In a surprise move, the finance ministry has asked public sector companies to stop inviting competitive bids from banks for parking their surplus funds and directed them to give such business to state-run banks on nomination basis.
The directive would mean that the PSUs would lose out on getting the best returns on their surplus cash because the nominated bank may even dish out below sub-prime rates as they would be guaranteed of the business irrespective of the rates they offer, industry sources said.
With banks like State Bank of India losing out on PSU business due to aggressive competition, the finance ministry has stepped in to direct PSUs like ONGC to stop calling for competitive interest rate offers and park at least 60 per cent of their surplus cash with state-run banks.
Sources said Oil and Natural Gas Corp is the first to resist the directive, saying it may lose Rs 400 crore (Rs 4 billion) annually on interest income.
ONGC, which has cash surplus of about Rs 25,000 crore (Rs 250 billion), at present asks banks on its panel to quote interest rates they would offer for short-term deposits. The card rates of banks published on their websites are not applicable for bulk deposits for which banks quote the rates on demand.
Prevailing card rates would be about 200 basis points lower than the rates obtained by ONGC through competitive bidding, sources said adding giving business on nomination basis breeds malpractices and favoritism.
But for competitive quotes, ONGC has no other method of knowing the best rates available, the official said.
ONGC, a company official said, followed the guidelines laid by the Department of Public Enterprises (DPE) for investment of surplus funds.
DPE following the stock market scam had laid down maximum safety, no element of speculation and proper commercial appreciation as principles for investing surplus funds.
Competitive bidding ensures that human discretion is eliminated and favoritism avoided, the official said, while pointing that about 86 per cent of deposits of ONGC were with public sector banks.
ONGC chairman and managing director R S Sharma recently wrote to the petroleum ministry, saying the finance ministry's directive would lead to 'unethical' practices like favoritism towards a particular bank.
"The process of making decisions for investment of short-term surplus funds without inviting competitive bids will lack transparency and is liable to come in conflict with the approach of the CVC and CAG," he wrote.
A Joint Parliamentary Committee (JPC), which enquired into the stock market scam of early 1990s, had adversely commented on certain investment decisions made by certain state firms and had asked the government to lay down clear guidelines for investment of surplus funds to avoid recurrence.
"DPE guidelines for investment of surplus funds were based on the recommendations of the JPC constituted to enquire into the irregularities in securities transaction made by certain Public Sector Enterprises. The requirement of dispensing with bidding process may be against the recommendations of JPC," Sharma wrote.