RISK INSURANCE & MANAGEMENT

RISK MANAGEMENT FRAMEWORK

Vodafone Vs Idea Cellular

SUBMITTED TO:

Prof ANIL BHATT

SUBMITTED BY:

ANKUR KEJRIWAL -2011H149202 HARI MOHAN -2011H149238

Enterprise risk management (ERM): Includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall.

is one of the worlds largest mobile companies providing a wide range of services, including voice, messaging, data and fixed broadband. Vodafone have over 404 million customers, employ over 86,000 people and operate in over 30 countries across 5 continents. From 1 August 2012, the Groups operations are now split into three geographic regions Northern and Central Europe, Southern Europe and AMAP (Africa, Middle East, Asia Pacific).The Group is listed on the London and NASDAQ (ADR listing) stock exchanges and is headquartered in Paddington, London. Vodafone have over 238,000 base station sites and over 14,000 Vodafone stores around the world.

VODAFONE GROUP

Vodafone follows a process of defining, assessing, classifying and monitoring risks as set out below: 1. Defining the risks Various levels of management in each operating company define risks at project, process and operational, tactical and strategic levels according to risk tolerance. 2. Assessing the impact of the risks on the organisation should they happening Risks are assessed based on their potential impact on the business (customers, business systems, employees), financial position and reputation. A level 1 risk is seen as insignificant and level 5 is catastrophic. For example, if more than half of our customers would be impacted by the risk, it would be classified as level 5. 3. Assessing the likelihood of the risks happening Risks are assessed based on the likelihood of them happening after taking into account controls in place to mitigate them. Again it uses a scale from 1 to 5, where 1 is never and 5 is almost certain. When it rate a risk 5, it means the controls in place will not prevent the risk from happening due to factors outside our control. 4. Classifying the risks The company classify risks as critical, high, medium and low based on their impact and likelihood of them occurring. So where a risk has a high likelihood of occurring and the impact on our business, financial position or reputation is high it would be considered critical. 5. Monitoring and reporting the risks Vodafone capture well over 2 000 operational, tactical and strategic risks across the Group in our risk system , Cura. It manage risks continually and review them quarterly. It also involve internal audit and report back to the Groups Audit, Risk and Compliance Committee and the Board quarterly. Key types of risk faced by Vodafone & how company is managing/mitigating it are given below: STRATEGIC

Regulatory decisions and changes in regulation- Vodafone comply with a wide range of requirements that regulate the licensing, construction and operation of its networks in the countries it operate in. In particular, the decisions of regulators on granting spectrum licences as well as wholesale and retail tariffs may affect it negatively. The impact of this risk is HIGH & therefore company is fulfilling the entire requirement to avoid legal consequences. Mitigating factors Vodafone have specialist regulatory and government relation teams. It participates actively through written submissions and formal hearings on legislative and regulatory changes. It has access to best practice and international debate through Vodafone. It conduct detailed scenario planning on an ongoing basis.

Increased competition: The company is facing intense competition in all its markets. Its ability to compete effectively depends on network quality, capacity and coverage, pricing of services and devices, quality of customer services, developing new and improved products and services in response to customer demands, new technologies, reach and quality of sales and distribution channels, and capital resources. The impact of this risk is HIGH & therefore company is focussing on loss reduction technique of risk minimisation. Mitigating factors Vodafone continue to invest in network coverage and quality. It continues to expand its distribution. It re-focused on dramatically improving the customer experience across all customer touch points. It offers a wide range of devices at competitive prices. It continues to offer more value to customers through promotions and discounts. Major network and billing infrastructure failures- The company operate complex mobile networks that rely on third parties to provide power or transmission. In certain countries, like Mozambique and Lesotho, it has limited redundancy in its master switching centres. Network and billing infrastructure may also be damaged by natural disasters or terrorism. In particular, network outages may negatively impact customer usage and revenue. Its severity is HIGH & frequency is LOW & therefore Vodafone has insured all its physical assets. Mitigating factors The company have comprehensive business continuity and disaster recovery plans in place. It invest in maintaining and upgrading our networks on an ongoing basis It has comprehensive insurance in place. OPERATIONAL

