The Meaning of Bhopal for Investors

The 1984 Bhopal disaster, involving a catastrophic failure at a Union Carbide pesticide manufacturing plant, represents a serious problem for Dow with the potential to damage the company's reputation. Over 14,000 deaths, and 50,000+ permanent injuries have been attributed to the event and its aftermath by Indian government officials. It has been the source of ongoing legal battles in both India and the United States. This case study covers the existing and potential financial and reputa-tional impacts for Dow related to the Bhopal disaster, as well as a general overview of the ongoing events and controversies.

While Dow claims that it has no responsibility for the incident and that it is a tragic event of the past, investors should be concerned about current developments and the possible financial ramifications that could result. Key issues include:

• Union Carbide's status in India. Dow's subsidiary, Union Carbide, has been listed as an "absconder from justice" by the Chief Bhopal Magistrate for failing to appear before the court on criminal charges relating to the disaster. Likewise, an extradition order has been issued by the Indian government36 for Warren Anderson, former CEO of Union Carbide at the time of the accident, so that he may face criminal charges as well. Efforts are under way to summon Dow to deliver Union Carbide to appear in the criminal case and to have Dow clean up the Bhopal site (Singh, 2002). While Union Carbide no longer has a presence in India, Dow does. Its current holdings37 registered in India38 include:

• Dow Chemical (India) Holdings Private Limited held by Dow Chemical Pacific;

• Dow Chemical International Pvt. Ltd.;

36The Indian Express (July 16, 2003), "Government Finally Acts on Anderson's Extradition;" The Hindu (March 15, 2003). "Centre Blamed for Delay in Anderson's Extradition;" Frontline Magazine (August 2— 15, 2003). "Request for Anderson's Extradition," Vol. 20, Issue 16.

37When asked about the size of its holdings in India, the company stated that the above companies were "minor holdings" and that it did not disclose information regarding the valuation of individual subsidiaries.

38Dow Chemical India Holdings Pvt. Ltd. (Registration #11-113550). Registered in Mumbai, Maharashtra; Dow Chemical Intl. Pvt. Ltd. (Registration #11-1135512) Registered in Mumbai, Maharashtra; Dow Polymers Pvt. Ltd. (Registration #04-27447) Registered in Ahmedabad, Gujarat; DE Nocil Crop Protection Ltd. (Registration #11-83566) Registered in Mumbai, Maharashtra; Dow Chemical International Ltd., USA (Registration #833). Registered in New Delhi; Dow Corning India P Ltd; Dow Corning Singapore Pte Ltd, Singapore (Registration #1299) Registered in New Delhi; Dow Elanco B.V., Netherlands (Registration #1236) Registered in New Delhi; Anabond Essex India Pvt Ltd. Registered in Chennai, Tamilnadu.; NEW DELHI: Registrar of Companies, 2nd Floor, B Block, Paryavaran Bhavan CGO Complex, Lodi Road, New Delhi 110 003; MUMBAI: Registrar of Companies, Maharashtra, Everest 100, Marine Drive, Mumbai 400 002, Tel: +91 22 22812639 fax: +91 22 22811977.

• Anabond Essex India Private Limited held by the Mortell Company (50 percent);

• DE Nocil Crop Protection Ltd (Joint venture);

• Dow Corning India P Ltd Dow Corning Singapore Pvt. Ltd, Singapore.

• India's increased economic importance. India is a growing player in the globalized chemical industry and opportunity costs could be sizable for Dow if it is constrained in such a large and growing market by the "substantial legal risk" that Dow says exists regarding Bhopal. The Indian economy was projected to grow by 7.2 percent in 2004.39 It boasts the world's 12th-largest chemical industry in terms of production, which is valued at Rs 1200 Billion ($26 bn) and has been growing at twice the rate of Asia's overall chemical market since 1998, and in the late 1990s India became a net exporter of chemi-cals.40 Agribusiness is an important consumer of Dow's products and India's agricultural sector is projected to grow 13.8 percent in 2004 (Shah, 2003). Dow currently reports that it has 12 percent of revenues from Asia, while only 2 percent of fixed assets there (Fig. 8.29). This implies that for Dow to increase its market share in India it may have to acquire more fixed assets in the country and therefore increase its exposure to potential liabilities from Bhopal.

