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SUMMER TRAINING REPORT
ON
CASH MANAGEMENTIn
NATIONAL FERTILIZERS LIMITED
Submitted By: Submitted to:
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INSTITUTE OF MANAGEMENT STUDIES
DEHRADUN
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Acknowledgement
No task is a one-man effort. Co-operation and Co-ordination of various people at different
times go into successful completion and achievement of set goals. It is a great pleasure to
extend my heartfelt thanks to everybody who helped me through the successful completion
of this Summer Internship Project.
Firstly I wish to express my sincere thanks to MR. TOLIA, Chief Manager (H.R), for
providing all facilities and permission during the course of my research.
Secondly,I would hereby like to offer my sincere thanks to my Company Guide, Mr. M A
KHAN, Dy manager (Finance &Accounts), NFL, who helped me as a torch bearer, a friend,
and guide during my entire project duration. I would also like to thank MR.NARESH
KUMAR SUBRAMANIAN, Deputy Manager (finance & accounts) who provided me a
opportunity to work in this esteemed organization and helped me with getting relevant data
related to this project.
I would also like to take the opportunity to express a token of my appreciation for all the
support, help and constant inspiration that I received from my Mentor (Faculty Guide), Mr.
Pradeep suri, IMS (Institute of Management Studies), Dehradun. I would like to thanks him
because without his cooperation and assistance, this project would not have been possible.
I would like to thank IMS (Institute of Management Studies), Dehradun which provided me
with such a wonderful opportunity to do a project in an industry concurrently while pursuing
the MBA course.
I am also thankful to many others who indirectly helped me in the successful completion of
this project.
Neha GuptaIMS, Dehradun
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RESEARCH METHODOLOGY
The methodology used for carrying out this project is as follows:
Studying the annual accounts of the company for obtaining related
financial data.
Studying the accounting records and arrangements with the
consortium of banks, Commercial paper, working capital demand
loan (WCDL), FDRs and short term loans.
Analyzing the guidelines and norms laid down by the department of
public enterprises(DPE) for the investment of funds by PSUs.
Reviewing RBI bulletins and RBI policies and guidelines.
Studying the cash flow statement. Cash budgets and cash reports.
Analyzing the various ratios in order to find out the liquidity position
of NFL.
Rationale of the study:
The rationale of this project is to understand the real life management practices going on in
the firms and to link it with theoretical concepts. This project study is aimed to understand
the intricacies involved in analyzing, granting and managing current assets. Its a kind of
industrial exposure that is being given to us through this project.
Scope of the study:
This project aims at studying and analyzing the management of working capital in National
Fertilizers Limited. My study has focused more on the operating cycles of working capital
components and comparing it with bank norms, a ratio analysis of NFL with other industry
players and the sources of working capital financing.
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FINDINGS
1. NFL requires no long term loan. All NFL bonds will be redeemed by 30th
June`04.
Since its interest cost is very high. They cab do without bonds since they have
sufficient funds with the banks. It has repaid all its debts & has become a Zero-Debt
Company.
2. At the time of receiving payments NFL is using drafts while at the time of making
NFL uses cheques.
3. There is no fixed system of interest reduction adopted by NFL. It varies according to
changing situations and on the intellectual judgment of the financial officials. Here
the Consortium of Banks & Multi banking System is used for interest reduction.
4. Inter-banking system poses disadvantage i.e. the funds when transferred from one
bank to another may be wrongly transferred to a personal account rather than the
company account.
5. The interest rate of cash credit is quite high i.e. 9-10%. Very rarely NFL is using it.
6. The interest rate of commercial paper is also high i.e. 6-7% therefore its use has been
stopped. It involves too much manpower, too much bookwork and its effective rate of
interest is also high.
7. NFL is now using the most efficient and effective system known as CASH
MANAGEMENT SYSTEM (CMS).
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RECOMMENDATIONS
1. NFL should exercise tight control over inter-bank transfers of cash and transfers
between various units of NFL such as divisions or subsidiaries. Excessive funds may
be tied up in various division of the firm, which company should give due attention
to.
2. NFL should give special attention to the handling of large remittances so that they
may be deposited in a bank as quickly as possible e.g. personal pick-ups, air mart,
special delivery etc.
3. when a small no. of remittances account for a large proportion of total deposits, it
may be worthwhile to initiate controls to accelerate the deposits and collection of
their cheques.
4. Investments in treasury bills and government securities of three yrs maturity, call
money deposits. NFL can also deposit its surplus funds in UTI & ILFS.
5. Monthly report for the total payments released during the month along with details of
the major recipients should be prepared for reporting to the management.
6. Surprise checks of the physical cash should be made periodically. When cash is lying
at more than one place, cash verification for all the places should be attempted at one
time.
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INTRODUCTION
Looking for an interesting way to undertake a study for my summer project in
business management. I took a mentorship with National fertilizers ltd (NFL).
I took the mentorship as an opportunity to enhance my knowledge of the field of
business.
I had many question pertaining to the business conducted by the NFL, a leading
Indian company, engaged in fertilizers business, as well as question pertaining to
business in general.
Through my time spent with the NFL, I was able to answer many of my question &
learn how business is conducted in India.
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BACKGROUND
HISTORY OF FERTILIZERS PRODUCTION
As we all know, food is a basic necessity of life.
Thats why when a country is faced with shortages of food & famine, it is in the
worst of situations.
India was in that situation just 60yrs ago, after obtaining its independence in
1947.
The Indian govt knew that it would have to give top priority to feed all of its
people.
Along with the production of fertilizers, one of the important activity is
working capital management. NFL is a multi-unit company having five plants and is
involved with the production of nitrogenous fertilizers. It has wide network of dealers
and customers. Moreover it procures raw material from a large no. of suppliers. A
huge amount of funds is involved which includes both receipts and payments. A
proper working capital management is necessary to handle efficiently & effectively
all these activities.
Our project basically dealt with understanding NFLs system and giving
recommendations for improving upon it.
The areas, which we emphasized upon were the cash management where we
studied the various cash management techniques being followed by the organization,
understand its working and tried to improve upon it. Our findings revealed that NFL follows
very efficient & effective management system.
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FERTILIZER INDUSTRY IN INDIA
Definition of Fertilizers:
Fertilizers are defined as those chemicals which when added to soil, supply the essential
nutrients required for plant growth in the soil.