One of the greatest challenges for companies is implementing their policy & values and sustainability strategy implementation across operational business units and key functional areas. Technological advances in handsets and use of alternative communication services may result in less demand for its traditional service offerings: Advancements in Smartphone branding and technology places more focus on devices rather than the underlying services provided by mobile operators. The development of applications which make use of the internet as a substitute for some of our more traditional services, such as messaging and voice, could erode revenue. Reduced demand for our core services of voice, messaging and data and the development of services by handset suppliers could significantly impact its future profitability. The company is practicing LOSS PREVENTION strategy to minimise loss. Mitigation: Vodafone has developed strategies which strengthen its relationships with customers, including the development of its own branded products, offering a broad selection of handsets and devices from a variety of manufacturers and providing its own alternatives to its more traditional services. The company have accelerated the introduction of integrated voice, messaging and data tariffs to minimise customers reducing their out-of-bundle usage through substitution. A malicious attack on our network may be successful and disrupt its services or compromise on data: This could lead to a loss of confidential customer data or availability of critical systems. Vodafone network is also susceptible to interruption due to a physical attack and theft of our network components as the value and market for network components increases (for example copper, batteries, generators and fuel). Its impact is HIGH & therefore the company is following Loss Prevention technique. Mitigation: Its critical infrastructure has been designed to prevent unauthorised access and reduce the likelihood and impact of a successful attack. Business continuity and disaster recovery plans are in place to cover residual risk that cannot be mitigated. It also manage the risk using our global security operations centre that provides 24/7 monitoring of its network in many countries. Business would be adversely affected by the non-supply of equipment and support services by a major supplier: Companies require network-related and other significant support services from third party suppliers. The withdrawal or removal from the market of one or more of these major third party suppliers could adversely affect its operations and could require it to make additional capital or operational expenditures.

FINANCIAL

These are the factors which affect the profits & share price of the company. Vodafone may be unable to obtain additional/renew sufficient spectrum with an adequate return: The spectrum it uses for the delivery of its services is regulated in each of our markets. The regulators supervise the allocation of frequency spectrum and monitor and enforce regulation and competition laws which apply to the mobile telecommunications industry. Decisions by regulators regarding the granting, amendment or renewal of licences, to us or to third parties, including the implementation of unsustainable cost and revenue models, could adversely affect its future operations in these geographic areas. Since its severity is high & low frequency, the company will go for insurance Mitigation: Local executives and regulatory staff manage negotiations with local regulators on renewal of spectrum licences. In the event of a failure to renew, it could migrate traffic onto other frequencies. To date, all licences have been renewed but it is possible that political or competitor influences may create significant complications or uncertainty in some markets. Vodafone may not satisfactorily resolve major tax disputes: It operates in many jurisdictions around the world and from time to time have faced disputes on the amount of tax due. In particular, in spite of a recent positive India Supreme Court decision(GAAR) relating to an ongoing tax case in India, as set out on pages 138 and 139, the Indian government is proposing retroactive tax legislation which would in effect overturn the courts decision. Such or similar types of action in other jurisdictions may expose us to significant additional tax liabilities which would affect the results of the business. Since its severity is high & low frequency, the company will go for loss reduction technique. Mitigation: It maintains constructive but robust engagement with the tax authorities and relevant government representatives, as well as active engagement with a wide range of international companies and business organisations with similar issues. Where appropriate it engages advisors and legal counsel to obtain opinions on tax legislation and principles. Country risk: Recent conditions in the euro zone have resulted in a higher risk of disruption and business risk from high currency volatility and the potential of an exit of one or more countries from the euro. As part of its response to these conditions the company have revised its existing processes and policies, and in places, evolved them with the aim of both minimising the Groups economic exposure and to preserve its ability to operate in a range of potential conditions that may exist in the event of one or more of these future events. Since its Impact is HIGH, company is using LOSS PREVENTION technique to minimise loss. Currency related risks: While its share price is denominated in sterling, the majority of its financial results are generated in other currencies. As result the Groups operating profit is sensitive to either a relative strengthening or weakening of the major currencies in which it transacts. Hedging is practiced to minimise the exchange risk. Credit risk: The Group invests in repurchase agreements which are fully collateralised investments. The collateral is sovereign and supranational debt of major EU countries denominated in Euros and US dollars and can be readily converted to cash. In the event of any default, ownership of the collateral would revert to the Group. Liquidity risk: The Group uses commercial paper and bank facilities to manage short-term liquidity and manages long-term liquidity by raising funds on capital markets. The Group manages liquidity risk on long-term borrowings by maintaining a varied maturity profile with a cap on the level of debt maturing in any one calendar year, therefore minimising refinancing risk. Long-term borrowings mature between one and 27 years. COMPLIANCE

