On September 2, 1997, in the board meeting of Indian Hotels Co. Ltd. (IHCL), Ratan Tata took over as the chairman of IHCL, after the former chairman and managing director, Ajit Baburao Kerkar (Kerkar), was made to resign. R.K. Krishna Kumar (Kumar), managing director of Tata Tea, was appointed the new Managing Director and S. Ramakrishnan of Tata Industries was made the Deputy Managing Director. Kerkar was asked to leave after two allegations of FERA violations surfaced: the non-repatriation of dollar deposits by two foreign airlines, which had offices on the Taj premises in Mumbai; and issue of Global Depositary Receipts (GDR) by IHCL?s subsidiary, Oriental Hotels, amounting to about US$30 million. The Tatas leveled serious charges of misdemeanor and irregularity against Kerkar, who had by then become a legend in the hotel industry for turning a single loss making property (the Taj Mahal Hotel in Mumbai) into a reputed international chain. Commenting on Kerkar's exit, a leading national daily wrote, “Building an international hotel chain during the most draconian days of the Foreign Exchange Regulation Act (FERA) obviously could not have happened without plenty of tightrope walking and some maneuvering on either side of the law.” The exit of Kerkar put an end to the era of „entrepreneur-manager? style of management encouraged by JRD Tata. It was replaced with Ratan Tata's style, which was more oriented towards maximizing shareholder's value through group vision, better disclosure practices, transparency in corporate conduct and proper succession planning.

Kerkar joined IHCL in January 1962 as assistant catering manager. He began his career with J. Lyon & Company in London where he qualified in hoteliering. Climbing the ladder quickly, Kerkar became the general manager of the badly managed and poorly run Taj Mahal Hotel, Mumbai, in 1968. In 1970, he became its managing director. Kerkar was one of the 'super managers' appointed by JRD Tata, who were given full freedom to run the different wings of the family empire in their individual ways. Over the next 27 years, Kerkar built up IHCL as India's largest and most profitable hospitality company. In the 1970s, IHCL expanded in a major way in Delhi, Madras, Goa and Rajasthan. This was seen as a major achievement for Kerkar as he succeeded despite very little financial help from the Tatas. By the 1980s, the once sick hotel had turned into a chain embracing the US and Europe. Kerkar funded the expansion of the IHCL flagship Taj Hotel by floating different companies, with different partners. Kerkar pioneered the concept of Rajasthan's palace hotels and resort hotels of Goa. He enhanced India's status as a tourist attraction by developing Rajasthan and Goa as tourist destinations. Kerkar had a well-polished public image and established himself as a capable executive. He was regarded as the man who almost single-handedly converted a one-hotel company into a thriving hotel chain with an international presence. Ultimately however, the Kerkar era came to an end on August 30, 1997, not with canapé and champagne, but with anger and acrimony.

The negative attitude of the Tatas toward the hotel business forced Kerkar to raise funds in his private capacity. Kerkar took the help of a group of investors, including the biscuit and cashew millionaire Rajan Pillai, for the Goa venture. The Tatas had just 6% of the equity in the venture. The Taj in Chennai and the Malabar Hotel in Kerala were built with the help of another group of investors. Kerkar later claimed that from the very beginning he wanted all the companies belonging to the Tata group to take large stakes in each of the hotels so that they remained forever secure as Tata entities. In the 1980s, Kerkar used the same financial strategy that he followed in India to set up hotels in the UK and the US. These complex financing arrangements resulted in many companies with interconnected loans and exposures, and minimized the equity control of IHCL and the Tatas over the Taj group. It also became one of the major charges against Kerkar's corporate governance. The Tatas blamed Kerkar for FERA violations in the agreement between IHCL and Singapore Airlines for the latter?s office in the Taj Mahal Hotel in Mumbai. According to the Tatas, IHCL management directed Singapore Airlines, to pay security deposits amounting to $4.91 million to Taj International Hotels Hong Kong Ltd., instead of receiving the money directly in India. For more than three and a half years, the management kept this money overseas without the knowledge and approval of the board and the statutory authorities. The transaction came to light after Ratan Tata received a letter from Singapore Airlines requesting for a 10% reduction in the deposit asked for by the Taj. However, Kerkar strongly refuted this allegation. Kerkar said that the money was paid to Taj Hong Kong only as ample