The resources sector is currently in the midst of a correction, with an extended period of lower and volatile commodity prices impacting earnings, balance sheets and investor perceptions. Our businesses are also exposed to a variety of risks, which are inherent to a global natural resources organisation. It is therefore essential to have in place necessary systems to manage these risks, while balancing the relative risk reward equation demanded by our stakeholders.

Our management systems, organisational structures, processes, standards, code of conduct together form the system of internal control that governs how we conduct the Group's business and manage the associated risks. Our risk management framework is designed to be simple, consistent and clear for managing and reporting risks from the Group's businesses to the Board.

Risk management is embedded in our critical business activities, functions and processes. It helps Vedanta meet its objectives through aligning operating controls with mission and vision. The effective management of risk is critical to support the delivery of the Group's strategic objectives. The framework helps the organisation meet its objectives through alignment of operating controls to the mission and vision of the Group.

We have a multi-layered risk management framework aimed at effectively mitigating the various risks, which our businesses are exposed to in the course of their operations as well as in their strategic actions. We identify risk at the individual business level for existing operations, as well as for ongoing projects through a consistently applied methodology.

Formal discussion on risk management happens in business level review meetings at least once in a quarter. The respective businesses review the risks, change in the nature and extent of the major risks since the last assessment, control measures established for the risk and further action plans. The control measures stated in the risk matrix are also periodically reviewed by the business management teams to verify their effectiveness.

Ensuring effective tone at the top is vital for the risk management process to function effectively. These meetings are chaired by business CEOs and attended by CXOs, senior management and concerned functional heads. Risk officers have been formally nominated at all operating businesses as well as Group level whose role is to create awareness on risks at senior management level and to develop and nurture a risk management culture within the businesses. Risk mitigation plans form an integral part of performance management process. Structured discussion on risk management also happens at SBU levels on their respective risk matrix and mitigation plans. Governance of risk management framework in the businesses is anchored with their leadership team.

The Board of Directors has the ultimate responsibility for management of risks and for ensuring the effectiveness of internal control systems. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The Audit Committee aids the Board in this process by identification and assessment of any changes in risk exposure, review of risk control measures and by approval of remedial actions, where appropriate.

The Audit Committee is in turn supported by the Group Level Risk Management Committee which helps the Audit Committee in evaluating the design and operating effectiveness of the risk mitigation programme and the control systems. Group Risk Management Committee (GRMC) comprising of Group CEO, Group CFO, Director Finance, Director - Management Assurance and Group Head – HSE meets every quarter. GRMC discusses key events impacting the risk profile, emerging risks and progress against the planned actions apart from other things.

Materiality and tolerance for risk are key considerations in our decision-making. The responsibility for identifying and managing risk lies with all the managers and business leaders in the Group.

Operations at Jharsuguda aluminium smelter


Our management systems, organisational structures, processes, standards, code of conduct together form the system of internal control that governs how we conduct the Group's business and manage the associated risks.

The Group's approach to risk management, elaborated in its risk policy and the risk charter, is aimed at embedding a risk aware culture in all decision making process. Accountability for risk management is clear throughout the Group and is a key performance area for line managers.

As stated above, every business division in the Group has developed its own risk matrix of top 20 risks, which get reviewed at business management committee/business ExCo chaired by the CEO. In addition, business divisions have also developed their own risk registers depending on the size of operations and number of SBUs / locations. These risks get reviewed in SBU level meetings.

The order in which these risks appear in the section below does not necessarily reflect the likelihood of their occurrence or the relative magnitude of their impact on our business. Risk direction of each risk was reviewed based on events, economic conditions, changes in business environment and regulatory changes. While our risk management framework is designed to help the organisation meet its objectives, there can be no guarantee that our risk management activities will mitigate or prevent these or other risks from occurring.

