Management Discussion and Analysis

III) Risk Management

Tata Steel has adopted the framework of Corporate Sustainability Management System and triple bottom line performance reporting that facilitates the Company’s efforts to proactively manage concerns and address the needs beyond compliance to norms.

Risk Management is a structured and disciplined approach to manage enterprise risk. The Company recognises Risk Management as an integrated, forward looking and process oriented approach for managing all key business risks and opportunities. The Company’s Risk Management process is based on the framework of the Tata Business Excellence Model.

In translating the Company’s vision and mission into specific strategies, objectives and priorities, each business unit of the Company addresses opportunities and the attendant risks through an institutionalised approach that is aligned with the Company’s objectives. The Managing Director, Deputy Managing Directors and the Business Heads (Vice Presidents and Executives-in-Charge) manage risks on a daily basis through cross functional involvement and intense communication across businesses. The Risk Management process commences with the preparation of the Long Term and Annual Business Plans and managing the performance of the business in conformity to the above Plan.

The Company reviews, monitors and manages risk under the following broad category:

Strategic Risks
The Steel Industry today faces several significant strategic issues which include, inter alia, industry consolidation issues, execution of profitable growth options, raw material linkages and security, technology and new product development, raising finance from global financial markets, protecting the environment and serving the community while creating value for its shareholders. The Management of the Company prepares the long term strategic plans taking into account the long term objectives of the Company. The Executive Committee of the Board and the Board of Directors of the Company periodically review the strategic plan of the Company taking into account the changes in the global steel industry and advise the management on various strategic issues. The Company undertakes its growth projects including acquisitions based on the strategic plan approved by the Board.

Business and Operational Risk
The management of the Company headed by the Managing Director is responsible for managing the day to day affairs of the Company.

The Company has adopted the framework of Corporate Sustainability Management System and Triple Bottom Line
performance (Economic, Environmental, and Societal) reporting. This facilitates the Company’s efforts to proactively manage concerns and address the needs beyond compliance to norms. The Company’s goals of ensuring safety, improved quality of life and environmental sustainability are cascaded down the organisation through the deployment of its Environmental, Health & Safety Policy.

The steel industry is still highly fragmented and cyclical in nature as well as demand for steel products is generally
affected by macroeconomic fluctuations in the global markets. The Company has undertaken several initiatives to insulate itself from volatility in steel prices by continuously enriching its product mix and moving up the value chain, branding its products and entering into long term contracts with its customers. The Company is relatively protected from increases in the prices of key raw materials since it meets 100% of iron ore and around 70% of coal requirements from its captive mines.

The impact of Company’s products, services and operations on employees, society and environment are systematically analysed through stakeholder engagement, “risk analysis” under ISO-14001, OHSAS-18001 and “Life Cycle Assessment” of products.

The Company has taken number of initiatives to mitigate risks arising from concentration risk at a single location in
Jamshedpur. The overseas acquisitions of NatSteel Asia Pte. Ltd. having presence in seven countries of South-East Asia and Tata Steel (Thailand) Public Company Ltd. were steps taken in this direction. Further, beside expanding steel capacity in Jamshedpur, the Company is also executing greenfield projects in Orissa, Chhattisgarh and Jharkhand in foreseeable future. The Company has taken a Mega Insurance Policy to insure all its operating assets against property damage, business interruption losses due to fire and allied perils (such as fire, explosion, earthquake, flood, storm etc.) and terrorism damages. The Company has also taken a Comprehensive General Liability Insurance and Product Liability Insurance. The risks are periodically reviewed by the top management to ascertain the adequacy of coverage and if required, corrective action is taken to mitigate the risks to levels considered acceptable by the Company.

Implementation of a robust communication process across the organisation is a key element of the Risk Management process.

There are various communication forums in the Company which provide a platform to the entire cross section of employees to raise and discuss various operational issues relating to the performance of the Company.

Growth Execution Risk
All capital investment proposals are evaluated and reviewed based on the Investment Management Process of the Company. The proposals are evaluated by the Investment Management Committee headed by the Managing Director against benchmark criteria for investments including Hurdle Rate, Fitment Criteria for Strategy and Performance and criticality before being put up for the approval of the Executive Committee of the Board and the Board of Directors. Major capital projects are also subject to post completion review by the Corporate Audit for effectiveness of these investments. The Company periodically submits the status report of all major projects before the Executive Committee of the Board and the Board of Directors.

Acquisitions & Post Acquisition Integration
The Company pursues acquisition opportunities as per its long term strategic plans approved by the Board. All acquisition proposals are evaluated by the Board. The Senior Management of the Company reviews the integration process and provides guidance to the integration teams for realisation of targets and creating value from the acquisitions. The Company has made significant progress in integrating NatSteel Asia Pte. Ltd. and Tata Steel (Thailand) Public Company Ltd. through formation of various integration committees and work-streams. To facilitate the integration of Tata Steel and Corus, a Strategic and Integration Committee has been formed to facilitate the
integration process.

Financial Risk
The Company actively monitors Foreign Exchange and Interest Rate exposure. Based on an informed view and assessment of these risks, it has developed a Risk Management Policy. The Risk Management policy of the Company operates to achieve greater predictability of earnings and provides a stable planning environment.

The Company actively and selectively hedged its export receivables and import payables during the last financial year. The Company drew down USD 1.65 billion of foreign currency loans on its Balance Sheet during the year and retained the funds in liquid and highly rated foreign currency fixed deposits prior to their deployment in order to minimise negative carry. As part of the competitive bid process for the acquisition of Corus Group plc, the Company was required under the UK Takeover Code to provide “certainty of funds” in Pound Sterling. For this purpose the Company made use of financial derivatives to minimise risk during the transaction period.

The Company endeavours to pursue the following long-term financing objectives as part of its Strategic Plan:

• Raising cost efficient funds for the growth plans of the Company
• To be an Investment grade Company in the long-term
• To provide financial flexibility in the Balance Sheet
• Funding strategy to focus on EPS accretion
• To comply with the expectations of various lenders in terms of financial covenants

The Company was featured as the “Corporate Risk Manager of the Year” by Asia Risk magazine in its October 2006 issue.

Statutory Compliance
On obtaining confirmation from the various units of the Company of having complied with all the statutory requirements, a declaration regarding compliance with the provisions of the various statutes is made by the Managing Director at each Board Meeting. The Company Secretary, ensures compliance with SEBI regulations and provisions of the Listing Agreement. The Chief Financial Officer, as the Compliance Officer for prevention of
insider trading ensures compliance with the Tata Guidelines on Insider Trading.

Contingent Liabilities
Details of contingent liabilities are given in Schedule M of the Notes on Balance Sheet and Profit and Loss Account.

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