once this entailed using the funds statement, financial statement users now obtain this information largely from cash flow statements, income statements, and balance sheets. Depending on whether financial statement users want to analyze cash flow or working capital, they can choose between the beginning and ending balance sheets of a specific accounting period to evaluate a company's working capital or the cash flow statement of the same period to evaluate a company's cash activities. Financial statement users can examine these statements together to monitor both working capital and cash activities.

Users of financial statements employ comparative analysis of this information over a number of years to better evaluate a company's performance and to enhance their ability at predictive decision making. Users analyze the trends to determine the degree to which funds, derived from operations, contribute to the growth of the company.

In addition, stockholders and creditors find analyzing the flow of funds helpful in understanding the changes in assets and asset sources. Analyzing the flow of funds helps stockholders and creditors determine how a company used its additional resources derived from profitable operations and to identify the financial strengths and weaknesses of the business. This additional information is essential to evaluating managerial performance and to making investment decisions. Creditors are more able to determine how the business uses credit and the debt capacity of the business.

Within a company, managers monitor the flow of funds particularly when planning and budgeting. From analyzing a series of relevant financial statements over a number of years, management can project cash requirements needed for growth, identify and plan the efficient use of idle funds, determine working capital requirements, ease the impact of insufficient cash balances, and plan the payment of interest to creditors and dividends to stockholders.

2.1)What is Fund Management?

Fund management or Investment Management Funds management represents the core of sound financial planning. Although it is not a new concept, practices, techniques, and norms have been revised substantially in recent years. Funds management is the process of managing balance sheet and off-balance sheet instruments to maximize and maintain the spread between interests earned and paid while ensuring the bank’s ability to pay off liabilities and fund asset growth. Therefore, a bank’s funds management practices will affect earnings and liquidity. A sound basis for evaluating funds management is by understanding the bank, the customer mix, the asset liability composition, and the economic and competitive environment. The adequacy of policies, procedures, and management information systems must be determined, and the effect of funds management practices on liquidity and interest rate risk analyzed. Liquidity risk is related to, but substantially different from, interest rate risk. Liquidity risk arises from

mismatching the maturities of assets and liabilities. Interest rate risk arises from mismatching the re-pricing of assets and liabilities. Both risks may be increased by rumored or existing asset quality deterioration. Poor asset quality will introduce maturity mismatches through assets failing to pay off as agreed, or re-pricing mismatches through the borrower’s inability to pay higher rates on variable rate loans. Rumored asset problems may cause a run on deposits, which, in turn, will result in both maturity and price mismatches.

2.2)Relevance of Fund ManagementFund management in the recent times getting a lot of attention and making a stir in the fund related issues of the companies. It is now gained a lot of popularity and occupied a core area for the company management. The factors behind the meteoric rise of fund management are as follows…. · Present and anticipated fund availability – Companies now are not only concerned regarding the present prospects of business but they also wanting to have a future predictions of the business growth and development. They are very much keen to know their present as well as future access to fund in-order to grow, expand, and diversify.· Present and future earnings capacity – Funds are usually generated from the present and the future earnings of the company. Thus, the companies ahead of time want to know their earning capacity that would determine their fund accumulation. · Historical funding requirements- Historical sources of funding forms basis for solving complex fund shortage. Fund Management thus keeps track of all the historical data and facts and pulls out the company of unpleasant situation.· Current liquidity position- Fund Management also gives the company a detail overview of its present liquidity positions. This in return helps the company to get a better of its current financial strength. · Anticipated future funding needs- Future expansion or diversification of business of any company is monitored by the availability of funds. Fund Management gives the company an idea regarding estimated fund required if the company goes in for future expansion or diversification of its business.· Options for reducing funding needs or attracting additional funds-As from the above discussions it is quite clear that fund management gives an overview of the companies funding requirements. So, the company on that basis can go in for reducing funding needs or attracting fresh funds· Sources of funds-Another vital aspect of fund management is to lead the way and show the company better paths for acquiring hassle-free and quick sources of funds when the company is in dire need of it.

3)About Petroleum Industry

3.1)History- The Indian Petroleum industry is one of the oldest in the world, with oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drake's discovery in Titusville. References to rock-oil as 'shilajatu' are found in the Vedas. Early evidences of oil seeps were recorded along the banks of the Nampong River in upper Assam, in the 1820s by British army men and geologists. First Indian oil well at Digboi in 1889. Refining, transportation, followed with the discovery at Digboi. It is amazing

how the oil was transported in elephant drawn carts across the jungles and then through the waterways to as far as the Malabar coast. Seismic surveys were carried out in the 19th century in jungles of Assam using elephant logistics.

After independence, India didn't lose much time in initiating geological and seismic surveys in search of oil in the Indian basins. After discoveries in the western sector in Gujarat, the prevailing attitude of non-cooperation by multinationals necessitated the establishment of Koyali refinery in the 60s. One after the other major refineries was set up and infrastructure for distribution of the products expanded at a great pace.

Unique challenges of reaching essential fuel, be it kerosene or LPG to far-flung, logistically challenging terrains across the vast geography of India was addressed with amazing resilience. India's forays into offshore in the 1970's at Aliabet were also very early for a fledgling industry of a developing country. The bold initiative taken with faith in indigenous capabilities in an entirely new and technologies challenging area is a tribute to the Indian oil technologists of the day. But the faith was not misplaced as the oilmen did the country proud by bringing the Mumbai high to production in a then world record time of 26 months from the day of discovery.

The industry has come a long way since then. The giant offshore structures, the ultramodern environment friendly refineries, the high-tech pipeline transportation facilities may appear dazzling. For nearly fifty years after independence, the oil sector in India has seen the growth of giant national oil companies in a sheltered environment. A process of transition of the sector has begun since the mid nineties, from a state of complete protection to the phase of open competition. The move was inevitable if India had to attract funds and technology from abroad into our petroleum sector.

The sector in recent years has been characterized by rising consumption of oil products, declining crude production and low reserve accretion. India remains one of the least-explored countries in the world, with a well density among the lowest in the world.  With demand for 100 million tonne, India is the fourth largest oil consumption zone in Asia, even though on a per capita basis the consumption is a mere 0.1 tonne, the lowest in the region- This makes the prospects of the Indian Oil industry even more exciting.

The years since independence have, however, seen the rapid growth of the upstream and downstream oil sectors. There has been optimal use of resources for exploration activities and increasing refining capacity as well as the creation of a vast marketing infrastructure and a pool of highly trained and skilled manpower. Indigenous crude production has risen to 35 million tonnes per year, an addition of fourteen refineries, an installed capacity of 69 million tonnes per year and a network of 5000 km of pipelines.  

But with the consumption of hydrocarbons said to increase manifold in the coming decades (155mmtpa by the end of the 10th plan) the liberalization, deregulation and reforms in the petroleum sector is essential for the health and overall growth of our economy.

As the Indian Economy breaks the shackles of a Hindu rate of growth to grow at a pace of 8% and above, the single biggest beneficiary should be the oil & energy sector. Oil and energy are most happening sectors of the Indian economy today. PSU Oil Companies were in the limelight over the past two years for a variety of reasons- first, the companies, then the huge surge in profits, and recently, the drama over sale of government's stake through public offer.

3.2) Key Factors Affecting the Growth Of Petroleum Industry In India

Automobile sale have been surging every year. Car sales are up by nearly 30%, heavy & medium commercial vehicle sales have climbed an even steeper 40%, and consumption of diesel and LPG are on a steep rise.

That should be pretty good news for the industry, which is counting on surging sales and economic boom to absorb the huge refining capacity that has built up in the country. The interesting story is that oil products consumption has started picking up in line with the economic boom, though with a certain lag.

Going forward, we should see much larger pick- up in sales of oil products in line with the GDP growth rate, feel analysts.

High consumption has meant high profit margins for oil companies, particularly refining majors like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), Indian Oil Corporation (IOC) and a host of other smaller refining companies.

Refining margins are now ruling at their highest levels over the past decade. According to analysts tracking the sector, refining margins are now at $8 per barrel, one of the highest levels in many years. And these margins have stayed high despite a rise in prices of crude oil.

For integrated refining & marketing companies, like HPCL, BPCL and IOC, the gains are even more substantial and their numbers may look very impressive.

However, sentiment for the sector would be significantly impacted by the performance of the biggest oil company in the country- ONGC .The Company is by far the biggest player in the oil exploration & production sector and has a presence in the refining sector through its arm- MRPL. As crude prices have held firm in the global markets over the past months, the company should show good performance for the year. The company should benefit from a surge in demand in this region.

According to CLSA. "While Asia (excluding, Middle East) accounts for only 10% of oil production, it accounts for as much as 25% of oil consumption and refining capacity. Oil consumption in Asia is returning, driven mainly by a surge in Chinese demand over the shorter term. With most Asian economies on track for a solid recovery, we would expect demand growth to top 3-4% in the next few years leading to a quick recovery. With Asia

forming 45% of global incremental demand between 2000 and 2010, we expect Asian refining margins to remain at higher than global averages"

1.Exploration

India remains one of the least explored regions in the world with a well density of 20 per 10000km2. Of the 26 sedimentary basins, only 6 have been explored so far. The Oil and Natural Gas Corporation (ONGC) and the Oil India Limited (OIL) - the two upstream public sector oil companies- in 1981/82 had taken their search to previously unexplored areas. Number of wells drilled as well as the meterage increased. However current reserve accretion continues to be low. 

2.NELP

The government in order to increase exploration activity approved the New Exploration Licensing Policy (NELP) in March 1997 which would level the playing field in the upstream sector between private and public sector companies in all fiscal, financial and contractual matters.  

Salient features of the NELP 

1) There will be no mandatory state participation through ONGC/OIL nor there any carried interest of the government.  2) The two public sector upstream companies would compete for petroleum exploration licenses, instead of the existing system of granting of licenses on nomination basis. The public sector companies will also be able to avail of the fiscal and contract benefits available to private companies.  3)  Open availability of exploration acreage to provide a continuous window of opportunity to companies. The acreages will be demarcated on grid system and pending preparation of the grid, blocks will be carved out for offer.  4) Freedom to the contractors for the marketing of crude oil and gas in the domestic market.  5) Royalty payments at the rate of 12.5% for the on land areas and 10%for the offshore. Half the royalty of the offshore area will be credited to a hydrocarbon development fund to fund and promote exploration related study and activity.  6) To encourage exploration in deepwater and frontier areas royalty will be charged at half the prevailing rate for normal offshore area, for deep water areas beyond 400m bathymetry for the first seven years after commencement of commercial production.  7) Prompt action by the Ministry of Petroleum and Natural Gas to sign the PSC's for exploration blocks.   The government to attract private investment in the upstream sector has conducted regular rounds of bidding. 

3.Refining

The total installed refining capacity of the 15 refineries in the country at the end of March 1998 was 69.140 million tonnes per annum and the total is expected to go up to 131 mtpa by the year 2001/02. The expected increase in refining capacity should be sufficient to meet the growth in petroleum product demand (112 mtpa by the end of the ninth plan) with minimum level of imports.  

The Sub-group on refining has suggested certain financial incentives for the efficient functioning of the refining sector and enhancing private sector participation during the Ninth five year plan period. In order to increase capacity utilization of the existing refineries, 11 new crude pipelines have been proposed by the Sub-group. 

In addition, there is an urgent need to reduce fuel loss in refineries, which reached a level of 7.1% in 1985/86 and declining marginally to 6.1% in 1996/97. To reduce energy consumption, projects amounting to Rs 7200 million have been identified, which on implementation, will achieve a saving of 186000 tonnes per annum (tpa).

4.Demand and Supply

The aggregate consumption of petroleum products during 1997/98 was 90mt. In the period 1992-98, LPG and HSD registered the largest demand growth rate of 9.2% and 8.6% respectively. The Transport (38%), residential (26%) and industrial (24%) sectors are the largest consumers of petroleum products. The total production of petroleum products during 1997/98 was 61mt (MoPNG 1998). India's self sufficiency in petroleum products has declined to 34% in 1997/98 from 60% in 1985/86 resulting in a substantial growth in the import bill. 

5.Natural Gas

Natural Gas currently accounts for 8% of the energy consumption in the country. The current demand is 89 mcmd with domestic availability lagging behind at 63mcmd. The total gas consumption in 1996/97 was 19bcm with power and fertilizer sectors accounting for more than 80% of the consumption.  The gap between demand and supply is set to widen unless major gas discoveries are made. India is also looking at pipeline gas and LNG imports from neighboring countries as well as countries from Iran, Oman, Central and South East Asia. 

The growth of the gas/ LNG imports is very closely intertwined with the power sector, and the competition, and perhaps to an extent the replacement of coal as the preferred fuel. The setting up of Natural Gas import infrastructure would depend to a large extent on the ability of the power sector to pay for gas as against the cheaper coal, or an alternative fuel.

6.Transportation

The Railways handle the bulk of petroleum product movement in the country, followed by the pipeline. The use of pipelines, provide for more reliability, safety, greater capacity

and efficiency in delivery of the product. There are 5000km of pipeline in the country. At present there are two crude pipelines, one belonging to OIL bringing northeastern crude to Barauni refinery and the other owned by IOC taking crude from the gulf of Kutchh to Koyali and Mathura refineries. The IOC pipeline is being extended to bring crude to their Panipat refinery. Another new pipeline is being laid from the Gulf of Kutchh to Bina to meet the crude requirements of the new joint venture refinery at the place.   

7.Pricing for Oil and Natural Gas

The Administered Price Mechanism, which has been a feature of the oil industry in the last fifty years, was sought to be phased out. The dismantling of this mechanism began on 1 April 1998 and ended in 2002.  The Government however continues to control the prices of petro products.

The APM was made up of a cost-plus pricing system for the producing companies and cross-subsidization for the consumers. The Oil -Pool Account was to see to the interests of both producers and consumers. Subsidies have contributed to the severe liquidity crunch faced by the oil companies. The new package accompanying the dismantling of prices is directed towards bringing greater transparency in subsidies, moving prices towards their real costs, sending right market signals, at the same time not throwing the small consumer to the wolves. Studies have shown, the dismantling of the APM will result in an overall wholesale price-index inflation of 1.57% in five years on a cumulative basis.  

The de-regulation of Natural Gas prices also began in a phased manner. The consumer price of gas at landfall points would be linked to the price of a basket of LSHS/FO prices. Domestic gas prices are to move closer towards the inter-fuel market determining pricing regime. The de-regulation of prices is to accompany those of crude oil and petroleum products, to provide a rational market- related pricing framework for end users. 

According to Oil & Gas Journal (OGJ), India had approximately 5.6 billion barrels of proven oil reserves as of January 2010, the second-largest amount in the Asia-Pacific region after China. India’s crude oil reserves tend to be light and sweet, with specific gravity varying from 38° API in the offshore Mumbai High field to 32° API at other onshore basins. India produced roughly 880 thousand barrels per day (bbl/d) of total oil in 2009 from over 3,600 operating oil wells. Approximately 680 thousand bbl/d was crude oil, the remainder was other liquids and refinery gain. In 2009, India consumed nearly 3 million bbl/d, making it the fourth largest consumer of oil in the world. EIA expects approximately 100 thousand bbl/d annual consumption growth through 2011.

The combination of rising oil consumption and relatively flat production has left India increasingly dependent on imports to meet its petroleum demand. In 2009, India was the sixth largest net importer of oil in the world, importing nearly 2.1 million bbl/d, or about 70 percent, of its oil needs. The EIA expects India to become the fourth largest net importer of oil in the world by 2025, behind the United States, China, and Japan. Nearly 70 percent of India’s crude oil imports come from the Middle East, primarily from Saudi Arabia, followed by Iran. The Indian government expects this geographical dependence to rise in light of limited prospects for domestic production.

8.Sector OrganizationThough the government has taken steps in recent years to deregulate the hydrocarbons industry and encourage greater foreign involvement, India’s oil sector is dominated by state-owned enterprises. India’s state-owned Oil and Natural Gas Corporation (ONGC) is the largest oil company and dominates India’s upstream sector. State-owned Oil India

Limited (OIL) is the next largest oil producer. Other major state-run players include the Indian Oil Corporation (IOC) and the Gas Authority of Indian Limited (GAIL). In addition, the private Indian firm, Reliance Industries Limited, is becoming a significant operator in the oil sector and is the largest private oil and gas company in the country. Cairn India, a branch of UK-based Cairn Energy, and BG Exploration are also important private sector operators in the industry.As a net importer of oil, the Indian government has policies aimed at increasing domestic exploration and production (E&P) activities. As part of an effort to attract oil majors with deepwater drilling experience and other technical expertise, the Ministry of Petroleum and Natural Gas created the New Exploration License Policy (NELP) in 2000, which for the first time permits foreign companies to hold 100 percent equity ownership in oil and natural gas projects. Despite this, international oil and gas companies currently operate a small number of fields. India’s downstream sector is also dominated by state-owned entities. The Indian Oil Corporation (IOC) is the largest state-owned company in the downstream sector, operating 10 of India’s 18 refineries and controlling about three-quarters of the domestic oil pipeline transportation network. Reliance Industries opened India’s first privately-owned refinery in 1999, and has gained a considerable market share in India’s oil sector.

10.Exploration and ProductionMost of India’s crude oil reserves are located offshore, in the west of the country, and onshore in the northeast. Substantial reserves, however, are located offshore in the Bay of Bengal and in Rajasthan state. India’s largest oil field is the offshore Mumbai High field, located north-west of Mumbai and operated by ONGC. Another of India’s large oil fields is the Krishna-Godavari basin, located in the Bay of Bengal. Block D6 in the Krishna-Godavari basin, operated by Reliance Industries, began oil production in September 2008. The primary mechanism through which the Indian government has promoted new E&P projects has been the NELP framework. The latest round of auctions, NELP VIII, was launched in April 2009 and attracted nearly $1.1 billion in investment. India currently plans to launch the NELP IX bidding round in the third quarter of 2010.

11.Overseas Exploration & ProductionIn recent years, Indian national oil companies have increasingly looked to acquire equity stakes in E&P projects overseas. The most active company abroad is ONGC Videsh Ltd. (OVL), the overseas investment arm of ONGC. OVL conducts oil and natural gas operations in 13 countries, including Vietnam, Myanmar, Russia (Sakhalin Island), Iran, Iraq, Sudan, Brazil, and Columbia. One of OVL’s most high profile investments is its share in the Greater Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work in Sudan since 1997. OVL acquired a 25 percent equity stake in the company in 2003, with the balance held by the China National Petroleum Company (CNPC, 40 percent), PETRONAS (30 percent), and the Sudan National Oil Company (Sudapet, 5 percent). The GNPOC acreage in Sudan holds proved crude oil reserves of more than one billion barrels with current production levels at roughly 300,000 bbl/d from 10 fields. In addition to the upstream activities, the GNPOC companies operate a 935-mile crude oil pipeline that pumps oil to Port Sudan for export.

OVL also holds a 20 percent stake in the ExxonMobil-led consortium that operates the Sakhalin-I project in Russia. According to company estimates, the oil fields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels. In addition to ONGC, other Indian companies are also actively involved in E&P projects abroad. OIL, for example, is working on projects in Libya, Gabon, Nigeria, and Sudan.

12.Downstream/RefiningAccording to OGJ, India had 2.8 million bbl/d of crude oil refining capacity at 18 facilities as of January 1, 2010. India has the fifth largest refinery capacity in the world. In 2009, privately-owned Reliance Industries added another refinery to its Jamnagar complex to raise the entire complex’s refining capacity from 660,000 bbl/d to 1.24 million bbl/d. The Jamnagar complex is the largest oil refinery complex in the world.Other key upcoming refinery projects include Essar Oil’s Vadinar refinery expansion of 110,000 bbl/d in 2011, 120,000 bbl/d greenfield refinery in Bina in 2011 by a joint venture between Bharat Petroleum Corporation Limited and Oman Oil Company Limited, a 180,000 bbl/d grassroots refinery in Bhatinda in 2014 by Hindustan Petroleum Corporation Limited, and IOC’s grassroots Paradeep refinery of 300,000 bbl/d in 2015. India is slated to add 840 thousand bbl/d of refining capacity through 2015 based on currently proposed projects.Due to expectations of higher demand for petroleum products in the region, further investment in the Indian refining sector is likely. As part of the country’s 11th Five Year Plan from 2007 to 2012, the government would like to promote India as a competitive refining destination, and industry experts expect the country to be an exporter of refined products to Asia in the near future.

13.Refined Fuel SubsidiesThe Market Determined Price Mechanism is notionally benchmarked to international oil prices, but the Indian government heavily subsidizes domestic prices of oil products such as diesel, gasoline, kerosene, and LPG. At the same time, taxes on crude and petroleum products imposed by different layers of Indian government often exceed the subsidies. According to industry analysts, though originally an attempt to protect economically disadvantaged Indian consumers, fuel subsidies distort India’s domestic market by forcing India’s state owned oil companies to accept “under-recoveries” (i.e. losses) and encouraging India’s private companies to orient their product sales internationally. With diesel prices significantly lower than other fuels, particularly gasoline, diesel consumption rose by nearly 20 percent from 2007 through 2009. The International Energy Agency reports that losses from fuel price subsidies for the 2010-11 fiscal year are expected to exceed $23 billion.

