DIRECTORS' REPORT AND MANAGEMENT DISCUSSION & ANALYSIS REPORT Your Directors present their 44th Annual Report together with the Audited Financial Statement of the Company for the year ended 31 March 2015. DIVIDEND In view of the accumulated losses, the Board of Directors are not in a position to recommend dividend on the Preference Share Capital and Equity Share Capital of the Company. RESERVES There is no transfer of profits to the reserves. STATE OF COMPANY'S AFFAIR Production During the year under review, the plant had a steady run between 1 April 2014 to 30 September 2014 and again between 11 January 2015 to 31 March 2015. The stoppage of plant for 102 days was mainly due to delay in Government according approval for continuation of subsidy for Naphtha based Urea Plants. Urea production achieved during the year 2014-15 was 491,405 MTs compared to 285,923 MTs in the previous year. Your Company earned a profit before tax of Rs.17.59 crores during the year under review and the performance would have been much better but for the stoppage of plant. Efforts are continuously being made to augment working capital to enable sustained operations of your Ammonia and Urea Plants. The plant operations were carried out mainly by importing Naphtha and Furnace Oil. The reliability of plant operation is expected to improve with the commissioning of a Naphtha Handling Facility in the Tuticorin Port premises which will be taken on lease by your Company. During the shutdown of Ammonia and Urea plants in the third quarter of 2014-15, your Company undertook repairs and maintenance activities to improve reliability, energy efficiency levels and increase production. Progress in conversion of ammonia plant from naphtha to gas: Government is in the process of identifying the party to lay the gas pipe line from Ennore to Tuticorin. Meanwhile, the Department of Fertilizers has permitted the Naphtha based Urea plants to run on Naphtha till such time the gas connectivity is established; but with a cap on the Naphtha price which is linked to the average delivered RLNG (Re-gasified Liquefied Natural Gas) price to the recently converted plants. Your Company is in a state of readiness to complete the process of conversion activities to use natural gas / mixed feedstock as and when gas connectivity / availability is established. PUBLIC DEPOSITS There are no deposits covered under Chapter V of the Companies Act, 2013 ("the Act") during the year 2014-15, the details of which are required to be furnished. FINANCIAL STATEMENT OF SUBSIDIARIES, JOINT VENTURES AND ASSOCIATE COMPANIES Pursuant to Section 129(3) of the Act read with Rule 5 of the Companies (Accounts) Rules, 2014, the statement containing salient features of the financial statements of the Company's subsidiaries', associates' and joint ventures' (in Form AOC-1) is attached to the Financial Statement. As regards the annual accounts of subsidiaries, refer Notes to the Form AOC-1. During the year under review, no company has become or ceased to be subsidiaries, associates and joint ventures companies. The Board had approved the policy on Material Subsidiary as per the Listing Agreement and is available on the Company's website under the web link: <http://www.spic.in/Determining%20Material%20Subsidiary%20> Policy.pdf CONSOLIDATED FINANCIAL STATEMENT The Consolidated Financial Statements of the Company are prepared in accordance with Section 129 (3) of the Act and relevant Accounting Standards Viz., AS-21 (Consolidated Financial Statements), AS-23 (Accounting for Investment in Associates in Consolidated Financial Statements) and AS-27 (Financial Reporting of Interests in Joint Ventures) issued by the Institute of Chartered Accountants of India and forms part of the Annual Report. SAFETY, HEALTH AND ENVIRONMENT Adequate care and attention have been bestowed on matters relating to safety, health and environment in the plant. Your Company has bagged 4 safety awards from Director of Industrial Safety and Health at a function held in Chennai in November 2014, for the lowest accident days during the previous years. Certification of ISO 9001 and ISO 14001 stage audit by External Auditors M/s. Det Norske Veritas (DNV) have been completed and your Company is certified for ISO 9001 and ISO 14001. HUMAN RESOURCE AND INDUSTRIAL RELATIONS The Company considers its human resources as important asset and endeavours to nurture, groom and retain talent to meet the current and future needs of its business. The Company continues to provide a conducive work environment and opportunities for professional development of its employees through training and development. Industrial Relations in the Company