Opportunities and Risks

OPPORTUNITIES

While we constantly monitor and mitigate our risks, we keep track of our opportunities as well. Our strategic initiatives are directed towards making the best of these opportunities.

The long-term trends in markets and products that we are present in, our business operations and our balance sheet provide us many opportunities to create value for our stakeholders.

Favourable supply-demand fundamentals

The commodities market has been on an uptick since 2016, underpinned by supply-demand deficit in most commodities backed by bullish global growth indicators, supply-related reforms and disruptions and stable-to-growing demand. This enables our commodity basket of base metals and oil to benefit from the favourable price movements.

India’s ease of doing business

The Indian Government is opening up the mining sector to private players and amending mining laws to support miners and introduce transparency into the mining process, for example, transparent e-auctioning process for mines, privatisation of the coal sector, government incentives such as ‘Make in India’ for promoting local producers, etc. This is increasing the ease of doing business and may also bring down costs for Indian miners.

India’s growth drives resource demand

There is significant focus and investment in India on urbanisation and development of infrastructure, transportation and power. Currently, per capita consumption of metals in India is 70-80% below global averages. As the country expands its economy, domestic consumption of key commodities will increase substantially, both through demand growth and higher intensity of consumption. As a company present and focused on Indian markets, this provides a huge market for our products.

Portfolio of diversified low-cost assets

Vedanta has a portfolio of large, diversified, structurally low-cost assets with significant opportunities for brownfield expansion, providing it a strong base for the next phase of growth.

Underutilised resources in India with the opportunity to integrate backwards

India has huge underutilised potential of rich and diverse resources. As the regulations and laws around accessing this vast resource pool ease, it provides Vedanta with the opportunity to reduce costs through backward integration and also opportunities to expand further. Vedanta is one of the few players in India spending on exploration.

Availability of cutting-edge technology and outsourcing partners in the mining industry

This can optimise costs and increase efficiency and productivity for Vedanta.

RISKS

Principal Risks and Uncertainties

Managing our risks

As a global natural resources company, our businesses are exposed to a variety of risks. It is therefore essential to have in place the necessary systems and a robust governance framework to manage risk, while balancing the risk-reward equation expected by stakeholders.

Our risk management framework is designed to be simple and consistent, and provide clarity on managing and reporting risks to the Board. Together, our management systems, organisational structures, processes, standards and Code of Conduct and Ethics form the system of internal control that governs how the Group conducts its business and manages the associated risks. The Board has ultimate responsibility for the management of risks and for ensuring the effectiveness of internal control systems. The Board’s review includes the Audit Committee’s report on the risk matrix, significant risks and the mitigating actions we put in place. Any weaknesses identified by the review are addressed by enhanced procedures to strengthen the relevant controls, and these are reviewed at regular intervals.

The Audit Committee is in turn assisted by the Group Risk Management Committee (GRMC) in evaluating the design and effectiveness of the risk mitigation programme and control systems. The GRMC meets every quarter and comprises the Group Chief Executive Officer, Group Chief Financial Officer, Director Finance and Director – Management Assurance. The Group Head – Health, Safety, Environment & Sustainability is invited to attend these meetings. The GRMC discusses key events impacting the risk profile, principal risks and uncertainties, emerging risks and progress against planned actions.

Since it is critical to the delivery of the Group’s strategic objectives, risk management is embedded in business-critical activities, functions and processes. The risk management framework helps the Company by aligning operating controls with the objectives of the Group. It is designed to manage rather than eliminate the risk of failure to achieve business objectives and provides reasonable and not absolute assurance against material misstatement or loss. Materiality and risk tolerance are key considerations in our decision making. The responsibility for identifying and managing risk lies with every manager and business leader.

In addition to this structure, other key risk governance and oversight committees include:

  • Finance Standing Committee, with oversight of treasury-related risks. This is a committee of the Board and is attended by the Group CFO, business CFOs, Group Treasury Head and the Treasury Heads at the respective businesses; and
  • The Group Capex Sub-Committee, which evaluates the risks associated with any capital investment decisions and institutes a risk management framework in expansion projects.

