Simbhaoli Power Private Limited (SPPL) is incorporated under the laws of India under the Companies Act 1956 and engaged in bagasse/bio-mass based power co-generation business situated at Simbhaoli and Chilwaria in the state of Uttar Pradesh. The power plants are operating in the vicinity of the sugar plants of the Simbhaoli Sugars Limited, its holding company, which is the principal provider of Bagasse, the bio-fuel to Company for generating power along with other services.
The Company is in joint venture arrangement with Simbhaoli Sugars Limited (SSL) and Sindicatum Captive Energy Singapore Pte Limited (SCES). SSL and SCES are holding securities in the Company, in the ratio of 51:49 respectively.
The Company has expanded the cogeneration capacity at Chilwaria to 38MW and also implementing the expansion of cogeneration capacity at Simbhaoli plant from 34 MW to 62 MW. The expansion of Simbhaoli plant is expected to be completed by December 2015. After expansion, the total installed capacity of the Company will be 100 MW at both the locations.
Risk Management
The Company has prepared the framework for risk management and formalizes a risk management policy. This report encompasses identification of potential risks related to the business of the Company and also laying down policies and procedures relating to the risk management of the Company. The risks detailed herein are not exhaustive and are for illustrative purposes only.
Risk and uncertainties are the familiar concepts to those involved in business. Risk means any uncertain event that could significantly enhance or impede a company’s ability to achieve its current or future objectives, including failure to capitalize the opportunities. Over the past few decades there is seen a steady move towards a managerial response to these forms of risk. The risk management is defined as the identification, analysis, mitigation and minimization of those risks, which can threaten the assets or earnings capacity of an enterprise. It is a process whereby an organization is able to monitor and mitigate those risks which helps in increasing shareholders value. The point of risk management is not to implement reward; the point is to manage it.
The definition highlights the structured approach towards management of risks. The risks must be identified before they can be measured, and only after their impact has been evaluated, one can decide on the most effective method of control. The objective of Company’s risk management policy is to help the manager at all levels make informed decisions which:
Risk Management Framework
The management has ultimate responsibility for dealing with all risk facing the organization,including both business and speculative risks.Being agriculture based industry,it becomes more relevant to evaluate the risks and consider the mitigation plans.
Risk management deals with insurable and uninsurable risks and the choice of the appropriate techniques for dealing with them.The emphasis in risk management is on reducing the cost of handling risk by various means that are considered most appropriate for minimizing them.
Risk Management Process
This Policy has been prepared to safeguard the Company’s assets–Employees, Property and reputation;create an environment where all executives assume responsibility for risk management and critically identify potential risks, measure their potential impact on the Company and formulate risk management strategies to mitigate potential loss from the risks.
This risk management policy framework has been formulated to ensure that there is a formal process for risk identification,risk assessment and risk mitigation to effectively manage risks associated with the business of the organization.The risk management in the organization provides a framework to identify, assess and manage potential risks and opportunities. The effective risk management affects everyone in the organization.To ensure widespread understanding, the Board members and all operational/business unit managers should be familiar with,and all staff aware of,the principles set out inthe Company shall adhere to this policy.
A. Identifying Risks
The first step in the risk management policy is to identify risk. The identification of risk involves first examining the sources of all kinds of risk,particularly from the perspective of internal and external stakeholders.The organization preferred process involves bringing together a representative group to identify 'what may go wrong'.Relating these risks to the strategic and operational objectives of the organization and to the financial statements of the organization will ensure that the risks are relevant to the future directions of the organization. Once this step has occurred,it is important to ensure that the root cause of the risk is identified.This requires discussion with the people in relevant areas.The risks categorized under the following heads will be identified by the respective divisions.
The objectives of the Company are subject to risks applicable to the Company that is external and internal as enumerated below.
External Risks: External risks involve the risks prone to the Industry as a whole and the factors are beyond the control of the Company.Further,the risks classified under the internal and external categories are overlapping and sometimes can be handled by a single technique.
1. Risk of raw material:bio-fuel like bagasse,rice husk,cane trash,paddy straw are the raw materials used for the production of power.The power production depends on the availability of bio-fuel,whose production depends on climatic factors,investment and increased yield per hectare and the economics of competing crops. The operational costs depend upon the availability of raw material.A variety of factors contribute to a shortage of bio-fuel in any given crushing season.
The availability of raw material depend upon various factors like crushing of sugarcane,rice,paddy,content of moisture, government policies,setting up of other power plants,paper and other competitive industries,storage capacity of the factory etc.
2.Pricing of raw goods:The performance of a Company depend substantially on the prices of bio-fuel,availability in relative region,rate of power declared by State Government etc.The following factors affect the operations and price may fluctuate substantially.