have been cordial during the year under review. The number of employees as on 31st March, 2015 is 517. EXTRACT OF ANNUAL RETURN Form MGT-9 as on 31st March 2015 as required under Section 92 of the Act is given in Annexure - I to this Report. DIRECTORS The Board of Directors, pursuant to Section 149 of the Act and on the recommendation of the Nomination and Remuneration Committee appointed Tmt Sashikala Srikanth and Brig (Retd) Harish Chandra Chawla as Independent Directors on 8th September 2014 and Mr. Sumanjit Chaudhry on 10th February 2015 for a period of five years subject to the approval of the Members. The Board of Directors at their Meeting held on 14th November 2014 appointed Tmt G Latha I.A.S, Nominee of TIDCO as an Additional Director of the Company. Thiru S R Ramakrishnan, Whole-time Director is liable to retire by rotation at the ensuing Annual General Meeting and being eligible offers himself for re-election. Thiru K K Rajagopalan, Whole-time Director resigned from the services of the Company and also as a Director with effect from 30th September 2014. The Directors placed on record the appreciation for the invaluable services rendered by Thiru K K Rajagopalan during his tenure as Whole-time Director of the Company. Particulars relating to the appointment of Thiru S R Ramakrishnan, Tmt Sashikala Srikanth, Brig (Retd) Harish Chandra Chawla, Thiru Sumanjit Chaudhry and Tmt G Latha I.A.S are given in the annexure to the Notice. All the Independent Directors of the Company on the date of this Report have duly submitted the disclosures to the Board stating that they fulfil the requirements enumerated under Section 149 (6) of the Act and Listing Agreement, so as to qualify themselves to be appointed as Independent Directors. FAMILIARIZATION PROGRAMME FOR INDEPENDENT DIRECTORS Documents/Brochures, Reports and Internal Policies of your Company are provided to the Directors to familiarise with the Company's procedures and practices. Presentations are made at the Board/Committee Meetings, on Company's performance, business strategy, risks involved and global business environment. Presentations are also made to the Independent Directors separately on the Company's business segments. Site visits to plant location were organized to help the Independent Directors to enhance their understanding of the operations of the Company. The details of such familiarization programmes for Independent Directors are available on the Company's website under weblink: <http://www.spic.in/Familiarisation%20Program%20for%20> Independent%20Directors.pdf NOMINATION AND REMUNERATION POLICY Your Company has a Nomination and Remuneration Policy for appointment and remuneration of the Directors, Key Managerial Personnel and Senior Executives of the Company including criteria for determining qualifications, positive attributes, independence of a Director and other related matters as required under Section 178(3) of the Act and the Listing Agreement. The details of the Policy are given in Annexure - II to this Report. PARTICULARS OF REMUNERATION OF DIRECTORS, KMP AND EMPLOYEES The information required under section 197(12) of the Act read with the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 and forming part of the Board's Report for the year ended March 31, 2015 is given in Annexure - III to this Report. STATUTORY AUDITORS At the 43rd Annual General Meeting (AGM) held on 8th September 2014, M/s. Deloitte Haskins & Sells, Chartered Accountants, were appointed as Statutory Auditors of the Company to hold office until the conclusion of the 45th AGM of the Company. The Company has received a certificate from the Auditors to the effect that it would be in accordance with the provisions of Section 141 of the Act if they are re-appointed at the 44th AGM. In terms of Section 139 of the Companies Act, 2013, the appointment of M/s. Deloitte Haskins & Sells, Chartered Accountants, as Statutory Auditors of the Company shall be ratified by the Members at every AGM and the resolution seeking ratification is being proposed. DIRECTOR'S REPLY TO AUDIT QUALIFICATION Audit Qualification-! Attention is invited to Note 2(b)(i) to the consolidated financial statements describing non consolidation of the financial statements of a subsidiary to reflect the adjustments relating to the period 1 April 2011 to 31 March 2015, as the said financial statements are not available to the Company for the reasons explained in the said Note. Our audit report for the previous year was also similarly qualified. Reply As Jebel Ali Free Zone Authorities (JAFZA) had taken over the assets of SPIC Fertilizers and Chemicals (SFC) FZE, Dubai, the holding Company SFCL Mauritius lost control over the subsidiary. Full provision has been made for these investments in earlier years. The Company is considering writing off the investments in SFCL Mauritius and is in the process of getting the approval of the Regulatory Authorities concerned, to write off the aforesaid investment in the books of account. The accounts relating to the subsidiary company, SFCL Mauritius included, in the consolidated financial statement is as at 31 March 2011 which are based on Management accounts and since the financial statements from 1 April 2011 to 31 March 2015 are under preparation, adjustments, if any, to liabilities, in the consolidated financial statement for the said period has not been made in respect of these two subsidiaries. For the reasons mentioned in Note 2(b)(i) of the Notes to the Consolidated Financial Statements since the Company has already made provision in full for the said investment, the proposal to write off, subject to requisite approval of Regulatory Authorities concerned is not likely to affect the financial statements of your Company. Subsequent to the date of the Statutory Auditors' Report, the annual accounts of SFCL, Mauritius for the year ended 31 March 2010, 31 March 2011, 31 March 2012 and 31 March 2013 were approved by the Directors of SFCL Mauritius on 29th May 2015 and also adopted by their Shareholders on 2nd June, 2015. Audit Qualification-II With respect to a jointly controlled entity, the consolidated financial statements carry long term loans and advances amounting to Rs. 211.59 lac, short term loans and advances of Rs.578.93 lac and current liabilities of Rs. 160.86 lac relating to the consolidated financial statements of the subsidiary company - Certus Investment & Trading Limited, Mauritius and its two subsidiaries. Based on the disclaimer of opinion given by the independent auditors of the subsidiary of the jointly controlled entity, Certus Investment & Trading Limited, Mauritius, we are unable to express our opinion on the long term loans and advances amounting to Rs. 211.59 lac, short term loans and advances of Rs.578.93 lacs and current liabilities amounting to Rs. 160.86 lac included in the consolidated financial statements. Reply The Board of Directors of Tamilnadu Petroproducts Limited, a jointly controlled entity have given the following reply with reference to the qualification made by their Statutory Auditors: "As regards the short term advance of Rs.3419.54 lakhs (proportionate share of Rs.578.93 lakhs) carried in the Consolidated Financial Statement (CFS), it has been confirmed that as on date the subsidiary has recovered the entire dues. As regards the long term loans and advances of Rs.1249.80 lakhs (proportionate share of Rs.211.59 lakhs) in the CFS, which represent the advance paid to the technology partner for knowhow, there is time till December 2016 to avail the same. It is also being explored if the rights can be transferred to other interested parties and hence at present no adjustment is deemed necessary. In the light of the above, it is expected that these matters will have no impact on the Consolidated Financial Statement." COST AUDITOR Thiru P R Tantri, Cost Accountant was appointed as the Cost Auditor of the Company for 2014-15 to carry out the audit of your Company's cost accounts and records. The Cost Audit Report for the year ended 31st March 2014 was filed within the time stipulated under the Act. The Board of Directors, on the recommendation of the Audit Committee, have appointed Thiru P R Tantri, Cost Accountant as Cost Auditor to audit the cost accounts and records of the fertilizer business of your Company for the Financial Year 2015-16 at a remuneration of Rs.1,00,000/- plus reimbursement of actual out-of-pocket expenses for travelling and other expenses. As required under Rule 14 of the Companies (Audit & Auditors) Rules, 2014, approval of Members is sought for the payment of remuneration to the Cost Auditor. SECRETARIAL AUDIT REPORT Secretarial Audit under Section 204 of the Act, for financial year 2014-15 was conducted by Ms. B Chandra, Practicing Company Secretary, Chennai. The Secretarial Audit Report as furnished is given as Annexure - IV to this Report. There are no qualifications, reservations or adverse remarks made by the Secretarial Auditor in the Report. DIRECTORS' RESPONSIBILITY STATEMENT Pursuant to the provisions contained in Section 134 (3) of the Act, your Directors to the best of their knowledge and belief and according to information and explanations obtained from the management, confirm that: (a) in the preparation of the annual financial statements for the year ended March 31, 2015, the applicable