CORPORATE GOVERNANCE

HIMACHAL FERTILIZER
CORPORATION: AN ETHICAL
CONUNDRUM
Learning Objectives
 Identify the ethical dilemmas faced by an
individual and understand implications of
alternative course of action.
 Recognize the need to prioritize values in a
decision-making context .
 Understand the fiduciary responsibility of the board
and manage the interface with executive
management.
Himachal Fertilizer Corporation

Engaged in production and marketing of Urea.

With revenues of over US$ 9 billion and net
income of over US$ 500 million in 2011, HFC had
operations and offices spread across the countries.
The company was in the process of setting up of a
plant in Central India, with a capacity to process five
million tons of Naphtha that it would use as a
feedstock for producing urea.

The new plant would increase its existing production

capacity by 25%. The Naphtha was to be received
from East Asia via large tankers, offloaded at a port
and transported through through a pipeline to HFC
manufacturing plant for processing.
 March 2012
HFC had floated a tender to handle imported
naphtha for its upcoming plant. The bidder port
that would be awarded the contract would be
required to make significant additional investments
in new facilities for offloading of naphtha from the
tankers, constructing pipelines to carry naphtha
before being transported to the plant.
HFC would construct and operate the pipeline to
transport Naphtha from storage tank to the plant.

It will also obtain necessary environmental

clearances from the states through which the
pipeline would pass.
Financial Evaluation of the contract to
handle Naphtha
Item Amount Unit

Capacity of plant 8.25 Million metric ton per year

Naphtha required 5 Million metric ton per year

Estimated handling of 6 US$ per metric ton

charges for Naphtha
Operating cost of facilities 0.40 US$ per metric ton
for Naphtha
Discount rate for 10%
computing present value
Present value of pre-tax 238 Million US$
cash flows @10%
Additional investment in 120 Million US$
facilities
Net present value of 118 Million US$
contract (before tax)
 The tender documents had been obtained by five
companies upon payment of requisite fees.

Only two ports, one located on the Southern coast

of India, owned by India Ports Limited (IPL) and
other located on the western coast of India by
Bharat Ports Limited were expected to be serious
contenders.
 The bids were to be evaluated by a team of
executives from the logistics division of HFC and
then presented to investment committee (of board)
which comprised three HFC board members.

The committee was tasked with the selection of the

winning bid and recommending decision to board.
 Investment committee was scheduled to meet on
April 20, 2012 and presentation from management
was to be led by Mr. George Mathew, Director
(Logistics)
Investment Committee
 Mr. Anil Nair- A non-executive independent
director on board.
 Mr. Neil Shah- A non-executive independent
director on board.
 Mr. Surendra Rawat- Director (Finance)
Meeting on April 15

On 15th April, 2012, Neil received a telephone call

around 10 A.M from Mr. Paul Joseph who
identified himself as General Manager with India
Ports Limited (IPL)
Neil was unsure about how to deal with the information Paul
had provided.

One course of action for him to disclose to the committee

before the meeting that he had met an executive from IPL and
that this executive had conveyed information that might had
significant bearing on the integrity of the bidding process.

Another option was to mention it informally to Anil Nair

(Chairman of committee)
 Corporate Governance is the acceptance by
management of the inalienable rights of
shareholders as the true owners of corporation and
of their own role as trustees on behalf of
shareholders.
It is about commitment to values, about ethical
business conduct and about making a distinction
between personal and corporate funds in the
management of a company.
 Governance describes the overall management
approach through which senior executives direct
and control the entire organization.

 Governance activities ensure that critical

management information reaching the executive
team is sufficiently complete, accurate and timely
to enable appropriate management decision
making.
SEBI requirements on Corporate
Governance
 Disclosure of pledged shares
 Peer review of working paper of audits
 Maintenance of website
 Compulsory dematerialization of promoter
holdings
 Approval of CFO by audit committee
 Enabling shareholders to cast vote electronically
Code of Conduct for Board of
Directors
 The board shall lay down a code of conduct for all
Board members and senior management of
company. It should be posted on website of
company.
 All board members and senior management
personnel shall affirm compliance with the code on
an annual basis. The Annual report of the company
shall contain a declaration to this effect signed by
CEO.
 An independent director shall be held liable, only
in respect of such acts of omission or commission
by a company which had occurred with his
knowledge, attributable through board processes,
and with his consent or involvement or where he
had not acted diligently with respect of the
provisions contained in the listing agreement.
Objective of Corporate Governance

 Primarily concerned with public listed

companies i.e. those listed on a Stock
Exchange

 Focused on preventing corporate collapses

such as Enron, Polly Peck and the Maxwell
companies
Pillars of Corporate Governance
 Accountability

 Fairness

 Transparency

 Independence
Good Board Practices
 Clearly defined roles and authorities

 Duties and responsibilities of Directors

understood

 Board is well structured

 Appropriate composition and mix of skills

Transparent Disclosure
 Financial Information disclosed and Non-
Financial Information disclosed.
 Financials prepared according to International

Financial Reporting Standards (IFRS).

 Companies Registry filings up to date

 High-Quality annual report published

 Web-based disclosure
Amendments from 1st October 2014

 One or more women directors are recommended

for certain classes of companies
 Every company in India must have a resident
directory
 The maximum permissible directors cannot exceed
15 in a public limited company.
 The Independent Directors are a newly introduced
concept under the Act. A code of conduct is
prescribed and so are other functions and duties
 The Independent directors must attend at least one meeting a
year
 Every company must appoint an individual or firm as an
auditor. The responsibility of the Audit committee has
increased.
 Filing and disclosures with the Registrar of Companies has
increased
 Top management recognizes the rights of the shareholders and
ensures strong co-operation between the company and the
stakeholders
 Every company has to make accurate disclosure of financial
situations, performance, material matter, ownership and
governance
 Should Neil had agreed to meet Paul Joseph, IPL’s
representative? What are the implications of Neil’s
decision?
 What would you recommend Neil to do regarding
the information obtained from his meeting with
Paul? What are the implications of your
recommendation?
 Which principle of corporate governance may have
been followed or violated in case?