In addition to the above structure, other key risk governance and oversight committees include the following:

  • CFO Committee has an oversight on the treasury related risks. This committee comprises of Group CFO, Deputy CFO, business CFOs, Group Treasury Head and Treasury Heads at respective businesses
  • Group Capex Sub-Committee which evaluates the risks while reviewing any capital investment decisions as well as institutes a risk management framework in expansion projects
  • Vedanta Board Level Sustainability Committee looks at sustainability related risks. This Committee is headed by a non- Executive Director and has Group CEO and other business leaders as its members.
  • The Board with the assistance of management has carried out a robust assessment of the principal risks and uncertainties of the Group (including those that threaten the business model, future performance, solvency or liquidity) and tested the financial plans for the Group for each of the principal risks and uncertainties mentioned below.

Risk

Impact

Mitigation

Access to capital

The Group may not be able to meet its payment obligations when due or be unable to borrow funds in the market at an acceptable price to fund actual or proposed commitments. A sustained adverse economic downturn and/or suspension of its operation in any business, effecting revenue and free cash flow generation, may cause stress on the Company's financing and covenant compliance and its ability to raise financing at competitive terms. Any constraints on upstreaming of funds from the subsidiaries to the Group may affect the liquidity position at the Group level.

  • The team is working on completing the near-term refinancing, reducing cost of borrowing, extending maturity profile and deleveraging the balance sheet. The Group also has a track record of good relations with banks and of raising borrowings in last few years.
  • Structured ramp-up of facilities will give better margins and help in loan repayments / interest servicing. Regular discussions are going on with rating agencies.
  • The lending banks at Vedanta have consented to certain changes requested by the Company to its covenants under the terms of the relevant debt facilities effective from March 31, 2016 until the period ending September 30, 2018.
  • The Group also generates healthy cash flows from its current operations which, together with the available cash and cash equivalents and liquid financial asset investments, provide liquidity both in the short term as well as in the long-term.

Challenges to operationalise investments in aluminium business

Some of our projects have been completed (pending commissioning) and may be subject to number of challenges during operationalisation phase. These may include challenges around sourcing raw material materials.

  • We are in the process of commencing operationalisation of these facilities. We have received approval to convert 3 units at Jharsuguda from IPP to CPP effective April 2016. Ramp-up of the first line of 1.25 mt Jharsuguda-II smelter commenced from April 2016. The remaining two units of BALCO power plant have been commissioned recently. Third unit of TSPL was also synchronised in Q4 FY 2015-16. Pot ramp up activities commenced at Korba II smelter in April 2016.
  • We continue our efforts to secure key raw material linkages for our alumina / aluminium business. Various infrastructures related challenges are being addressed.
  • A strong management team is in place and continues to work towards sustainable low cost of production, operational excellence and securing key raw material linkages.
  • Further details in this connection are included in the Aluminium business section.

Challenges in production growth of Iron Ore business

While Goa iron ore production resumed in FY 2015-16, risk around the lifting of existing mining caps remains.

  • We have resumed operations at our major mines. All mining plans have been approved by Indian Bureau of Mines and the state government allocations of mining cap is in line with Supreme Court directive.
  • We continue to actively pursue the lifting of mining caps and additional allocation of production from the state government.

Extension of Production Sharing Contract of Cairn beyond 2020 or extension at less favourable terms

Cairn India has 70% participating interest in Rajasthan Block. The production sharing contract (PSC) of Rajasthan Block runs till 2020. Challenges in extension of production sharing contract of Cairn (beyond 2020) or extension at less favourable terms may have implications.

  • We are in continuous dialogue with the Indian Government and relevant stakeholders. The Production-Sharing Contract has certain in-built options for extension; Cairn has already applied for an extension and the matter is being pursued with all stakeholders.

Discovery risk

The increased production rates from our growth oriented operations places demand on exploration and prospecting initiatives to replace reserves and resources at a pace faster than depletion. A failure in our ability to discover new reserves, enhance existing reserves or develop new operations in sufficient quantities to maintain or grow the current level of our reserves could negatively affect our prospects. There are numerous uncertainties inherent in estimating ore and oil & gas reserves, and geological, technical and economic assumptions that are valid at the time of estimation. These may change significantly when new information becomes available.

  • Our strategic priority is to add to our reserves and resources by extending resources at a faster rate than we deplete them, through continuous focus on drilling and exploration programme.
  • In order to achieve this we have developed an appropriate organisation and allocated adequate financial resources for exploration. International technical experts and agencies are working closely with our exploration team to build on this target.
  • We continue to work towards long-term supply contracts with mines to secure additional reserves for future production.

