CASE STUDY: 1 ABOUT THE COMPANY XYZ Limited (herein after referred as 'the Company') is engaged in coal mining and marketing. It sells coal & coal products to various companies which are engaged in the manufacture of power and steel. 10% of the total coal mined is also exported to South East Asian Countries. The Company has a risk management function headed by the Chief Risk Officer ('CRO'), who participates in all the leadership meetings and shares his views with the Heads of the Departments during such meetings. He has a vast experience in the mining related risks. Monthly assessment of the operational and business risks faced by the Company is assessed and mitigation procedures are reviewed. On a half-yearly basis, a report is submitted to the Board, for its review and a detailed presentation is made by the CRO. CONCERNS NOTICED (A) The operations of the Company, were significantly affected during the last two years, on account of pandemic. The Company was not able to implement various proposed capех projects and costs of the projects escalated substantially, impacting the payback periods. (B) Further, due to pandemic, employees' health was affected in most of the mining locations, resulting in : (i) Reduction in attendance by 50% during pandemic period, which lasted for almost 6 months. (ii) The efficiency of the employees reduced, due to after affects of the pandemic. (iii) There was a huge demand for coal and employees were regularly working overtime, to meet targets. This impacted efficiency. (iv) Multiple accidents occurred in the recent past, due to employee fatigue. (C) The operating costs have gone up and the Company was unable to increase the selling prices, since they have entered into long term sale contracts. The payments were not being received on a timely basis, and the over dues were piling up, which affected the working capital requirements. REMEDIAL STEPS TAKEN In order to improve operational efficiencies, the Board of Directors advised the management, to establish a Steering Committee to evaluate the areas of cost reduction and identify efficiency improvement projects, besides prioritizing employees' Health & Wellness. The Steering Committee comprised of Operations Head, Chief Financial Officer, Chief Risk Officer, Human Resources Head, Logistics Head & Marketing Head. Steering Committee, has come up with various suggestions for implementation, which includes (a) Outsourcing the entire mining activity to external agencies at fixed rate contracts. (b) Modernisation of mining equipment, which would enhance production and improve efficiencies. (c) Install a conveyor belt from the mines to the wagon loading point, to reduce delays in internal movements and multiple handling of the materials. (d) Upgrade the existing IT systems, to ensure on-line monitoring of the coal mined, shifted and dispatched. (e) Increase the frequency of health checks from annual to half yearly basis and extend free medication to all employees at the Company operated clinic. (f) Establish "Centre of Excellence" for training the employees, with respect to "Just in time", "Multi-tasking" and "Safety" concepts. (g) Integrate the Risk Management with strategic activity. The Steering Committee, also wanted to assess the risk maturity levels in the organization and the level of integration of risk management with operational performance. An external firm was appointed, to study the existing risk management practices, assess the gaps compared to industry best practices. The external firm carried out a risk maturity exercise and applied various techniques to identify whether all related risks have been covered and adequately mitigated. They have submitted their report after a detailed study. They have identified that the company has a qualitative risk assessment module, based on which all risks are classified in High, Medium and Low. Certain risks which are considered medium, required to be moved to high risk category. The report also included details of the existing risk maturity levels in the company. EXPANSION / DIVERSIFICATION PLANS Based on the revival of the Indian economy, the Board of Directors of the Company have envisaged to diversify into power generation & distribution activities. The various options which were under consideration included: Option I: To set up a green-field project for power generation, funded through debt and internal accruals. Option II: Enter into a Joint Venture with 50% share in equity with other power generating companies, to set up a power generation plant. Option III: Revive a sick power generation unit, and avail tax & other benefits extended by the Government. The Board members have advised the CFO and CRO to examine the three options and submit a brief report for consideration, based on which Board can assess the project viability. The CFO & CRO, carried out the evaluation and examined the funding requirements, future cash flows, return on investments and risks involved in each of the options. The CFO summarized certain financial assumptions which are given below : (Amount in ₹ Crores) Option 1Option 2Option 3 Timelines to commence operations5 years5 years2 years Life of the project25 years25 years10 years Capacity of the plant500MW500MW500MW Estimated Project cost2,000.002,000.00500.00 Funding options External Loan from financial institutions1,500.00500.00250.00 Internal Accruals500.00500.00250.00 Total Company's exposure to the project2,000.001,000.00500.00 Exposure of the Joint Venture partner-1,000.00- Interest rates9%9%6% The CRO, has summarized the following specific project related risks of the three options: - (a) Project getting delayed beyond scheduled period. (b) Changes in government regulations relating to taxes and tariffs. (c) Possibility of imposition of Environment cess after 5 years. (d) Joint venture partner not providing funds on a timely basis. (e) Higher maintenance costs and machine failures. Multiple Choice Questions: Choose the most appropriate answer from the given options.