Himachal Fertilizer Corporation (A) : An Ethical Conundrum
Himachal Fertilizer Corporation (A) : An Ethical Conundrum
Himachal Fertilizer Corporation (A) : An Ethical Conundrum
H
imachal Fertilizer Corporation (hereafter, HFC, or the Company) was a large
publicly listed corporation in India engaged in the production and market-
ing of urea. Urea is a chemical compound most commonly used as a nitrogen
fertilizer in the agricultural and polymer industries. Available as free-flowing prills
(granules), it is the cheapest form of fertilizer to transport and the least likely to “cake.”
It is therefore favored in developing countries such as India.
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 country. The Company was in
the process of setting up a plant in Central India, with a capacity to process five million
metric tons of naphtha (a flammable liquid made from distilling petroleum) that it
would use as the feedstock for producing urea. The new plant would increase its exist-
ing production capacity of about 33 million metric tons by 25 percent.1 The naphtha
was to be received from East Asia via large tankers, offloaded at a port, and transported
through a pipeline to HFC’s manufacturing plant for processing.
In March 2012 HFC had floated a tender (i.e., invited bids) to handle imported
naphtha for its upcoming plant. Given the sizeable volume of naphtha to be handled,
the bidder port that would be awarded the contract would be required to make sig-
nificant additional investments in new facilities, including setting up a single buoy
mooring (SBM)2 for offloading of naphtha from the tankers, constructing pipelines to
carry naphtha onshore from the SBM, and installing storage tanks to store the naphtha
before being transported to the plant. HFC would construct and operate the pipeline
to transport naphtha from the storage tanks to the plant and obtain necessary environ-
mental clearances from the states through which the pipeline would pass.3
The investment to be made by the bidder port was expected to be US$ 120 million.
HFC and the port would sign a contract that would guarantee a minimum cash flow
to the port for an initial period of twenty years, with an option to renew the contract
Copyright © 2015 by the Case Research Journal and by Samir Kumar Barua and Mahendra R. Gujarathi.
All rights reserved. The case was prepared by the authors for the sole purpose of providing material for
classroom discussion. It is not intended to illustrate either effective or ineffective handling of a managerial
situation. The case has benefitted from the comments of the participants in the 2013 NACRA annual
conference, 2014 annual conference of Northeast Decision Sciences Institute and 2015 Bentley Global
Business Ethics Teaching Workshop. The authors would like to thank Professors Bala Balasubramanian,
Robert Frederick, Janis Gogan, Mike Hoffman, and Jeff Moriarty for their comments on earlier drafts
of the case. The helpful and insightful comments of three anonymous reviewers and of the editor John
Lawrence are also greatly appreciated.
Himachal Fertilizer Corporation (A): An Ethical Conundrum 1
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for another ten-year period on mutually agreed terms (see Exhibit 1 for the details of
financial evaluation of the contract.)
Operating cost of facilities for naphtha 0.40 US$ per metric ton
* Assumes that a 1.65 million metric ton plant requires about one million metric ton of naphtha.
The net present value of the contract, ignoring taxes, was about US$ 118 mil-
lion, based on the cash flows in the first twenty years. Since the costs of the bidder
would mostly be incurred in Indian Rupees (INR), if US$ were to appreciate against
the Rupee, the contract would become even more valuable. The salvage value of the
facilities at the end of the twenty-year period would further boost the bidder’s finan-
cial returns. Given the global recessionary situation continuing to prevail in 2012, the
contract would be a lifeline for the winner of the contract. HFC therefore expected the
rates4 quoted by bidding ports to be very competitive.
The tender documents had been obtained by five companies upon payment of the
requisite fees. Although any port in the country was free to bid for the contract, realisti-
cally, due to their proximity, only two ports, one located on the Southern coast of India,
owned by India Ports Limited (IPL), and another located on the Western coast of
India, owned by Bharat Ports Limited (BPL), were expected to be serious contenders.
Evaluation of Bids
Potential bidders were given approximately four weeks to submit their bids. The dead-
line for bid submission was 5:30 p.m. on April 14, 2012. The bids were to be evaluated
by a team of executives from the logistics division of HFC and then presented to the
investment committee (of the board), which comprised three HFC board members.
The Committee was tasked with the selection of the winning bid and recommending
a decision to the board. The recommendation of the investment committee would be
discussed in a meeting of the full board for a final decision on awarding of the contract.
