VII. Risks, Opportunities and Threats

Tata Steel Group aims to address risks, opportunities and threats posed by the business environment by developing appropriate risk mitigation measures. Tata Steel's response to these elements are discussed in the following section.

1. Macro environment

During the Financial Year 2012-13, the European economy continued to face headwinds as the effect of austerity measures continued across the continent.

This impacted the underlying demand for steel in Europe resulting in a contraction of steel consumption by 10% compared to the previous year. In India too, the economy slowed down considerably with high interest rates impacting the consumption sectors and capital investments. Considering the fragile macro-environment, the Company has been pursuing an active operating risk management process across the Group that takes into account the market realities.

2. Industry Cyclicality

The steel industry is subject to cyclical swings arising from factors such as excess capacity, regional demand and supply imbalances and volatile swings in market demand and prices, more recently exacerbated by swings in input prices as well as changes in the regulatory environment.

Due to unfavourable economic conditions globally, steel demand experienced only a marginal increase in 2012. Capacity utilisation rates in the sector remain below 80% globally, and excess capacity remains a major concern in the steel sector, particularly in Europe and China. The steel consumption growth in India has been relatively resilient, even though some user segments like automotives has been under stress in terms of demand growth.

Considering the industry volatility, Tata Steel Europe continued to calibrate its production at levels consistent with market demand in the United Kingdom and Europe. In India, the Company continued its journey of developing new market segments and enhancing value added services to its customers.

3. Growth Projects

The Group continues to pursue its growth strategy, particularly in the Indian market, where it sees significant market opportunities. The Group completed the brownfield expansion of its Jamshedpur facility in December 2012 that increased capacity by 2.9 million tonnes per annum (mtpa).

The Group has commenced work to develop the 6.0 mtpa greenfield steel plant in the state of Odisha, India, in two phases of 3.0 mtpa each. The Group has obtained the necessary land and construction approvals for the first and second phase of this new steel plant in Odisha with financial closure already achieved for the first phase. Tata Steel's installed capacity in Europe is sufficient to address regional demand.

4. Raw Materials Security and Price Volatility

The volatility of prices of critical raw materials for steel making like iron ore and coal has increased significantly in the last few years. Therefore mitigating the impact of the price volatility is a key objective of the Company.

As part of this strategy, various growth projects are under development in Africa, Canada and India to develop new resources.

During the Financial Year 2012-13, the steady expansion of coking coal supply and the slower pace of growth in China meant the supply/demand balance improved with increasing availability of coal. This enabled the Group to develop new supplies whilst maintaining its long-term strategic relationships.

5. Health, Safety and Environmental Risks

The manufacture of steel involves steps that are potentially hazardous if not executed with due care and attention. The Group's businesses are subject to numerous laws, regulations and contractual commitments relating to health, safety and the environment in the countries in which it operates. Indian operations were hitherto driven mainly by environmental compliance with norms issued by Ministry of Environment & Forests and respective pollution control boards. Extra efforts are being taken to ensure workplace safety in the mines and collieries in India and our new construction sites.

To meet environmental standards, dust and other emission levels are monitored to ensure they stay within permissible limits. The Group continues to invest to improve energy efficiency and to reduce CO₂ emissions. In India, the capacity increases take into account the planned improvement targets in CO₂ emissions per tonne.

6. Technology Risks

A key challenge of the Group is to ensure that its facilities are equipped with technologies that can produce value added products that are competitive in the market.

The Group's R&D efforts are oriented towards improvements in the existing process and product capability that can serve the customer better. R&D efforts are also being made to advance the Group's proprietary knowledge in order to produce new generations of steel products.

7. Financing

Tata Steel Group's growth strategy is dependent on the internal cash generation levels and ability to draw external capital for growth projects.

Financing for the Odisha project was a specific risk to the Group given the volatility in the global financial markets and the availability of credit. In May 2013, the Company achieved financial closure for its project in Odisha for which it contracted long-term Rupee borrowing aggregating to Rs. 22,800 crores to the subsidiary company, Tata Steel Odisha Limited to be drawn over the next 5 years and to be repaid over a period of 12 years. In addition to this, Tata Steel has taken advantage of favourable credit and liquidity conditions by raising Rs. 2,500 crores worth of Non-Convertible Debentures during the year.

8. Pensions Risk

Tata Steel UK has significant pension obligations arising from the provision of retirement benefits.

TSE has two major pension schemes viz., The British Steel Pension Scheme (BSPS) for which the sponsor is Tata Steel UK and the Stichting Pensioenfonds Hoogovens (SPH) at the Netherlands where the members along with the Company contribute to meet the cost of future service benefits subject to review at the future actuarial valuations.

