Future pension obligations may prove costlier than currently anticipated and the market value of assets in the Company's pension plans could decline.
The Company provides post-retirement and pension benefits to the Company's employees, including defined benefit plans. The Company's pension liabilities are generally funded. However, lower returns on pension fund assets, changes in market conditions, interest rates or inflation rates, and adverse changes in other critical actuarial assumptions, may impact the Company's pension liabilities or assets and consequently increase funding requirements, which could materially decrease the Company's net income and cash flows.
For Jaguar Land Rover, the arrangements with the trustees of the defined benefit pension schemes, an actuarial valuation of the assets and liabilities of the schemes is undertaken every three years. The most recent valuation, as at April 2015 and completed in 2016, indicated a shortfall in the assets of the schemes as at that date, versus the actuarially determined liabilities as at that date, of GB£ 789 million (compared to GB£ 702 million as at April 2012).
As part of the valuation process, the Company agreed to a schedule of contributions with the trustee of the schemes, which, together with the expected investment performance of the assets of the schemes, is expected to eliminate the deficit by 2025. As part of this schedule of contributions, the Company paid GB£ 69 million into the pension schemes in March 2016 as advance payments towards deficit contributions due during Fiscal 2017. As at March 31, 2017, the UK defined benefit pension accounted deficit had increased to GB£ 1.46 billion, as compared to GB£ 567 million as at March 31, 2016. This increase has primarily been driven by a decline in AA-negative rated UK corporate bond yields following Brexit and even though the accounted deficit position does not affect cash contributions, movements in the associated balance sheet liability may have other impacts notably on the Company's results of operations and financial condition.
The Company is exposed to operational risks, including risks in connection with the Company's use of information technology.
Operational risk is the risk of loss resulting from inadequate or failed internal systems and processes, from either internal or external events. Such risks could stem from inadequacy or failures of controls within internal procedures, violations of internal policies by employees, disruptions or malfunctioning of information technology systems, such as computer networks and telecommunication systems, other mechanical or equipment failures, human error, natural disasters or malicious acts by third parties. Any unauthorized access to or misuse of data on the Company's information technology systems, human errors or technological or process failures of any kind or any failure in its protection measures could severely disrupt the Company's operations, including its manufacturing, design and engineering processes, and could have a material adverse effect on the Company's reputation, financial condition and results of operations.
The Company may be materially and adversely affected by the divulgence of confidential information.
Although the Company has implemented policies and procedures to protect confidential information such as key contractual provisions, future projects, and customer records, such information may be divulged, including as a result of hacking or other threats from cyberspace. If this occurs, the Company could be subject to claims by affected parties, negative publicity and loss of proprietary information, all of which could have an adverse and material impact on the Company's reputation, business, financial condition, results of operations and cash flows.
The Company's insurance coverage may not be adequate to protect against all potential losses to which the Company may be subject, and this may have a material adverse effect on the Company's business, financial condition and results of operations.
While the Company believes that the insurance coverage that it maintains is reasonably adequate to cover all normal risks associated with the operation of its business, there can be no assurance that the Company's insurance coverage will be sufficient, that any claim under its insurance policies will be honored fully or in a timely manner, or that the Company's insurance premiums will not increase substantially. There can be no assurance that any claim under the Company's insurance policies will be honoured fully or timely, the Company's insurance coverage will be sufficient in any respect or its insurance premiums will not change substantially. Accordingly, to the extent that the Company suffers loss or damage that is not covered by insurance or that exceeds the Company's insurance coverage, or are required to pay higher insurance premiums, the Company's business, financial condition and results of operations may be materially and adversely affected.
The Company's business could be negatively affected by the actions of activist shareholders.
Certain of the Company's shareholders may from time to time advance shareholder proposals or otherwise attempt to effect changes or acquire control over the Company's business. Campaigns by shareholders to effect changes at publicly listed companies are sometimes led by investors seeking to increase short-term shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases or even sales of assets or the entire Company, or by voting against proposals put forward by the board of directors and management of the Company. If faced with actions by activist shareholders, the Company may not be able to respond effectively to such actions, which could be disruptive to its business.
Political and Regulatory Risks
India's obligations under the World Trade Organization Agreement could materially affect the Company's business.
India's obligations under its World Trade Organization agreement could reduce the present level of tariffs on imports of components and vehicles. Reductions of import tariffs could result in increased competition, which in turn could materially and adversely affect the Company's sales, business, financial condition and results of operations.
New or changing laws, regulations and government policies regarding increased fuel economy, reduced greenhouse gas and other emissions, vehicle safety and taxes may have significant impact on the Company's business
As an automobile company, the Company is subjected to extensive governmental regulations regarding vehicle emission levels, noise, safety and levels of pollutants generated by its production facilities. In particular, the United States and Europe have stringent regulations relating to vehicle emissions. The contemplated tightening of vehicle emissions regulations by the European Union will require significant costs for compliance. In China, further regulations are being introduced by Chinese government in the short to medium term future relating to greenhouse gas emissions and other environmental concerns. While the Company is pursuing various technologies in order to meet the required standards in the various countries in which it sells its vehicles, the costs for compliance with these required standards may be significant to the Company's operations and may adversely impact its results of operations. They may also result in limiting the type of vehicles the Company sells and where the Company sells them, which may affect the Company's revenues.
