COVID-19 impact: How India Inc is gearing up to tackle unforeseen risks

Companies are looking to combine risk management with strategy.

An Indian manufacturing company which supplies goods to the US and to companies in Europe found itself facing an unexpected problem following the Coronavirus (Covid-19) pandemic.

There was a shortage of freight containers.

Without containers, the company was unable to use ships to get its products overseas and eventually had to use airplanes to transport its goods.

Such unexpected situations which increase expenses or otherwise pose risks to profits are being more closely studied and prepared for across Indian boardrooms after the Covid-19 pandemic and companies are carrying over their learnings in managing unforeseen risks after the events of 2020.

A solution for the company above, an auto component maker, was to watch shipping rates even more closely.

Vedanta, which faced supply chain disruptions among other issues during the Covid-19 pandemic, used a digital war-room to monitor the evolving pandemic situation daily and take decisions accordingly.

“This war room has now been converted into a business transformation office so that we don’t lose the agility we had gained during the height of the Covid lockdown,” said Ajay Kapur, chief executive officer (aluminium and power) and managing director (commercial) at Vedanta.

Similarly, JSW Steel sought to create hubs across the country to reduce the number of people in the corporate office in Mumbai.

There are also other kind of changes which take more cognizance of risk.

Some companies are looking to combine risk management with strategy according to Sudhakar Rajendran, partner and enterprise risk leader, EY India.

For example, people evaluating a new geography would also give a perspective on risks arising from operating in that particular region.

This has happened after the pandemic, Kapur said.

“A critical function of boards has always been to understand and mitigate enterprise-wide risks – but the Covid-19 pandemic has brought that responsibility into sharp focus.

"Its unprecedented impact has highlighted the inter-connectedness of risks and the velocity at which the risk landscape can change.

"Understanding new and emerging risks to business during a pandemic that impacted the lives of so many globally has added a new layer of complexity,” he said.

“The risk on account of (the) Covid-19 pandemic which jolted the world throughout 2020 was not identified as a risk by most.

"In such a high-risk environment, the role of risk management committees has changed dramatically,” said Suresh Surana, founder of audit, tax and consulting provider RSM India.

The Securities and Exchange Board of India issued a consultation paper on December 10 looking to mandate risk management committees to the top 1000 companies and better define the role of such committees including looking at internal controls.

Internal control and risk management has typically been under the purview of the audit committee.

The expanded role of the risk management committee would give them some oversight on this too, under the proposed Sebi guidelines.

An overlap of responsibilities between the two committees may create some ambiguity and should be resolved in the final guidelines, suggested Puneet Gupta, Protiviti India Member managing director.

"While the audit committee is largely constituted of independent directors, the risk management committee is not.

"This may dilute effectiveness in the event of a shift in responsibilities when the final regulations are in place," he said.

The increased focus on business risks comes even as earnings show signs of improvement.

The Nifty 50 companies saw earnings estimates cut 20 per cent for the financial year 2020-21 (FY21), noted a 3rd January Jefferies India Equity Strategy report from equity analysts Mahesh Nandurkar and Abhinav Sinha.

The Nifty earnings growth expectations are 37 per cent for FY22 (see chart of Nifty index versus price/earnings multiples).

“India's gradual reopening and consequent economic pick-up has turned out to be faster than expected, which has driven earnings upgrades,” said the report.