Transitioning of zinc and lead mining operations from open pit to underground mining

Our zinc and lead mining operations in India are transitioning from an open pit mining operation to an underground mining operation. Difficulties in managing this transition may result in challenges in achieving stated business milestones.

  • A strong separate empowered organisation is working towards ensuring a smooth transition from open pit to under-ground mining. We are working with internationally renowned engineering and technology partners on this project. There is strong focus on safety aspects in the project.
  • Technical audits are being carried out by independent agencies.
  • Reputed contractors have been engaged to ensure completion of the project on indicated time lines. These mines will be developed using best in class technology and equipment and ensuring the highest level of productivity and safety.
  • We have inducted employees / contractors in our system having underground mining expertise. We are also sending our employees to overseas underground mines for skill development.
  • Stage gate process to review risks and remedy at multiple stages on the way. Robust quality control procedures have also been implemented to check safety and quality of services / design / actual physical work.
  • Further, additional output from stage V as well as ramp up from some of the mines is expected to smoothen out this transition.

Fluctuation in commodity prices (including oil)

Prices and demand for the Group's products are expected to remain volatile/ uncertain and strongly influenced by global economic conditions. Volatility in commodity prices and demand may adversely affect our earnings, cash flow and reserves.

  • In order to mitigate the impact of falling commodity prices, a cost reduction programme is being pursued. Optimisation of operations to drive efficiencies, and product mix optimisation is also being pursued. Structured cost reduction programme delivering transformational improvements will reset our cost base to the lowest possible level. We continue to focus on manpower rationalisation and deriving value out of procurement synergies across locations.
  • The Group has a well-diversified portfolio which acts as a hedge against fluctuations in commodities and delivers cash flows through the cycle. Vedanta considers exposure to commodity price fluctuations to be an integral part of the Group's business and its usual policy is to sell its products at prevailing market prices and not to enter into price hedging arrangements other than for businesses of custom smelting and purchased alumina, where back-to-back hedging is used to mitigate pricing risks. In exceptional circumstances we may enter into strategic hedging but only with prior approval of the Executive Committee.
  • The Group monitors the commodity markets closely to determine the effect of price fluctuations on earnings, capital expenditure and cash flows. The CFO Committee reviews all commodity-related risks and suggests necessary courses of action as needed by business divisions. Our focus is on cost control and cost reduction.

Currency exchange rate fluctuations

Our assets, earnings and cash flows are influenced by a variety of currencies due to the diversity of the countries in which we operate. Fluctuations in exchange rates of those currencies may have an impact on our financials. Although the majority of the Group's revenue is tied to commodity prices that are typically priced by reference to the US dollar, a significant part of its expenses are incurred and paid in local currency. Moreover Group borrowings are significantly denominated in US dollars while a large percentage of cash and liquid investments are held in other currencies, mainly in the Indian rupee. Any material fluctuations of these currencies against the US dollar could result in lower profitability or in higher cash outflows towards debt obligations.

  • Vedanta does not speculate in forex. We have developed robust controls in forex management to hedge currency risk liabilities on a back-to-back basis.
  • The CFO Committee reviews our forex-related matters periodically and suggests necessary courses of action as may be needed by businesses from time to time, and within the overall framework of our forex policy.
  • We seek to mitigate the impact of short-term movements in currency on the businesses by hedging short-term exposures progressively based on their maturity. However, large or prolonged movements in exchange rates may have a material adverse effect on the Group's businesses, operating results, financial condition and/or prospects.
  • At the time of borrowing decisions, appropriate sensitivity analysis is carried out for domestic borrowings vis-à-vis overseas borrowings
  • Notes to financial statements in Annual Report give details of accounting policy followed in computation of currency translation impact. We continue to monitor the currency translation impact and highlight this separately in financials to give appropriate perspective.

Tax related matters

Our businesses are in a tax regime and change in any tax structure or any tax related litigations may impact our profitability.

  • Vedanta has a robust organisation in place at business and Group level to handle tax-related matters. We engage, consult and take opinion from reputed tax consulting firms. Reliance is placed on appropriate legal opinion and precedence.
  • We continue to take appropriate legal opinions and actions on the tax matters to mitigate the impact of these actions on the Group and its subsidiaries.

