ITC - The FERA Violation Story


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Case Details:

Case Code : BECG016
Case Length : 14 Pages
Period : 1996 - 2001
Pub. Date : 2002
Teaching Note : Available
Organization : Enforcement Directorate (ED), Customs and Department of Revenue Intelligence (DRI), ITC
Industry : Food, Beverages and Tobacco
Countries : India

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Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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ITC in Trouble Contd...

Though ITC performed very well on the financial front for the fiscal 1996-97, charges of FERA violation, excise duty evasion and share price manipulation in the early 1990s seemed to have tarnished the company's image beyond repair (Refer Exhibit I & II).

Background Note

ITC was started by UK-based tobacco major BAT. It was called the Peninsular Tobacco Company (Peninsular), for cigarette manufacturing, tobacco procurement and processing activities. In 1910, it set up a full-fledged sales organization named the Imperial Tobacco Company of India Limited (Imperial). To cope with the growing demand, BAT set up another cigarette manufacturing unit in Bangalore in 1912. To handle the raw material (tobacco leaf) requirements, a new company called Indian Leaf Tobacco Company (ILTC) was incorporated in July 1912. By 1919, BAT had transferred its holdings in Peninsular and ILTC to Imperial. Following this, Imperial replaced Peninsular as BAT's main subsidiary in India.

By the late 1960s, the Indian government began putting pressure on multinational companies to reduce their holdings. Imperial divested its equity in 1969 through a public offer, which raised the shareholdings of Indian individual and institutional investors from 6.6% to 26%.

After this, the holdings of Indian financial institutions were 38% and the foreign collaborator held 36%. Though Imperial clearly dominated the cigarette business, it soon realized that making only a single product, especially one that was considered injurious to health, could become a problem. In addition, regular increases in excise duty on cigarettes started having a negative impact on the company's profitability. To reduce its dependence on the cigarette and tobacco business, Imperial decided to diversify into new businesses. It set up a marine products export division in 1971. The company's name was changed to ITC Ltd. (ITC) in 1974. In the same year, ITC reorganized itself and emerged as a new organization divided along product lines.

In 1975, ILTC was made a division of ITC. In 1975, ITC set up its first hotel in Chennai. The company diversified into the textile industry with Tribeni Handlooms in 1977. The same year, ITC set up Bhadrachalam Paperboards. In 1981, ITC diversified into the cement business and bought a 33% stake in India Cements from IDBI. This investment however did not generate the synergies that ITC had hoped for and two years later the company divested its stake...

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