As Indonesia tweaks policies, the West enacts anti-graft rules and democracies replace dictatorships, the word ?risk? is reverberating across companies that have purchased assets abroad.
Corporates seek coal and iron ore, new markets, technology or products or feedstock for their mother plants at home when they make overseas acquisitions. They face three kinds of risks ? political, security and reputation. Until now, these risks were at the bottom of the priority list for overseas acquirers. Not any longer.
?There is a shift in attitude among Indian companies using risk to maximise opportunities surrounding new investments and transactions,? said Patrick Lord, managing director, Control Risks. Control Risks is a specialist business risk advisory helping organisations succeed in hostile or complex environments by managing political, integrity and security risks.
?Risks manifest in different ways. For example, political instabilities in Egypt, Syria and Vietnam change business policies,? he said. As foreign governments change policies, Indian companies that have invested abroad are in danger of losing money overnight.
Indonesia?s new policy benchmarking its coal prices to international rates has hit power producers in India. ?The new regulations will set us back by $500 million over a five-year period, compared with a situation when the original contracts are honoured,? Tata Power executive director Ramakrishnan told a newspaper on Monday. ?The company will benefit as coal owners but lose as consumers.?
Tata Power was banking on imported low ash content coal which gives better calorific or heat value to fire its power plant from its mines in Indonesia to sell power at R2.26 a unit to Gujarat State Electricity Board. In 2005, Tata Power had purchased a 30% stake in two mines in Indonesia, giving it a right to ship 30 million tonnes of coal.
If there is political risk, the company must find out what state and non-state actions could help it mitigate risks.
?Lots of Indian companies are caught up with the speed and abruptness of the regime?s collapse in Egypt,? said Lord, whose firm quadrupled its head count in India in the past few years.
Indian companies spent $6.53 billion on 77 acquisitions abroad in 2011, nearly a third of what they spent on 115 deals in 2010 according to Grant Thornton, a consultant.
Adani Enterprises, with interests in ports, power plants and mineral trading, had planned to supply 30% of coal from its Indonesian mines to fire its Indian power plants. ?We had a 30-year contract with Adani Enterprises to source coal,? says Ravi Sharma, Adani Power managing director.
?The regulation is likely to increase the price of coal for projects using imported coal from Indonesia,? junior minister for coal Pratik Prakashbapu Patil informed Lok Sabha In August.
It is increasingly felt that Indian companies must strengthen their boards with specialised directors who can access risks. ?At the board level, it is important to have a dash board of different categories of risk assessors who can can take a productive view of risks of 12 months,? says Sunny Banerjea, managing director of KPMG India, a consultant. ?As Indian companies expand their global foot prints, the senior leadership team should look beyond the financial risks even though it is impossible to guard against every possible risk.?
Companies need to protect their reputation as they purchase global assets. The Tata Group, India?s largest purchaser of global assets, has managed to adapt to local management and culture, be it the teabag maker Tetley, steelmaker Corus or Jaguar Land Rover in London.
?We have seen many companies revising risk policies,? says Lord of Control Risks. Last month, Mahindra and Mahindra, India?s largest tractor and sports utility vehicle maker, snared KN Vaidyanathan as its chief risk officer. Vaidyanathan, a management graduate, was previously an executive director at market regulator Securities Exchange Board of India.
Political instability at the macro-level has increased as the Arab Spring dislodges rulers who have been at the helm for decades, leading to uncertainties on the regulatory front.
?Risks are getting structured,? says an official from a global consulting firm. There is larger liability on independent directors after the Satyam Computers scandal in which its the chairman hid losses for years. ?The board rooms are now talking ? what else can be done to mitigate risks,? he said.
The Foreign Corruption Practices Act in the US and the UK Bribery Act brought to bring in transparency in business are also pushing companies to evaluate risks.
?Extra-territorial legislation such as the FCPA in the US and the UK Bribery Act, and their increasingly aggressive enforcement are strong drivers of compliance, which demand that companies with exposure to these markets introduce greater transparency and visible preventive measures,? says Lord of Control Risks.
?We see this as an opportunity for companies to fully embrace best practices in corporate governance ? not only to reduce the risk of non-compliance, but to make their organisation more efficient and therefore, more profitable,? he said.