Breaches in information/ IT security

Like many other global organisations, our reliance on computers and network technology is increasing. These systems could be subject to security breaches resulting in theft, disclosure or corruption of key/ strategic information. Security breaches could also result in misappropriation of funds or disruptions to our business operations. A cyber security breach could have an impact on business operations.

  • Appropriate organisation is in place at respective businesses for information and IT security.
  • At group level, Chief Information Security Officer (CISO) focuses on formulating necessary frameworks, policies, procedures and for leading any agreed group wide initiatives to mitigate risks. Various initiatives have been taken up to beef up IT / cybersecurity controls.
  • We seek to manage cyber security risk through increased standards, ongoing monitoring of threats and awareness initiatives throughout the organisation. An IT system is in place to monitor logical access controls. We continue to carry out IT security reviews by experts periodically and improve IT security standards.

Political, legal and regulatory risk

We have operations in many countries around the globe, which have varying degrees of political and commercial stability. The political, legal and regulatory regimes in the countries we operate in may result in higher operating costs, restrictions such as the imposition or increase in royalties or taxation rates, export duty, impact on mining rights/ ban and change in legislation pertaining to repatriation of money. We may also be affected by the political acts of governments including resource nationalisation and legal cases in these countries over which we have no control.

  • The Company and its business divisions monitor regulatory and political developments on continuous basis. Our focus has been to communicate our responsible mining credentials through representations to government and industry associations.
  • We continue to demonstrate the Group's commitment to sustainability by proactive environmental, safety and CSR practices. We continue to actively engage with local community / media / NGOs on these matters.
  • We are SOX and SEC related compliant organisations. We have an online portal for compliance monitoring. Appropriate escalation and review mechanisms are in place. Competent in-house legal organisation exists at all the businesses and the legal teams have been strengthened with induction of senior legal professionals at all businesses. SOP has been implemented across businesses for compliance monitoring.
  • Contract management framework has been strengthened with issue of boiler plate clauses across the Group which will form part of all contracts. All key contract types standardised. Involvement of legal in decision making process is being reinforced. A Framework for monitoring against Anti Bribery & Corruption guidelines is also in place.

Community relations

The continued success of our existing operations and future projects are in part dependent upon broad support and a healthy relationship with the respective local communities. Failure to identify and manage local concerns and expectations can have a negative impact on relations with local communities and therefore affect the organisation's reputation and social licence to operate and grow.

  • Establishing and maintaining close links with stake holders an essential part of our journey as a sustainable business.
  • CSR approach to community programmes is governed by two key considerations: the needs of the local people and the development plan in line with the SDGs and also CSR National Voluntary Guidelines of Ministry of Corporate Affairs, Government of India as well as Section 135 of companies act in India. We integrate CSR objectives with Sustainable Development Goals by UN.
  • Our business leadership teams have periodic engagements with the local communities to establish relations based on trust and mutual benefit. Our businesses seeks to identify and minimise any potentially negative operational impacts and risks through responsible behaviour – acting transparently and ethically, promoting dialogue and complying with commitments to stakeholders.
  • Establishing and maintaining close links with stakeholders an essential part of our journey as a sustainable business. There are structured programmes on reducing Water, Energy and Carbon consumption.
  • Our focus is on local consent prior to accessing resources. Structured community development programmes continue to operate at various locations.
  • Board level Corporate Social Responsibility Committee decides the focus areas of CSR activities, budget and programmes to be undertaken by businesses. We help communities identify their priorities through need assessment programmes and then work closely with them to design programmes that seek to make progress towards improvement in quality of life of the local communities.
  • Further details of the Group's CSR activities are included in the Sustainability section.

Health, Safety and Environment (HSE)

The resources sector is subject to extensive health, safety, and environmental laws, regulations and standards. Evolving regulations, standards and stakeholder expectations could result in increased cost, litigation or threaten the viability of operations in extreme cases.