The investment committee was scheduled to meet on April 20, 2012, and the presen-
tation from management was to be led by Mr. George Mathew, director (logistics).5
George Mathew, a mechanical engineer by profession, was a long-time executive
in the Company. He had risen through the ranks and had been with the logistics divi-
sion throughout his career at HFC. Perceived as a “tough” boss, subordinates respected
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to Jul 2021.
his technical competence. He demanded absolute obedience from his subordinates.
George was articulate and expressed his views boldly and with conviction. He was not
a person who would give in easily to those opposed to his views.
The investment committee was chaired by Mr. Anil Nair, a non-executive inde-
pendent director with vast corporate experience. The other members of the committee
were Mr. Neil Shah who was also a non-executive independent director on the board,
and Mr. Surendra Rawat, director (finance) of HFC. Neil and Anil had developed an
excellent working relationship over the six years they had been on HFC’s board. Both
of them had joined the board on the same day and had worked together on several
challenging issues.
Neil was a chartered accountant with over two decades of corporate board expe-
rience. He had recently retired from active service as director (finance) of a large
multinational corporation. After retirement, he operated from an office located in
Mumbai, advising companies on issues connected with strategy and governance. He
had been inducted into the board of HFC following wide-spread reforms in corporate
governance implemented by the Indian government (Appendix A provides a brief
history and current state of corporate governance in India). The boards of listed com-
panies were required to have a minimum of one-third non-executive independent
directors. Neil was well-respected in the corporate world on the strength of his profes-
sional standing. Neil chaired the audit and ethics committee of the HFC board.
Himachal Fertilizer Corporation (A): An Ethical Conundrum 3
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Paul began the conversation by saying, “Sir, a key bid condition was changed at the
last minute to disqualify us. At around 1:00 p.m. yesterday, we received a fax message
from HFC that the deadline for submission of sealed bids had been advanced from
5:30 p.m. to 3:00 p.m. We made frantic efforts to reach the HFC office by this new
deadline but were unable to do so. Although we presented our bid at 4:30 p.m., it was
rejected because it was submitted after the new deadline. We are extremely upset that
our bid was not accepted.”
Neil was puzzled by the assertion that advancing of the deadline by a few hours was
being characterized as a “serious breach” of the bidding process when four weeks had
been given for bid preparation. He asked Paul, “I do not understand why advancing
the deadline by a couple of hours would be of significant consequence. You had several
weeks to submit your bid. Why would you wait until the last minute to submit it?”
“Sir, let me explain. Because the bids are required to be delivered in person, the bids
are submitted by a senior and trusted employee. We intended to submit it just before
the deadline to minimize the possibility of the information being surreptitiously made
available to the other bidders. In our case, an executive director was assigned the task
of submitting the bid. He was to drive down to Bangalore to submit the bid by 5:00
p.m. As soon as we received the fax informing us that the deadline had been advanced,
we contacted him. Despite frantic efforts, he reached the headquarters of HFC at 4:30
p.m., well after the new deadline had expired. We understand that HFC has received
only one bid—from BPL. We believe that BPL was informed in advance about the
change in deadline and that the change was executed in a manner that would exclude
us from the bidding process,” explained Paul.
Neil had always been uneasy about decisions involving large contracts. The high
stakes involved created significant incentive for unethical behavior. However, provid-
ing advantage to a bidder through an apparently innocuous deadline change was new
to him.
“Sir, we feel that BPL may have promised to compensate some managers in return
for favorable treatment,” added Paul, “particularly those involved in evaluating the
bids, such as Mr. George Mathew.”
Neil responded, “I do not mean to impugn the reputation of your company but
isn’t it possible that IPL, too, attempted to bribe management but couldn’t strike a deal
with HFC?”
Paul responded, “Sir, we are a company that observes the highest standards of
probity in our functioning. If you permit, Mr. Nitin Advani, the promoter7 of our
company, would be happy to speak with you. You can see for yourself that he is a busi-
nessman with strong ethical values.”
Neil was anxious. He could not decide immediately on what he should do. He real-
ized that he had perhaps already put himself in a compromising situation by meeting
Paul. Meeting Mr. Advani would only make things worse. He said to Paul, “No, there
is no need for Mr. Advani to meet me. Let me see what to do with the information
you’ve provided.”