14.Strategic Petroleum Reserve

To support India’s energy security, India is constructing a strategic petroleum reserve (SPR). The first storage facility at Visakhapatnam will hold approximately 9.8 million bbls of crude (1.33 million tons) and is scheduled for completion by the end of 2011. The second facility at Mangalore will have a capacity of nearly 11 million bbls (1.5 million tons) and is scheduled for completion by the end of 2012. The third facility of Padur, also

scheduled to be completed by the end of 2012, will have a capacity of nearly 18.3 million bbls (2.5 million tons).The selection of coastal storage facilities was made so that the reserves could be easily transported to refineries during a supply disruption. The SPR project is being managed by the Indian Strategic Petroleum Reserves Limited (ISPRL), which is part of Oil Industry Development Board (OIDB), a state-controlled organization. India does not have any strategic crude oil stocks at this time.

3.3)Petroleum Planning & Analysis Cell (PPAC)

The Petroleum Planning & Analysis Cell (PPAC) was created w.e.f. 1st April 2002 after dismantling of the Administered Pricing Mechanism (APM) in the petroleum sector and abolition of the erstwhile Oil Coordination Committee (OCC). The Governing Body under the chairmanship of Secretary (PNG) and senior officials of MOPNG and Chief Executives of major oil and gas PSUs as members provides necessary supervision, guidelines in the functioning of PPAC.

Investment Opportunities in Petroleum Sector

Petroleum products are the single largest merchandise export from India. Improved Oil Recovery (IOR) / Enhanced Oil Recovery (EOR) techniques Crude oil production from the deepwater block D6 in KG Basin Use of improved technology Extended oil field acquisition activities Capacity utilization of refineries Foreign company collaboration End-user market and Infrastructure development Setting up oil & gas courses at universities and training institutes Opportunities for world-class service providers

3.4) India’s Top Ten Oil Companies

The Indian petroleum market over the years has been generally dominated by Public Sector Units (PSUs) under the grip of the Central Government. But in the recent past remarkable achievements have been made by the private sectors which cannot be overlooked. With increased capacity production and well equipped technology the private sectors are giving a tough competition to PSUs. Thus, above mention reason the ranking of the private company are creeping up and may overtake the leading PSUs. However the present top ten oil companies are as follows….

1. Indian Oil Corporation Limited

2. Oil & Natural Gas Company

3. Bharat Petroleum Corporation Limited

4. Reliance Industries Limited

5. Essar Oil Limited

6. Assam company Limited

7. Hindustan Petroleum Corporation Limited

8.Petroleum India International

9. Oil India Limited

10. Tata Petrodyne Limited

Hindustan Petroleum Corporation Limited (HPCL)

A state-owned oil company of the Government of India located at Mumbai, India and is a Fortune 500 company of India listed at number 311 in the global 500 rankings, with an annual turnover of over 1,16,428 Crores and sales/income from operations of Rs 1,31,802 Crores (US$ 25,618 Millions) during financial year 2008-09, about 20% Marketing share in India and a strong market infrastructure. Corresponding figures for financial year 2007-08 are: Turnover- Rs 1,03,837 crores, and sales/income from Operations- 1,12,098 Crores (US$ 25,142 Million).

HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the other in Vishakhapatnam, (East Coast) with a capacity of 8.3 MMTPA. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited (MRPL), a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA. Another Refinery of 9 MMTPA is under construction in Bathinda, Punjab by HMEL, a Joint Venture with Mittal Energy Investments Pte.Ltd.

HPCL also owns and operates the largest Lube Refinery in India producing Lube Base Oils of international standards. With a capacity of 335 TMT. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production. Presently HPCL produces over 300+ grades of Lubes, Specialities and Greases.

The marketing network of HPCL consists of 13 Zonal offices in major cities and 101 Regional offices facilitated by a Supply & Distribution infrastructure comprising

Terminals, Aviation Service Facilities, LPG Bottling Plants, Lube filling plants, Inland Relay Depots, Retail Outlets (Petrol Pumps) and LPG & Lube Distributorships.

HPCL has, over the years, moved from strength to strength on all fronts. The refining capacity steadily increased from 5.5 million metric tonnes in 1984/85 to 13.00 million metric tonnes (MMT) now. On the financial front, the turnover grew from 2687 crores in 1984-85 to Rs 1,31,802 Crores in Financial year 2008-09.

4.1)Products

1. Petrol- Known as Motor Spirit(MS) in Oil Industry. HPCL markets the product through its retail pumps spread all over India. Its principle consumers are regular personal vehicle owners.

2. Diesel - Known as High Spirit Diesel(HSD) in Oil Industry. HPCL markets the products through its retail pumps as well as terminals and depots. Its consumers are not only regular auto owners but also transport agencies, industries etc.

3. Lubricants- HPCL is the market leader in lubricant and associated products. It commands over 30% of market share in this sector. The popular brands of HP lubes are Laal Ghoda, Milcy, Thanda Raja, Koolgard etc.

4. LPG -A popular brand in mainly urban areas.5. Aviation Turbine Fuel- With major ASF(Air Service Facility) present in all major

airports of India, HPCL is a key player in this sector supplying ATF to major airlines. It has an accomplishment of sorts to supply fuel to US Air Force 1.

6. Bitumen7. Furnace Oil

Refineries

1. Mumbai Refinery - 5.5 Million Metric Tonnes (MMT) Capacity2. Visakhapatnam Refinery - 7.5 MMT at Visakhapatnam3. Mangalore Refinery Pvt. Ltd. - 9.69 MMT at Mangalore, Karnataka(HPCL has

16.65 % Stake).4. Guru Gobind Singh Refinery Project - 9 MMT at Bhatinda, Punjab(HPCL &

Mittal Energy each have 49% stake).

International rankings

1. HPCL is a Fortune Global 500 company as per the ranking of 2009 and was ranked at position 311.

2. HPCL was featured on the Forbes Global 2000 list for 2009 at position 10023. It is 10th most valuable brand in India according to an annual survey conducted

by Brand Finance and The Economic Times in 2010.

Recognition and Awards 2008

1. NDTV Profit Business Leadership Award

2. Reader’s Digest ‘Trusted Brand Asia Platinum’ Award3. Golden Peacock Corporate Governance Award 20084. CIO 100 Award 20085. India Star Award6. OISD Safety Award7. National Award For Excellence In Cost Management8. Greentech Environment Excellence Award 20089. Best HR Practices in ‘People Management’

Major Ongoing Projects

New FCCU at Mumbai Refinery Lube Oil Base Stock (LOBS) Up gradation project at Mumbai Refinery Diesel Hydro Treating (DHT) at Mumbai & Visakhapatnam refineries New Integrated Effluent Treatment Plant at Mumbai Refinery New Grease & Speciality Products Plant, Silvassa. A state-of-art plant for production

of Grease, Coolants & Brake Fluid to start by September,2010. Guru Gobind Refinery Project- Bhatinda, Punjab. Production - 9 MMTPA. To be

commissioned by 2012. White Oil Terminal-Vishakhapatnam.

HPCL

CORPORATE REFINERYMARKETING

CORPORATE FINANCE

COMPANYSECRETARY

VISHAKAPATNAM MUMBAI

STRATEGIC BUSINESS UNIT (SBU)

RETAIL LPG DIRECT SALES LUBRICANT AVIATION

ZONE

TERMINAL OFFICE REGIONAL OFFICE

ZONE OPERATING LOCATION

DEPOTCARRYING FRIEGHT AGENT(CFA)CONTRATOR OPERATED DEPOT(COD)COLD (FOR LUBRICANTS)LPG BOTTLING PLANT

THERE ARE 14 Regional Offices UNDER THE EASTERN GMO OF Hindustan Petroleum Corporation Limited:

6 RETAIL Regional Offices 4 LIQUID PETROLEUM GAS (LPG) Regional Offices 4 DIRECT SALES Regional Offices 2 TERMINALS AT BUDGEBUDGE AND RAMNAGAR

MAJOR PAYMENTS MADE AT HPCL:NATURE OF PAYMENT MADE BY CRUDE PAYMENT MADE BT THE HEADQUARTERS FINANCING OF MAJOR PROJECTS LIKE UPGRADATION OF REFINERIES OR

TERMINALS, ETC. MADE BY THE RESPECTIVE ZONAL OFFICE OR REGIONAL OFFICE

PAYMENT OF EXCISE DUTY MADE AT THE REFINERY PAYMENT OF SALES TAX MADE BY THE ZONAL OFFICE BY WAY OF

CHEQUS OR ONLINE MODE PAYMENTS FOR PURCHASE OF PRODUCT FROM OTHER COMPANIES MADE

BY HEADQUARTERS SALARY TO THE MANAGEMENT LEVEL PAID BY HEADQUARTERS SALARY TO THE NON-MANAGEMENT LEVEL PAID BY THE ZONAL LEVEL PAYMENTS FORPURCHASE MADE AT LOCAL OPERATIVE LOCATIONS IS

MADE BY THEIR RESPECTIVE REGIONAL OFFICES.

THERE ARE TWO TYPES OF BANK ACCOUNTS MAINTAINED BY HINDUSTAN PETROLEUM CORPORATION LIMITED FOR ITS FINANCIAL OPERATIONS. THEY ARE:

OPERATIVE ACCOUNTS NON-OPERATIVE COLLECTION ACCOUNTS

4.2) OPERATIVE ACCOUNT

There are various modes in which the operative account of Hindustan Petroleum Corporation Limited functions.

CHEQUES - Hindustan Petroleum Corporation Limited makes certain payments by way of cheques. For example the payment made for leasehold premises is made by way of cheques.

ONLINE PAYMENTS - this is a process whereby Hindustan Petroleum Corporation Limited, like any other corporate organization, makes its payments through any bank, keeping a record of the transactions. Later the vouchers are prepared in the system by the accountants for book-keeping purposes.

E-PAYMENTS – under this system the accountants of Hindustan Petroleum Corporation Limited upload all the payment vouchers in batches from the company’s server to the STANDARD CHARTERED BANK server through BATCH PROCESSING ROUTE instructing the bank to make the mentioned payments. Thus the instructions get processed and payments are made.

LETTER OF AUTHORITY (L.A.) – it is a system where the specified authorized signatories of Hindustan Petroleum Corporation Limited can issue a LETTER OF AUTHORITY instructing the bank to make payments on its behalf. It is to be noted that only the authorized personal can issue such letters.

ELECTRONIC DATA INTERCHANGE (EDI) - Hindustan Petroleum Corporation Limited holds a special account in the State Bank of India for the payment of freight charges to the railway authorities. This account is linked to the CAG Branch, Mumbai and collects payments from it. The railways directly debit this account for the amount due through a system called ELECTRONIC DATA INTERCHANGE (EDI).

The Regional Offices have an operative account through which they meet the expenses of the various operating locations under them. The limit of money held in the Operative Account is determined and approved by the Treasury at CAG Branch, Mumbai, depending upon the needs and requirements of the Operating Locations under the Regional Offices. The Operating Locations only have Petty Cash Deposits (PCD) with them to meet petty expenses like maintenance cost or cleaning charges, etc.