Bagasse:The profitability of the power business depends significantly on the cost of its primary raw material i.e.bagasse.The cost of bio-fuel cannot be pre-determined.The minimum price of the fuel based on competitive pressure for purchase of cane when production of cane doesn't match regional demand.
Rice Husk, Cane Trash, Paddy Straw:Availability of rice husk,cane trash,paddy straw is widely depend on rice production and collection program adopted.
3.Pricing of finished goods-Power:The success of power business is dependent on a number of factors beyond the control,including the willingness of the state power corporation to purchase power and the price payable.The growth in the power business is based upon the policies announced by the state governments from time to time. With the change in state policies,the power business is not able to generate sufficient revenue.
4.Manpower risks:The success of the business is substantially dependent on the availability of skilled manpower for operations.Any loss or interruption of the services of the key senior personnel,or the inability to recruit sufficient qualified personnel,could adversely affect the business.
In addition power production processes depend upon highly skilled employees. The business requires considerable resources to recruiting and developing such individuals and encouraging such individuals to remain employed by it.There is an inherent risk related to skilled and specialized manpower.They gain experience working with the Company and need continuous motivation and supervision. There is a risk of specialized manpower leaving the jobs, joining competitors,sharing confidential information etc.There is also the risk of being under-utilized or put in areas where they are unfit.
5.Environment risk:Manufacturing operations in India are subject to environmental regulations and be exposed to liability as a result of its handling of hazardous materials and potential costs for environmental compliance. The power business is subject to Indian laws and regulations concerning the discharge of solid particulate matter during its operation.The boiler is required to obtain certain clearances from and authorization from government authorities for the operation.These regulations can often require to purchase and install expensive pollution control equipment or make operational changes to limit any adverse impact or potential adverse impact on the environment and any violation of these regulations result in stiff penalties.Any unanticipated changes in the environmental regulations lead to substantial capital expenditures.
6.Government regulations:The power industry is operated in regulated environment under the policies and regulations of central and state governments affecting the related industries could adversely affect its operations and its profitability.Several aspects of the operations including the sourcing and pricing of raw material (indirect) and price/sale of power (Direct) is regulated by the governments.The central government policies affecting the agricultural industry,such as
environmental regulations,taxes, tariffs,duties can influence industry profitability.
7.Legal liability risks:For alleged non-compliance/violation of various laws applicable to the Company,there can be legal liabilities on the Company and its management.This may arise
and be fiThis also includes liability under various Pollution Control Acts like water,air,noise etc.
Internal Risk Factors:There are various internal risk factors,which affects the profitability of the Company. Some of them are as follows:
a) Coordination between Joint Venture partners
b) Coordination amongst departments
c) Project execution risks
d) Technology and consumer preferences related risks
e) Financial risks
f) Key man risk
a. Coordination between Joint Venture partners: There may be lack of coordination among joint venture partners viz. SSL and SCES and decision making process.They may cause delay in taking urgent decision for carrying operations of the Company.Further,they also may cause delay in funding the project and routine business of the Company.
b. Coordination amongst departments: Lack of coordination amongst various functional departments,may lead to mismanagement.This can also happen due to lack of internal controls,failure of planning, equipment failure and lack of performance in any of the functional areas of management viz,marketing,construction,finance,etc.
c. Project execution risks: Planning, time management, resource mobilization and quality control are inherent to successful execution of projects.Any failure in quality and delay in completion of projects can constitute a risk to Company's performance.
d. Technology and consumer preferences related risks: Changes in technology can also lead to Company lagging behind the competitors.Change in consumer preferences/choices can also make the Company’s products less competitive.
e. Financial risks: These include non- realization of money from customers, increasing interest costs, discontinuance of existing finance facilities by any of the lenders,high cost of carrying inventory,fall in profitability on account of increase in cost or decrease in price of products, fall in liquidity leading to cash flow problems and denial of tax and other benefits. Delay in funding for the project and/or procurement of raw material by the joint venture parties.
f. Key man risk: The key men in the top management of the organization are responsible for overall business success and their continuity and absence may be risk to the Company.
C. Other risks
There are other risks which affect the operations such as machinery/equipment failure,strikes, lock-out, natural disaster,force majure,Act of God etc.
B. Risks specific to the Company and the mitigation measures adopted
1) Raw Material Risk:
For bagase: Sugarcane is the principal raw material used for the production of bagasse. The sugar business depends on the availability of sugarcane, whose production depends on climatic factors, investment and increased yield per hectare and the economics of competing crops.Risk mitigation measures: The Company is able to procure the sugarcane during a particular period and accordingly supply of bagaase is planned and adjusted.
For other biomass fuel: Other biomass fuels like rice husk, paddy straw and cane trash are available in market with fluctuating price.