• Bhopal as a long-term issue. Many serious points of contention remain between the survivors and Dow despite the funds from the civil case ($470 million). An estimated Rs 1500 crores (approx. $340 million) remains undistributed in the Bhopal compensation fund.41 The balance of the amount remaining in the fund is committed to compensation of victims, and cannot be used for the many other needs of the community, such as the public health and economic impacts resulting from the disaster, or for remediation of the contamination left behind by Union Carbide. Ongoing issues include remediation of water pollution alleged to be from the site, cleanup of the site itself,42 and further social support for widows, orphans, and the many thousands who are unable to work as a result of injuries. Given this, it seems likely that legal challenges and controversies will continue regardless of the outcomes of individual cases.

• Potential for divestment. Bhopal creates the real potential for escalating exclusions against Dow Chemical by money managers who run portfolios screened for social responsibility. In 2003 a study showed that there is now over $2.18 trillion under SRI management.43 Corporate directors can no longer ignore this level of investment. The issue is gaining a higher profile and will likely begin to affect investment decisions among this expanding group of investors.

39Indian Business Insight (January, 2004) "Sustained Growth: Indian Economy to Post 7.2% Growth in

2003-2004."

40Indian Business Insight (November 2003) "The Chemical Industry: An Indian Perspective," vol. 38;

41The Hindu (March 22, 2004) "Bhopal Tragedy: Payment Sought from Compensation Fund Balance."

42Indian Express (October 20, 2002) "MP [Madhya Pradesh] Wants Dow to Clean Up Mess."

43Social Investment Forum.

Fixed Assets Revenue

Figure 8.29. Breakdown of Dow's fixed assets and revenue by region. (Source: William S. Stravropoulos, Chairman and CEO, Dow Chemical, Presentation to Morgan Stanley Conference, February 24, 2004.)

• Regulatory trends. Recent events in India involving pesticides (including Dow product: chlorpyrifos) in soft drinks has led to demands for greater regulatory oversight of water quality and other aspects of environmental quality. India's economic growth and combined with renewed concern over pollution may provide the necessary funds and motivation to institute more effective environmental cleanup and monitoring laws, which would affect both the status of the Bhopal site and Dow's operations in general.

For investors to put Bhopal into perspective it is important to recognize one important factor - Bhopal is not just a synonym for industrial disaster, it is a leading test case for what is alleged to be wrong with the lack of corporate social accountability in the globalized economy. The actions of Union Carbide, and now Dow, are perceived worldwide as those of foreign investors more concerned about damage control than about the hundreds of thousands of human lives their operations have destroyed.

When Dow acquired Union Carbide's shares in February of 2001, it stated that "the company conducted an exhaustive assessment to ensure that there was absolutely no outstanding liability in relation to Bhopal. There was none; the company that Dow acquired retained absolutely no responsibility for either the tragedy or for the Bhopal site."44

However, Dow states in its 2002 Global Public Report:

We respect that for some people, responsibility for the Bhopal tragedy continues to be an unresolved issue. This doesn't change the facts that the Government of India, through the Settlement agreement, has full authority and responsibility over issues arising from the tragedy and that, upon acquiring Union Carbide, Dow inherited no responsibility. Still, some people would have us take action to resolve their concerns. But, we

^Statement of The Dow Chemical Company Regarding the Bhopal Tragedy, available at http: // www.dow.com/environment / debate/d15.html.

are aware of potentially significant legal risks associated with such actions and we will not compromise our obligation to protect our shareholder interests. (Author emphasis.)

The management's reporting of the Bhopal case presents a number of apparent omissions, inaccuracies, and contradictions that are misleading to investors. It implies that resolving outstanding concerns would raise significant legal risks. This amplifies the reality that the management is aware of outstanding risks related to Bhopal that are not being reported to shareholders, such as the fact that Union Carbide is considered an "absconder from justice" by the Bhopal magistrate.

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