However the limit defined for the Operating Locations does not include the Sales Tax to be paid by the Regional Offices. The Sales Tax payments are directly made by the Zonal Office through cheques or letter of authority from the treasury via the CAG Branch, Mumbai. The Sales Tax are not be paid by the Operative account of the Regional Offices.

Besides the Operating account the Regional Offices have certain pre-funding accounts for meeting expenses like- salary payment of the non-management level staff;- pension payments;- Medical expenditures; etc.

The Regional Offices can open up new accounts requesting the Treasury at CAG Branch, Mumbai. The Treasury approves the request and thus the required formalities are carried out to open up the account. The formalities for opening of a new account are:-

The Regional Offices can change the limitations or authorized signatories by making a request to Treasury at CAG Branch, Mumbai. The Treasury approves the request and thus the required formalities are carried out to make the required changes.The formalities for altering the limitations of the Operating accounts or changing the authorized signatories are:-

NON-OPERATIVE COLLECTION ACCOUNT

The Non-Operative Collection Accounts are maintained by Hindustan Petroleum Corporation Limited to receive payments from parties and other segments.

The various modes in which the Non-Operative Collection Accounts receives payments are:- CHEQUES - Non-Operative Collection Accounts can receive payments in the form of cheques from

its parties and then the amount gets credited into the bank account when presented. DEMAND DRAFTS - Non-Operative Collection Accounts can receive payments in the form of

Demand Drafts. The money gets credited into the bank account of Hindustan Petroleum Corporation Limited when presented in the bank.

PAY-ORDERS - Non-Operative Collection Accounts receive payments from parties in Pay-Orders. The payer instructs his/her banker to make payments into the account of Hindustan Petroleum Corporation Limited.

E-RECIEPT - under this mode of receipt the payment is received by the banker of Hindustan Petroleum Corporation Limited. The bank uploads the vouchers on to the server of Hindustan Petroleum Corporation Limited via its server using the BATCH PROCESSING ROUTE. The account of the company is credited as well. Thus the cash-receipt is prepared by the accountants for book-keeping purposes.

ONLINE PAYMENTS – the payment is received in the company account through E-mode and cash receipt is prepared for book-keeping purposes.

DISCOUNTING LIMITS – the company receives negotiable instruments from distinct dealers in respect of product supplied to them. In general the banker of Hindustan Petroleum Corporation Limited gets the instrument cleared by depositing it in the local clearing house. Then the instrument goes to the clearing house of the payer to get cleared. This usually takes a longer time which as a result blocks funds of the company. To solve this problem Hindustan Petroleum Corporation Limited has made discounting arrangements with its banker. The company has stated an estimated amount of outstation instruments it is to receive in a stipulated period of time. The company pays a fixed rate of discounting charges on the estimated amount irrespective of the fact whether the company receives any such instruments. The benefit of this system is that as soon as the instrument is presented to the banker the account of the company is created with such amount debiting the CAG Branch, Mumbai for discounting charges. Thus the funds of the company remains mobilized.

REAL TIME GROSS SETTLEMENT (RTGS)With the advancement of technology the company is trying to switch over to RTGS for receiving payments from them. This system is advantageous for the company in many ways. They are

it ensures better mobility of the funds of the company It reduces the time lag between the receipt of the instrument and the crediting of the

bank account of the company. It reduces the risk factor of a default in payment by the payers as there are no chances

of dishonor in this mode. RTGS is a cost-effective method of collecting payments. Thus it lowers the

expenditures of the company.

At present 60% of Hindustan Petroleum Corporation Limited dealers have switched over to RTGS mode. However 40% still remain to instruments and are yet to be transferred.

4.3) MEMORANDUM OF INSTRUCTIONS TO BRANCHES

1. NATURE OF FACILITY: Under the facility, HPCL will have the arrangement of payment of excise duty through cheques issued by HPCL installations/deposits at select centers. Wherever there is a letter of authority facility for this purpose the same will be replaced by this “CHEQUE FACILITY (IN LIEU OF LETTER AUTHORITY FACILITY) FOR PAYMENT OF EXCISE DUTY” within limits allocated under separate advices.

2. MODALITIES OF CONDUCT OF THE EXISTING ACCOUNTS are as under: a. Cheques drawn on SBI designated branch issued by the authorized representative of local union will be

presented to designated SBI branch/other branches/other bank branches as the case may be for making payment for the excise duty. The branch is also authorized to honor such cheques after due scrutiny as and when they are presented by the excise authorities, etc. through their bankers.

b. The branch shall be authorized to make payment not exceeding a specified limit per day and specified no. of times in a month for the purpose, separately advised to the branch.

c. The payments of this account shall be made only to Central Excise authorities and no other payment from this account is to be provided. For the purpose of HPCL’s local event concerned at the time requisitioning the chequebook, shall mention in the name of the payee (CEA). The branch shall ensure that all cheques are pre-stamped with the payee’s name and are also pre-crossed “account payee only” before the issue of chequebook. The requisite stamp will be provided by HPCL’s local unit at the time of requisition of the chequebook.

d. The names and specimen signatures of the officials who will be signing the cheques (jointly by two) attested by the head of the Banking and Insurance department, HQ Office, HPCL Mumbai and duly verified by our office and sent to the branch. If the L/A facility has been operative at the branch, the specimen signatures of authorized signatories on record for L/A facility for payment of excise duty are also valid and applicable for cheques under the “CHEQUE FACILITY” (IN LIEU OF LETTER OF AUTHORITY FACILITY) FOR PAYMENT OF EXCISE DUTY”

e. The existing current account for letter of authority facility for payment of excise duty will itself re-designated/ Re-opened as “CHEQUE FACILITY” (IN LIEU OF LETTER OF AUTHORITY FACILITY) FOR PAYMENT OF EXCISE DUTY” and hence no new formalities for opening a current account are required. At branches where L/A is not upgraded a new current account as “CHEQUE FACILITY” (IN LIEU OF LETTER OF AUTHORITY FACILITY) FOR PAYMENT OF EXCISE DUTY” may be opened for this purpose.

f. If the branch is nominated to accept the concerned duty, on receipt of the cheque, the payment bill will have to be made by internal book transfer entry. However in case, the nominated bank (NB) at the centre is other than SBI, the payment will have to be made on presentation of cheque (through clearing/ on collection basis) within a specified limit advised to you.

3. The facility will be operated strictly on the following lines:a. the payment by cheque shall be released first by debiting HPCL’s account opened for this purpose at the

branch and then at the end of the day the total Outstanding balance as a lump-sum will be debited by non-CMP linked branches through auto-sweep to CAG Branch, Mumbai where HPCL’s cash credit account is maintained.

b. The branch should retain the paid cheques at the end.

c. In case the branch is having CMP facility the day end debit must be sent through debit transfer mode of CMP, direct to CAG Branch, Mumbai through CMP center, Mumbai shall advise the necessary code and operating instructions on debit transfer module of CMP for the purpose.

d. Wherever the debit transfer module of CMP is already in operation at the branch for remitting the debit standing in the account of excise duty, the same procedure to be followed for transfer of the main CC account of HPCL at CAG Branch, Mumbai.

4. The limit established at a branch for honoring payments by cheque is meant for utilization each day if avail of. In the events cheques bearing different dates are presented for payment on any day, it is possible that the total utilization of the facility on that particular day may exceed the allocate limit at the branch. This may be permitted and reported to DGM and RM-AMT-1 at CAG Branch, Mumbai for confirmation.

5. Recovery of charges: a. A composite bank charge of rs.500 +service tax +EC as applicable towards remittance charges (through

whatever mode) (for all components of bank charges including postage/telegram/telex charges) is recoverable from HPCL’s each days transfer funds. The said charge should be recovered on monthly consolidated basis at the end of each month by debiting the CAG Branch, Mumbai through branch clearing general account distinct date wise charges recovered. It may be reiterated that the said charges are NOT to be recovered at the time of daily auto-sweep. In the case of CMP LINKED branches, where from funds are to be transferred through CMP, only CMP charges are applicable in the place of composite bank charges and these charges are recovered by centrally by CMP center, Mumbai

b. Account maintenance charges are to be recovered at a prevailing rate on annual basis.c. Issuance of chequebook, the charges at rs.2 per leaf for an MICR centers and rs.1 per leaf for non-MICR

centers shall be recovered on the date of issuance.d. The branch on core platform, should be assured that “no fees “menu is selected so that the charges are

not automatically debited by the system.6. These instructions are applicable w.e.f 13 aug.2009 valid till further advice.

4.4) MONEY INSURANCE POLICY

WHEREAS the insured described in the schedule here to (herein after called the “Insured”) by a proposal and declaration which shall be the basis of this contract and is deemed to be incorporated herein has applied to UNITED INDIA INSURANCE COMPANY LIMITED for the insurance herein after contained and has paid the premium stated in the said schedule as consideration for such insurance during the period stated in the said schedule.The company hereby agrees the terms, conditions and exclusions herein contained, endorsed or otherwise expressed hereon, to indemnify the insured against the loss of

Money in transit by the insured or insured authorized employees, occasion by robbery, theft or any other fortuitous caused;

Money by burglary, robbery or hold up whilst in the insured premises in a safe or strong room provided always that the limit of the company’s liability for any one loss shall in no case exceed the amount specified in the said schedule

SECTION 1

I. Money for payment of wages, salaries or for petty cash in direct transit from the bank to the insured premises from the time the cash is received at the bank by the insured or authorized employee/s of the insured until delivery at the premises or other place of disbursement and whilst

there, until paid out provided that after business hours such cash be secured in locked safe on the premises for a period no exceeding 48 hours. From time of arrival of such cash at the said premises or place of disbursement. Cheques drawn by the insured to provide for such cash are covered in transit from the premises to the bank

II. Money other than described in 1 in the personal custody of the insured or authorized employees whilst in direct transit between the premises and bank or post office.

III. Money other than described in above 2 belonging to the insured which is collected by and in the personal custody of the insured or the authorized employees of the insured whilst in transit to the premises or bank within a period not exceeding 48 hours from tome of collection.

SECTION 2Money whilst on the premises during the business hours and whilst secured locked safe or strong room in the insured premises outside business hours.

DEFINITIONSMoney shall mean and include cash, bank drafts, currency notes, cheques, postal orders and current postage stamp.SAFEA strong and fire-proof receptacle containing money, valuable papers or the like which is commercially marketed as safe

EXCLUSIONSThe company shall not be liable in respect of:

1. Shortage due to error or omission2. Loss of money interested to any person other than insured or authorized employee of insured.

Loss of money where the insured or his employee is involved as a principle or accessory. (However loss due to fraud or dishonesty of cash carrying employee of the insured, occurring whilst in transit and discovered within 48 hours is covered.