There is also a Vedanta Sustainability Committee at Group level, which looks at sustainability-related risks.

At a business level, formal discussions on risk management occur at review meetings at least once a quarter. The respective businesses review their major risks and changes in their nature and extent since the last assessment, and discuss the control measures that are in place and further action plans. The control measures stated in the risk matrix are also periodically reviewed by the business management teams to verify their continued effectiveness. These meetings are chaired by the respective business CEOs and attended by CXOs, senior management and appropriate functional heads. Risk officers have been formally nominated at each of the operating businesses as well as at Group level. Their role is to create awareness of risks at the Senior Management level and to develop and nurture a risk management culture. Risk mitigation plans form an integral part of the performance management process. Structured discussions on risk management also happen at business level with regard to their respective risk matrix and mitigation plans. The leadership teams in the businesses are accountable for governance of the risk management framework and they provide regular updates to the GRMC.

Each of the businesses has developed its own risk matrix and risk register, which is reviewed by their respective management committee/ executive committee, chaired by their CEOs. In addition, each business has developed its own risk register depending on the size of its operations and number of Strategic Business Unites (SBUs)/ locations. Risks across these risk registers are aggregated and evaluated and the Group’s principal risks are identified based on the frequency, and potential magnitude and impact of the risks identified.

This element is an important component of the overall internal control process, from which the Board obtains assurance. The scope of work, authority and resources of Management Assurance Services (MAS) are regularly reviewed by the Audit Committee. The responsibilities of MAS include recommending improvements in the control environment and reviewing compliance with our philosophy, policies and procedures. The planning of internal audits is approached from a risk perspective. In preparing the internal audit plan, reference is made to the risk matrix, and inputs are sought from senior management, business teams and members of the Audit Committee. In addition, we make reference to past audit experience, financial analysis and the current economic and business environment.

Each of the principal subsidiaries has procedures in place to ensure that sufficient internal controls are maintained. These procedures include a monthly meeting of the relevant management committee and quarterly meeting of the Audit Committee of that subsidiary. Any adverse findings are reported to the Audit Committee. The Chairman of the Audit Committee may request MAS and/or the external auditor to look at certain areas identified by risk management and the internal control framework. The findings by MAS are presented monthly to the Executive Committee and to the Audit Committee periodically. Due to the limitations inherent in any system of internal control, this system is designed to meet the Group’s particular needs, and the risks to which it is exposed, rather than to eliminate the risk altogether. Therefore, it can only provide reasonable and not absolute assurance against material misstatement or loss.

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. The risk direction of each risk has been reviewed based on events, economic conditions, changes in business environment and regulatory changes during the year. While Vedanta’s risk management framework is designed to help the organisation meet its objectives, there can be no guarantee that the Group’s risk management activities will mitigate or prevent these or other risks from occurring.

The Board, with the assistance of the management, carries out periodic and robust assessments of the principal risks and uncertainties of the Group and tests the financial plans for each of risks and uncertainties mentioned below.

Financial risks

Impact

R1Access to capital

The Group may not be able to meet its payment obligations when due or may 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, affecting revenue and FCF generation, may cause stress on the Company’s financing and covenant compliance and its ability to raise financing at competitive terms.

Risk has reduced compared to last year, due to good liquidity and an improved credit profile.

Mitigation

  • A focused team continues to work on refinancing initiatives, reducing cost of borrowing, extending maturity profile and deleveraging the balance sheet.
  • The Group has a track record of good relations with banks and of raising borrowings in the last few years.
  • The Group holds regular discussions with rating agencies. Accordingly, ratings have been upgraded.
  • With an improved credit profile and a stronger balance sheet, Vedanta continues to enjoy good access to capital and loan markets and proactively refinances its near-term debt. No concerns envisaged for upcoming maturities.
  • Group treasury policies such as borrowing, investment, commodity hedging, banking, forex, etc. have been prepared after elaborate benchmarking and risk analysis. Business teams ensure continued compliance with the Group’s treasury policies that govern our financial risk management practices.