Need for Fertilizers:
Fertilizer is an essential input in modern agricultural practice because it helps in maintaining
the fertility of the soil. Whenever land is used continuously for farming, its organic matter
gets reduced. Therefore, it is essential that some extra nutrients be provided to the soil to get
maximum returns from the money invested in the land. Chemical fertilizers increase fertility
of the soil by providing chemical inputs to the soil.
The pressure of increasing population and shrinking land resources has had an adverse effect
on agriculture activities, which results in multiple cropping systems for different agro-climate
conditions. Multiple cropping systems drain the soil very heavily; therefore fertilizers are a
must to increase the fertility of the soil.
Although the production of fertilizers is continuous throughout the year, yet its use is
seasonal. The requirement is limited to a very short period of months i.e. Kharifseason and
Rabi season. Kharif season starts from April 1 and ends on September 30. The peak time of
use of fertilizers during Kharif is June and July. The other season is Rabi, which is from
October 1 to March 31, and here the peak time for the use of fertilizers is November &
December.
The attention of both the government and the industry is focused toward achieving the
objectives of reducing the cost of fertilizers for farmers so that it is affordable to them, and at
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the same time improve productivity of the system to optimize return from heavy investment.
It will therefore be appropriate to have a hard look at the current situation identifying gaps
and development guidelines and specific plans of action to achieve these objectives.
Types of Fertilizers:
Mainly there are three types of fertilizers: Nitrogenous fertilizers, Phosphoric fertilizers and
Potash fertilizers.
Salient features of the Indian Fertilizer industry:
Fertilizer sector is very crucial for Indian economy because it provides a very
important input to agriculture. It is regulated by government policies administering
the price of fertilizer and the production
Urea production is an energy intensive process
Natural gas, naphtha, LSLS/fuel oil are used as feedstock for producing urea
Cost of energy varies from 65% to 87% of production costs
Specific energy consumption of sample plants covered under this study varies
between 5.53 Gcal/MT of urea and 10.2 Gcal/MT
Majority of the industry is energy conscious and focuses on energy management
Over the years, the industry has improved its energy performance by bringing down
specific energy consumption and improving capacity utilization
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PROFILE OF NATIONAL FERTILIZERS LIMITED
National Fertilizers Limited (NFL) is a profitable public sector undertaking which operates
under the administrative control of the Department of Fertilizers, Ministry of Chemicals &Fertilizers. It is a Schedule-A & Mini-Ratna Category-I company, and is among one of the
major players in the fertilizer industry in India with 16.6% share in urea production during
2005-06.
The company manufactures nitrogenous fertilizers, mainly urea. It also produces and markets
bio-fertilizers and various industrial products like Methanol, Sodium Nitrite, Sulfur, Liquid
Oxygen and Liquid Nitrogen.
National Fertilizers Limited was incorporated on 23rd August, 1974 for implementation of
fertilizers plants, based on gasification technology of feed stock/LSHS at Bathinda, Punjab
and Panipat, Haryana having an installed capacity of 5.11 lakh tons of Urea each. In April
1978, the Nangal group of plants of Fertilizer Corporation of India (FCI) was transferred to
NFL consequent upon recognition of FCI. The Govt. of India in the year 1984 entrusted the
company to execute its first inland gas based fertilizer project of 7.26 lakh tons urea capacity
in Guna district of Madhya Pradesh. On completion of this project received the First Prize for
Excellence in Project Management from the Ministry of Programme Implementation, Govt.
of India. Subsequently, a second plant at Vijaipur was installed in the year 1993 for doubling
its current annual production capacity. NFLs registered office is at Scope Complex, Core III,
7 Institutional Area, Lodhi Road, New Delhi 110003 and its corporate office is at A-11,
Sector-24, Noida, UP.
All NFL plants have been certified ISO 9002 for conforming to international quality
standards and International Environmental Standard i.e. ISO 14001. With the certification of
Corporate Office / Marketing operations under ISO 9001:2000, NFL has become the first
fertilizer company in the country to have its total business covered under ISO 9001
certification.
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The company has an installed capacity of 35.49 lakh MT nitrogenous fertilizers and has
recorded an annual sales turnover of Rs 3591 crores during 2005-06. The companys strength
lies in its sizeable presence, professional marketing and strong distribution network
nationwide.
Products and Services:
NFL manufactures and markets nitrogenous fertilizers and a wide range of industrial
products which are used in industries like steel, rubber, glass, paint & dyes and many more.
Two most popular brands of NFL are Kisan Urea and Kisan Khad which has a substantial
market across the country.
Kisan Urea is a high concentrated, solid, nitrogenous fertilizer. It is completely soluble in
water hence Nitrogen is easily available to crops.
Kisan Urea is ideally suitable for all types of crops and for foliar spray which instantly
removes nitrogen deficiency. Carbonic acid present in Kisan Urea helps in absorption of
other nutrients like phosphate and Potash by roots of crop.
The Company has developed Neem-coated urea which on demonstration has improved the
crop yield by 4-5%. The company is focusing on widening the marketing operations of
Neem-coated urea.
NFL also manufacturers and markets three types of Bio-fertilizers: Rhizobium, Phosphate
Solubilising Bacteria (PSB) and Azetobactor. These Bio-fertilizers are used to supplement
chemical fertilizers and also to maintain soil fertility.
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NATIONAL FERTILIZERS LIMITED
NFL was incorporated on 23rd august, 1974 with two manufacturing units at Bathinda and
panipat. Subsequently, on the reorganization of fertilizer group of companies in 1978, the
Nangal unit of fertilizers corporation of India came under the NFL fold. The company
expand its installed capacity in 1984 by installing and commissioning of its vijaipur gas
based plant in Madhya Pradesh.
The Vijaipur plant was a land mark achievement in project management in India. The plant
was completed well within time and approved project cost. In recognition of this
achievement, the project was awarded the first prize in excellence in project management by
govt of India. Subsequently the Vijaipur plant doubled its capacity to 14.52 laky MTs by
commissioning Vijaipur expansion unit i.e. vijaipur-2 in 1997. the plant annual capacities
have now been re-rated w.e.f. 1.4.2000 from 7.26 lakh MT of urea to 8.64 lakh MT for
Vijaipur-1 & Vijaipur-2 plants each.