3. Loss occurring on the premises, after business hours unless the money is in a locked safe or strong room.

4. loss occasioned by strike, terrorist activities 5. money carried under contract affreightment and theft of money from unattended vehicle6. Loss of money from safe or strong room following use of the key to the safe or strong room or

any duplicate thereof belonging to the insured, unless this has been obtained by threat or violence.

7. loss or damage whether direct or indirect arising from war/ war-like operation, act of foreign enemy, hostilities, civil war, rebellion, insurrection, civil commotion, military usurped power, seizure, capture, confiscation, arrest, restraints, and detainment by the order of any government or any authority. Any action, suit or other proceedings where the company alleges that by reason of above provisions any loss or damage is not covered by this insurance. The burden of proving such loss or damage is covered shall be upon the insured.

8. a. any loss, damage, destruction to any property whatsoever or any loss of expense whatsoever resulting, or arising there from or any consequential loss, and any legal liability of whatsoever r nature directly or indirectly caused by or contributed to by or arising from contributed to by or arising from ionizing radiation or contamination by radioactivity, from ant source whatsoever.

b. any loss, damage, destruction or legal liability directly or indirectly caused by or contributed by or arising from nuclear weapons material.9. Consequential loss or legal liability of any kind.10. Loss or damage due to or contributed to by the insured having caused or suffered anything to be done whereby the risk hereby insured against unnecessarily increased.

SPECIAL CONDITIONS

MAITAINANCE OF BOOKS AND KEYS: the insured shall keep a daily record of the account of the amount of cash contained in the safe or strong room and such record shall be deposited in a secure place other than the said safe or strong room and produced as documentary evidence in support of a claim under this policy. The keys of the safe or strong room shall be left on the premises out of business hours unless the premises are occupied by the insured or any authorized employee of the insured in which case, such keys if left on the premises shall be deposited in a secure place not in the vicinity of the safe or strong room.

SUM INSURED: the sum insured should represent the estimated annual turnover, which should not be less than the previous year’s turnover of money in transit + 15%. The insured has the option of increasing the sum insured as and when required during the currency of the policy.

LIABILITY OF THE INSURER: if at a time of loss it is found that the actual money in transit gas exceeded the sum insured under the policy, no liability shall attach. However, this does not apply to the cash in the premises during the business hours.

RIGHTS OF RECOVERY: the company shall be entitled in the name of the insured to have the absolute conduct and control of all or any proceedings that it considers necessary for the purpose of tracing and recovering money lost or of securing during reimbursement in respect of money lost and insured at the company’s expense furnish all such assistance as may be reasonably be required by the company in connection with such proceedings and in the event of any or all of the money being recovered, it shall be imperative upon the insured to refund to the company such a proportion of the sum allowed by way of compensation as the amount recovered bears to the total amount of money lost.

GENERAL

NOTICE: every notice in communication required by this policy shall be in writing to the office of the company through which the insurance is affected.DUTY OF DISCLOSURE: the policy shall be void and all premium paid hereon hall be forfeited to the company in the event of misrepresentation, mis-description or non-disclosure.REASONABLE CARE: the insured shall take all reasonable steps to safeguard the property insured against accident, loss or damage.CLAIMS PROCEDURE: upon the happening of any giving rise to or likely to give rise to a claim under this policy, coming to the knowledge of the insured:

a. The insured shall give immediate notice to the police and to the policy issuing office of the company and take all practicable steps to discover the guilty person/s to recover the cash lost.

b. The insured shall deliver the company, within 14 days from the date on which the event shall have come to his knowledge, a detailed statement in writing of the loss.

c. The insured shall furnish all explanations, vouchers, proof of ownership and other evidence to substantiate the claim and the company may, if it deems necessary, require corroborative evidence of the statements of the insured of any of the insured’s family members or employee/s

CONTRIBUTION: if at the happening of any loss or damage covered by this policy there shall be subsisting any other insurance of any other nature whatsoever covering the same property whether effected by the insured or not, the company shall not be liable to pay or contribute more than its rate able proportion of any loss or damage

4.5)Managing payment risks in commercial transactions

Features of a commercial contract

Everything they have agreed between themselves Evidence of contract

Record of agreed goods Record of agreed time of delivery Record of agreed terms of delivery Record of agreed point of delivery Record of agreed method of payment

Design can vary but not the contents First document to bring parties together Any inaccuracy or inconsistency may have legal repercussions if shipment is not

as per contract

Essential details in a contractDetails of buyer / seller – with full address

– Manufacturer – Seller – buyer – end user….– Method of dispatch

Initial quote confirmed order contract

– Terms of delivery• Exact point at which risks and responsibilities pass from seller to buyer

(INCO TERMS 2000)– Insurance– freight

– References / dates – • terms to be avoided FAV (first available vessel) /ASAP

– Appointment of freight forwarder– Terms of payment– Documentation– Other instructions

Different types of trade transactions Export / import of capital goods Export / import of accessories – non capital goods

Export / import of services

Features of a commercial contract Sale / purchase contract is a document recording the terms of delivery and terms of

payment Who will bear the expenses / risk factors up to which stage

Whether transport charges will be for the buyer or seller’s account Transit risk will be covered by marine insurance at whose expense

At which stage transfer of title of the goods will take place

seller buyerCommercial contract

Four main categories of charges / cost Dispatch, carriage, delivery

2

Remitting Bank

1

Documents forwarded

3Documents Presented

COMMERCIAL

CONTRACT

Seller buyer

2

Remitting Bank

Collecting Bank

1

Documents forwarded

34Payment

made

5

6

Payment Transferred

Payment made to Exporter

SALE CONTRAC

T

seller

Buyer

Customs clearance for export / import Service / assistance rendered in addition

Insurance

Terms of payment Documents on collection basis

Documentary collection At sight – DP basis On due date – DA basis

Direct collection Consignment basis Payment guarantees Documentary Credit / Letter of Credit Standby letter of credits Advance Payment

RISK FACTORS If the buyer refuses to accept the documents and not paying – Seller

To offer discount To search for an alternate buyer offering the goods with or without discount If alternate buyer not found, goods are to be re-booked Expenses – transport charges, freight charges, bank charges….Cost of funds Or abandon the goods….. Documents are safe but payment not assured

COLLECTION

---------------------------------------------------------------------------------

Goods consigned directly

1

SALE CONTRACT

seller

buyer

RISK FACTORS IN CLEAN COLLECTION: Seller should have absolute faith and confidence on the buyer… since goods are directly

consigned. Payment on due date by buyer If defaulted there is no assurance Has to resort to legal procedures.

3

Sellers Bank Buyers Bank

2

Documents forwarded

4Documents Presented

Goods consigned directly1

SALE CONTRAC

T

Seller buyer

3

Sellers Bank Buyers Bank

2

Documents forwarded

45Payment

made

6

7

Payment Transferred

Payment made to Exporter

Goods consigned directly1

SALE CONTRACT

seller buyer

DIRECT COLLECTION RISK FACTORS: No control on the goods since it is directly consigned to buyer Documents are also forwarded directly to the buyer … Only if the Seller has absolute confidence on the buyer’s capacity to pay. this method

will be suitable; Otherwise… this will be more risky

LEGAL ASPECTS OF CREDIT COLLECTIONLEGAL ASPECTS OF CREDIT COLLECTION Transaction is covered under Indian Contract Act 1872. Bank is appointed as an agent for collection by the seller Bank does not assume any responsibility for credit protection Seller has to proceed against the buyer for non-fulfillment of contractual obligations

under civil suit. In case of exports – no legal support except ICC Paris guidelines on collection

documents URC 522

ADVANCE PAYMENTS

Sellers Bank

2Payment

made on the

agreed date3

4

Payment Transferred

Payment made to Exporter

Goods consigned directly with documents1

SALE CONTRAC

T

seller buyer

Commercial contract

Payment made in advance through the bank Goods

consigned

seller buyer

Buyer remits the payment in advance Receiving the consignment or getting back the payment if shipment never takes place

will be the risk for the buyer Seller enjoys buyer’s funds

LETTER OF CREDIT AND GUARANTEES:To manage the receivables with lesser risks corporate may opt for any of these payment methods:

Letter of Credit / Documentary Credit Inland / Foreign Guarantees / Standby credits Inland / Foreign

DOCUMENTARY CREDIT: An arrangement whereby a bank acting at the request and on instructions of a customer

i.e., the applicant / buyer To make payment to a third party (the beneficiary) by themselves or authorize other

bank to pay or negotiate Against stipulated documents

Provided Terms and conditions of the credit are complied with

COMMERCIAL CONTRACT

State Bank

of India,

ImporterHPCL

Mumbai1

4

3

2

BENEFITS OF A CONFIRMED CREDIT Since the credit is confirmed by confirming bank they have a commitment to pay to the

beneficiary if the documents presented, represents ‘complying presentation’. Their undertaking will be an additional undertaking in addition to the issuing bank’s

undertaking Beneficiary is more comfortable under this arrangement since he is assured of payment

immediately on presentation of documents to the confirming bank

UNCONFIRMED CREDIT PAYMENT BY A NEGOTIATING BANK Even though negotiating bank does not have any commitment to pay, they pay value

against set of credit complied documents drawn under a letter of credit with the beneficiary.

Documents under LC Bill of Exchange Commercial Invoice Transport document Inspection certificate Insurance Certificate of origin (in foreign trade)

NEGOTIATION OF DOCUMENTS UNDER CONFIRMED CREDIT

State Bank

1

3

4

5 6 2

NEGOTIATION OF

DOCUMENTS UNDER

UNCONFIRMED CREDIT

ICICI Bank

1

3

4

5 6 2

STANDBY CREDITS1. Promise to honor beneficiary’s presentation of a document indicating the default of the

applicant 2. Act as a standby arrangement in case the obligation is not fulfilled by the applicant3. MORE USEFUL IN COLLECTION INSTRUMENTS.4. TO PRESENT A COPY OF COMMERCIAL INVOICE & UNPAID BILL OF

EXCHANGE5. In respect of any debt, obligation or any liability by the overseas party in connection

with bonafide trade transaction6. As a back-up instrument for collection7. ICC 600 & ISP 98 are the governing guidelines

GUARANTEE

4

Exporter’s Bank Issuing Bank

2

Documents forwarded

78Payment

made

5

6

Payment made

Payment made to Exporter

Goods consigned directly

1

Payment demanded on due date and defaulted by importer

3Standby credit

seller buyer

GUARENTEED INVOCATION

GUARANTEES INLAND/FOREIGN: FINANCIAL / PERFORMANCE /DPG DIFFERENCE BETWEEN FIN/PERF GUARANTEES TYPES OF GUARANTEES –RECEIVABLES AND PAYABLES CHECK POINTS

GUARANTEES - CHECK POINTS: PURPOSE – SPECIFIC

Issuing bank

buyer seller

contract

appl

ica t

ion

Issuing bank

buyer seller

Non performanceDefault stage i

RecoveryStage 3

VALIDITY PERIOD CLAIM PERIOD VALUE LIMITATION CLAUSE REASONS FOR INVOKING – SPECIFIC HOW TO EXTINGUISH THE LIABLITY

INLAND GUARANTEES: TYPE STATUS OF THE IB DOCUMENTARY CONDITIONS DOCUMENTS TO BE SPECIFIED REINSTATEMENT CLAUSE CHARGES INTEREST FACTORPost dated Cheques: Advantages Wrongful dishonor Rightful dishonor Implications of dishonor

Criminal N I law (Amendment) Act 1988

CRIMINAL LIABLITY IPC 415 CHEATING IPC 417 PUNISHMENT FOR CHEATING IPC 420 CHEATING AND DISHONESTLY INDUCING FOR DELY OF PROPERTY

– 7YEARS SEC 2 & 11 DEFINES ‘PERSONS’ – CO, ASSNS, BODY OR PERSONS WHETHER

INCORPORATED OR NOT Sec 138 – dishonor of cheques

For insufficient balance Exceeds arrangement Account closed Payment stopped by drawer

Issuing notice by the drawer to the payee not to present the cheque – but the payee presents the cheque – dishonored – can the drawer prosecuted?