  • Health, Safety and Environment (HSE) is a high priority area for the organisation. Compliance with international and local regulations and standards, protecting our people, communities and the environment from harm and our operations from business interruptions are our key focus areas.
  • Vedanta Board level Sustainability Committee chaired by a Non-Executive Director and includes the CEO as its member meets periodically to discuss HSE performance.
  • We have appropriate policies and standards in place to mitigate and minimise any HSE related occurrences. Structured monitoring and a review mechanism and system of positive compliance reporting is in place.
  • The Company has implemented a set of standards to align its sustainability framework in line with international practices. A structured sustainability assurance programme continues to operate in the business divisions covering environment, health, safety, community relations and human rights aspects and to embed our commitment at the operational level.
  • HSE experts are also inducted from reputed Indian and global organisations to bring in best-in-class practices.
  • The businesses have an appropriate policy in place for occupational health related matters supported by structured processes, controls and technology. Our operations ensure the issue of operational health and consequential potential risk/obligations are carefully handled. Depending on the nature of the exposure and surrounding risk, our operations have different levels of processes, controls and monitoring mechanisms. There is a strong focus on safety during project planning / execution with adequate thrust on contract workmen safety.
  • Fatal accidents and injury rates have declined. We are implementing programmes to eliminate fatalities and control injuries. Our leadership remains focused on a Zero-Harm culture across the organisation. Consistent application of ‘Life-Saving’ performance standards, introduction of making better risk decisions concept, quantitative risk assessments for critical risks and the formal identification of process safety risks with the focus on the implementation of controls are central to our improvement program. We continue to improve on our safety investigations and follow-up processes. Further details of our HSE related activities are included in the Sustainability section.

Talent/skill shortage risk

The Company’s efforts to continue its growth and efficient operations will place significant demand on its management resources. Our highly skilled workforce and experienced management team is critical to maintaining its current operations, implementing its development projects and achieving longer-term growth. Any significant loss or diminution in the collective pool of Vedanta’s executive management or other key team members could have a material effect on its businesses, operating results and future prospects.

  • We continue to invest in initiatives to widen our talent pool. This is a priority area for the Group. Our senior leadership is actively involved in development of talent pool. We have a talent management system in place to identify and develop internal candidates for critical management positions and processes to identify suitable external candidates.
  • Our performance management system is designed to provide reward and remuneration structures and personal development opportunities to attract and retain key employees. A structured programme maps critical positions and ensures all such positions are filled with competent resources.
  • Our progressive HR policies and strong HR leadership have ensured that career progression, job rotation and job enrichment are focus areas for our businesses.
  • We have established the Mining Academy in Rajasthan to develop an employee pool with enhanced underground mining skills. We also have a structured programme to develop a technically proficient employee pool.

Loss of assets or profit due to natural calamities

Our operations may be subject to a number of circumstances not wholly within the Group’s control. These include damage to or breakdown of equipment or infrastructure, unexpected geological variations or technical issues, extreme weather conditions and natural disasters, any of which could adversely affect production and/or costs.

  • Vedanta has taken appropriate Group insurance cover to mitigate this risk. We have appointed an external agency to review the risk portfolio and adequacy of this cover and to assist us in our insurance portfolio. Our underwriters are reputed institutions and have capacity to underwrite our risk. There is an established mechanism of periodic insurance review in place at all entities.
  • However, any occurrence not fully covered by insurance could have an adverse effect on the Group’s business.
  • We continue to focus on the capability building within the Group.

The Group’s reported results could be adversely affected by the impairment of assets

The change in carrying value of assets depends on various assumptions. The change in any of those assumptions may impact the useful life and its carrying value.

  • We maintain a close watch on various business drivers that could impact impairment assessment. There is continuous focus, monitoring and periodic review of our assets.
  • We also periodically review the assumptions, carry out testing and reassess the useful life of these assets with the help of reputed firms.
  • Vedanta reviews the carrying value of its assets and long-term price assumptions in light of the recent weakness in commodity & oil prices. Any impact of changes to these assumptions on the carrying values will be a non-cash charge reflected in the results for FY 2015-16. This non-cash charge do not affect the cash generation capability of the business. With the completion of this review and subsequent decisions being taken as a fallout of the same, we expect this risk to be mitigated to a large extent.