Three of the units are strategically located in the high consumption areas of Punjab and
Haryana. The company has an installed capacity of 35.49 lakh MTs of nitrogenous fertilizers
and has recorded an annual sales turnover of RS 3,395 crores during 2003-04. Thecompanys strength lies in its sizeable presence, professional marketing and strong
distribution network nationwide.
NFL, a profitable public sector undertaking operates under the administrative control of
deptt. of fertilizers in the ministry of chemical and fertilizers.
Kisan urea and kisan khadNFLs popular brands are sold over a large marketing territory
spanning the length and breadth of the country. The company also manufactures and markets
Biofertilizers and a wide range of industrial product like methanol, nitric acid, sulphur, liquid
oxygen, liquid nitrogen etc. the company has developed neem coated ureas which on
demonstration has improved the crop yield by 4-5%. The company is focusing its thrust to
widen the marketing operations of neem coated urea.
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NFL over the years has developed a team of dedicated professionals in the areas of
production, maintenance, project management, safety and environment control. These
professionals are sought after in the industry both in India & abroad for their specialized
sevices.
NFL is known in the industry for its work culture, value added human resources, safety,
environment, concern for ecology and its commitment to social upliftment. All NFL plants
have been certified for ISO-9002 for conforming to international quality standards and
international environmental standards i.e. ISO-14001. with the certification of corporate
office/marketing operations under ISO-9001:2000, NFL has become the first fertilizer
company in the country to have its total business covered under ISO-9001 certification.
Urea is an essential commodity under the essential commodities act, 1955. The deptt. of
fertilizers plans and monitors production, import and distribution of fertilizers and
management of subsidy for indigenous and imported fertilizers in the country.
The system of marketing of urea has undergone a change w.e.f. 1.4.2003 when company
has been allowed to market 25% of its produce outside ECA during kharif 2003. This
percentage of sales outside ECA was raised to 50% in Rabi 2003-04, the same portion
prevails for Kharif 2004.
NFL enters into a Memorandum of understanding (MoU) with the government for each
year under which the government undertakes to assist NFL with regard to availability of
inputs, obtaining ECA allocations commensurate with the availability of fertilizers from NFL
plants etc. NFL on its part, undertakes to adhere to its production and movement plans,
achieve its ECA allocation and provide regular feed back to the administrative department.
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OBJECTIVES
Basic corporate objectives
In terms of memorandum of association, NFL was set up to manufacture and market
chemical fertilizers, other chemical and by-product as well as to provide the allied services.
In order to achieve and maintain a leading position in the production and marketing of
fertilizers, the following micro objectives have been intensified:-
1. Research and development
To carry out R&D activities for:-
(a) increasing plant availability
(b) saving use of energy in different forms
(c) better recovery of saleable by-product
(d) process improvement/ development and
(e) increasing efficiency utilization on a sustained basis in the application of chemical
fertilizers in combination with other agriculture inputs.
2. Productivity
maintenance of plant and machinery and pollution control. More specifically(a)to strive to
raise capability utilization (b)to improve upon consumption norms consistently.
3. Profitability
To manage the asset, men and material in most effective and efficient manner ensuring
(a)reasonable return on investment commensurate with the principles laid down by the
government from time to time, and (b)generation of increasing internal resoures.
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4. Marketing & consumer services
(a) To provide the farmers high quality products in right time and in quantities and with a
package of modern agricultural practices, at the same time maintaining for fair
business practices.
(b) To further intensify promotional efforts for increased use of fertilizers and to
maximize distribution of companys product within the areas covered by the company
consistent with government policy.
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NFL MISSION
To be a market leader in fertilizers; and a significant players in all its other business;
reputed for customer delight, optimum rewards shareholder, ethics, professionalism and
concern for the ecology and the community.
NFL VISION 2008
NFL will be a reputed, valuable, major Indian enterprise, with domestic and international
operations in addition to the core fertilizer business, and into chemical, petrochemical and
related services and trading business.
NFL GOALS 2008
To achieve a group turnover of Rs.10,000 crores, from the diverse business; with the net
profit of Rs.1200 crores and additional outlay of Rs.6000 crores, financed by a mix of equity,
debt and portfolio investment.
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AWARDS
AWARDS YEAR UNIT
National Productivity Award for Bio-
Fertilizers
2002-03 Vijaipur
FAI Award for Best Overall Performance
of an Operating Nitrogenous
Fertilizer unit
1999-00 Vijaipur
Productivity Award by NPC 1997-98 Bathinda
Certificate of Merit from NPC 1997-98 Bathinda
Certificate of Merit by NPC 1996 Nangal
Commendation certificate for outstanding
work in Energy Conservation
by the Ministry of Power, Govt. of India
1996 Vijaipur
Second Best Productivity Award by 1993-94 Panipat
Second Best National Productivity Award
by National Productivity
Council (NPC)
1993-94 Panipat
Certificate for Productivity Improvement
by National Productivity
Council
1991-92 Bathinda
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OTHER PRESTIGIOUS
AWARDS & RECOGNITIONS
AWARDS YEAR UNIT
Golden Peacock Innovation Award from
IOD, N. Delhi.
2005 Panipat
National Energy Conservation Award
from the Ministry of Power
2005 Vijaipur-I
National Energy Management Award
from CII
2005 Vijaipur
Golden Peacock Innovation Award from
IOD
2005 Panipat
Energy Conservation Award from the
Ministry of Power.
2000 Vijaipur
Best Energy Conservation
Implementation Gold Award by
Institutional
Green Land Society, Hyderabad.
1999-00 Panipat
National Energy Conservation Award by
Ministry of Power, G.o.I
1995 Vijaipur
Udyog Excellence Gold Medal and
Citation by Industrial Economic
Forum, G.o.I
1995 Bhatinda
Corporate Performance Award by
Economic Times.
1993-94 NFL
First Prize in Excellence in Project Mgt.
By Ministry of Program
Implementation.
1989 Vijaipur
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POLLUTION CONTROL AWARDS
AWARDS YEAR UNIT
Silver Award for outstanding achievement
in Environment Management by M/s
Green tech Foundation,Hyderabad
2004-05 Vijaipur
Madhya Pradesh State Level Annual award
on Environment
1999-00 Vijaipur
11th Indira Gandhi Memorial National
Gold Award for Environmental &
Ecological Implementation
1998-99 Vijaipur
Best Pollution Control Implementation
Gold Award from International Green land
Society, Hyderabad
1998-99 Vijaipur
Environment Protection Award by
Fertilizer Association of India
1995-96 Vijaipur
Environment Protection Award by
Fertilizer Association
of India
1991-92 Vijaipur
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SAFETY AWARDS
AWARDS YEAR UNIT
Prashansha Patra by National SafetyCouncil of India
2005 Vijaipur
Suraksha Puruskar for adopting
Occupational Safety and Health
Management Systems from NSC.
2004 Bathinda
Yogyata Praman Patra 2001 award by
NSC
2003-04 Bathinda
National Safety Award 2002 2003-04 Nangal
National Safety Award 2002(Runner up) 2003-04 Bathinda
Punjab State Safety Award 2003 2003-04 Nangal
Yogyata Praman Patra 2003 2003 Bathinda
Prashansa Puraskar 2000 award by NSC 2000 Bathinda
Haryana State Safety & Welfare Award 1999-00 Panipat
National Safety Award 1999 & 2000 Bathinda
Yogata Praman Patra by NSC, Mumbai 1998-99 Vijaipur
Safety awards (5 Nos.) by Punjab Govt. 1998 & 1999 Bathinda
Award for Excellence in Safety by FAI 1997-98 Nangal
Award from National Safety Council, USA 1997 Panipat
British Safety Council Safety Award 1997 Nangal
Award of Honour by NSC,USA 1996 Nangal
British Safety Council Award 1996 Nangal
Sarv Sresht Safety Award 1994 & 96 Vijaipur
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Longest Accident Free Period by NSC,
USA
1992 Nangal
Longest Accident Free Man days by NSC,
USA
1990 Panipat
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EMPLOYEES SKILL AWARDS
AWARDS YEAR UNIT
Punjab State Krit Veer Award 2003 Bathinda
Krit Veer Award to 1 employee by Punjab
Govt.
2002 Nangal
Vishwakarma Rashtriya Puraskar from the
Ministry of Labour & Employment, G.o.I
1999 Bathinda
Krit Vir awards to 13 employees by Punjab
Govt.
1995, 96 & 98 Bathinda
Krit Vir awards to 13 employees by PunjabGovt. 1995 & 1996 Nangal
Vishwakarma Rashtriya Puraskar to three
employees.
1993 Bathinda
Krit Award to 6 Employees by Punjab
State Labour Deptt.
1993 Bathinda
Vishwakarma Rashtriya Puraskar to one
Employee by Ministry of Labour, G.o.I
1992 Nangal
Krit Vir Award to 5 employees by PunjabState Labour Deptt.
2002 Nangal
Prime Ministers Shramvir Award to four
employees for Unconventional repairs of
Air Compressor Blades
1984 Panipat
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ISO CERTIFICATIONS
PLANTS / OFFICE CERTIFICATION AWARDED SINCE
Vijaipur Plant ISO-9002/ISO-14001 1997-98/98-99
ISO 9001:2000 2003-04 Panipat Plant ISO-9002/ISO-14001 1999-00/2000-01
ISO 9001:2000 2003-04
OHSAS-18001 2004-05
Bathinda Plants ISO-9002/14001/18001 2000-01/2001-02/03-04
ISO 9001:2000 2003-04
OHSAS-18001 2003-04
Nangal Plant ISO 9001: 2000 2002-03
ISO-14001 2001-02
CO/CMO ISO 9001:2000 2002-03
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NFLS PLANTS
NANGAL UNIT
INSTALLED CAPACITY
Location district: ropar(Punjab)
Urea 4,78,500 MT
Methanol 22,110 MT
Project cost urea (including revamp) Rs.283.11crores
Foreign exchange component (including revamp) Rs.118.49crores
Commissioned (urea revamp) 1.2.2001
This plant purchases power for its own use.
This plant produces industrial products along with urea.
Land 1800 acres
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PANIPAT UNIT
INSTALLED CAPACITY
Location district: karnal(Haryana)
Urea 5,11,500 MT
Commissioned 1.9.1979
Project cost Rs.223.50 crores
Foreign exchange component Rs.55.79 crores
Factory area 442 acres
Township+ low lying 131 acres
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BATHINDA UNIT
INSTALLED CAPACITY
Location District:Bathinda
Urea 5,11,500 MT
Commissioned 1.10.1979
Project cost Rs.239.30 cr
Foreign exchange component Rs.67.87 cr
Factory area 450 acres
Township 285 acres
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VIJAIPUR UNIT-1
INSTALLED CAPACITY
First inland location plant based on gas from Bombay high/south basin.
Location District:Guna(M.P)
Urea 8,64,600 MT
Commissioned 01.07.1988
Project cost Rs.533 crores
Foreign exchange component Rs.185.20 crores
Land 1250 acres
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VIJAIPUR UNIT-2
INSTALLED CAPACITY
Urea 8,64,600 MT
Commissioned 31.03.1997
Project cost Rs.1071 crores
Foreign exchange component Rs.431 crores
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MEMORANDUM OF UNDERSTANDING
Memorandum of understanding (Mou) is a negotiated agreement between government as
owner of public enterprises and the management of the public sector enterprise (PSEs). Mou
is meant to measure the performance of management of PSE at the end of the year in an
objective and transparent manner.
In the search of improving accountability and giving higher operational autonomy to public
sector undertaking, the department of public sector enterprise (DPE) government of India
introduced the concept of memorandum of understanding (Mou) in early nineties. The new
industrial policy of 1991 made it mandatory for all PSUs to enter in to MOU with their
respective administrative ministries. The Mou over these years has gained significant
improvement from the fact that it reflect the companys overall composite rating and
secondly the performance of the chief executive of the company is partly seen through Mou.
The strengthening of existing system of monitoring PSUs through Mou is an important
element of the present policy of the government.