Risk mitigation measures: The Company is able to plan to procure raw material from nearby industry during season by his fuel procurement plan.
2) Business Operations Risks: These risks relate broadly to the company’s organization and management, such as planning, monitoring and reporting systems in the day to day management process namely:
1 Organization and management risks,
2 Production, process and productivity risks,
3 Business interruption risks,
4 Profitability
Risk mitigation measures: The business operations suffer major loss by fire in the factory.
These losses can be minimized by taking proposer fire policy and also by adopting the safety measures as follows:
3) Liquidity Risks:
1. Financial solvency and liquidity risks
2. Borrowing limits
3. Cash management risks
Risk Mitigation Measures:
4) Market Risks/ Industry Risks:
1. Quantities, qualities, suppliers, lead time, interest rate risks
2. Raw material rates
3. Interruption in the supply of Raw material
Risk Mitigation Measures:
7) Human Resource Risks:
1. Labour Turnover Risks, involving replacement risks, training risks, skill risks, etc.
2. Unrest Risks due to Strikes and Lockouts.
Risk Mitigation Measures:
8) Disaster Risks:
1. Natural risks like Fire, Floods, Earthquakes, act of god etc.
Risk Mitigation Measures:
Risk Mitigation Measures:
EDP department should maintain repairs and upgrades the systems on a continuous basis with personnel who are trained in software and hardware.
Password protection should be provided at different levels to ensure data integrity.
Licensed software is being used in the systems.
The Company ensures “Data Security”, by having access control/ restrictions.
10) Legal Risks: These risks relate to the following:
1. Contract Risks
2. Contractual Liability
3. Frauds
4. Judicial Risks
5. Insurance Risks
Risk Mitigation Measures adopted by the Company
Following are the Risk mitigation measures adopted by the Company to mitigate the risks relating to the Legal:
A study of contracts with focus on contractual liabilities,deductions,penalties and interest conditions.
The Legal department and the Legal Advisors vet the documents.
Contracts are finalized as per the advice from legal professionals and advocates.
Insurance policies should be audited to avoid any dispute subsequently.
Timely renewal of insurance and full coverage of insurable risks of the Company.
Internal control systems for proper control on the operations of the Company and to detect any frauds.
Action plans:
1. All steps required to monitor/control of external risks and their reduction/minimization, are to be taken by keeping a strict watch on the policies of the government, economic scenario of the country,better customer relationships,better quality of products,competitive pricing,keeping abreast of competitors activities and insurance of the assets of the Company.
2. Internal Business risks are to be controlled and reduced by:-
a. Establishment of internal control systems, which involves internal audits and internal checks by internal and external auditors.
b. Legal liability risks are minimized by ensuring complete legal compliances and constant reporting back to the Board/Committees.
c. Implementation of effective HR management for monitoring manpower resources, laying down formal organization structure, rules/regulations/policies, their implementation, and delegation of authorities, maintaining confidentiality of information etc.
d. Keeping a watch on the technology advances/strategies of the competitors for continuous monitoring of the products and marketing policies of the Company as well as understanding consumer preferences.
e. Taking insurance of assets of the Company based upon risk, cost and benefit analysis.
f. Effective management of the financial resources of the Company so that the Company's financial risks are minimized.Foreign exchange risk is managed through forward contracts.
g. Key Man risk – Possibility of Key Man Insurance policy will be examined.
The Company’s strategy to manage the risks should be by framing policies and procedures for tangible action plans for risk management.The Company operates in multiple directions and having a diversified business model and should develop practices for identification of potential risks, their assessment, timely and satisfactory risk minimization and mitigation.
Risk Officer
Managing Director will be the principal risk officer of the Company and each functional/unit heads will be responsible for identification and mitigation policies of risks in their areas of operations.Suitable authorization will be given to them, with a policy /procedural guidelines.
The Board of Directors of the Company and their Audit Committee shall periodically review the risk management policies of the Company so that management controls the risk through properly defined network. Head of departments/business unit heads shall be responsible for implementation of the risk management system as be applicable to their respective areas of functioning and report them to the Board and the Audit Committee.
Time Frame
The policies will be in place with immediate effect and shall be subject to review by audit committee and Board of directors of the Company.
Communication
The risk management policy should be communicated to all employees of SPPL through the Local intranet. The risk management policy should also be displayed at all strategic administrative locations of the company. Feedback and suggestion for improvement of the Policy are welcomed.
Disclaimer Clause
The Management cautions readers that the risks outlined above are not exhaustive and are for information purposes only. Management is not an expert in assessment of risk factors, risk mitigation measures and management's perception of risks. Readers are therefore requested to exercise their own judgment in assessing various risks associated with the Company.