As part of a comprehensive range of revisions to the contribution and benefits framework in the BSPS Scheme to address costs and risks, there have been modifications in the benefits accrued after 1st April, 2012 that Tata Steel UK has agreed with the employees and their representatives including the accrual rate, calculation of benefits by reference to highest consecutive three years average pensionable earnings, linking pension increases to the Retail Prices Index and a longevity adjustment factor to be introduced for pensions coming into payment from 1st April, 2015 to provide greater protection in case future increases in life expectancy are greater than that assumed. Additional measures such as the longevity adjustment factor and fixed earnings cap will provide further protection against future long-term risks. Currently, the BSPS is open to new entrants. However, new employees from April 2014 will be enrolled in a 'nursery' pension arrangement on a defined contribution basis which can be revised based on the future funding position of the Scheme.

9. Forex, Credit, Liquidity and Counterparty Risk

Through its global operations, the Group operates in several currencies. Volatility in the currency markets can adversely affect the outcome of commercial transactions and cause trading uncertainties.

The Group has foreign exchange hedging policies in place to protect its trading and manufacturing margins against rapid and significant foreign exchange movements.

10. Regulatory and Compliance Risks

The Group operates in multiple geographies and thus has compliance obligations with diverse and complex laws and regulations. To limit such risk, country risk assessments are conducted as part of the investment evaluation. Protecting the reputation of Tata Steel and the wider Tata Group is an integral part of this objective.

VIII. Internal Control Systems

In Tata Steel India, the Corporate Audit Division continuously monitors the effectiveness of the internal controls with an objective to provide to the Audit Committee and the Board of Directors, an independent, objective and reasonable assurance on the adequacy and effectiveness of the organisation's risk management, control and governance processes. The division also assesses opportunities for improvement in business processes, systems and controls; provides recommendations designed to add value to the organisation and follows up on the implementation of corrective actions and improvements in business processes after review by the Audit Committee and the Senior Management.

The scope and authority of the Corporate Audit division is derived from the Audit Charter approved by the Audit Committee. The Charter is designed in a manner that the Audit Plan is focused on the following objectives:

• All operational and related activities are performed efficiently and effectively.
• Significant financial, managerial and operating information that is relevant, accurate and reliable, is provided on time.
• Review the process of identification and management of business risks.
• Resources are acquired economically, used efficiently and safeguarded adequately.
• Employees' actions are in accordance with the Company's policies and procedures, Tata Code of Conduct and applicable laws and regulations.
• Significant legislative and regulatory provisions impacting the organisation are recognised and addressed appropriately.
• Opportunities identified during audits, for improving management control, business targets and profitability, process efficiency and the organisation's image, are communicated to the appropriate level of management.
• Shareholders' and other Stakeholders' wealth and welfare are preserved, protected and enhanced.

Corporate Audit division develops an annual audit plan based on the risk profile of business activities of the organisation and the business activities are prioritised for audit accordingly. The audit plan is approved by the Audit Committee which regularly reviews the compliance to the plan.

During the year, the Audit Committee met regularly to review the reports submitted by the Corporate Audit Division. All significant audit observations and follow-up actions thereon were reported to the Audit Committee.

The Audit Committee also met the Company's Statutory Auditors to ascertain their views on the financial statements, including the financial reporting system, compliance to accounting policies and procedures, the adequacy and effectiveness of the internal controls and systems followed by the Company. The Audit Committee's observations and suggestions were acted upon by the Management.

In Tata Steel Europe, the Board of Directors is responsible for TSE's system of internal control and reviewing its effectiveness. The Company has a well-established internal audit function that reports to the Director Finance on a day-to-day basis and has direct access to the chairman of the Audit committee, who meets with the Director Audit several times each year. The Audit committee receives reports from the internal audit function four times a year and also considers the terms of reference, plans and effectiveness of the function. The internal audit function works closely with the external auditors. It provides independent and objective assurance to the Board, the Audit committee and the Executive committee on the systems of internal control employed in the Group, and provides a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance procedures.

There were no changes in internal control over financial reporting that occurred during the period under review that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

TSE's system of internal control has been designed in order to provide the directors with reasonable assurance that its assets are safeguarded, that transactions are authorised and properly recorded and that material errors and irregularities are either prevented or would be detected within a timely period.

IX. Human Resources and Industrial Relations

Tata Steel Group recognises people as the primary source of its competitiveness and continues to focus on people development by leveraging technology and developing a continuously learning human resource base to unleash their potential and fulfill their aspirations.

The change in the business scenario across the world has been a centre stage of the recent conversations across the Tata Steel Group. While meeting the current business challenge has been the focus, there is a clear mandate to make a continued resolve to not only 'weather the storm' but to prepare and equip Tata Steel Group for a healthy future as a leading global steel company. Further, the business environment is rapidly changing, bringing in its own set of opportunities and challenges, and at the same time, Tata Steel Group is also evolving and expanding its reach strategically, geographically and culturally. Both the new geographies and the shifting environments of the businesses demand the need to prepare our current and future leaders to face and overcome such business adversities and opportunities.