Modi cements vs. Kuchil Kumar -1998 Drawer can easily get rid of the consequences. Hence stop

payment will not preclude action under Sec 138 Non cognizable offence Cheque to be presented within 6 months or expiry date

whichever is earlier Payee or holder in due course makes a demand to drawer within 30 days from date of

receipt of the returned instrument Drawee’s failure to pay within 15 days of receipt of notice Non-payment leads to ‘cause of action’ Complaint to be registered within one month of the ‘cause of action’

Period of one month should be from the day immediately following the day on which the period of 15 days from the date of receipt of the notice by the drawer expired. Supreme Court judgment in Prem Chand Vs Yashpal Singh

No court lower to that of Metropolitan Magistrate or Judicial Magistrate of I class will try the offence

GUIDELINES

Complaint in writing With dishonored cheque / return memo / copy of notice / evidence for receipt of notice by

the drawer Sec 146 conveys ‘Bank’s slip prima facie evidence of certain facts – court will

presume the fact of dishonor of such cheques until such fact is disproved’ Sec 147 – every offence punishable under this act is compoundable

To be filed either where cheque is issued / dishonored With metropolitan magistrate/ judicial magistrate/ I class magistrate

Cause of action Drawer can be punished only if he could not pay during the notice period Not for dishonor of cheque Punishment

Twice the cheque value Two years imprisonment

Liability of Directors Sec 141 of NI Act – every person of a company in charge of and responsible for business

shall be deemed guilty Recent Supreme Court judgment by Arun Kumai in

Appeal by SMS Pharmaceuticals Only directors responsible for the particular deal would be liable under NI Act No universal rule that a director of a company is in charge of its every day

affairs… Depends upon the respective roles assigned to the officers in a company

Components of foreign exchange transactions of HPCL:

Trade related transactions (1.5%) Non-refundable remittances (0.5%)

Gifts / foreign aids / donations /freight related remittances /invisible / services / interest and dividend payments

Capital transfers (8%) Balance – (90%) - ?

Currency risk & exchange markets

Dynamics of Exchange rate

Active markets for exports and imports: London New York Tokyo Sydney Singapore Frankfurt Dubai

Market participants: Merchants

◦ Domestic corporate / Multinational corporations◦ Financial institutions◦ Hedge funds –

High risky investment vehicles that speculates in the currency Authorized Dealers / Banks/market makers

◦ Cover transactions – for merchant transactions◦ Proprietary transactions

Brokers Overseas Banks Central Monitory Authority (BOE / FEDRESERVE / Bundesbank) Hedgers-To meet their contractual obligations Arbitragers Speculators

Certain terminologies Exchange rates

◦ Ratio used to convert from one currency into another currency GBP/USD ……1.6576

Convertible currency◦ Freely bought or sold with no restrictions or with lesser restrictions.

What moves the exchange rates? Under Perfect market condition demand and supply moves the market exchange rates Perfect market condition means

◦ Freedom of entry and exit from the market◦ Homogeneous or identical – ◦ Must be able to earn a reasonable profit◦ Freedom of information flows – efficient markets….

Development of euro markets Trade related flows Current account surplus / deficit Capital flows

Economic news and statistics Political changes Intervention by the Central Banking authority Sentiments or rumors

Impact of Government policy on exchange rate movements: Fixed exchange regime Floating exchange rates…free float Managed float –

Impact of revaluation in line with REER Impact of certain steps like

Increasing Reserve Requirements – CRR Foreign investments flow

Exchange rate dynamics• Unique method of ‘Two way quotation’

– GBP/USD - 1.6605/10– EUR/USD 1.2620/25– USD/INR 47.90/91

• Concept of base currency• Methods of quoting exchange rates

– Direct / Indirect• Different transactions and different rates of exchange

Exchange rates: Buying and Selling

◦ Buying TT / Bills Buying / TC Buying / FC buying

◦ Selling TT / Bills / TC / FC

Certain transactions Quoting appropriate rates Sample transactions

Inward remittance EUR 5 million Buying a draft for USD 50 Remittance of USD 15 million loan repayment Retirement of Import bill Transfer of 1 million USD from FC account of the customer

◦ Spread◦ Concept of base rate and Merchant rate

Inter-bank rate-market rate GBP/USD 1.9880/85 EUR/USD 1.4750/60

USD/CHF 1.0720/25 USD/JPY 109.25/40 USD/INR 39.10/11

Exchange rates: Spot and forward transactions spot

◦ what it means in the market – value date◦ difference between spot / tom / cash

Forward transactions◦ fixed delivery option deliveryCross rates

Exposure in currencies other than USD how it settles

◦ one export / import transaction◦ Importer wants to retire import bill drawn in JPY against USD◦ Importer wants to retire import bill drawn in JPY against EUR

4.6) INTERNATIONAL TRADE - EXPORTS

Risk factors in cross border trade:• Commercial risk

– Buyers default– Financial institutions failure to transfer payment

• Political risk– Importing country’s of laws– Importing county’s change of laws

• Exchange Risk

DIFFERENT FACILITIES:• FUND BASED FACILITIES

– PRE-SHIPMENT FINANCE– POST-SHIPMENT FINANCE

• NON-FUND BASED FACILITIES– EXPORT GUARANTEES

Check list at the time of receiving letter of credit:• Whether LC is properly advised• Status of the issuing bank• Whether conditions can be fulfilled• Shipment schedule • Documentation requirements

– Any special certifications

– Any document which requires buyers signature – attestation

EXPORT OPERATIONS:• Existing facilities

– Fund based – Pre-shipment finance

• In rupees• In FC (PCFC)• PC Running account

– Post shipment finance

FUND BASED FACILITIES:• PRE-SHIPMENT

– FROM DATE OF RECEIPT OF EXPORT ORDER TILL DATE OF SHIPMENT/ SUBMISSION OF DOCUMENTS

• POST-SHIPMENT– FROM DATE OF SHIPMENT / SUBMN OF DOCUMENTS TILL FUNDS

RECEIVED IN THE NOSTRO ACCOUNT OF THE AD• PRE-SHIPMENT FINANCE

– PACKING CREDIT– ADVANCE AGAINST CHEQUES REPRESENTING ADV PAYMENTS

• POST-SHIPMENT FINANCE– EXPORT BILLS PURCHASED / DISCOUNTED / NEGOTIATION– ADVANCE AGAINST DDB– ADVANCE AGAINST COLLECTION BILLS (DEMAND LOAN)

• In rupees• In FC (PSCFC)

PRE-SHIPMENT STAGE:• Maximum amount of loan• Period of loan• Interest rate

– Rupee credit / Credit in Foreign currency– Up to 180 days– Beyond 180 days

POST SHIPMENT STAGE:• Recent developments

– Re-introduction of PSCFC– Interest rate linked to LIBOR with a maximum of 1.00%

• Advance against export bills drawn under letter of credit– Negotiation of export documents

Clarification given by international chamber of commerce on negotiation under UCP 600 & ISBP 681

PRE-SHIPMENT FINANCE: Recent developments

Interest rates on packing credit Credit policy 19-04-2001 – switch over from administered system to freedom for the

bankers Linked to their (PRIME LENDING RATE)PLR for such facilities

up to 180 days from date of advance In case of Rupee finance PLR minus 2.5% maximum For selective segments PLR minus 4.5% In case of foreign currency PCFC LIBOR plus 1.0% maximum

Beyond 180 days - ECNOS Overdue interest – freedom for banks

Recent developments Liquidation of packing credit protecting concessional rate of interest

With any other shipping documents With any other export proceeds From EEFC account or Rupee funds

Advance to sub-supplier Not having an export order / not even having IE Code no.

POST SHIPMENT FINANCE:• Essentially against shipping documents• Documents can be under letter of credit or confirmed order. (non LC bills)• If under Letter of Credit and LC is restricted• If the exporter does not want finance against the LC documents and insist the bank to

forward the documents to the LC issuing bank and claim reimbursement

DOCUMENTS – COMMERCIAL:• Bill of exchange• Commercial invoice• Transport document – bill of lading• Insurance document• Certificate of origin• Packing list – weight certificate• Any other document – transaction specific

RECENT DEVELOPMENTS IN LC DOCUMENTS:• Introduction of International Standard Banking Practices for examination of documents• Spelling mistakes, common abbreviations acceptable• Will reduce rejection of documents under letter of credits for minor mistakes• UCP 600 and documentation

Art 14 – Standard examination of documents:

14.a .Appearing on their face to constitute complying presentation – examine the documents alone

14.b . Time limit for rejection of documents – words ‘reasonable time’ dropped Maximum period of time for rejection of documents

5 banking days for determining the presentation as credit complied 14.c .Presentation period connected to original transport documents – not later than 21

days 14.d .Data need not be identical but must not conflict

Invoice – electronic equipments Packing list – electronic weighing machines

LC states 2000 pieces of readymade shirts Invoice – 1000 pieces of Blue color readymade shirts and 1000 black color

readymade shirts Packing list – 2000 pieces of readymade shirts

14.e .Description of goods can be in general in other documents 14.f .Issuer of the documents to be specified – other than Invoice, transport document and

Insurance 14.g .Documents submitted by the beneficiary but not required under LC – will be

disregarded and returned to the beneficiary) 14.h .conditions stating without specifying documents 14.i .Documents issued prior to the date of LC 14.j .Address stated in the LC and address in the any stipulated document need not be

same (ISBP paragraph 60 & 61) But within the same country Address and contact details of the applicant and notify party must be as stated in the

credit (transport doc) 14.k .Shipper / consignor indicated in any document can be other than the beneficiary

