ENTERPRISE RISK MANAGEMENT

PEL’s ERM framework is designed by integrating the COSO^* framework at its core.

The Risk Management Group (RMG) establishes the risk policy and processes for risk evaluation and measurement, whereas business units focus on developing and implementing mitigation measures, while taking controlled risks. Specific risk approaches are in place for financial and non-financial businesses.

The Company ensures seamless interaction between the Strategic Business Units (SBUs) and RMG to assess the real risks and their severity on the business. The RMG is independent of SBUs and reports directly to the Board. PEL believes in embedding a risk management culture in all facets of business decisions to ensure sustainable growth of the organisation.

The Board

The Board oversees PEL’s risk management programme. It regularly reviews and evaluates the programme to ensure adequate policies, procedures and systems are in place to execute the strategy and manage related risk. The Board-level Risk Committee reviews the macro-level risks and reports it to the Board. In FY2018, in addition to the existing Audit and Risk Committee, a new Board-level committee – Risk Management Committee for Financial Services – was formed to focus on strategy and risk management practices followed in the Financial Services business unit.

Periodically, the RMG appraises the portfolio health in the the Financial Services vertical and the risk profile of the business verticals in non-Financial Services businesses to the Board.

Business Heads and Teams

Business heads and operational teams assess the risk profile of their businesses/transactions and propose measures to mitigate the risks. They work closely with RMG to provide requisite information about the transactions or business environments and assist in creating risk registers.

^*COSO - Committee of Sponsoring Organisations of the Treadway Commission

FINANCIAL SERVICES BUSINESS

The RMG independently assesses all investments and loans of PEL’s Financial Services business. The Group uses internal risk assessment models to evaluate credit, market and concentration risks embedded in any deal. Based on the assessment, the Group recommends a plan to mitigate or eliminate the identified risks in the investments.

Risk Assessment Approach

The approach involves identification and measurement of risk for each investment. Risks are classified into quantifiable and non-quantifiable risks.

1. Quantifiable risks are estimated as the deficit in cash flow under stress testing
2. Non-quantifiable risks are estimated through comprehensive scorecards and standard mark-ups

• Security value, promoter evaluation, exit options, etc. are rated through scorecards
• Operational and concentration risks are covered through standard mark-ups

The Risk team considers various factors such as historical performance, execution capability, financial strength of the promoter and company, competitive landscape in the industry and specific segment, regulatory framework and certainty, impact of macro-economic ‘changes’, etc. while assessing the deal. The security structure is assessed for value, enforceability and liquidity. The rating generated is used for internal benchmarking and pricing. The Credit team take inputs from the RMG to arrive at optimal deal structuring.

Portfolio Revaluation Process

All executed deals are re-valued by the RMG at regular intervals. The portfolio revaluation provides the Management with the latest overview of the portfolio performance. It also triggers specific action plans for identified deals and data-based insights for enhancing underwriting criteria for future deals. The deal-specific action plans are duly executed by business teams to mitigate or eliminate the identified risks. Also, the insights are used as feedback for better credit underwriting in the future.

Stress Testing

Stress Testing is one of the key tools to assess balance sheet strength under various macro-economic scenarios. The Group has a Board-approved macro-economic Stress Testing mechanism, which has been designed internally, incorporating some of the best global practices. The Stress Testing framework covers both the assets and liabilities. The results of the stress test are discussed at the Risk Management Committee (Financial Services) of the Board.

Underwriting and Risk Mitigation

Generally a conservative, data-driven underwriting and structuring approach is adopted. The deal-related idiosyncratic risk and the risks emanating from exogenous events are thoroughly analysed as a part of the risk assessment process. The impact of any event on specific micro-markets, industries and product segments are carefully analysed and the deal underwriting criteria is altered accordingly.

Additionally, in case of non-real estate loans and investments, a detailed external due diligence is conducted. The external due diligence combined with internal understanding is assessed by Credit Underwriting and Risk teams to structure and analyse the deal. Larger deals and deals done in new sectors are presented to internal committees, which have independent experts with considerable experience.

Governance Structure

A robust governance structure for risk management process has been put in place. Various committees, both at Senior Executive Management level and at Board Sub-committee level, have been formed to evaluate the risk and risk management process at PEL

Framework to evaluate Risk Adjusted Returns

The Risk team assesses every loan proposal independently using proprietary risk assessment models

Approval Process and Delegations

The sanctioning authority has been assigned based on the level of hierarchy within the organisation to ensure smooth processing of loan applications. However, at the transaction level, exceptions are built in to capture the severity of risk. Also, critical policy revisions (new product / income programmes, etc.) are jointly approved by the National Credit Manager, COO and Compliance Head and placed to the Group Risk Head and Board for ratification on quarterly basis.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

To manage risk of loss resulting from Retail Operational Risk, an independent Operational Risk Management (ORM) Team is putting in place the framework and review mechanism to manage and measure the effectiveness of governance, risk management and internal controls. This framework comprises two lines of defence:

• Line Business Management (Including Support and Operations): Manages operational risk on a daily basis, maintains internal controls, designs and implements internal control-related policies and procedures
• Operational Risk Management: Develops and implements policies, procedures, tools and techniques to assess and monitor the adequacy and effectiveness of the internal controls

NON-FINANCIAL SERVICES BUSINESSES

Risk assessment at Non-Financial Services business units is carried out using risk registers. Risks across different business units and their probability, impact and mitigation plans are properly documented at regular intervals. These risks are then aggregated, and key risks across each business units along with the proposed mitigants are presented to and reviewed by the Board on a periodic basis.

Another important focus area for PEL in mitigating risks associated with the non-Financial Services business is to harness quality as a culture. The Company has a strong belief that quality is driven by a concern for patient safety. An exemplary quality framework is implemented at PEL’s facilities as well as at several contract manufacturing operations. A deep commitment to building a quality-driven organisational culture has helped PEL achieve the highest level of regulatory compliance. These have been explained in detail in the Pharma section.

MAJOR RISKS AND MITIGATING ACTIONS

The major risks perceived by PEL, along with the measures taken to mitigate them are as follows: