CASE STUDY - 3 About the Company SSS Limited (the company) is an MNC Company, engaged in the manufacture of fertilisers. The Company has been carrying out business for over five decades in India, Sri Lanka and South East Asian Countries. In India, this is one of the largest private sector company having fertiliser manufacturing units across three states and four divisional marketing offices, and more than 300 stock points across South India. The present turnover of the company is more than ₹ 10,000 Crores. Since 90% of the raw materials are imported, the manufacturing units are set up next to major ports. Cyclones & storms are inherent risks and the unit is geared with emergency response plans. Also, since the production process involves in handling hazardous materials, the workmen are adequately trained and wearing of safety gear is made mandatory to all workmen who are engaged in the production activities. Fertiliser sector in India is a regulated sector. The Central Government decides the distributional priorities and mandates all the Companies to prioritise dispatch to the designated states, where there is a shortage of fertilisers. However, due to complete ban on chemical fertilisers in Sri Lanka, the sale of chemical fertiliser was affected four years back and the Company had to launch organic fertilisers in Sri Lanka. Due to cost considerations, the off-take of organic fertilisers was not encouraging in Sri Lanka. Exports to other South East Asian Countries mainly comprised on Speciality Nutrients and such sales constitute 10% of the overall sales volume. Corporate Governance The Company's Board comprised of elite professionals from different sectors, who provide value added guidance to the Senior Management team. The Board has an Audit Committee & Risk Management Committee under the chairmanship of independent directors. They are experts in the fields of finance, audit and risk management. The Internal Audit and Risk Management functions of the Company reports to these Committees which have an oversight over the internal controls and risk management processes respectively. It is also ensured that the risk management is integrated with operations covering procurement of the raw materials, production activities, marketing & collections, Corporate Governance etc. Various digital tools and dash boards are in place for monitoring controls and risks. The Risk Management Committee adopts various quantitative techniques to classify the risks and ensures adequate mitigation steps are in place to respond to critical and high risks. During the course of Risk Management Committee meeting recently there was a discussion with regard to impact on sales in Sri Lanka, due to government regulations and country related risks. Important concerns highlighted 1. Major raw materials are sourced through imports. Due to prevailing political conditions in some of the countries and continued Russia-Ukraine war, the prices of raw materials have significantly increased, and sourcing of the same is affected. The Company hedges only fifty percent of the imports and considered the same adequate to mitigate the risks of foreign currency fluctuations. 2. During the year, there was an anonymous whistleblower complaint, who raised certain bribery matters against the commercial manager. A detailed investigation was carried out by the Internal Audit Team which concluded with identification of a fraud in the commercial department due to certain gaps in internal controls. Two of the executives were taking bribes from the domestic vendors, for placing raw material supply orders. Based on the investigation report, the Board of Directors, have decided to further strengthen the existing manual controls by making it to automated controls and advised the Chief Risk Officer (CRO) and the IT Head to implement the same. 3. During the current year, due to erratic climatic conditions, the Company was not able to sell the budgeted volumes of fertilisers and there was piling of inventory at the stock points. Also, the receivables were piling up as the dealers and the large famers were not able to meet the payment obligations. The Company was planning to levy interest charges on the overdue. Due to huge pile up of stocks and outstanding, there was a stress on working capital management, due to which the Company was not able to meet payment due dates for the import suppliers. Business expansion by the Company 1. The Company is planning to launch Organic Fertilisers in India. 2. During the year, the company acquired RST Pvt. Ltd. (RST), an entity which deals in the sale of agri-based implements. The Board saw this as a very good opportunity, considering the usage of this equipment in Agri sector in India. Due diligence was carried out of RST and the Board of Directors had approved the acquisition of 100% stake in RST for a value of ₹ 150 Crores. The Chief Financial Officer (CFO), had evaluated two options for funding the acquisition of RST: Option I - Fund the acquisition fully through internal accruals. Option II - Fund the acquisition 50% through internal accruals and 50% with Long term borrowings at 9% interest rate. The Profit before Depreciation, Interest & Tax (PBDIT) for the five years has been estimated as given in the table below: Year12345 PBDIT ₹ crores1520253035 3. Pursuant to the approval of the Board, the Company acquired 100% in RST and took control of the operations. It was observed that RST had no documented internal financial controls or risk management framework. The Board has mandated the Internal Audit team and the Risk Management team to set up controls and extend the risk management framework to RST. 4. Considering that the Company has no exposure to the agri-implements sector, the Board has requested the CRO to evaluate and suggest inherent risks related to this sector. An external firm was engaged by the CRO to carry out the study and report on the inherent risks. Based on the above, you are requested to answer the following questions: Multiple Choice Questions Choose the most appropriate answer from the given options.