Major highlights of the new initiatives in these areas in Tata Steel India, during the financial year under review were:

1. For sustainable future, Leadership Development across all levels is the focus area for Tata Steel Group. During the Financial Year 2012-13, a Talent Appreciation Process (TAP) was conducted for 85 top leaders of Tata Steel India. Further, the Global Leadership Development Programme (GLDP) was also conducted for 40 leaders (20 from Europe and 20 from India and South East Asia) across the Tata Steel Group.
2. People development and growth of employees have always been the focal point of HRM practices at Tata Steel which is imbibed in the culture of care for people. The Company has held the view that people are its greatest asset. It has, therefore, adopted the best standards for employee well-being and quality of life, strongly promoting the workforce rights. This year, there has also been a special emphasis on working towards the well being of our own as well as contractor workers.

During the year, the Company made various HR policy improvements, particularly on rules related to Greenfield sites of Tata Steel. E.g., Housing policy for Kalinganagar Project Operations (KPO), Mediclaim for Diploma Engineer Trainees (DETs) at KPO, etc. For employees across the India operations, an insurance policy has been introduced for employees' children located away from their parents for education purpose.

In the area of 'Training and Development', as a first time initiative, structured training programmes were designed and delivered for the focus area/groups covering Management Trainees at KPO, External Processing Agencies (EPAs) of Long products division and employees of Jamshedpur Continuous Annealing and Processing Company Private Limited (JCAPCPL). The efforts continued on capability building of employees at all levels in order to build organisational capability in functional and project management areas, fulfill the technical skill requirement arising out of advanced mechanisation and preparing bench strength of skilled manpower for critical positions in existing operations as well as for foreseen future requirements.

As a result of such focused approaches, the employee productivity improved from 457 tonnes of crude steel (tcs)/man/year in the Financial Year 2011-12 to 513/tcs/man/year in the Financial Year 2012-13 considering Works and Services manpower. The employees strength of permanent employees in Indian operations increased to 35,905 as on 31st March, 2013 as compared to 35,793 as on 31st March, 2012, primarily due to increase in the number of officers at the KPO site during the Financial Year 2012-13. Industrial Relations remained normal at all locations during the reporting period.

A unique knowledge sharing platform, The Round Table, has created a brand and won the hearts of many especially the youngsters. It is a platform for individuals to get together, share with each other their ideas, and join in thoughtful conversation with knowledgeable persons in the pursuit of holistic learning.

In the process of converting the learning centres into 'Counselling Centres' extending even to employees' family, several programmes were conducted like 'Psychology of Life' focused at employee wards in class XI and XII; 'Search for Meaning Together' for Officer couples and 'Samarthya', a forum launched by XLRI students whereby children are led through workshops to deal and cope with their emotions.

During the year the Company received various rewards and recognition in HRM area as enumerated below:

• Tata Steel won the World Championship (7th Virtual Steel Making Challenge) organised by World Steel Association at Brussels. Manjunathan M and Chandra Prakash S, Management Trainees of 2012 batch represented Tata Steel and were declared World Champions. Earlier in the Middle East-India-Africa region all the top 10 teams were also from Tata Steel. This feat was achieved for the 2nd time in succession.
• For the 2nd time in succession, Tata Steel was adjudged the 'Best Company' and Shavak Nanavati Technical Institute was declared the 'Best Establishment' at the 24th CII National Work Skill Competition held at Delhi.
• Tata Steel received the 'Leadership in HR Excellence' award instituted by CII.

The European operations have not experienced any significant industrial relations problems during the year. The number of employees in TSE at the end of March 2013 was 32,100 as compared to 33,300 on 31st March, 2012. The reduction mainly resulted from restructuring measures due to the continued economic downturn.

During the Financial Year 2012-13, TSE announced various restructuring measures which included consolidation of activities of two of its subsidiaries in the Netherlands, sale of certain non-core assets in the Netherlands and taking measures at its UK operations to improve the level of competitiveness. These restructuring measures have helped the TSE to right size its workforce at some places and have also created some new jobs at the same time.

One of the Group's policies is to give full and fair consideration to applications for employment made by disabled persons, having regard to their particular aptitudes and abilities, and employ them where suitable work can be found. The requirements of job applicants and existing members of staff who have a disability are reviewed to ensure that reasonable adjustments are made to enable them to perform as well as possible during the recruitment process and while employed. All reasonable measures are taken to ensure that disabled employees are given the opportunity and facilities to participate fully in the workplace, in training and in career development and promotion opportunities. In addition, every effort is made to find appropriate alternative jobs for those who become disabled while working for the Group.

X. Statutory Compliance

The Managing Director makes a declaration at each Board Meeting regarding the compliance with provisions of various statutes after obtaining confirmation from all the units of the Company. The Company Secretary ensures compliance with the SEBI regulations and provisions of the Listing Agreement. The Executive Director and Group Chief Financial Officer as the Compliance Officer ensures compliance with the guidelines for prevention of insider trading.

XI. Cautionary Statement

Statements made in this report describing the Company's objectives, projections, estimates and expectations may be 'forward-looking statements' within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.