Think Tank

Strategic role of the new world Treasury: the Co-CFO

Naveen Chandramohan is the founder of Itus Capital, an asset management firm managing money in the equities and debt markets in India

In the new India we live in, CFOs have an increasingly strategic role in the organisation. Globally, there are five roles that fall under the purview of the CFO: risk management (enterprise-wide and investments), regulatory compliance, M&A and transactions, IT and cybersecurity, and investor relations. Increasingly, CFOs in India are likely to come under the same strategic purview of their global peers, which makes their role both diverse and strategic in nature. Looking ahead, CFOs would prefer to spend less time on traditional Finance activities and more on strategic leadership, organisational transformation, performance management, and big data and technology trends. In this new world, it is imperative that the CFO works hand-in hand with the treasury for all investment, financial related mandates to ensure organisational compliance.

In turn, today’s corporate treasury heads require a real-time, dynamic update of not just their business cash flows, but also their external investment risks. While corporates have enjoyed an unprecedented financial boom for several years, the recent volatility and rising defaults in India have highlighted the need to re-look at risk management practices within the firm. To maximise their agility in this complex environment, CFOs need to transform their Finance operations into a strategic business partner to the organisation. One of the best places to embark on that transformation is in the area of treasury management, which delivers a low risk, high-yield value proposition for driving growth, improving working capital and mitigating risk.

The Last 10 years: Key Changes
A well-run treasury is today more important than ever. Treasury heads own market risks related to interest rates, foreign exchange, commodities and credit. They are also responsible for identifying and managing such risks, and often look for both internal and external support to ensure that they are able to deliver on their role as strategic partner to the C-suite and right hand to the CFO.

From an investment standpoint, one of the treasury’s key roles is to evaluate avenues for investing excess cash, as well as potential avenues for investment management. Over the last 10 years, most treasuries relied on two options: fixed deposits in a PSU Bank, and the segregation of cash into short-term and longer-term mandates (in cases where the mandate from the Board was slightly broader). The short-term bucket was typically invested in liquid mutual funds, while the longer term ones went into debt mutual funds or credit-risk funds.

The debt mutual fund industry has grown its AUM two-fold in the last 6 years, with corporates accounting for over 50% of this growth. Was it not justified to allocate money here?

The Investment Mandate for tomorrow
While mutual funds as an asset class have been great for managing risks for retail investors, corporates require higher levels of customisation, transparency and look-through, thus translating into better risk reporting.

Working with the treasury head, the CFO should seek a granular view of the daily risk and exposures. We no longer live in a time when Finance can simply look at securities with a AAA rating and be comfortable with the principal guarantee of the asset. Today, it is important for Finance heads to have a more granular and real-time understanding of the investment risk.

This is the predominant reason that many treasury heads need to re-examine their avenues of investment, while also taking an internal decision as to what suits their risk appetite. Today, investing in short-term liquid funds still seems to be appropriate for companies looking at managing excess funds for working capital needs. However, strategic investments outside of the company’s operations or acquisitions require a closer study.

Estimated at Rs 27 trillion, the listed corporate bond market in India is today large and robust, with good options for treasuries looking to invest in high-quality financial debentures. Access to this market, however, requires a deeper study, and a drafting of investment guidelines for each treasury in line with their investment mandates as decided by their Boards.

The level of customisation, risk see-through and granular breakdown of risks becomes much harder to achieve through a portfolio of mutual funds. It is therefore important for a treasury to evaluate this investment with an external investment manager through a managed account, alongside their internal investment team. For instance, companies like Apple, apart from having an internal treasury, outsource their investment mandates to Braeburn capital, which manages a dedicated managed account in line with the risk mandate of the Board.

Treasury Management: External vs In-house
It is natural for corporates to think of building all of their expertise in-house to manage treasury money and to build an investment mandate. As always, it boils down to questions around personnel, expertise, know-how and operational processes. Today, there are investment management firms that look at customising processes and know-how for corporate treasuries to ensure that risk management practices remain within the thresholds set by the Board. The detailed structure that treasuries need to set involves: identifying investment circumstances; selecting the instrument; pricing the risks; and evaluating them as a part of the broader portfolio. From here, the process moves on to the operational, reporting and regulatory facets. Crucially, if the treasury can adhere to all of this in-house, it makes sense to build them internally within the team. The benefits of having to opt for an external manager include structured processes to the investment mandate, operational know-how, improved risk management and economies of scale. In sum, the modern treasury is in a position to give the CFO a new level of confidence in critical financial information so that there less focus on questioning data and more on the business activities that depend on it.