Himachal Fertilizer Corporation (HFC)

• Himachal Fertilizer Corporation (HFC) is a large publicly listed corporation in India.
• HFC is engaged in the production and marketing of urea.
• Urea is a chemical compound commonly used as a nitrogen fertilizer in agriculture and polymer industries.
• Urea's availability as free-flowing prills makes it cheap to transport and less likely to cake.
• India favors urea in developing countries.
• HFC had revenues of over US$ 9 billion and a net income of over US$ 500 million in 2011.
• HFC was setting up a plant in Central India to process five million metric tons of flammable naphtha for urea production.
• The new plant was projected to increase its existing production capacity of about 33 million metric tons by 25 percent.
• Naphtha supply was planned from East Asia via tankers, offloaded at a port, and transported through a pipeline.
• In March 2012, HFC floated a tender to handle imported naphtha for its upcoming plant, inviting bids.
• Additional investments were required by the bidder port which was awarded the contract.
• Investments included setting up a single buoy mooring (SBM), constructing pipelines, and installing storage tanks
• HFC would construct and operate the pipeline from the storage tanks to the plant
• HFC would obtain the necessary environmental clearances from the states.
• The investment expected from the bidder port was US$ 120 million.
• HFC and the port would sign a contract guaranteeing a minimum cash flow to the port for twenty years, with an option to renew.
• The net present value of the contract, ignoring taxes, was about US$ 118 million, based on the cash flows in the first twenty years.
• The contract would be beneficial for the winner due to the global recession in 2012, and the competitive rates
• Five companies obtained the tender documents after paying the fees.
• India Ports Limited (IPL), located on the Southern coast of India, and Bharat Ports Limited (BPL), located on the Western coast of India, were expected to be serious contenders.
• Potential bidders were given about four weeks to submit their bids with a deadline of April 14, 2012.
• Executives from HFC's logistics division would evaluate the bids and the investment committee would then review them.
• The investment committee, comprising three HFC board members, was tasked to select a winning bid based on decision by the board
• George Mathew, the director (logistics), leading the presentation from management
• George Mathew was perceived as a "tough" boss, subordinates respected his technical competence
• The investment committee was chaired by Anil Nair, a non-executive independent director
• Other committee members were Neil Shah and Surendra Rawat, director (finance) of HFC
• April 15, 2012: Neil received a call from Paul Joseph, the general manager with India Ports Limited (IPL).
• Paul requested an immediate meeting to discuss the irregularity of handling Naphtha tender for HFC.
• The words “irregularity in the tender process” raised Neil's antenna as he was concerned about the process being compromised
• Neil was unsure about meeting the caller might violate HFC's code of conduct
• Paul claimed disqualification because of a change in the favor of a specific bidder
• Neil agreed but cautioned Paul about soliciting support/influence for IPLs bid.
• Paul stated the deadline for bid submission was advanced to 3:00 PM from 5:30 PM, making it impossible for them to make the deadline.
• IPL was upset as the bid was rejected once it was submitted after the new deadline.
• Paul alleged that the executive director could not make the deadline driving to Bangalore to submit their bid
• BPL told IPL that HFC had only received one bid as they believed the deadline was changed for BPL.
• BPL was accused of the advancement of the deadline to exclude IPL.
• BPL may have tried to bribe some managers for favorable treatment.
• Paul offered that Nitin Advani, the promoter of IPL, would speak with Neil.
• State-of-the-art port facilities and specialization in liquid cargo handling at IPL led Paul to plead that the denial of a fair opportunity to participate because of devious means was unfair.
• Neil inquired about the absence of written complaints to the company.
• Paul stated that a letter was already sent to HFC that request to accept the bid was denied.
• One action was disclosing to the investment committee before the meeting
• Another action was mentioning it to Anil Nair, the chair of the committee,
• The final action was waiting to see how the events unfolded.

Appendix A: Corporate governance in India

• Real momentum for corporate governance in India transpired during the country's process of liberalization in the 1990s
• In 1998, the Confederation of Indian Industry (CII) issued the Desirable Code of Corporate Governance.
• In 1999, the Securities and Exchange Board of India (SEBI) set up the Kumar Mangalam Birla committee to raise corporate governance standards
• A committee chaired by N. R. Narayana Murthy set up best practices on corporate governance
• Murthy committee defined that Corporate governance is the acceptance by management of the inalienable rights of shareholders
• Clause 49 was modified by SEBI after the U.S.'s Sarbanes Oxley Act of 2002
• Clause 49 modified SEBI listing requirements based on suggestions from the Birla and Murthy Committees
• SEBI issued requirements pertaining to disclosures after the Satyam fraud in 2008
• The requirements ensured disclosure of pledged shares, peer review of audit papers, website maintenance, auditor approval of CFO, and electronic voting for shareholder meetings.

Code of Conduct for Board of Directors

• The board of directors was found in Clause 49 which also included providing code of conduct for the board and senior management
• Code posting on the website
• Annual compliance affirmation by board members and senior management
• The annual report of the company containing signed CEO declaration
• Independent directors held liable for company acts of omission/commission within their knowledge or consent
• The liability was present in the context of lacked diligence concerning Listing Agreement provisions
• Additional regulatory changes anticipated to bring India's corporate governance practices closer to the U.S. and Europe

General Notes

• 1 metric ton of naphtha is required to produce 1.65 tons of urea.
• 5 million tons of naphtha would service a urea plant of 8 million tons.
• SBMs (Single Buoy Moorings) are offshore platforms with limited storage to empty liquid cargo from ships too large to dock at ports.
• Pipeline pump cargo from SBMs (Single Buoy Moorings) to a larger onshore storage
• Required environmental clearance time varies depending on the number of states passed through
• Quoted rates were per ton of handled naphtha.
• Position of Director (logistics) was full time on the HFC board of directors
• The ethical conduct section required officers and directors to complete fiduciary obligations without judgement compromised
• It was laid that officers and directors must not participate if it had potential conflicts of interest
• Must act fairly and transparently
• Business, relationships and activities were not to engage in any relationships party to Company transaction