measure of security, since there were several cases of entities that leased premises and did not vacate them. Kerkar was also alleged to have laundered money to help Cox & Kings (UK) to finance its acquisition of 40% stake in Cox & Kings (India)1 by Anthony Good. Good was a British national and a close associate of Ajit Kerkar. Good was also associated with Good Relations India Ltd., a public relations firm wholly owned and promoted by Cox & Kings. It was also alleged that Cox & Kings was actually controlled by Kerkar's son, Peter Kerkar; Good merely acted as a conduit for the funds to enable the takeover of Cox & Kings (India). Moreover, Peter was a 50% beneficiary of the 40% stake acquired by Good. However, Kerkar maintained that the acquisition of shares by Cox & Kings (UK) did not involve any cash dealings. The stake was allotted to Cox & Kings (UK) in consideration of transfer of the Indian business of the company to Cox & Kings (India). However, it was alleged that the funds provided to Good to acquire the stake in Cox & Kings (India) were made available by siphoning off profits from overseas hotel operations of IHCL in the US and other countries and from the sale of Baileys Hotel in London. The changing shareholding pattern of Cox & Kings (India) was one of the major causes of tension between Kerkar and the Tatas. During 1992-96, the Kerkar family increased its stake in the company from 17% to more than 30%. Thus Cox & Kings became a company controlled by Kerkar rather than an affiliate of the Taj Group. Questions were also raised on the manner in which an overseas fund floated by Cox & Kings (India) failed to make proper disclosures. It was claimed that the company was setting up a bank, for which Cox & Kings Travel and Finance Limited had received the required approvals from the RBI. But, the RBI had issued only a letter of intent, which was cancelled later. The fund named as 'The India 21st Century Fund' was launched in November 1995, in association with J Henry Schroeder Bank A G of Zurich. The fund was listed on the Luxembourg stock exchange for investing in Indian companies. Kerkar was on the board of the fund. The fund was open for subscription from November 10, 1995. About $15 million was collected for the fund. In another significant development, the Enforcement Directorate (ED) and RBI questioned IHCL in October 1997 whether IHCL had obtained prior clearance under Section 27 of FERA before entering into a technical and consultancy services collaboration with Asian Resorts and Restaurants Associates Ltd. (ARRA). ARRA entered into technical and consultancy services collaboration with IHCL on July 5, 1974, the day of its incorporation in Hong Kong. As per the agreement, which was valid for twenty years, ARRA was to pay HK$20,000 p.a. to IHCL for the consultancy rendered and 1.5% gross income for technical services rendered. Terms of payment between the companies changed in 1981. It was then agreed that IHCL would receive a lump sum amount of US$12,50,000 for five years for the years 1981-86. Also, ARRA was given the rights to use the Taj International Hotels name in all its operations abroad. Initially, ARRA was using the name of the Taj Group of Hotels and Restaurants name. The ED and RBI alleged that IHCL had not obtained the required clearance under Section 27 of FERA before entering into these agreements with ARRA. The allegation was based on a letter written by Kerkar to the Union revenue secretary mentioning that IHCL had not obtained prior approval for the agreements with ARRA. At the same time, Kerkar was also accused of misusing his position to prevent full subscription to the Gateway Hotels and Gateway Resorts (GHGR), an IHCL subsidiary. GHGR was involved in managing the hotels and resorts in small towns and cities. The 100% stake in the company was held by IHCL and other Taj group companies including Taj Investment & Fin., Taj Services Ltd., Taj Trade and Investment Co. Ltd., Taida Trading and Investment Co. Ltd. and Taj Enterprise Ltd. A crucial 30% of the stake was not put up for subscription. Later, the unsubscribed stake was allotted to companies controlled by Kerkar and his friends and relatives, thereby creating value to those companies. In October 1997, Kerkar was also asked to resign his positions in two IHCL associates, PIEM Hotels and Benaras Hotels. He was the chairman of PIEM Hotels and a director on the board of Benaras Hotels. The PIEM Hotels group comprised the Hotel President in Mumbai, Taj Residency in Bangalore, Taj Review in Agra and Taj Residency in Indore. Benaras Hotels managed Hotel Taj Ganges, the erstwhile palace of Vibhuti Singh in Varanasi. Commenting on the Board's decision, Kerkar said, “The Board of the two companies has the right to remove anybody. I wish the new chairman and new directors good luck and hope that they do even better than what I achieved during my tenure.”