Accounting Standards had been followed along with proper explanation relating to material departures; (b) the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2015 and of the profit of the Company for the year ended on that date; (c) the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; (d) the Directors have prepared the annual accounts on a going concern basis; (e) the Directors have laid down proper internal financial controls to be followed by the Company and such controls are adequate and operating effectively; (f) the Directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively. PARTICULARS OF LOAN, GUARANTEES OR INVESTMENTS There were no loans, guarantees or investments made by the Company under Section 186 of the Act during the year under review. RELATED PARTY TRANSACTIONS The transactions entered into during the financial year with related parties as defined under the Act were in the ordinary course of business and at arm's length basis. There are no material contracts / arrangements / transactions to be disclosed. Hence the provisions of Section 188 of the Act would not apply and disclosure in form AOC-2 is not required. The approval of the Members is being sought at the 44th AGM for the transactions considered material as per Clause 49 of the Listing Agreement. The policy on Related Party Transaction as required under the Listing Agreement is available on the Company's website under the weblink: <http://www.spic.in/Policy%20on%20Related%20Parties.pdf>. MATERIAL CHANGES AND COMMITMENTS, IF ANY, AFFECTING THE FINANCIAL POSITION OF THE COMPANY There are no material changes or commitments affecting the financial position of your Company that has occurred between the end of the financial year i.e., 31st March 2015 and the date of this Report. ENERGY CONSERVATION, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND OUTGO Conservation of Energy An Energy Audit group, consisting of senior executives and certified energy auditors, is focusing on various energy saving measures. This group identifies potential areas for improvement, scans the environment for innovative and reliable solutions and considers proposal for implementation. Efforts are continuously being taken to reduce energy consumption in the plants. Some of the activities implemented during the year are: • To avoid the energy loss through the exchangers, the coolers of loop refrigeration condenser (bottom), the material of construction has been upgraded with Duplex Stainless steel make. Similarly, syn gas coolers (I/II Stage) & PAC intercooler (III Stage), the material of construction has been upgraded with Austenitic Stainless steel make in the Ammonia plant. • To prepare the plant towards natural gas operation, all the reformer and fired heater - burners were replaced with dual fuel fired burners. These burners were designed for higher efficiency and lowest emission. • To reduce the stack temperature and to conserve energy, tubes of the leaky cold air heater bundles of Ammonia plant boilers (3 boilers) were replaced. • As energy conservation activity, two of the old generation cooling tower cells have been replaced in the Ammonia plant. • Performance of all pumps and compressors were studied with our energy Audit group. Various energy saving technologies like provision of VFD, speed reduction, impeller trimming and smoothening the fluid passage with special coatings were implemented. INTERNAL FINANCIAL CONTROL & RISK MANAGEMENT SYSTEM The Company has adequate internal control systems to monitor business processes, financial reporting and compliance with applicable regulations. The systems are periodically reviewed by the Audit Committee of the Board, for identification of deficiencies and necessary time bound actions are taken to improve efficiency at all the levels. The Committee also reviews the internal auditors' report, key issues, significant processes and accounting policies. Risk Management is an integral part of the business process. The Company has constituted a Risk Management Committee and adopted a policy on risk management, identified and drawn mitigation plans to manage risk. The Audit Committee of the Board reviews the risk management report periodically. SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS There are no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and Company's operations in future. CORPORATE SOCIAL RESPONSIBILITY As a responsible corporate citizen, your Company in its endeavour to contribute for the sustained development and growth of the Society has set out in its Corporate Social Responsibility (CSR) Policy, plans in line with the provisions of the Act and the Rules thereon. The