“Sir, you have to help us out. We have state-of-the-art port facilities that are much
better than BPL’s facilities. I can assure you that we would serve the needs of HFC bet-
ter than BPL because we specialize in handling liquid cargo, which is what this tender
calls for. And sir, we would have understood if our bid had been rejected because it was
not competitive, but being denied an opportunity to participate in the bid through
such devious means is entirely unfair,” pleaded Paul.
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Neil said, “I understand your concern. Let me think it over.” Just as he was about
to leave, Neil called Paul back and asked, “If what you are saying is indeed true, then
why did you not complain in writing to the Company?”
“Sir, we have already sent a letter to HFC explaining why our bid could not be
submitted before the revised deadline. We have requested that since the deadline was
changed with such short notice, our bid should be accepted. We fear that our request
will be denied,” said Paul.
Neil was unsure how to deal with the information that Paul had provided. One
course of action would be 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 have a significant bearing on the integrity of the bidding process. Another
option was to mention it informally to Anil Nair (chair of the committee). Neil also
considered doing nothing and waiting to see how events unfolded in the investment
committee meeting.
Himachal Fertilizer Corporation (A): An Ethical Conundrum 5
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Appendix A: Note on Corporate Governance in India
Although some governance and disclosure standards were required by the Companies
Act of 1956, the real momentum for corporate governance in India gathered steam
during the country’s process of liberalization in 1990s. In 1998, the Confederation
of Indian Industry (CII) issued a voluntary code called Desirable Code of Corpo-
rate Governance. In 1999, the Securities and Exchange Board of India (SEBI)—a
regulating body similar to the Securities Exchange Commission in the U.S.—set up
a committee chaired by Kumar Mangalam Birla to raise the standards of corporate
governance. Later it set up another committee chaired by N. R. Narayana Murthy
for formalizing the best practices on corporate governance. The Murthy committee
defined corporate governance as follows in its report:8
Corporate governance is the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the 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.
Based on the suggestions of the Birla and the Murthy Committees, and the Sar-
banes Oxley Act of 2002 in the U.S., Clause 49 was modified by SEBI as part of the
listing requirements for the companies listed on Indian stock exchanges. SEBI noted
that the Indian Corporate Governance Framework is in compliance with the Cor-
porate Governance Principles of OECD (Organization for Economic Cooperation
and Development). Later, in the aftermath of India’s biggest corporate fraud (Satyam)
in 2008, SEBI issued requirements pertaining to disclosure of pledged shares, peer
review of the working papers of audits, maintenance of website, compulsory demate-
rialization of promoter holdings, approval of CFO by the audit committee, enabling
shareholders to cast vote electronically, etc.
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to Jul 2021.
Notes
1. One metric ton of naphtha is required to produce about 1.65 tons of urea.
Thus, five million tons of naphtha would service a urea plant of about eight
million tons.
2. SBMs are off-shore floating platforms, with limited storage capacity that are
used to empty liquid cargo such as crude and petroleum products from ships
that are too large to dock at ports. The cargo is pumped by pipelines from the
SBMs to large onshore storages.
3. The time for obtaining environmental clearances would vary depending on the
number of states through which the pipeline from the port to the plant would
pass.
4. The rates were to be quoted per ton of Naphtha handled.
5. Director (logistics) was a whole time (i.e., full-time) director on the board of
HFC.
6. The Code of Conduct of HFC laid down broad standards of compliance and
ethics, as required by Clause 49 of the Listing Agreement with the Bombay
Stock Exchange and the National Stock Exchange. The ethical conduct section
of the Code required officers and directors to (a) fulfill their fiduciary obliga-
tions without allowing their independence of judgment to be compromised;
(b) act fairly and transparently and not participate in any subject matter in
which a conflict of interest is likely to exist such that an independent judgment
of the Company’s best interest cannot be exercised; (c) not engage in any busi-
ness, relationship or activity with anyone who is a party to a transaction with
the Company; and (d) avoid any dealings with a contractor or supplier that
compromise the ability to transact business on a professional, impartial and
competitive basis, or influences decisions to be made by the Company.
7. Promoters are the founders of a company. They typically occupy senior execu-
tive positions in the company, and are members of the board of directors.
8. Available at http://www.sebi.gov.in/commreport/corpgov.pdf
Himachal Fertilizer Corporation (A): An Ethical Conundrum 7
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to Jul 2021.