Many companies are facing new and expanding regulatory compliance risks resulting from an increasing number of international, national and regional programs. The key risk areas resulting directly or indirectly from regulatory measures are varied and can include: Vodafone emerging market footprint may present exposure to unpredictable economic, political, and regulatory tax and legal risks: Political, regulatory, economic and legal systems in emerging markets may be less predictable than in countries with more stable institutional structures. Since it operate in and are exposed to emerging markets, the value of our investments in these markets may be adversely affected by political, regulatory, economic, tax and legal developments which are beyond its control and anticipated benefits resulting from acquisitions and other investments it have made in these markets may not be achieved in the time expected or at all. Company retains this risk. Vodafone could suffer loss of consumer confidence and/or legal action due to a failure to protect our customer information: Mobile networks carry and store large volumes of confidential personal and business voice traffic and

data. It host increasing quantities and types of customer data in both enterprise and consumer segments. It needs to ensure its service environments are sufficiently secure to protect the company from loss or corruption of customer information. Failure to adequately protect customer information could have a material adverse effect on our reputation and may lead to legal action against the Group. Mitigation: Both the hardware and software applications which hold or transmit confidential personal and business voice and data traffic include security features. Security related reviews are conducted according to its policies and security standards. Security governance and compliance is managed and monitored through software tools that are deployed to all local markets and selected partner markets. Since its Impact is HIGH, company prefers LOSS PREVENTION to minimise risk & loss. The business may be impaired by actual or perceived health risks associated with the transmission of radio waves from mobile telephones, transmitters and associated equipment: Concerns have been expressed that the electromagnetic signals emitted by mobile telephone handsets and base stations may pose health risks. It is not aware that such health risks have been substantiated, however, in the event of a major scientific finding supporting this view this might result in prohibitive legislation being introduced by certain governments. An inadequate response to electromagnetic fields (EMF) issues may result in loss of confidence in the industry and Vodafone. Company would like to avoid this risk because of its high severity. Company retains this risk. Mitigation: The Company have a global health and safety policy that includes standards for radio frequency fields that are mandated in all its operating companies. The company have a Group EMF board that manages potential risks through cross sector initiatives and who oversee a coordinated global programme to address and reduce public concern. Vodafone is engaged with relevant bodies to ensure that the scientific research agenda set by the World Health Organization is fully funded and executed as fast as reasonably possible. REPORTING

Vodafone reports on its performance, management and targets on Corporate Responsibility (CR) & other financial instruments issues across a range of formats designed to be accessible for various audiences. Over this time, it has developed and refined our approach to reporting. Our Group CR Review provides a strategic review of the key trends and issues affecting Vodafone, and insights from senior management on the link between our management of CR issues and our core business strategy. The company aim to provide a balanced account of our performance on the socio-economic, ethical and environmental issues that are most material to Vodafone. Its approach to CR reporting is aligned with the principles of the AA1000 Assurance Standard, namely completeness, materiality and responsiveness. The reports provided by the company are Accurate, Reliable, Updated, Comparable, Clear , Includes shareholders concern, span across geographies.

IDEA CELLULAR
Idea Cellular, usually referred to as Idea, is an Indian mobile network operators based in Mumbai, India. It is the 3rd largest operator of mobile services in India according to the number of subscribers as per latest TRAI regulation. The Risk Management framework of the Company ensures compliance with the requirements of clause 49 of the Listing Agreement. This framework provides for risk identification, risk evaluation and prioritisation followed by development of risk mitigation plans. The framework requires that the Audit Committee be periodically informed about the risk assessment, impact of risk on the business and mitigation plans. These processes are periodically reviewed. The various risks, including the risks associated with the economy, regulations, competition, foreign exchange, interest rate etc, are documented, monitored and managed efficiently. Internal Control Systems: The Company has appropriate internal control systems for business processes, covering operations, financial reporting and compliance with applicable laws and regulations. Process controls are reviewed periodically and strengthened to create a robust control environment. The operating parameters are also monitored and controlled. Regular internal audits and management reviews ensure that the responsibilities are executed effectively. The Audit Committee actively reviews the adequacy and effectiveness of internal control systems and suggests improvements for strengthening them.

Key types of Risks faced by the company & how company is managing/mitigating it are given below OPERATIONAL