Risk direction

Impact

R2Fluctuation in commodity prices (including oil) and currency exchange rates

Prices and demand for the Group’s products may remain volatile/uncertain and could be influenced by global economic conditions. Volatility in commodity prices and demand may adversely affect our earnings, cash flow and reserves.

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.

Mitigation

  • The Group has a well-diversified portfolio that acts as a hedge against fluctuations in commodities and delivers cash flows through the cycle.
  • It pursue low-cost production, allowing profitable supply throughout the commodity price 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. Strategic hedge, if any, is taken after appropriate deliberations and due approval from ExCo.
  • Our forex policy prohibits forex speculation.
  • The Group ensures robust controls in forex management to hedge currency risk liabilities on a back-to-back basis.
  • The Finance Committee reviews all forex and commodity-related risks and suggests necessary courses of action as needed by business divisions.
  • Vedanta seeks 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.
  • Notes to the financial statements in the Annual Report give details of the accounting policy followed in calculating the impact of currency translation.

Risk direction

Impact

R3Major project delivery

Shortfall in achievement of expansion projects stated objectives leading to challenges in achieving stated business milestones – existing and new growth projects.

Mitigation

  • Vedanta enlists internationally renowned engineering and technology partners on all projects.
  • The Company has a focus on the safety aspects in the project.
  • Geo-technical audits are being carried out by independent agencies.
  • Reputable contractors are engaged to ensure completion of the project on indicated timelines.
  • The Group is a strong and separate empowered organisation working towards ensuring a smooth transition from open pit to underground mining.
  • Mines are being developed using best-in-class technology and equipment and ensuring the highest level of productivity and safety.
  • Stage gate process is used to review risks and remedy at multiple stages on the way.
  • Robust quality control procedures have also been implemented to check the safety and quality of services/ design/ actual physical work.

Risk direction

Sustainability risks

Impact

R4Health, Safety and Environment (HSE)

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

Emissions and climate change: Our global presence exposes us to a number of jurisdictions in which regulations or laws have been, or are being, considered to limit or reduce emissions. The likely effect of these changes could be to increase the cost for fossil fuels, impose levies for emissions in excess of certain permitted levels, and increase administrative costs for monitoring and reporting. Increasing regulation of GHG emissions, including the progressive introduction of carbon emissions trading mechanisms and tighter emission reduction targets, is likely to raise costs and reduce demand growth.

Mitigation

  • HSE is a high-priority area for Vedanta. Compliance with international and local regulations and standards, protecting our people, communities and the environment from harm and our operations from business interruptions are key focus areas.
  • Vedanta has a Board-level Sustainability Committee, chaired by a Non-executive Director and attended by the Group CEO, which meets periodically to discuss HSE performance.
  • Policies and standards are in place to mitigate and minimise any HSE-related occurrences. Safety standards issued/continue to be issued to reduce risk level in high-risk areas. Structured monitoring and a review mechanism and system of positive compliance reporting are in place.
  • The Company has implemented a set of standards to align its sustainability framework with international practice. A structured sustainability assurance programme continues to operate in the business divisions covering environment, health, safety, community relations and human rights aspects, and is designed to embed our commitment at operational level.
  • HSE experts have been inducted from reputed Indian and global organisations to bring in best-in-class practices.
  • All businesses have appropriate policies in place for occupational health-related matters, supported by structured processes, controls and technology.
  • Vedanta levies a strong focus on safety during project planning/execution, and contract workmen safety.
  • The Company builds safety targets into performance management to incentivise safe behaviour and effective risk management.
  • Leadership coaching was rolled out across businesses to make better risk decisions. Wave 2 of ‘Leadership in action’ has been launched to identify critical risks, and put in place critical controls and processes to measure, monitor and report effectiveness.
  • Leadership remains focused on a zero-harm culture across the organisation and consistent application of ‘Life-Saving’ performance standards.
  • Carbon forum with business representation monitors developments and sets out defensive policies, strategy and actions.
  • Vedanta defines targets and implements action plans to reduce the carbon intensity of its operations. This includes reducing emission intensity and increasing renewable mix and green cover at locations.
  • The Company engages with thgovernment on carbon policies and innovation technologies
  • Institutionalise systems to manage carbon risks and opportunities across the business over the lifecycle of its products
  • Engage with stakeholders in creating awareness and developing climate change solutions.

Risk direction

Impact

R5Tailings dam stability

A release of waste material leading to loss of life, injuries, environmental damage, reputational damage, financial costs and production impacts. A tailings dam failure is considered to be a catastrophic risk – i.e. a very high severity but very low frequency event that must be given the highest priority.

The appreciation of risk has improved further in the group.

Mitigation

  • The Risk Management Committee included tailings dams on the Group Risk Register with a requirement for annual internal review and three-yearly external review.
  • Operation of tailings dams is executed by suitably experienced personnel within the businesses.
  • Full review of tailings dams and water storage facilities are being carried out in the Group. Follow-up reviews will be conducted based on the results until the control is verified.
  • Management standard developed with business involvement.
  • Third-party expert assessment of the dams has been conducted to identify tailings dams’ related risks by a reputed international firm. Improvement opportunities/remedial works in line with best practice are progressing.
  • Individuals responsible for dam management have received training from a reputed agency.
  • System of monitoring of the tailings dams has been instituted.

Risk direction

Impact

R6Managing relationship with stakeholders

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

Mitigation

  • CSR approach to community programmes is governed by the following key considerations: the needs of the local people and the development plan in line with the new Companies Act in India; CSR guidelines; CSR National Voluntary Guidelines of the Ministry of Corporate Affairs, Government of India and the UN’s Sustainable Development Goals SDGs.
  • CSR Committees at business-level decide the focus areas of CSR, budget and their respective programmes.
  • Sustainable development programmes are driven by stakeholder engagement and consultation along with baseline studies and need-based assessments.
  • Periodic meetings with existing and potential Socially Responsible Investment (SRI) investors, lenders and analysts, as well as hosting a Sustainable Development Day in London, helps in two-way engagement and understanding the material issues for stakeholders.
  • Every business has a dedicated CSR team. Key focus areas for CSR are healthcare, children’s wellbeing and education, community development (infrastructure), skilling of youth, sports and culture, agriculture and animal husbandry, drinking water and sanitation, women’s empowerment, environment restoration and protection, and programmes of national importance. We have a dedicated team of over 161 CSR personnel.
  • Our CSR programmes help communities identify their priorities through participatory need assessment programmes and work closely with them to design programmes that seek to make progress towards improvements in the quality of life of local communities.
  • Our business leadership teams have periodic engagements with the local communities to build relations based on trust and mutual benefit. Our businesses seek 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.
  • The Company integrates its sustainability objectives into long-term plans.

Risk direction

Operational risks

Impact

R7Challenges to operationalise investments in the Aluminium and Power business

Some of our projects have been completed (pending commissioning) and may be subject to a number of challenges during the operationalisation phase. These may also include challenges around sourcing raw materials and infrastructure-related aspects.

Risk reduced compared to last year, due to ramp-up at Jharsuguda progressing satisfactorily.

Mitigation

  • Global technical experts have been inducted to strengthen operational excellence.
  • Operationalisation of Jharsuguda facilities is progressing satisfactorily.
  • Building of new intermediate facilities/infrastructure is progressing well.
  • There is a continuous focus on plant operating efficiency improvement programme to achieve design parameters, manpower rationalisation, logistics infrastructure and cost reduction initiatives.
  • Vedanta continues to pursue developing sources of bauxite.
  • There is continuous augmentation of power security and infrastructure.
  • Coal security is being strengthened by pursuing additional coal linkages.
  • Key raw material linkages for alumina/aluminium business: Infrastructure-related challenges are being addressed.
  • Strong management team continues to work towards sustainable low cost of production, operational excellence and securing key raw material linkages.
  • Talwandi Sabo Power Limited (TSPL) power plant matters are being addressed in a structured manner by a competent team.

Risk direction

Impact

R8Discovery risk

Increased production rates from our growth-oriented operations place 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 and 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.