In order to comply with current and future safety and environmental norms, the Company may have to incur additional capital expenditure and Research & Development expenditure to (i) operate and maintain the Company's production facilities, (ii) install new emissions controls or reduction technologies, (iii) purchase or otherwise obtain allowances to emit greenhouse gases, (iv) administer and manage the Company's greenhouse gas emissions program, and (v) invest in Research and Development to upgrade products and manufacturing facilities. If the Company is unable to develop commercially viable technologies or otherwise unable to attain compliance within the time frames set by the new standards, the Company could face significant civil penalties or be forced to restrict product offerings significantly. For example, in the United States, manufacturers are subject to substantial civil penalties if they fail to meet federal Corporate Average Fuel Economy, or CAFE, standards. These penalties are calculated at $5.50 for each tenth of a mile below the required fuel efficiency level for each vehicle sold in a model year in the U.S. market. As with many European manufacturers, since 2010, Jaguar Land Rover has paid total penalties of US$46 million for its failure to meet CAFE standards. Jaguar Land Rover could incur a substantial increase in these penalties, including as a result of announced increases in CAFE civil penalties to adjust for inflation. Moreover, safety and environmental standards may at times impose conflicting imperatives, which pose engineering challenges and would, among other things, increase the Company's costs.
The Motor Vehicles (Amendment) Bill, 2017 has been passed in Lok Sabha on April 10, 2017 and presently the Bill is under scrutiny of the Rajya Sabha. This Bill addresses various issues regarding road safety, traffic management & other matters. It provides for the imposition of hefty penalties on vehicle manufacturers found producing faulty vehicles. The Bill proposes for a National Road Safety Board, to be created by the Central Government through a notification. The Board will provide advice to the Central and State Governments on all aspects of road safety and traffic management.
The Government of India had proposed a comprehensive national goods and services tax, or GST, regime that would combine taxes and levies by the central and state governments into one unified rate structure. While both the Government of India and state governments of India have publicly announced that all committed incentives will be protected following the implementation of the GST, given the limited availability of information on incentives and refunds, the Company is unable to provide any assurance as to this or any other aspect of the tax regime following implementation of the GST.
The Central Goods and Services Tax Bill (CGST), the Integrated Goods and Services Tax Bill (IGST) the Goods and Services Tax (Compensation to States) Bill and the Union Territory Goods and Services Tax Bill (UTGST) were passed by Lok Sabha on April 6, 2017 and so far 17 States have passed SGST Laws as on May 23, 2017. The Government of India has publicly announced its intention to implement the GST on July 1 2017. With the progress made so far, this seems to be a realistic timeline.
Imposition of any additional taxes and levies designed to limit the use of automobiles could adversely affect the demand for the Company's vehicles and the Company's results of operations. Changes in corporate and other taxation policies as well as changes in export and other incentives given by various governments or import or tariff policies could also adversely affect the Company's results of operations. For instance, the United Kingdom's exit from the European Union would result in material changes to the UK's tax, tariff and fiscal policies. In addition, the incoming U.S. presidential administration could seek to introduce changes to laws and policies governing international trade and impose additional tariffs and duties on foreign vehicle imports, which could have a material adverse effect on the Company's sales in the United States. Furthermore, Brazil in recent years increased import duty on foreign vehicles, which put pressure on sales margins in Brazil and prompted the Company to enter into discussions with the Brazilian government to exempt a certain number of imported vehicles from the increased tariff. Such government actions may be unpredictable and beyond the Company's control, and any adverse changes in government policy could have a material adverse effect on the Company's business prospects, results of operations and financial condition.
Evaluating and estimating the Company's provision and accruals for the Company's taxes requires significant judgement. As the Company conducts its business, the final tax determination may be uncertain. The Company operates in multiple geographical markets and the Company's operations in each market are susceptible to additional tax assessments and audits. The Company's collaborations with business partners are similarly susceptible to such tax assessments.
Authorities may engage in additional reviews, inquiries and audits that disrupt the Company's operations or challenge the Company's conclusions regarding tax matters. Any resulting tax assessment may be accompanied by a penalty or additional fee for failing to make the initial payment. The Company's tax rates may be affected by earnings estimation errors, losses in jurisdictions that do not grant a related tax benefit, changes in currency rates, acquisitions, investments, or changes in laws, regulations, or practices. Additionally, government fiscal pressures may increase the likelihood of adverse or aggressive interpretations of tax laws or regulations or the imposition of arbitrary or onerous taxes, interest charges and penalties. Tax assessments may be levied even where the Company considers its practices to comply with tax laws and regulations. Should the Company challenge such taxes or believe them to be without merit, the Company may nonetheless be required to pay them? These amounts may be materially different from the Company's expected tax assessments and could additionally result in expropriation of assets, attachment of additional securities, liens, imposition of royalties or new taxes and requirements for local ownership or beneficiation.