NFL started signing Mou from the year 1991-1992 and has been getting excellent rating for
most of the years. NFLs Mou rating from 1991-92 to 2005-06 is given below:
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MOU RATING
YEAR RATING
1991-92 Excellent
1992-93 Excellent
1993-94 Excellent
1994-95 Excellent
1995-96 Excellent
1996-97 Fair
1997-98 Very good
1998-99 Good
1999-00 Very good
2000-01 Excellent
2001-02 Excellent
2002-03 Excellent
2003-04 Excellent
2004-05 Excellent
2005-06 Excellent
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COMPANY PROFILE
loan funds
In 1998 NFL had taken the loan from many of the places, given below:-
SECURED LOANS
Non-convertible redeemable bonds (A) : 5496.60
Cash credit (B) : 39339.85
TERM LOAN FROM
Housing development finance corp. Ltd (C) : 6375.00
DEMAND LOAN FROM :
State bank of PATIALA (D) : 5000.00
UNSECURED LOANS
Short term loan from
Bank of MAHARASHTRA : 5000.00
A) NFL had purchased the bonds i.e the secured non convertible redeemable bonds of Rs
100,000/- each for cash at par redeemable at the end of 4th year
33%, 5th
year 33% and 5th
year34% from 1.07.98/31.07.98.
These bonds were secured by PARI-PASSU first charge on land owned by BHATINDA
unit / fixed assets of Panipat (excluding land) & BHANTINDA units. Means as a security
these assets were kept for taking the loan.
B) The cash credit from consortium of bankers. As a security they kept hypothecation of
stores, spares, raw material, finished and semi finished goods, books debts and other current
assets.
C) The company had also taken the term loans from HDFC bank and Secured by equitable
mortgage of land situated at Noida & Panipat and all fixed assets of Nangal unit.
D) The demand loan was taken from SBP, Secured by PARI-PASSU first charge on the
current assets of the company.
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INTRODUCTION TO CASH MANAGEMENT
1. Cash Credit:
It is also known as drawing account. Under this arrangement a business is authorized to draw
cash subject to the limit prefixed by the bank. Under term-loan where the full amount is
available to the borrower, in case of case credit, a credit limit is put at its disposal. This gives
the borrower a lot more flexibility. The business can avail funds to the extent it desires. The
interest is charged only for the amount against the limit. The borrower is accorded the facility
of reducing the debit balance in his account as per his convenience and save interest. At
times cash credit and overdraft are taken to be identical but a bank extends cash credit facility
to its valued customers on a regular basis for a long tenure. On the contrary overdraft facility
is provided occasionally and for shorter durations.
2. Working Capital Demand Loan (WCDL):
It is a part of cash credit but the rate of interest is different. It is always given for a particular
period and it is not possible to repay before the maturity date. The rate of interest is lower
than that for cash credit.
3. Short-term loans:
When a company is in need of extra funds, it can go for short-term loans over and above the
cash credit limit for a maximum period of 6 months, at a relatively lower rate of interest.
Non-fund based sources of finance:
1. Letter of Credit (L/C):
Letter of credit has unique features making it a favorite instrument in the commercial world,
especially in international trade. The basic advantage is that of guaranteed payment is case
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the order is executed as per the terms. As an additional advantage, it acts as a cash
management tool also. The business can get instantaneous payment of full amount or as
agreed with the customer through the bank, against delivery of dispatch documents. It need
not wait till the goods reach the customer. Sometimes even before the dispatch of goods, the
bank provides advances against the Letter of credit.
Letter of credit is now also being used in the domestic trade. A L/C is being issued by a bank
on behalf of its customer (buyer) to the seller. As per this document the bank agrees to honor
drafts drawn on it for the supplies made to the customer if the seller fulfills the conditions
laid down in L/C.
The L/C serves various useful functions, which are as under:
i. It virtually eliminates credit risk, if the bank has a good standing
ii. It reduces uncertainty, as the seller knows the conditions that should be fulfilled to
receive payments
iii. If offers safety to the buyer who wants to ensure that payment is made only in
conformity with the conditions of the L/C
2. Bank Guarantee (B/G):
Bank guarantee is one in which the banker takes responsibility on behalf of its customers to
pay the suppliers, the amount due to its customer. The bank takes the responsibility only
when its customers credit standing and relation with the bank is good.
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STRATEGIES FOR UTILIZING CASH
The company is required to formulate strategies regarding the utilization of cash more
efficiently by the following methods:-
To manage cash efficiently and effectively, budgets are prepared to give an estimate
of future inflow and outflow of cash over a specified period of time. This enables the
management in taking decision regarding the investment of surplus cash if any in
various short-term securities.
A firm can utilize its cash by following a collection policy which would enable it to
adapt to the changing situations and must delay their payment till the last date without
damaging the firm credit rating.
Payments are made to:-
ONGC gas/coal
IOC -oil
Rail freight
Sources of funds are:-
Sale of urea
Subsidy
Price of urea is fixed by government.
On receipt of subsidy
1. cash credit utilization shall be made nil.
2. to make urgent payments from subsidy.
3. all balance amount shall be surplus fund which shall be invested according to
DPE guideline.
4. ask for quotas from consortium banks and other empanelled banks.
5. select best quota.
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Cash management of NFL aims at evolving strategies for delaying with various facts
of cash management which include the followings:
1. OPTIMUM UTILIZATION OF OPERATING CASH FLOWS
Implementation of a sound management programme is based on rapid generation,
efficient utilization & effective conservation of its cash resources. The cash flows in a
circle, therefore prudent financial planning facilitating the running of the business with
minimum cash balance. This is achieved by making a proper analysis of operative cash
flow cycle and forecsted cash flow statement.
2. CASH FORECASTING
RTGS
The Real Time Gross Settlement (RTGS) provided by RBI enables real-time
settlement of fund transfers by processing and settling the payment instructions
between banks individually and continuously throughout the day.
The Reserve Bank of India has prescribed that all RTGS payment transactions
(processed before cut off timing) have to be settled by the Beneficiary Bank within
two hours from the time the same has been received by the Beneficiary Bank.
Only transactions above INR 100,000 should be routed through RTGS.
Instructions received by the Bank before
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WORKING CAPITAL MANAGEMENT
A company starting with cash purchases raw materials, components etc. on a cash or credit
basis. These materials will be converted into finished goods after undergoing the stage of
work-in-progress. For this purpose, the company has to make payments towards wages,
salaries and other manufacturing costs. Payments to suppliers have to be made on purchase in
the case of cash purchases and on the expiry of credit period in the case of credit purchases.
Further, the company has to meet other operating costs described as financial costs (interest
on borrowed capital). In case the company sells its finished goods on cash basis, it will
receive cash along with profit with least delay. When it sells goods on a credit basis, it will
pass through one more stage, viz, accounts receivable and gets back cash along with profit on
the expiry of credit period. Once again the cash will be used for the purchase of raw materials
and/or payment to suppliers and the whole cycle termed as working capital cycle or
operating cycle repeats itself. This process indicates that each stage or component of
working capital is dependent on its previous stage or component.