(Scope widened)

Art 16 – Discrepant documents, waiver and notice: 16. a . If the presentation of documents does not comply with credit terms - nominated bank /

confirming bank / issuing bank ‘may refuse to honor or negotiate’– changes ‘deletion of the words ‘on their face’ and Substitution of words ‘may refuse to take up the documents’ with ‘may refuse to

honor or negotiate’ 16.b . if the documents are discrepant ,IB may, at its sole judgment approach the applicant 16.c . Bank (NB/CB/IB) must give a single notice and the notice must state:

Banks refusal to honor or negotiate Each discrepancy in respect of which bank refuses to honor or negotiate

E.g., Invoice not as per Credit Not a valid discrepancy and not a valid rejection notice

Status of the discrepant documents Holding the documents pending further instructions from the presenter Holding the documents until receipt of applicants waiver and

agreeing to accept the waiver or

Receives further instructions from the presenter Prior to agreeing to accept a waiver

Returning the documents Acting in accordance with the instructions received from the presenter previously

16.d . notice of discrepancy must be given by telecommunication

or if that is not possible by other expeditious means No later than the close of fifth banking day following the day of presentation

16.e . NB/CB/IB – after providing notice of refusal bank may return the documents to the presenter at any time.(new)

16. f . If IB/CB fails to act in accordance with the provisions of this article, they shall be precluded from claiming that the documents are not ‘complying presentation

16.g . IB/CB shall be entitled to claim refund with interest if any reimbursement is already made for a discrepant document

FEMA ON EXPORTS FEMA 1999, Sec 7 sub sec (3) & sub sec (1)a FEMA Notification 23 – Master Circular No.8 of July 1, 2004. DECLARATION FORM – FORMALITIES Exemption from declaration form

Goods sent abroad for testing – subject to re-import Exports of value not exceeding USD25,000 or equivalent

Exporter’s obligations… Gifts of goods value not exceeding Rs.5.00 lacks Goods sent for export promotion up to 2%of average annual exports during preceding 3

years – subject to ceiling of Rs.5.00 lacks Participation in trade fairs abroad

Manner of payment of export bills TC /FC from the buyer during his visit to India International Credit Cards – Export to Nepal – in free foreign exchange if permitted by Nepal Rashtra Bank Gems & Jewellery units in SEZ and EOUs – in the form of precious metal

Delay in submission of shipping documents Dispatch of shipping documents to consignee directly

By AD May accede to the request of the exporter for dispatch of documents for whatever

reason, direct to consignee for regular customer on the basis of standing and track record of the exporter…

May permit Status holder exporters / units in SEZ to dispatch export docs to the consignee … proceeds to be repatriated through the AD named in GR

Trade discount declared in GR form

Reduction in value Reduction in value more than 25%

Subject to exporter in export business for minimum 3 years

Satisfactory track record

Export outstanding does not exceed 5% of average annual export realization during 3 calendar years. Change of buyer with or without trade discount Extension of time limit –

Self extension Exports made after July 1,2003 Provided the bill to be extended and to be written off does not exceed 10% of the

export proceeds due during the calendar year and not subject to… By AD

Up to 1 year from date of shipment Beyond 1 year …total export outstanding should not be more than 10% of preceding

3 years average export realizations Relaxation in time limit for realization of export proceeds

All exporters 12 months Status Holder Exporters -12 months Units in SEZ – no time limit

WRITE OFF. Outstanding for more than one year

– Write off amount should not exceed 10% of the total export proceeds realized in previous calendar year through the concerned AD

– Evidence to support the efforts taken by the exporter– Reasons : buyer’s failure …– Status exporter: up to 5% of preceding 3 years average annual realizations – Refund of export incentives...

• Advance payment against exports (C.4)– Shipments made against the advance payments are monitored by the AD through

whom advance payment is received.– Routing of export documents through the same AD (FEMA Notification 23.

16.1.iii)

4.7) INTERNATIONAL TRADE - IMPORTS

Difference between domestic trade and international trade• Regulations relating to

– Movement of goods– Receipt and payment of foreign exchange

• Counter party exposure• Country risk• Currency risk

INDIAN MARKETS• REGULATIONS

– FEMA 1999

• RBI NOTIFICATIONS• RBI SPECIFIC CIRCULARS ISSUED BY FED/DBOD /DBOS

– FOREIGN TRADE POLICY– ICC PARIS GUIDELINES

• UCP 600 effective from 1.7.07• ISBP ICC 681• URC ICC 522• ISP 98 for Standby Letter of Credits• URDG 458 for guarantees

– FEDAI GUIDELINES

FEMA Overview of 1999• Clear distinction on current and capital account transactions• Current account transactions are freely allowed except those specified under three

schedules• Capital account transactions are permitted subject to special or general notifications by

GOI/RBITypes of Foreign Exchange TransactionsTransactions involving

• Inflows of foreign exchange– Trade / invisibles / services / tourism / insurance / freight / investments /

borrowings• Outflows of foreign exchange

– Trade / invisibles / services / tourism / insurance / freight / investments abroad / repayment of borrowings/ repatriation of investments

Current account transactions…• A current account transaction is defined as

– Other than capital account transaction ….includes. Payment due in connection with

– foreign trade, – other current business, – services and – short term banking and credit facilities in the ordinary course of

business• Interest on loans • Net income from investments• Remittances for living expenses• Expenses in connection with foreign travel, education and medical care

Capital account transactions• Transactions which alters

– Either assets or Liabilities of • Resident in India –individuals and others• Resident outside India – Non-Resident

• Including transfer of securities• Borrowing or lending or investments

• Deposits• Holding of currency• Transfer/acquisition of immovable property• Including contingent liabilities

One sample transaction• HPCL intends to import capital goods for value of USD 60 million from Singapore• Seller insists 15%advance payment • Remaining 85% can be paid in three years• What are the issues:

– Outflow of foreign exchange – Repayment within three years– Currency movements…

FEMA 1999 ON IMPORT OF GOODS AND SERVICES• Responsibility of an importer

– To use foreign exchange only for permitted purposes– To submit documentary evidence for proper usage

• Responsibility of an AD– I E Code No.– Importability of the goods– To release foreign exchange only to customers – against specific application – Form A 1 (exemption up to USD 500)– Through debiting customers account or through cheques – No cash transactions– To follow up with the importer customer till he submits documentary evidence for

having used foreign exchange only for permitted purposes• Time limit for import payments

– Within 6 months from date of shipment– In case of short term trade credits…

• Trade credit up to $20 million per transaction • INTEREST:LIBOR + 2.00%

– Period– Import of capital goods

• Period – less than 3 years – Import of non capital goods

• Period – up to one year

FEMA 1999 ON IMPORT OF GOODS AND SERVICES

• submission of Bill of Entry for transactions • below USD100000 and • above USD100,000• EITHER

– Bill of entry for home consumption within 3 months from date of remittance • Or

– Certificate from CEO or auditor of the company that the goods have actually been imported into India provided

• amount of remittance is below USD 1 million and• Company’s net worth is not less than Rs.100 Crores

– If documentary evidence is not received from the importer AD to report the transaction to RBI

• Limit for advance remittance for imports and other current account • transactions without bank guarantee up to $100,000 or equivalent –• (can be allowed up to USD five million under bank’s discretion but for PSUs the limit is

USD 100,000 )– Condition- physical import of goods within 6 months (3 years in case of capital

goods)• For service imports

– Advance remittance up to USD 500,000 without bank guarantee

4.8) PRICINGZonal pricing function carries the responsibility of ensuring sale of products at the correct prices. Prices of all the products sold from Zone are developed by Zonal pricing officer basis inputs received from various sources like HQO Pricing, Railway budget, Zonal Sales Tax, RO Sales officer.

STATES COVERED UNDER EZ WEST BENGAL ORISSA JHARKHAND BIHAR ASSAM NORTH EAST LOCATIONS Free Trade Products Competitive Pricing Price changes every fortnight basis International Crude Price

o Price charged to Customer is called PRA since sold EXMI Eg: FO,LDO,IND.SKO,ATF etc

Controlled Products RSP fixed by Government Prices change periodically at the govt. discretion Price charged to the customer is called TSRA/CBR since sold as delivered. Eg: MS,HSD.DOM.SKO,DOM LPG

ACTIVITIES AT ZONAL LEVEL

Uploading of PRA, TSRA, RTKM , TOLL TAX, ATF FRIEGHT, ADDITIVE COST, ETC

Creation of New Town Code Review of CMR Advise to ERP for uploading

ARF,NRF,SIDING,SHUNTING,SHRINKAGE ALLOWANCE etc Implementation of Price Advise from HQO Price Advise to Locations Review of price break up (TSRA REPORT)

INITIATIVES TAKEN

Introduced NRF and Siding& Shunting in case of West Bengal for MS /HSD from pipeline which gave net recovery of Rs. 7.63 crores for the year 2008-2009.

Increment of Escalation % of Siding-Shunting from 5% to 10% to recover demurrage charges w.e.f 1.7.09

Implementation of Toll tax in Domestic LPG w.e.f 29.1.09 which has direct impact on State Capital RSP of West Bengal by 0.17 Paisa per cylinder.

For certain districts of Orissa Certified RTKM populated Change the pricing point from Cuttack to Khurda in case of Domestic and Non

Domestic LPG by which NRF per cylinder increases from Rs. 3.69 to Rs. 3.85 per Cylinder

In case of Non-Domestic LPG for Barauni we have taken PAP figure of Patna Bottling plant w.e.f 1.5.09 by which there is increase of Rs15/Cylinder approx resulting the recovery of 21 lakhs

CMR was wrongly populated for Customer Auto Care,Barpeta w.e.f 23.1.08 which was noticed and rectified in the month of March,09 and recovery of Rs 13 lacks was done against that.

Invoice generation of AUTO LPG from Haldia instead of Paharpur w.e.f 1.10.09 by Company is saving Rs 400/MT.

Entry tax adjustment in case of LPGEXMI sale of ND LPG: recovery of Rs 1 Lakhs done w.e.f 1.7.09

Somnathpur RTKM changed from 300 to 620 in case of FO by which under recovery removed

CMR rectification Primary pricing point was taken wrongly in CMR for the customers of Meghalaya.

No mismatch of free products price between OMC

PENDING ISSUES Service tax on Bitumen freight Toll tax in Orissa Recovery against debit note.

In past period due to certain logistic reason for district keonjhar Balasore was taken as secondary pricing point even though Rourkela is nearer but in case of direct customers, customers attached with Town Joda & Barbil still SPP was taken Rourkela.