Regulations in the areas of investments, taxes and levies may also have an impact on Indian securities, including the Company's Shares and ADSs.
In 2014, the antitrust regulator in China, the Bureau of Price Supervision and Anti-Monopoly of the National Development and Reform Commission (the "NDRC"), launched an investigation into the pricing practices of more than 1,000 Chinese and international companies in the automotive industry, including Jaguar Land Rover and many of its competitors. The NDRC has reportedly imposed fines on certain of the Company's international competitors as a result of anti-competitive practices pertaining to vehicle and spare-part pricing. In response to this investigation, Jaguar Land Rover established a process to review our pricing in China and announced reductions in the manufacturer's suggested retail price for the 5.0-liter V8 models, which include the Range Rover, Range Rover Sport and F-Type and the price of certain of our spare parts. Further imposition of price reductions and other actions taken in relation to Jaguar Land Rover's products may significantly reduce its revenues and profits generated by operations in China and have a material adverse effect on the Company's financial condition and results of operations. As a result, the Jaguar Land Rover's attempts to offset the potential decline in revenue and profits by increasing operational efficiencies and leveraging economies of scale (for example, through local production in China) may fail or not be as successful as expected. Furthermore, any regulatory action taken or penalties imposed by regulatory authorities may have significant adverse financial and reputational consequences on the Company's business and have a material adverse effect on the Company's results of operations and financial condition.
On March 29, 2017, the Supreme Court of India prohibited the sale and registration of Bharat Stage III vehicles from April 1, 2017. The Supreme Court's judgment overturned a government regulation, and was unexpected. The Government of India has applied to the Supreme Court for a grant of appropriate time for manufacturers to dispose Bharat Stage III vehicles in their inventory. This application is currently pending. Similarly a review petition filed by the Society of Indian Manufacturers, or SIAM, is also currently pending. The Supreme Court's decision resulted in a provision of Rs. 148 crores for the unsold inventory of BSIII vehicles at the year end of March 31, 2017. The Company cannot guarantee a favorable outcome for either the Government of India's application or SIAM's review petition. Any future potential or real unexpected change in law could havecould have a material adverse effect on the Company's business prospects, results of operations and financial condition.
The Company may be affected by competition law in India and any adverse application or interpretation of the Competition Act could adversely affect the Company's business.
The Indian Competition Act oversees practices having an appreciable adverse effect on competition, or AAEC, in a given relevant market in India. Under the Competition Act, any formal or informal arrangement, understanding or action in concert, which causes or is likely to cause an AAEC, is considered void and results in imposition of substantial penalties. Consequently, all agreements entered into by the Company could be within the purview of the Competition Act. Furthermore, any agreement among competitors which directly or indirectly involves determination of purchase or sale prices, limits or controls production, sharing the market by way of geographical area or number of subscribers in the relevant market or which directly or indirectly results in bid-rigging or collusive bidding is presumed to have an AAEC in the relevant market in India and is considered void. The Competition Act also prohibits abuse of a dominant position by any enterprise. The Company cannot predict with certainty the impact of the provisions of the Competition Act on the Company's agreements at this stage.
On March 4, 2011, the Government of India issued and brought into force the combination regulation (merger control) provisions under the Competition Act with effect from June 1, 2011. These provisions require acquisitions of shares, voting rights, assets or control or mergers or amalgamations that cross the prescribed asset- and turnover-based thresholds to be mandatorily notified to and pre-approved by the Competition Commission of India, or CCI. Additionally, on May 11, 2011, the CCI issued the Competition Commission of India (Procedure for Transaction of Business Relating to Combinations) Regulations, 2011 (as amended), which sets out the mechanism for the implementation of the merger control regime in India.
Furthermore, the CCI has extraterritorial powers and can investigate any agreements, abusive conduct or combination occurring outside India if such agreement, conduct or combination has an AAEC in India. The CCI has initiated an inquiry against the Company and other car manufacturers, collectively referred to hereinafter as the OEMs, pursuant to an allegation that genuine spare parts of automobiles manufactured by the OEMs were not made freely available in the open market in India and, accordingly, anti-competitive practices were carried out by the OEMs.
If the Company is adversely affected, directly or indirectly, by the application or interpretation of any provision of the Competition Act, or any enforcement proceedings initiated by the CCI, or any adverse publicity that may be generated due to scrutiny or prosecution by the CCI or if any prohibition or substantial penalties are levied under the Competition Act, it could adversely affect the Company's business, financial condition and results of operations.