The Hindu Business Line : Corporate Disclosures: Perceived threats and pronounced risks

Investment World - Corporate Governance
Corporate - Insight
Markets - Investor Protection
Corporate Disclosures: Perceived threats and pronounced risks

D. Murali

Companies are talking about risks and threats in their annual disclosures. And the exercise counts for being more real, and more investor-friendly. Interestingly, the price is high, not of disclosure though, but its opposite, in terms of opaqueness.

Isabelle Adjani is the only actress in the history of French cinema to get four César awards, as http://imdb.com would inform. One of her many quotes counsels thus: "You must take the risk to disclose yourself in order to become more real, more human. And even if the price is high."

Risky advice, you may fret, but the insight seems to work well with companies.

Hazardous cargo

Take, for example, Mercator Lines Ltd. The company moves liquid cargo, such as crude and toxic chemicals. In its MDA, or `Management Discussion and Analysis', which is part of the Annual Report 2005-06, Mercator cautions that the transportation activity it engages in is hazardous, because of the risk of `spills and environmental damage'. Mercator states, "The operation of ocean-going vessels carries an inherent risk of catastrophic marine disasters and property losses caused by adverse weather conditions, mechanical failures, human error, and other circumstances or events."

In a section titled `Threats, risks and concerns' the MDA highlights the impact of `fluctuations in freight rates' thus: "Pricing is driven by the geographic balance of trade, which determines the length of haul required and the growth in shipping capacity, i.e., the number of new ships coming on to the market less the number of older ships scrapped. The industry has low barriers to entry. The historical trend shows that strong global growth or shifts in the balance of trade leads to strong markets and high rates, followed by massive additions to capacity, leaving the industry vulnerable to a downturn."

Perhaps, we should study how capacity utilisation in the shipping industry behaves in relation to the trends in balance of trade. Of significance should be the July 9 article by Ronald D. White on www.fortwayne.com, which speaks of how `ever-larger ships create overcapacity'.

Many a worry

The common consumer complains about price rise. So do corporates. "Higher international crude prices and stronger demand of polyamides in engineering plastics keeps the prices of raw material on the higher side," says JCT Ltd in its recent MDA. High prices can have a cascading effect. Such as what JCT speaks of: "Due to higher raw material prices the prices of nylon filament yarns remain on higher side, which is affecting the growth of demand of nylon filament yarn, as weavers look for alternative cheaper yarns and fibres."

On filament, again, the company mentions that the size of Indian nylon filament yarn (textile grade) market currently stands at around 47,000 TPA (tonnes per annum), and grows at 4 to 5 per cent. JCT, with a capacity of 12,500 TPA, is `one of the two largest players in the Indian market'. Yet, it is apprehensive of smaller players operating at very low capacity. "We are under pressure as market takes its own time to absorb increased capacities," explains JCT. "Imports from China, Taiwan, Korea also affect the local margins. Total imports constituted around 20 per cent of total market size during the year."

On a similar note, the construction biggie L&T rues that markets in which it operates are witnessing "penetration by small players trying to consolidate their position and establish their presence through aggressive pricing". The ability of competitors to swiftly replicate the company's superior practices often diminishes its competitive advantage, notes L&T.

Likewise, Ruttonsha International Rectifier Ltd, which manufactures semiconductor devices such as `diodes, thyristor modules, rectifier assemblies, traction rectifiers electrochemical rectifiers and battery charger rectifiers', observes that threats to the organised sector of semiconductor industry in India are "mainly from the unorganised sector and the Government's policy of liberalisation of imports."

Taxes and duties

It is not unusual to find companies airing their misgivings about the prevailing tax regime. JCT, for instance, mentions in its MDA that the Union Budget 2006-07 reduced the excise duty on yarns to 8 per cent, while retaining the duty on raw material at 16 per cent. "This has created an anomaly and industry is not able to avail full benefit of Cenvat. The industry has put forward the case to the Finance Ministry for removing the anomaly and rationalising the inverted excise duty structure. Till the same is corrected the margins are likely to be under pressure," states the company's MDA.

That may sound like a voice in wilderness, but a remedy came a fortnight ago when the Government halved the excise duty on textile intermediates, from 16 to 8 per cent. For starters, `inverted duty structure' refers to a situation where the duty or tax on the finished product is lower than that on raw materials, thus acting as a disincentive for manufacturers.

Indirect taxes are the focus of a paragraph also in the latest MDA of Sundram Fasteners Ltd. "Non-implementation of uniform Value Added Tax (VAT) by all State Governments and eventual abolition of Central Sales Tax (CST) are also matters which affect competitiveness," says the company. "The impact of the proposed levy of excise duties based on MRP is uncertain."

Sundram Fasteners voices its anxiety about `spurious products'. The fakes are sold in large quantities, and any increase in the ultimate price of the product will only multiply sale of spurious products, opines the company. "Automotive Components Manufacturers Association of India has been repeatedly pointing out to the Government of India about the adverse impact of spurious components on the industry, exchequer and the public. The company is of the view that the Government should act forthwith to curb this menace." Not something that we may see quick results in.

Risk management

Peter Drucker says, "Management is doing things right; leadership is doing the right things." Beyond doubt, a right thing to do is to manage risk. And this finds its echo in MDAs. A case in point is FCS Software Solutions Ltd. The company lists three `indicative risks', currently under its consideration. The first is business continuity management (BCM) risk. "This includes existence of single point of failure (SPOF) arising out of concentration of operations at one location. To cover the risk we are diversifying our locations into different cities, which primarily include Panchkula, Chandigarh and Gurgaon apart from our current location at Noida," explains FCS. The second is `information security/data privacy related risk', which includes `risk of data theft, exploitation of IT security vulnerabilities, social engineering attacks and so on.' And the third is `process related risk'; this includes `inadequate segregation of duties, inappropriate management oversight'.

Another example is L&T. "Risk management is being institutionalised," says the company. "An organisation for risk management has been set up in the divisions. The present systems and procedures of risk management are being fine-tuned and geared up to meet the growing complexities of the business in India and abroad."

More specifically, L&T elaborates how it manages risk in its long duration contracts, which are susceptible to input price increase mainly in the areas of commodities such as `cement, oil, steel, copper and other metals'. The company's MDA speaks of "a policy framework for hedging the commodity price risk through suitable derivative products offered by the commodity exchanges."

"To walk across the street is a risk," says Mikhail Baryshnikov. Useful thought, that is, for companies that are too afraid to talk about risk.

CorporateDisclosures@gmail.com

More Stories on : Corporate Governance | Insight | Investor Protection

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page