Figure: The Working Capital (Operating) Cycle
38
Cas
h
Wages, Salariesand
Manufacturing
costs
Work-In-Process
Raw materials,
components,stores etc.
Sundry
Creditors orAccounts
Payable
Finished
Goods
Selling and
Distribution,General
Administration
and Financial
costs
Sundry Debtors
OrAccounts
Receivable
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The figure above shows the normal operating cycle of a company. It indicates that the normal
business operations of a manufacturing and trading company start with cash, go through the
successive segments of the operating cycle, viz, raw material storage/conversion period,
work-in-process conversion period, finished goods storage/conversion period and average
collection period before getting back cash along with profit. The total duration of all the
segments mentioned above is known as Gross operating cycle period. In case the
company is placed in an advantageous position of being able to sell its products for cash,
then the segment of average collection period will disappear from the gross operating cycle
period and hence, the total duration of the cycle gets reduced.
In case advance payments are to be made for procuring materials, the operating cycle
increases. When the average payment period of the company to its suppliers is deducted from
the gross operating cycle period, the resultant period is called the Net operating cycle
period or simply Operating cycle period.
The following steps are the steps used to calculate the operating cycle of a company:
1. Raw Material Conversion Period (RMCP) -> Raw Material Inventory / Daily Raw
material consumption
Raw Material Inventory = (Opening stock + Closing Stock of raw material) / 2
Daily consumption of raw material = Annual raw material consumption / 365
2. Work-in-Process Conversion Period (WIPCP) -> WIP Inventory / Daily Cost of
Production
Work-in-Process Inventory = (Opening WIP + Closing WIP) / 2
Daily Cost of Production = Annual Cost of Production / 365
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Annual Cost of Production = Opening stock of WIP + Raw material consumed +
Other manufacturing costs such as wages and salaries, power and fuel etc. +
Depreciation Closing stock of WIP
3. Finished Goods Conversion Period (FGCP) -> Finished Goods Inventory / Daily
Cost of Goods Sold
Finished Goods Inventory = (Opening stock of FG + Closing stock of FG) / 2
Daily Cost of Goods Sold (COGS) = Annual COGS / 365
Annual COGS = Opening stock of finished goods + Cost of Production + Excise duty
+ Selling and distribution costs + General administrative costs + Financial costs
Closing stock of finished goods
4. Debtors Conversion Period -> Sundry Debtors / Daily Sales
5. Creditors Deferral Period -> Sundry Creditors / Daily Purchases
Application of the Operating Cycle
The operating cycle approach proves quite useful as a technique for exercising control over
working capital. Each segment of the operating cycle can be compared with the norms set by
banks used for hypothecation of stocks. Significant deviations call for closer scrutiny by the
management, who can seek the reasons for such occurrences. The deviations may have
occurred due to a variety of reasons. For example, an increase in the average conversion
period may have occurred due to the shortage of an important raw material (in which case the
purchase manager can be asked for an explanation), plant break-down (in which case the
maintenance manager may be asked for an explanation), a strike by workers (which calls for
an explanation from the chief of personnel and industrial relations) etc. Once the reasons are
known, remedial measures can be taken in respect of immediately controllable factors and
other factors may be accepted as constraints for the time being, pending long-term solutions.
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For example, frequent break-down of plant may call for replacement of certain sectors and/or
modernization which cannot be implemented immediately, but can be implemented say in
about a year.
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Company Analysis
On reviewing the financial condition of National Fertilizers Limited from the company
accounts, I compiled the following data shown in graphical form; it shows a clear picture of
the health of the company for the past 5 years.
1.
42
2950
3654 3388 3474 3591
0
1000
2000
3000
4000
(RS. IN CRORES)
2001-02 2002-03* 2003-04 2004-05 2005-06
SALES TURNOVER
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2.PBT and PAT
43
48.33 40.61
448.43
286.27
119.10
85.04
214.55
160.91
179.30
116.40
0.00
100.00
200.00
300.00
400.00
500.00
(RS. IN CRORES)
2001-2002 2002-2003* 2003-2004 2004-2005 2005-2006
PROFIT BEFORE TAX PROFIT AFTER TAX
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3. BREAK UP OF COST OF SALES (%)
44
54.68
21.03
4.76
5.26
1.763.47
3.810.23
5.00 RAW MATERIAL (54.68% )
POWER & FUEL (21.03% )
SALARY & WAGES (4.76% )
FREIGHT & HANDLING (5.26% )
REPAIR & MAINTAINANCE(1.76% )
DEPRECIATION (3.47% )
ADMN., FACTORY AND OTHERS (3.81% )
PROFITS (5.00% )
INTEREST & FINANCING CHARGES
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4. INTEREST AND FINANCE CHARGES
5. LONG TERM LOANS
45
378
290
123
0 0
0
50
100
150
200
250
300
350
400(RS. IN CRORES)
2001-2002 2002-2003 2003-2004 2004-2005 2005-2006
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6. SUNDRY DEBTORS
(RS. IN CRORE)
PARTICULARS 2005-2006 2004-2005
TRADE DEBTORS
UPTO 6 MONTHS 52.53 62.02
ABOVE 6 MONTHS 13.40 13.86
SUB TOTAL 65.93 75.88
FICC 771.38 372.47
TOTAL 837.31 448.35
LESS : PROVISION FOR
DOUBTFUL DEBTS
12.84 13.29
NET SUNDRY DEBTORS 824.47 435.06
TRADE DEBTORS DECREASED BY RS.9.95 CRORES AS COMPARED TO PREVIOUS YEAR.
IN TERM OF PERCENTAGE TRADE DEBTORS ARE 4.04% (PREVIOUS YEAR 4.40%) OF
MARKETING TURNOVER.