Intense competition from other operators: The competition in the Indian telecommunications industry is intense. Idea faces significant competition from companies that have a pan-India footprint such as Bharti Airtel Limited, Tata Teleservices Limited and Reliance Communications Ventures Limited. Competition may affect its subscriber growth and profitability by causing its subscriber base to decline and cause both a decrease in tariff rates and average revenue per user (ARPU) and an increase in Churn and selling and promotional expenses. With more than 107 Mn subscribers joining the wireless network, the total subscriber base has reached 919.2 Mn as on March 31, 2012, reflecting a tele-density of 76%. To manage competition & increase market share the company expanded its network & also introduced various services. The 3G services were launched in India at the end of last financial year. This provides significant data opportunity to the quality 3G operators as the broadband penetration in India stands at only 1.1%. Idea is the first company to introduce the sachet pricing at a low as RS 8 for trial purpose and attractive Gigabyte bundles, targeted towards medium to heavy users. Idea is dependent on its interconnection and leased line arrangements: Its services depend to a large degree upon our interconnection arrangements. Currently, interconnection is necessary for all local, national and international calls made or received by its subscribers. Difficulties in agreeing, maintaining or replacing such agreements may affect its operations. The Churn/attrition rate in networks is high: Subscriber attrition, in mobile networks in India is high especially among pre-paid customers. A high Churn rate increases subscriber acquisition costs and results in the loss of future subscriber revenues. Higher Churn in our post-paid subscribers increases the incidence of bad debts. A failure to identify and obtain and renew agreements for use of appropriate cell sites: A large part of companys strategy is the continued roll-out of its network in the Established Circles and New Circles. Any inability to secure cell-sites or renew licenses for cell-sites may have a material adverse impact on its business. Ideas ability to provide a quality mobile network is dependent on the spectrum allocated to them The Company, in 2010, won spectrum in 2100 MHz band in 11 service areas. Idea has launched 3G services in all the service areas (except Punjab) and has entered into roaming arrangement with other operators to provide 3G services in remaining service areas (except Orissa). At the end of FY12, Idea 3G services are available in more than 3,000 towns and10,000 villages, in 20 service areas. Ideas 3G services, considered to be one of the best, connect to the world of faster internet with the speed of up to 21Mbps, video calling and conferencing on the handset, Mobil TV, Idea Mall applications store, besides being capable of many other futuristic services. Company retains this risk. The company rely on sophisticated billing and credit control systems and processes: It is dependent on several complex software packages which record minutes used, calculate the appropriate charge and then deliver the bill to the subscriber. Any failure to properly capture the services provided and to charge the appropriate fees will have a material adverse effect on its revenue. Since the impact of this risk is HIGH & therefore Idea follows a LOSS PREVENTION technique by continuously monitoring its software. STRATEGIC

It is dependent on the services of key management personnel and their ability to recruit and retain employees: The telecommunications industry requires personnel with diverse skills. Any failure to recruit and retain appropriate employees would adversely affect the business. Company also face significant challenges in training our employees in the rapidly changing telecommunications industry and inability to do so successfully could adversely impact operations. The company therefore tries to hire the best capable managers through best HR practices to avoid this risk. The Promoters will continue to have the right to approve certain corporate actions: The promoters of ABG group can appoint anybody in the board. There can be no assurance that the Aditya Birla Group will not have conflicts of interest with other shareholders or with Idea. Any such conflicts may adversely affect its ability to execute business strategy or to operate business. Company retains this risk.

FINANCIAL

Idea is subject to restrictions on foreign investment in India: According to the prescribed limits under the Foreign Exchange Management Act, 1999 and applicable policy guidelines including the manual on Foreign Direct Investment (FDI), as amended from time to time, no more than 49% of equity capital currently may be held by foreign investors. Until It receive permission to raise the amount of equity capital held by foreign investors to 74% ,its ability to seek and obtain additional equity investments from foreign investors will be limited. This limitation may adversely affect the value of listed Equity Shares and ability to raise capital for the expansion of business. The costs are increasingly impacted by global commodity and equipment prices: Idea purchase commodities such as copper and steel to support the maintenance, expansion and roll-out of networks. The volatility of global commodity prices, especially metals prices, has adversely impacted the cost of equipment for its network maintenance and expansion. Derivatives are used to minimise the impact of fluctuating prices. COMPLIANCE

Activation of VAS Services: As per the directions of TRAI the service provider shall obtain confirmation from the consumer through consumer originated SMS or e-mail or FAX or in writing within twenty four hours of activation of the value added service and charge the consumer only if the confirmation is received from him for such value added service and shall discontinue such value added service if no confirmation is received from the consumer. Supreme Court order on quashing of licenses granted in January 2008: The Supreme Court has also directed TRAI to give fresh recommendations for grant of license and allocation of spectrum in 2G band in 22 Service Areas, as was done for 3G band, by auction by August 31, 2012. The said judgment impacts seven operational licenses and six non-operational licenses granted by DoT to the Company in January 2008. TRAI Regulation on Consumer protection: TRAI has introduced the Telecom Consumer Protection Regulation which mandates marketing of only 3 types of vouchers, Plan voucher, Top up Voucher and Special tariff voucher. These vouchers will be differentiated by specific colours given to each type of voucher. The prepaid itemized bill is also required to be given to the customer on request for last 6 months. Since violating the above 3 factors can have detrimental impact on company, therefore Idea will try to AVOID it. REPORTING

The Board of Directors has in accordance with the requirements of clause 49 constituted an Audit committee for overseeing the accounting, auditing and overall financial reporting process of the Company. Changes in accounting policies and practices; Compliance with Accounting Standards; Compliance with listing and other legal requirements concerning financial statements needs to mention in footnotes. The strict reporting standards reduces the flexibility of the managers to report the exact situation of the company but it also reduces managers ability to inflate or deflate the figures for various motivations of executive pay bonuses.