Workshop on Fixed Income Corporate Treasury Management Portfolio, Ahmedabad

Contributed by: Rajni Dhameja

IAIP, Ahmedabad organized an event – “Workshop on Fixed Income Corporate Treasury Management Portfolio”, on October 21, 2013. The event was well attended by members & candidates. The speaker Jayna Gandhi, CFA, Chief Manager, Treasury, The National Stock Exchange of India,  delivered an insightful talk on the functioning of corporate treasury encompassing the objectives of treasury, various functions within treasury & roles available in it.

Jayna explained that core objectives of treasury are minimizing the cost of funds & maximizing the return on investment. She further explained that in the current Indian corporate scenario, role of treasurer is undergoing transformation. Treasury function has to contribute to the strategic level rather than being in executing role.  This transformation is relevant in the light of the fact that performance of treasury function significantly impacts the ROI thereby shareholders’ wealth.

The presentation also included the detailed information about structure of the Corporate Treasury department, how it functions and the detailed discussion about various types of Treasuries. She explained that the structure and types largely determined by the corporate business model and remains guided by the mind set and the philosophy of the people at the helm of affairs such as Board of Directors, CEOs, Owners etc. The presentation broadly classified Treasuries as Borrowing, Investment and Mixed types & these were discussed in detail.

It was discussed that India being developing economy, there is a huge requirement of capital and most corporate Treasuries fall into borrowing category. They need to borrow short term and long term both. They require short term funding for their day to day working capital requirement and long term for financing large long term projects. The short term funding is generally secured through issuance of commercial papers (CPs) which can be against working capital or on a stand -alone basis. The stand -alone CPs should carry higher discount rate than CPs which are issued against limits approved in Banks against working capital. Inter Corporate Borrowing and provisions of Section 372A of the Companies Act,1956, wherein the provision regarding the rate of interest not being less than prevailing bank rates was also discussed.

For long term funding Bank finance is more popular route as Indian Corporate Bond market is not adequately developed. Bonds are issued in a primary market, mostly through the private placement route.  Approximately 93% of the primary market long term corporate bonds issuances are through the private placement. Indian secondary bond market is characterized by  poor liquidity, lack of long term curve, flat government bond yield curve post 10 yr maturity, few select Issues being traded on a daily basis & concentration of trading volume by few large institutional participants.

The presentation was greatly focused on Investment side Corporate Treasury Management.  The cash rich Treasuries in India generally invest in fixed income market. They take exposure after bucketing the cash flows into various time horizons,  accounting for the earmarked liabilities if any. In the corporate scenario, power to make investment lies with the Board, the Board can however, further delegate the same to the sub – committee of the Board, which in turn authorizes company officials and fixes limit.

The investment side corporate treasuries can be managed passively, semi-actively and actively depending upon the risk appetite of the organization and philosophy of its Board. Passive treasuries just invest into mutual funds, fixed deposits and tax free bonds and do not take any mark to market call and do not trade in secondary market. Active treasuries takes exposure at the longer end of the curve and also take interest rate call and trading calls. Considering the tax status of the organization, the goal of Treasuries is to achieve superior after –tax return and not pre-tax. The product features of Bank Certificate of deposits was covered in detail since this is the most liquid short trading instrument.

The presentation walked through the recent launch of Debt market on the stock exchange platform on a DVP-I basis. Gandhi gave generalized over view of short term and long term corporate bond credit analysis. She explained various aspects of credit risk, business & financial risk affecting business. Macro economic factors affecting interest rates, yield curve & its shapes, specific case of barbell strategy were discussed. The presentation briefly touched upon the Fixed Income Treasury portfolio performance management.

Then floor was left open for Q&A where the audience participated enthusiastically. The session was well received by all the participants.