details of CSR initiatives undertaken by your Company is given in Annexure - V to this Report PERFORMANCE EVALUATION OF THE BOARD, COMMITTEES AND DIRECTORS The Board on recommendation of the Nomination and Remuneration Committee has structured a framework for evaluation of the Individual Directors, Chairperson, Board as a whole and its Committees. The Independent Directors at their Meeting held during March 2015 evaluated the performance of Non Executive Directors, Chairperson and assessing the quality, quantity and timeliness of flow of information between the Company Management and the Board that is necessary for the Board to effectively and reasonably perform their duties. The evaluation of the Directors and the Board as a whole and its Committees were done through circulation of questionnaires, which assessed the performance on select parameters related to roles, responsibilities and obligations of the Board and functioning of the Committees. The evaluation criterion was based on the participation, contribution and offering guidance to and understanding of the areas which are relevant to the Directors in their capacity as Members of the Board/Committees. NUMBER OF MEETINGS OF THE BOARD During the year under review, six Board Meetings were held on 28th May 2014, 30th July 2014, 8th September 2014, 14th November 2014, 10th February 2015 and 24th March 2015. SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS There are no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and Company's operations in future. CORPORATE SOCIAL RESPONSIBILITY As a responsible corporate citizen, your Company in its endeavour to contribute for the sustained development and growth of the Society has set out in its Corporate Social Responsibility (CSR) Policy, plans in line with the provisions of the Act and the Rules thereon. The details of CSR initiatives undertaken by your Company is given in Annexure - V to this Report PERFORMANCE EVALUATION OF THE BOARD, COMMITTEES AND DIRECTORS The Board on recommendation of the Nomination and Remuneration Committee has structured a framework for evaluation of the Individual Directors, Chairperson, Board as a whole and its Committees. The Independent Directors at their Meeting held during March 2015 evaluated the performance of Non Executive Directors, Chairperson and assessing the quality, quantity and timeliness of flow of information between the Company Management and the Board that is necessary for the Board to effectively and reasonably perform their duties. The evaluation of the Directors and the Board as a whole and its Committees were done through circulation of questionnaires, which assessed the performance on select parameters related to roles, responsibilities and obligations of the Board and functioning of the Committees. The evaluation criterion was based on the participation, contribution and offering guidance to and understanding of the areas which are relevant to the Directors in their capacity as Members of the Board/Committees. NUMBER OF MEETINGS OF THE BOARD During the year under review, six Board Meetings were held on 28th May 2014, 30th July 2014, 8th September 2014, 14th November 2014, 10th February 2015 and 24th March 2015. VIGIL MECHANISM Pursuant to the provisions of Section 177 (9) and (10) of the Act and the Listing Agreement, Whistle Blower Policy for Directors and employees to report genuine concerns or grievances is put in place and a Vigil Mechanism established, the details of which are available on the website of the Company under weblink: <http://www.spic.in/Whistle%20Blower%20> Policy%20and%20Vigil%20Mechanism.pdf. POLICY ON INSIDER TRADING Your Company has adopted a Code of Conduct for Prevention of Insider Trading with a view to regulate trading in securities by the Directors and designated employees of the Company in line with SEBI (Prohibition of Insider Trading) Regulations, 2015. POLICY ON SEXUAL HARASSMENT OF WOMEN (POSH) AT WORKPLACE (PREVENTION, PROHIBITION AND REDRESSAL) ACT, 2013 The Company has zero tolerance for sexual harassment at workplace and has adopted a policy on prevention, prohibition and redressal of sexual harassment at workplace in line with the provisions of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and the Rules framed thereunder. An Internal Complaints Committee has been constituted and Orientation Programmes were conducted in the Registered Office and the Plant site at Tuticorin, for all female employees. The Members of the committee also attended a Workshop conducted by CII's Women Network to familiarize themselves with practices and procedures. There were no complaints reported under the POSH. MANAGEMENT DISCUSSION