Mumbai: Most Indian firms do not give due importance to their treasury operations and are treating their treasury division as a cost centre. This is the finding of a recent survey on treasury management practices at Indian companies carried out by audit firm Ernst & Young.
The typical job of a corporate treasury department includes managing currency risks and raising debt apart from playing in the bond and equity markets if the company has enough funds to invest.
The independent survey, covering 34 large companies across India, found that while around 85% of the respondents had a separate treasury operation, most said that their treasury division was nothing but a cost centre. The chief financial officers and treasurers of firms were the respondents.
The report, titled Corporate Treasury Survey 2007: A closer look at evolving treasury practices in India, said, “Although corporates acknowledge the importance of treasury in serving business units, few corporates have made efforts to assess the real value added by treasury.”
According to the survey, more than 61% of the treasuries operate with less than five people. Some of them are even engaged in a number of ad hoc functions, including fund raising, investor relations and insurance, blurring the lines between the functions of the treasury and finance functions.
A treasurer with a top multinational company, who does not wish either himself or his company to be identified, however, did not agree with the findings of the survey. According to him, large corporations in India have dedicated treasury operations.
“There are enough people in the treasury desk at the top-rung companies. A good company with a large operation can have 10-20 people in its front and back offices for treasury. The problem lies with the second-rung and other firms who do not know much about treasury,” he said.
“In our company, there is a clear policy on treasury and even set rules as how much exposure we can take. Unfortunately, that’s not the case in smaller organizations,” he added.
The study, which covered companies in several industries, said that except for regulatory compulsion, the forex risk management practices of most Indian companies are still short-sighted. According to it, companies generally have a hedging horizon of less than three years with most limiting their hedging within 12 months and 33% resorting to still more opportunistic hedging.
Prabal Banerji, group chief financial officer for Hinduja Group, said it is not always prudent for a company to hedge for a long time when there is so much volatility in the foreign exchanges. “It’s true that we have a conservative approach when it comes to treasury operations, because our focus is to make money out of the core business and not make money out of money,” Banerji said. “Depending upon the deal, if it is long term, we hedge by exercising payment of receipt, or we just exercise options for a short term deal,” he added.
Corporate treasuries in India are also characterized by low trading and transaction volumes, the report said.
“Even in cases of companies with turnover exceeding Rs10,000 crore, 58% have monthly transaction volumes of less than Rs100 crore,” it added.
According to the survey, lack of industry benchmarks and wide disparity in treasury philosophies make it difficult to measure the performance of the treasury department.