CASE STUDY: 3 FACTS OF THE CASE XYZ Auto Limited (XYZ) is a reputed car manufacturing company having its manufacturing operations in South India. It's manufacturing units are located near the east coast and well connected by different modes of transport. It has its presence in the small car - petrol & diesel segments. The present capacity of XYZ is 60,000 units per annum. It also markets all the related spares and has established its own service centres. CHALLENGES FACED BY THE COMPANY With the opening up of Indian economy and "Make in India" initiatives, global companies started establishing their operations in India and which is resulting in stiff competition in the domestic markets for the Company. These new companies have brought in the state of the art technology, with enhanced features for their cars. The Central & State governments have also provided various tax benefits to such entities for setting up their plants in India, which had a significant cost advantage to the new entities. Other challenges faced by the Company in its operations include: (i) Non-availability of the Labour as more than 50% of this temporary labour force which moved to their home towns due to COVID-19 pandemic is yet to come back, (ii) change in the State government due to elections and likely change in government policies. (iii) shortage of semi-conductor chips is forcing the company to reduce the production levels. (iv) significant increase in the raw material prices, especially metals are impacting margins and (v) increase in cost of petroleum products is forcing customers to buy Electric cars instead of petrol & diesel cars. FUTURE PLANS OF THE COMPANY XYZ is looking at modifying the design of the car and provide better features to meet the changing preferences of customers. An operational improvement team was set up to identify cost control measures and improve efficiencies in the production & supply chain activities. There is a plan to increase its annual capacity from 60,000 to 1,20,000 Units over the next three years. The additional capacity will be in electric car segment. This requires XYZ to set up a new production line. XYZ is planning to diversify into exports specifically in the electric car segment. The cash outflow for setting up the new production line is estimated at ₹150 Crores; ₹80 Crores and ₹20 Crores in the year 1, year 2 and year 3 respectively. The incremental cash flows and probability for various scenarios are given below: Year 3Year 4Years 5 Cash flowsProbabilityCash flowsProbabilityCash flowsProbability ₹ Crores₹ Crores₹ Crores 60.000.5075.000.40105.000.55 70.000.3085.000.25120.000.25 80.000.1595.000.20130.000.15 90.000.05105.000.15145.000.05 The CFO is planning to avail a separate term loan for this project from the financial institutions. OTHER REGULATORY MATTERS XYZ being a listed entity in India and is required to comply with all the listing agreement norms. XYZ has junior team members responsible for internal audit and risk management activities and they report to the CFO of the Company. The CFO makes quarterly presentation to the Audit Committee and Risk Management Committee and shares internal audit and risk updates to the respective committees set up by the Board of Directors. During the recently held Board Meeting, the Board of Directors advised the management to establish, a robust Risk Management Process with enhanced focus on risk mitigation procedures and risk reporting requirements, considering the heightened business risks and the planned expansion activities. ACTION TAKEN Based on these directives from the Board of Directors, the Management team has taken the following actions: A new Chief Risk Officer (CRO) has been appointed by the Company. All the risk management team members were transferred to a newly created Risk Management Department and were asked to report to the CRO. The newly appointed CRO has engaged an external firm to advise the Company, to establish a comprehensive Enterprise Risk Management Framework. After a detailed evaluation, the external firm has provided a comprehensive report to set up the Risk Management framework including the roles and responsibilities of the Risk Management team members and the Risk Management Committee. The report made few suggestions including categorisation of identified risks as per COSO Framework and ERM implementation, as covered in ISO 31000. Based on the facts given above, you are requested to answer the following questions: Multiple Choice Questions Choose the most appropriate answer from the given options.