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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"It is extremely disgusting to see what is happening to Chugh and Sapru today."

- S.L. Rao, Former Director, National Council of Applied Economic Research, commenting on the arrests of former ITC Chairmen, in November 1996.

ITC in Trouble

In October 1996, officials of the Enforcement Directorate1(ED), Customs and Department of Revenue Intelligence (DRI) conducted raids on the various establishments of tobacco to hotels major ITC in Kolkata. The raids were conducted because the ED suspected ITC of having contravened FERA regulations2 to the tune of $100 million.

ED sources claimed to have found conclusive documentary evidence of FERA violations by ITC from the raids. Following this, on October 30th, 1996, ED officials arrested R. K. Kutty, Director and head of ITC subsidiary International Business Division (IBD), G. K. P. Reddi, former IBD Director and Chairman, E. Ravindranath, former IBD Vice-President, Operations, IBD, and M. B. Rao, former export manager, IBD.

The arrests were made under section 35 of FERA, to conduct interrogations on FERA violations by ITC in international trading deals during 1991-95. All the arrested officials were remanded to judicial custody until November 13th, 1996.

On 31st October 1996, former Chairmen of ITC Ltd. (ITC), J.N. Sapru (Sapru) and Krishen Lal Chugh (Chugh) were summoned to the ED's office in Kolkata for interrogation. They were arrested the same day. On November 5, 1996, the ED interrogated ITC Chairman, Y.C. Deveshwar, who promised to submit a complete report on alleged FERA violations. By mid November, the ED arrested a few more ITC executives taking the total number of arrested officials to 15.

By June 1997, ITC's board of directors was facing prosecution on account of allegations of FERA contravention. An ED official said, "For the first time in Indian corporate history, the entire board of directors of a company has been held liable for irregularities." The case attracted extensive media attention, resulting in serious debates regarding the stringent FERA regulations and the need for efficient corporate governance practices in companies. The issue was discussed in both the houses of parliament, where MPs accused ITC of poor corporate governance practices and lack of transparency. The MPs wanted the DCA3 to investigate into the matter, as they felt ITC had contravened various sections of the companies Act and willfully and deliberately misinterpreted information causing loss to the shareholders.

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1] Enforcement Directorate is an enforcement body appointed by the central government for the purposes of FERA.

2] FERA was formulated to regulate dealings in foreign exchange and foreign securities.

3] The Department of Company Affairs is a central government body, which governs the Companies Act 1956 and the Monopolies and Restrictive Trade Practices (MRTP) Act 1969.

 

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