7. SOLVENCY
2005-2006 2004-2005
EQUITY 490.58 490.58
FREE RESERVES 763.18 676.56
NETWORTH (EQUITY PLUS FREE RESERVE) 1253.76 1167.14
CAPITAL EMPLOYED 1688.65 1456.14
NET FIXED ASSETS 963.02 1049.52
WORKING CAPITAL 725.63 405.67
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NFL has become a Zero-Debt company since July 2004
8. WORKING CAPITAL
9. INVENTORY
47
818730
775
406
726
-100
100
300
500
700
900
1100
(RS. IN CRORE)
2001-2002 2002-2003 2003-2004 2004-2005 2005-2006
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(RS. IN CRORE)
MAJOR ITEMS 2005-2006 2004-2005 VARIANCE
FURNANCE OIL/LSHS 73.72 37.59 36.13
COAL 37.07 20.08 16.99
PACKING MATERIAL 9.34 7.10 2.24
SPARES 72.19 112.85 (40.66)
GENERAL STORES 24.41 29.07 (4.66)
OTHERS 32.32 47.29 (14.97)
SUB-TOTAL (A) 249.05 253.98 (4.93)
FINISHED / SEMI FINISHED GOODS
UREA (CY 1.03 LMT, PY 1.24 LMT) 61.05 79.72 (18.67)
IP & OTHERS 14.39 17.14 (2.75)
SUB-TOTAL (B) 75.44 96.86 (21.42)
TOTAL (A+B) 324.49 350.84 (26.35)
10. LIQUIDITY
2005-2006
(ACTUAL)
2004-2005
(ACTUAL)
CURRENT ASSETS (RS. IN CRORE) 1271.73 1007.32
CURRENT LIABILITY (RS. IN CRORE) 546.10 601.65
NET CURRENT ASSETS
(WORKING CAPITAL)
(RS. IN CRORE) 725.63 405.67
CURRENT RATIO 2.33:1 1.68:1
ACID TEST RATIO 1.71:1 1.06:1
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RATIO ANALYSIS
Ratio for the year 2005-06
CURRENT RATIO
This ratio measures t
current ratio of 2.3:1
CURRENT ASSETS=
127173
CURRENT LIAB. 55273.82
= 2.300782
QUICK RATIO
It is a rigorous meas
current ratio. One de
assets of any firm. However, since inve
referred to as quick r
cash, in order to meeratio of NFL is lower
QUICK ASSETS=
CURRENT ASSETS-INVENTORY- LOAN
CURRENT LIAB. CURRENT LIABILITIES
=127173-32449.46-1585.86
55273.82
= 93137.68
55273.82
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FIXED ASSETS RATIO
FIXED ASSETS
LONG TERM FUNDS
From two years there is no long term funds in NFL,
So long term fund is zero.
CURRRENT ASSETS TO TOTAL NET ASSETS
CURRENT ASSETS
TOTAL NET ASSETS
127173
169946.7+ 55273.82
127173
225220.5
0.56466
Working Capital Financing in NFL
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The need for financing working capital arises mainly because the investment in working
capital/current assets i.e. raw materials, work-in-process, finished goods and receivables
typically fluctuates during the year. Although long-term funds partly finance current assets
and provide the margin money for working capital, such assets/working capital is almost
exclusively supported by short-term sources.
When NFL has to procure working capital, a Board resolution has to be passed to resolve the
cash credit limit of the company to meet the working capital requirements. The board also
has to decide upon the following issues.
How much funds to be procured?
Who will be the signing authority?
How power has to be delegated?
After the resolution has been passed, the Finance department will decide upon the
Consortium of Banks and meet the bank officials.
All the banks in the consortium have to sign the agreements shown below:
I. Working capital consortium agreement (CF 1)
II. Joint deed of hypothecation (CF 2)
III. Inter Se Agreement among consortium of banks. (CF 3)
IV. Letter regarding the grant of individual limits within the overall limit(CR 5)
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WORKING CAPITAL CONSORTIUM AGREEMENT:
Bank Cash Credit limit (Rs in Crores) Effective Interest Rate
SBI 125.00 10.50%
UBI 55.00 11.50%PNB 75.00 11.75%
SBP 5.00 11.00%
BOI 90.00 12.00%
SBH 50.00 10.50%
OBC 50.00 10.25%
TOTAL 450.00
Fund-based sources of working capital in NFL
1.Cash Credit
NFL can raise up to Rs. 450 crores from the consortium of banks, as shown in the table
above. Each banks individual limit and the effective rates of interest are also shown.
2.Working Capital Demand Loan (WCDL)
It is part of the cash credit limit. NFL can either avail the full amount of Rs. 450 crores as
cash credit or partly as WCDL and partly as cash credit. For NFL, the interest rate of WCDL
is around 9.75% - 10.00% pa. Here, no documentation is required.
3. Short-term loan
After exhausting the working capital limit, if NFL requires extra funds, it can raise additional
funds through short-term loans. It can procure short-term loans up to a limit of Rs. 100 crores
for a maximum period of 6 months. The interest rate for short-term loans is 9.75% to
10.00%. It is also called Clear loan since it is unsecured. No paper work is involved and it
is issued in the form of a Promissory Note.
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4.Commercial Paper (CP)
NFL has currently stopped using Commercial Paper for financing, as it involves a lot of
paper work and it has higher interest cost too.
As NFLs financial position is sound and it has a very strong repaying capacity, so CRISIL
has rated NFL as P1 for short-term loans and as A1 for long-term loans. The following
are the steps for issuing a commercial paper in NFL:
Step 1: NFL appoints an agent
Step 2: Submit the following documents to a regulatory authority like National Securities
Depository Limited (NSDL)
i. Letter of Intent.
ii. Letter to issue CP in demat from
iii. Master creation form for CP
iv. Corporate action information.
Step 3: Information required from bank:
i. Depository Participant ID
ii. CP allotment number.
iii. CP redemption number.
iv. CP redemption certificate after maturity.
Step 4: Information and documents to be submitted to Bank by NFL:
i. Offer letter Annexure VI
ii. Deal confirmation Annexure VII
iii. Jumbo commercial paper Annexure V
iv. Agreement in stamp paper (Rs. 100) Annexure IV
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v. CRISIL rating Annexure III
vi. Performa for submitting to RBI Annexure II
vii. Board Resolution Annexure I
viii. Confirmation compliance with RBI requirement Annexure II & VII
Non-fund Based sources of working capital in NFL
1. Letter of Credit (L/C):
Letter of credit is commonly used in international trade. It is now also used in domestic trade.
A L/C is issued by the bank on behalf of NFL to the seller. As per the document, the bank
agrees to honour drafts/cheques drawn on it for the supplies made to NFL if the seller fulfills
the condition laid down in the L/C.