INITIATIVES Comparison of RTKM of pricing & PCB Realignment of Meghalaya pricing Point. Review of CMR

ADVICE REQUIRED VAT on West Bengal Cess in case of Non-Domestic LPG. Pricing point of Somanthpur for FO. Proposal of Inter State pricing Ex Visag for districts i.e

Rayagada,Koraput,Malkangiri & Nowrangpur.

4.9) Balance Sheet of HPCL

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Sources of fundsOwner's fundEquity share capital 339.01 339.01 339.01 338.95 338.94Share application money - - - - -Preference share capital - - - - -Reserves & surplus 11,218.96 10,391.62 10,224.28 9,259.70 8,396.80

Loan fundsSecured loans 1,375.88 698.49 1,118.48 1,005.48 1,486.16Unsecured loans 19,926.49 22,056.68 15,668.22 9,512.05 5,177.67Total 32,860.34 33,485.80 27,349.99 20,116.18 15,399.57

Uses of fundsFixed assetsGross block 24,985.96 20,208.63 19,570.05 15,638.48 13,479.25Less : revaluation reserve - - - - -Less : accumulated depreciation 9,681.70 8,554.08 7,640.77 6,817.64 6,141.85Net block 15,304.26 11,654.55 11,929.28 8,820.84 7,337.40Capital work-in-progress 3,890.00 5,001.27 3,315.95 4,243.56 2,363.88Investments 11,387.22 14,196.47 6,837.05 7,127.47 4,027.64

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Net current assetsCurrent assets, loans & advances 21,091.59 16,262.69 19,495.39 11,589.93 11,089.78Less : current liabilities & provisions 18,812.73 13,629.18 14,227.68 11,665.62 9,419.13Total net current assets 2,278.86 2,633.51 5,267.71 -75.69 1,670.65Miscellaneous expenses not written - - - - -Total 32,860.34 33,485.80 27,349.99 20,116.18 15,399.57

Notes: Book value of unquoted investments 1,595.39 1,026.39 610.56 574.11 354.13Market value of quoted investments 10,226.97 12,948.34 8,068.12 7,094.89 4,458.23Contingent liabilities 4,598.74 5,588.88 6,450.22 7,176.59 6,768.48Number of equity shares outstanding (Lacs)

3386.27 3386.27 3386.27 3393.30 3393.30

4.10) Profit loss account last 5 yrs

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

IncomeOperating income 1,07,300.57 1,24,935.02 1,04,312.99 89,725.03 71,430.62

ExpensesMaterial consumed 97,466.11 1,16,474.02 98,080.49 82,632.14 66,533.17Manufacturing expenses  929.02 435.23 316.28 275.28 308.93Personnel expenses 1,617.32 1,137.19 867.66 729.42 690.77Selling expenses 2,758.04 2,520.87 2,206.01 2,588.71 2,190.11Administrative expenses 1,218.19 1,076.50 995.87 980.74 892.70Expenses capitalized - - - - -Cost of sales 1,03,988.68 1,21,643.81 1,02,466.31 87,206.29 70,615.68Operating profit 3,311.89 3,291.21 1,846.68 2,518.74 814.94Other recurring income 1,111.01 866.96 710.67 481.69 298.42Adjusted PBDIT 4,422.90 4,158.17 2,557.35 3,000.43 1,113.36Financial expenses 909.97 2,084.13 794.30 426.34 160.82Depreciation  1,164.40 981.29 850.82 704.00 688.97Other write offs - - - - -Adjusted PBT 2,348.53 1,092.75 912.23 1,870.09 263.57Tax charges  766.15 275.92 382.40 698.97 99.52Adjusted PAT 1,582.38 816.83 529.83 1,171.12 164.05Non- recurring items -227.34 -380.53 218.09 91.02 21.53Other non cash adjustments -53.67 138.68 386.96 309.03 220.05Reported net profit 1,301.37 574.98 1,134.88 1,571.17 405.63

  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06Earnings before appropriation 9,405.53 8,369.65 8,027.01 7,757.80 6,343.27Equity dividend 406.35 177.78 101.59 610.80 101.80Preference dividend - - - - -Dividend tax 67.49 30.21 17.26 97.75 14.28Retained earnings 8,931.69 8,161.66 7,908.16 7,049.25 6,227.19

5) SWOT Analysis of Oil & Energy Sector

The energy sector has witnessed mixed news during the current fiscal so far. While crude prices firmed up in the global market, the government's freeze on prices of petro-products affected margins of oil companies in 1QFY05.

However, the government took a series of steps starting mid-June including excise duty reduction and price increases. This was followed by another series of duty cuts (this time excise as well as custom duties).

Given this backdrop, we feel that there is a compelling reason for a SWOT analysis on the oil sector at the current juncture.

5.1) Strengths

Developing economy: Historically, demand for petroleum products has traced the economic growth of the country. With GDP expected to grow at near 7% in the long-term, the energy sector would benefit from the same, going forward.

To put things in perspective, diesel sales grew by nearly 12% (which constitutes 40% of the entire petro-products basket), petrol sales by 9% and a double-digit growth in LPG

(liquefied petroleum gas) in 1QFY05. While this rate is not likely to sustain, we expect the industry to witness a 4% growth in the entire product basket in FY05 and beyond.

Government decisions: The recent price increases and also the decision to allow oil companies to increase prices within a band of 10% augurs well for the industry. This step

Consumption growth

(MMT) FY01 FY02 FY03 FY04

Diesel 38 36.5 36.6 37.3

(%) change -3.9% 0.3% 1.9%

Petrol 6.6 7 7.6 7.9

(%) change 6.1% 8.6% 3.9%

LPG 7 7.7 8.4 9.3

(%) change 10.0% 9.1% 10.7%

is likely to reduce government interference and provide some autonomy to oil companies when it comes to increasing petrol and diesel prices in order to protect margins. Further, the duty cuts are also likely to result in reduced under-recoveries by way of subsidies on LPG and kerosene.

Customs duties Excise duty old (%) new (%)

Petrol 26 23

Diesel 11 8

Kerosene 16 12

Excise duties… Customs duty old (%) new (%)

crude oil 10 10

petrol 20 15

diesel 20 15

LPG 10 5

Kerosene 10 5

5.2) Weakness:

Crude prices: Nearly 70% of India's crude requirements are fulfilled by imports and this figure is likely to increase going forward. Crude prices have breached the $45 barrier again and are likely to remain at around $40 per barrel range.

As per IEA, India is one of the most inefficient countries among developing nations as far as energy usage is concerned. Such high crude prices are likely to impact margins of oil marketing companies. Given the political implications, retail prices may continue to lag the rise in input cost.

Lack of freedom: Although the government has decided to provide autonomy to oil companies to increase petrol and diesel prices within a 10% band, other products such as LPG and kerosene continue to remain under the government controlled price mechanism.

As per the current estimates, the subsidies on LPG amount to Rs 90 per cylinder after factoring in duty cuts and that on kerosene is over Rs 6 per litre.

While the government has managed to reduce its share in subsidies, select oil companies are being forced to absorb the losses.

Government: Hands-off

Year Subsidies

(Rs) LPG/cylinder Kerosene/litre

2002-03 67.75 2.45

2003-04 45.17 1.63

2004-05 22.85 0.81

5.3) Opportunities:

Equity Oil: Major oil marketing companies are now venturing into upstream exploration and production activities so as to secure crude supply.

To put things in perspective, IOC and OIL India are likely to jointly bid for oil fields aboard. At the same time, ONGC's wholly owned subsidiary, ONGC Videsh (OVL) has acquired stakes in over 9 countries in its quest to attain the 20 MMT (million metric tonnes) by 2020. This backward integration is an opportunity for IOC to secure at least 25% of its crude oil requirements for the refineries.

Natural Gas: Natural gas has the potential to be the fuel of the future with demand outpacing supply by more than two times. Such high scarcity of natural gas provides a big opportunity for oil companies. The below mentioned table indicates the allocation to the various core sectors and the shortage faced by them, thereby giving an idea of the potential for growth.

Although Petronet LNG has now started importing natural gas, the future holds promise as Reliance Industries Krishna Godavari Basin goes into commercial production in FY06 and Shell commences its terminal at Hazira. More exploration activities are in the pipeline and this could reduce the country's dependence on crude in the long term.

5.4) Threats:

Competition: Until FY04, oil-marketing companies had complete control over the downstream marketing business while private sector players were restricted to only refining.

However, with entry of private players such as Reliance, Essar Oil and Shell (in the waiting), the sector is likely to witness increased competition going forward. The oil PSUs had hitherto developed a fortnightly pricing mechanism, which is likely to discontinue.

The price of petrol and diesel is artificially kept high so as to cross-subsidize LPG and kerosene. Since private players will not be bound to provide for these subsidies, PSU marketing players are likely to suffer from lower throughput per outlet.

Continuing government interference: During the first six months of the current fiscal year, the oil marketing companies were refrained from increasing product prices due to political reasons.

Supply as a (%)age of allocation

Supply

Power 52.0%

Fertilizer 65.0%

Others* 51.0%

This affected margins of downstream players. Going forward, if the government interference continues, oil-marketing companies will be at a disadvantage.

Although we believe the industry is likely to witness increased competition, the initial retail rush by private sector players has slowed down. PSU marketing companies have already stepped up their expansion plans and to that extent, have created significant entry barriers for private players.

Although throughput per outlet (sales per outlet) is likely to decline in the future, we believe that any substantial entry of the private players would indirectly benefit the PSUs, as the government's pricing policy will not hold much water and the market forces would determine pricing.

Conclusion:-

Over the years India Petroleum Industry has played an influential part in triggering the speedy expansion of the country's economy by contributing 15% in the total GDP. Further to this, petroleum exports gave new dimension to foreign exchange earnings by drawing US$ 23.64 billion in the FY 2008-09.

Expansion of Indian petroleum retail market is triggered by the growth in automobile sales that resulted in major foreign investments. The growth is estimated to sustain and the market is likely to expand further by 20 million every year till 2030, placing India at the world map in terms of being the biggest automobile market. Accordingly, the petroleum dealers Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Indian Oil Corporation in collaboration with each other are looking forward to add 2,262 petrol pumps in India by 2010.

The petroleum industry has contributed heavily to the manufacturing industry in the country through foreign trade in petroleum products. Rapid globalization, fast-changing technology, and the changing methods in the way business is conducted have brought significant changes and enormous opportunities for petroleum companies in India to flourish and expand their operation to global markets.

Another very important reason why the Indian petroleum industry is a good option for investment is that the future of the petroleum industry in India promises great potential for development. The fast economic growth of India and the various developmental activities taking place presents India with opportunities in the future to be a dominant player globally in the export of petroleum products.

Webliography :- 1) www.hpcl.co.in2) Wikipedia3) iloveindia.com

4) www.roughneckchronicles.com/oilindustry/petroleumcompaniesinindia.htm5) www.economywatch.com/companies/petroleum-companies.html

6) ezinearticles.com › Business › International Business 7) www.petrofed.org/