Mitigation

  • Vedanta has a dedicated exploration cell with continuous focus on enhancing exploration capabilities.
  • There is appropriate organisation and adequate financial allocation in place for exploration
  • 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 the drilling and exploration programme.
  • The Company will continue to work towards long-term supply contracts with mines to secure sufficient supply where required.
  • Exploration-related systems are being strengthened and new technologies being utilised wherever appropriate.
  • International technical experts and agencies are working closely with our exploration team to build on this target.

Risk direction

Impact

R9Breaches in information/IT security

Like many 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.

Mitigation

  • Group-level standards and policies are in place to ensure uniformity in security stance and assessments.
  • Chief Information Security Officer (CISO) at Group-level focuses on formulating the necessary frameworks, policies and procedures, and for leading any agreed Group-wide initiatives to mitigate risks.
  • Various initiatives have been taken up to strengthen IT/ cyber security controls in the last few years.
  • Cyber security risk is being addressed through increased standards, ongoing monitoring of threats and awareness initiatives throughout the organisation.
  • IT system is in place to monitor logical access controls.
  • The Company will continue to carry out periodic IT security reviews by experts and improve IT security standards.

Risk direction

Impact

R10Loss 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.

Mitigation

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

Risk direction

Impact

R11Extension of production sharing contract of Cairn beyond 2020 at less favourable terms

Cairn India has 70% participating interest in Rajasthan Block. The Production Sharing Contract (PSC) of Rajasthan Block runs till 2020. Extension of the PSC of Cairn beyond 2020 at less favourable terms may have implications.

The Government of India notified PSC extension policy, which applies to Rajasthan Barmer block.

Mitigation

  • There is ongoing dialogue with the Government and relevant stakeholders.
  • Cairn Steering Committee is regularly reviewing the updates/progress, including plans to meet the timelines, and is continuously engaging with the stakeholders concerned.
  • Carrying value factors additional 10% profit petroleum share, hence mitigating financial/ balance sheet risk.

Risk direction

Compliance risks

Impact

R12Regulatory and legal risk

We have operations in many countries around the globe. These may be impacted because of legal and regulatory changes in the countries in which we operate, resulting in higher operating costs, and restrictions such as the imposition or increase in royalties or taxation rates, export duty, impacts on mining rights/bans, and change in legislation.

Mitigation

  • The Group and its business divisions monitor regulatory developments on an ongoing basis.
  • Business-level teams identify and meet regulatory obligations and respond to emerging requirements
  • Focus has been to communicate our responsible mining credentials through representations to government and industry associations.
  • The Group will continue to demonstrate its commitment to sustainability by proactive environmental, safety and CSR practices. The Group ensures ongoing engagement with local community/ media/ NGOs.
  • The Group ensures that its subsidiaries are SOX compliant.
  • A common compliance monitoring system is being implemented in Group companies. Legal requirements and a responsible person for compliance have been mapped in the system.
  • Legal counsel continues to work on strengthening the framework in the Group and on resolution of matters.
  • Group-wide online portal is being rolled out for compliance reporting. Appropriate escalation and review mechanisms are in place.
  • Competent in-house legal organisation is in place at all the businesses and the legal teams have been strengthened with induction of senior legal professionals across all Group companies.
  • Standard Operating Procedures (SOPs) have been implemented across our businesses for compliance monitoring.
  • Contract management framework has been strengthened with the issue of boiler plate clauses across the Group, which will form part of all contracts. All key contract types are standardised.
  • Framework for monitoring performance against anti-bribery and corruption guidelines is also in place.

Risk direction

Impact

R13Tax-related matters

Our businesses are in a tax regime and changes in any tax structure or any tax-related litigation may impact our profitability.

Mitigation

  • The Tax Council reviews all key tax litigations and provides advice to the Group.
  • Robust organisation is in place at business- and Group-level to handle tax-related matters.
  • The Group engages, consults and takes opinion of reputable tax consulting firms.
  • Reliance is placed on appropriate legal opinion and precedence.
  • The Group continues to take appropriate legal opinions and actions on tax matters to mitigate the impact of any actions on the Group and its subsidiaries.

Risk direction