The benefits of issuing L/C to NFL are as under:
i. It eliminates the credit risk if the bank has a good standingii. It reduces uncertainty, as the seller knows the conditions that should be fulfilled to
receive payments
iii. If offers safety to NFL, as it will be making payment only in conformity with
conditions laid down in L/C
A foreign L/C requires the following documents along with it - Bills of Entry, Bills of
Exchange, bank advice copy, foreign message, Bill of Lading (airway/shipping), and
certificates.
An inland L/C requires the following documents - Bills of Exchange, bank advice copy and
certificate.
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2. Bank Guarantee
When NFL takes a loan from any party, then a banker of NFL (like SBI) takes the
responsibility i.e. if the company defaults or is unable to repay the amount, then the bank
guarantees the creditors that it will pay the stipulated amount on behalf of NFL.
Apart from the above sources, a huge amount of funds are also sourced through
1. The Central Marketing Office (CMO) i.e. through the sale of fertilizers
2. Subsidies from the Fertilizer Industry Coordination Committee (FICC)
Guidelines specified by government for investment of Surplus Funds by PSUs
There are some guidelines specified by the government for Investment of Surplus Funds by
PSUs. These guidelines put restrictions on PSUs from investing their surplus funds in risky
securities/ventures. These guidelines are important as they affect the availability of surplus
funds which can be used as an effective source of working capital. The following is a brief
overview of the guidelines specified:
1. Investments should be made only in instruments with maximum safety.
2. There should be no element of speculation on the yield obtained from the investment.
3. There should be a proper commercial appreciation before any investment decision of
surplus funds is taken. The surplus availability may be worked out for a period of
minimum one year at any point of time.
4. Funds should not be invested by a PSU at a particular rate of interest for a particular
period of time, while the PSU is resorting to borrowing at an equal or higher rate of
interest for its requirements for the same period of time.
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5. Investment decisions should be based on sound commercial judgment. The
availability should be worked out based on cash flow estimates taking into account
working capital requirements, replacement of assets and other foreseeable demands.
6. The remaining period of maturity of any instrument of investment should not exceed
one year from the date of investment where the investment is made in an instrument
already issued. Where investment is made in an instrument newly issued, the final
maturity of the instrument should not exceed one year. However, only in the case of
term deposits with banks, it can be up to three years.
7. Investments may be made in one or more of the following instruments, subject to
principles outlined in the previous paragraphs:
a. Term deposits with any scheduled commercial bank (i.e. banks incorporated
in India) and with a paid-up capital of at least Rs. 100 crores, fulfilling the
capital adequacy norms as prescribed by the RBI from time to time. These
adequacy norms should be reflected in the last published balance sheet.
b. Instruments which have been rated by an established Credit Rating agency
and have been accorded the highest credit rating signifying highest safety, e.g.
Certificates of Deposit, deposit schemes or similar instruments issued by
scheduled commercial banks/term-lending institutions including their
subsidiaries, as well as commercial papers of corporate.
c. Inter-corporate loans are permissible to be lent only to Central PSUs, which
have obtained highest credit rating awarded by one of the established credit
rating agencies for borrowings for the corresponding period.
d. Any debt instrument which has obtained highest credit rating from an
established credit rating agency.
8. Decisions on investment of surplus funds shall be taken by the PSU Board. However,
decisions involving investing short-term surplus funds up to one year maturity may
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be delegated up to prescribed limits of investment, to a designated group of
Director(s), which should invariably include CMD and Director (Finance) internally.
Where such delegation is made, the delegation order should spell out the levels of
approval and the powers of each official which should be strictly observed. Where
such delegation is made, there should be a proper system of automatic internal
reporting to the Board at its next meeting in all cases.
Fertilizer Pricing Policy of the Government
The Government of India has introduced a New Pricing Scheme (Stage III) which is
administered by the Fertilizer Industry Coordination Committee (FICC) for all urea
producing units in India. This scheme is intended to sustain and ensure the healthy
development of the urea industry based on international standards of efficiency. The FICC
consists of representatives from all fertilizer companies in India and the government. It
passes all necessary resolutions and policies and strives to safeguard the interests of fertilizer
companies.
The following is a brief summary of the major points covered in the New Pricing Scheme:
The scheme mentions the concession rates of urea for all fertilizer units.
Transportation cost of gas is computed and paid separately.
The scheme aims at greater efficiency in urea production and its distribution in the
country. It seeks to promote the usage of natural gas, the most efficient and
comparatively cheaper feedstock, for production of urea. A definite time schedule has
been provided for conversion of all non-gas based urea units to gas within the next
three years, failing which they would find their subsidy grant lowered substantially.
The policy also encourages setting up of joint venture projects abroad where gas is
readily available at reasonable prices.
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The policy aims to establish a more efficient urea movement and distribution network
with the objective of ensuring availability of urea in all parts of the country. The
government will continue to regulate movement of urea up to 50 per cent of the
production depending upon the exigency of the situation. The monitoring of the
movement and distribution of urea throughout the country will be done by an online
computer-based monitoring system.
The policy seeks to encourage urea production from indigenous urea units beyond
100 per cent of their installed capacity by introducing a system of incentives for
additional urea production. The present provision of prior government permission for
additional urea production has been dispensed with.
The policy also mentions the guidelines for freight reimbursement for all urea units.
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ANNEXURE-I
1. ANNUAL ACCOUNTS OF NFL
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ANNEXURE II
Bank Norms for Inventory and Receivables for fertilizer industry
For Nitrogenous fertilizers:
Raw materials (including stores and other items used
in the process of manufacture) (Months' consumption)
3/4 (units near refinery)
1.5 (units away from
refinery)
Stock-in-process (Months' cost of production) Negligible
Finished Goods (Months' cost of sales)
Busy season 1.75
Off season 2.25
Receivables (Months' sales)Busy season 1.50
Off season 1.75
Note: Busy season October to February
Off season - March to September
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BIBLIOGRAPHY
Financial management I.M. Pandey
Cash management R.N.Joshi
Perspective,principles,practices
How to borrow from financial & banking institutions Nabhis
Financial management K.G.Gupta
BROUCHERES:
Companys annual report 2004-2005
Companys annual report 2005-2006
Companys weekly magazine
WEBSITES:
www.nationalfertilizers.com
www.cashmanagement.com
www.workingcapital.com
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