Kerkar's troubles started when Ratan Tata took over as the head of the Tata Empire. Unlike his father JRD Tata, Ratan Tata proved to be less trusting of his managers. As the Tatas had never helped Kerkar in any way – financial or otherwise, Kerkar commented that he didn't need Ratan Tata to start telling him how to run his business. Later, Ratan Tata also came up with the rule that all the affiliates in his empire should pay a hefty sum for using the Tata brand name, Kerkar didn?t accept this ruling. Kerkar also refused to incorporate the Tata name in the IHCL brand name. Following this, the Tatas were keen to replace Kerkar. To nominate Kerkar's successor, an IHCL board meeting was scheduled in the last week of August 1997, after which Kerkar was expected to continue as the non-executive chairman. Kerkar decided to reject the post after the nominees from within the hotel – Camellia Panjabi and Leonard Menezes – were given a raw deal. However, Tata directors also decided to blow the whistle on Kerkar, by informing the RBI about the alleged FERA violations by IHCL and Kerkar. After Kerkar's resignation, IHCL appointed the Chartered Accountancy firms of N M Raiji & Co and Sahni Natrajan & Bahl to go through the Taj group's transactions. On February 9, 1998, the two companies submitted their reports to IHCL. The report listed at least six serious FERA irregularities. It ended with a report on their scrutiny of board minutes between 1994 and 1997 to check if the IHCL board was informed about the various acts of omission and commission reported by the accountancy firms. According to the report, except for a transaction pertaining to the securitisation of loans advanced by the State Bank of India and Bank of India to St James Court Hotels Ltd., none of the other issues had been brought to the board for consideration. The six FERA irregularities included: - An amount of $0.5 million advanced to one Salim Assiyabi; - Payment of $4,63,076 in favor of Conil Investment & Trade Inc part of this money was diverted to J Henry Schroders Bank for the purchase of GDRs of Oriental Hotels Ltd. This was allegedly not reflected in the Indian Hotels books “with some help through false certificates obtained form J Henry Schroders Bank”; - Transfer of $2 million in the account of Piem Hong Kong, with a shortfall in the subsequent refund of that amount; - The creation of security of Indian assets for an overseas loan taken for St James Court from State Bank and Bank of India; - Acquisition of Cedar Bay Trading Ltd. a single share bearer company by Taj Honk Kong to park the GDRs mentioned above; - Diversion of funds to Cox & Kings and investments by Piem Hotels Ltd in Piem Hong Kong and investment by Oriental Hotels Ltd in Oriental Hotels Hong Kong. On February 16, 1998 Kumar submitted the above findings to the Exchange Control Department of the RBI. Seeking appropriate authorization in some cases, Kumar offered to cooperate with RBI's actions. However, the RBI did not pursue the matter any further. Instead, it quietly handed over the Chartered Accountants? report to the Directorate of Revenue Intelligence (DRI). Unlike the RBI, the DRI refused to adopt a soft line towards Indian Hotels. DRI did not accept the RBI's decision to overlook IHCL's irregularities. It also refused to accept that the Board of Directors was completely unaware of various transactions and wanted to know why the directors had failed to ask appropriate questions about obvious issues. More dangerously for the group, the DRI, based on prima facie information supplied by IHCL itself, registered the investigation under the repealed FERA act (FEMA). This meant that the much milder provisions of the FEMA Act would not apply to the investigation. However, the questions that needed to be answered were – Why did the venerable board of directors not ask questions all these years?; Why did it do so only when it embarked on its plan to remove Kerkar while Indian Hotels was expanding its operations in India and abroad?

1. Kerkar's attitude seemed to be: 'As long as the ends are achieved, the means do not matter' How far do you think is this ethical? 2. Kerkar had prevented full subscription to Gateway Hotels & Gateway Resorts, and transferred the stake to companies of his interest. How far do you think it was ethical on Kerkar's part to misuse his position as IHCL's CMD? 3. The Tatas did not question Kerkar during the years when IHCL was expanding in India and abroad. Kerkar was questioned only after IHCL was established as the largest chain. Critically comment how far this approach of the Tatas was justifiable.