AND ANALYSIS Industry Overview Indian Fertilizer Industry has been the backbone of Indian agriculture since the era of green revolution in 1960s. It has emerged as a world class industry in terms of state-of-the-art production technologies, high energy efficiency with excellent record in the areas of safety and environment supporting the ever growing demand for food grain.Currently, India is the second largest consumer of fertilisers and third largest producer of nitrogenous and phosphatic fertilisers in the world. For the year 2014-15 crop year (July - June period), India is expected to record a decline in food-grain production of 3% at 257.07 MT, compared to the highest ever food-grain production of 265.57 MT in 2013-14. The decline is due to lower production of rice, coarse cereals and pulses on account of erratic rainfall conditions during the monsoon season in 2014. Despite the indigenous production and import of fertilizers which is on the rise, there is still a huge deficit in indigenous production of fertilisers to meet the agricultural needs of Indian farmers. The urea production for 2014-15 was 225.85 lakh MT as compared to 227.15 lakh MT in the previous year while the GoI has imported 72.89 lakh MT during 2014-15 compared to 70.88 lakh MT in 2013-14. (Source - Press Information Bureau, Ministry of Chemicals and Fertilizers, GoI Globally, the nitrogenous fertiliser raw material prices have been on a declining trend over the last one year. A comparison with the margins of 2013-14 fiscal year shows that Indian fertilisers companies have started reflecting the comfort of lower crude oil prices. Also, the volatility in INR against USD throughout the year enabled the companies to insulate from facing large fluctuations in the forex market. With falling crude oil and natural gas prices, the quantum of subsidy will come down. This factor along with growing demand for fertilisers might benefit the fertiliser companies. Challenges During the year under review, your company did face some uncertainties/challenges in the policy front due to delays in the notification of subsidy continuation resulting in the stoppage of the plants for 102 days. In the coming years Naphtha based Urea units, would continue to face uncertainties for continuous operation; especially in the procurement of Naphtha and Furnace Oil since the price of gas to be considered for eligible subsidy would not be known in advance. The frequent start-stop of an Ammonia/Urea complex due to uneconomical price of Naphtha/Furnace Oil can be a deterrent in addition to detrimental effects on the catalysts and equipment operating at high temperatures and pressures. This would disrupt the availability of much needed fertilizers. Hence your Company has flagged the above issues to the GoI. Regarding gas connectivity to your plant, Indian Oil Corporation has been short listed by PNGRB (Petroleum and Natural Gas Regulatory Board) to lay the Gas pipeline from Ennore to Tuticorin via Ramnad. Once the contract is formally awarded, the Tuticorin - Ramnad section is likely to be completed on priority in about 15 months time. This would help your company to source about 0.6 - 0.9 MMSCMD of gas from ONGC, ahead of the completion of IOC LNG Terminal at Ennore in mid 2018. Since the Government has proposed to reduce the pre-set energy norm to 6.5 G Cal/MT of urea by 2018 from the present norm of 7.382 G Cal/MT, your Company on a priority basis, has already initiated corrective action to bring down the energy consumption. During the current year (2015-16) the budget allocation for subsidy for indigenous urea is only Rs.34000 crore against Rs.36200 crore allocated last year. If we factor in the carry over liability of last year, increase in domestic gas price and the exchange rate fluctuations, there could be an adverse impact on the disbursement of Urea subsidy and consequently managing the working capital needs would be a challenge. ACKNOWLEDGEMENT Your Company is grateful for the co-operation and continued support extended by the Department of Fertilizers, Ministry of Chemicals and Fertilizers, Ministry of Petroleum and Natural Gas, Ministry of Agriculture, Ministry of Corporate Affairs and other Departments of the Central Government, the Government of Tamilnadu, Governments of other States, Tamilnadu Industrial Development Corporation Limited, Tamilnadu Generation and Distribution Corporation Ltd, Financial Institutions and Banks. The Directors appreciate the dedicated and sincere services rendered by all the employees of your Company. For and on behalf of the Board of Directors ASHWIN C MUTHIAH (DIN:°°255679) Chairman Date : 4 August, 2015 Place : Chennai |