ITC: The FERA Violation Story

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ITC: The FERA Violation Story

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Case Code:

BECG016

Case Length:

Period:

Pub Date:

2002

Teaching Note:

YES

Price (Rs):

Organization:

ITC Limited

Industry:

Home Appliances & Consumer Products

Country:

India

Themes:

Leadership & Values

Abstract

The case examines the charges of FERA violations against tobacco major ITC in the 1990s. The case details the dubious international trading deals by ITC and its partners, the Chitalias, the Enforcement Directorate’s investigations and the arrests of ITC executives. The case also looks at charges of excise duty evasion and share price manipulation against ITC. The case ends with a discussion on the measures taken by the company to restore its corporate image in the light of the light of the various charges.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

Corporate governance
Unethical practices.

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.

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.

A majority of ITC's legal troubles could be traced back to its association with the US based Suresh Chitalia and Devang Chitalia (Chitalias). The Chitalias were ITC's trading partners in its international trading business and were also directors of ITC International, the international trading subsidiary of ITC.In 1989, ITC started the 'Bukhara' chain of restaurants in the US, jointly with its subsidiary ITC International and some Non-Resident Indian (NRI) doctors.

The ED found out that around $ 83 million was transferred into India as per ITC's instructions on the basis of the accounts maintained by the Chitalia group of companies. According to the ED officials, the ITC management gave daily instructions to manipulate the invoices related to exports in order to post artificial profits in its books.A sum of $ 6.5 million was transferred from ITC Global to the Chitalias' companies and the same was remitted to ITC at a later date. Another instance cited of money laundering by ITC was regarding the over-invoicing of machinery imported by ITC Bhadrachalam Paperboards Ltd., from Italy...

Alarmed by the growing criticism of its corporate governance practices and the legal problems, ITC took some drastic steps in its board meeting held on November 15, 1996. ITC inducted three independent, non-executive directors on the Board and repealed the executive powers of Saurabh Misra, ITC deputy chairman, Feroze Vevaina, finance chief and R.K. Kutty, director.ITC also suspended the powers of the Committee of Directors and appointed an interim management committee....

Exhibit I: Excise Duty Violation Charges Against ITC Exhibit II: Share Price Manipulation Charges Against ITC Exhibit III: FERA Sections Violated by ITC Exhibit IV: ITC Board Members - 1996 Exhibit V: About FERA and FEMA Exhibit VI: Restructured Corporate Governance Practices at ITC

Keywords

FERA, tobacco, ITC,1990,dubious international trading deals, ITC, Chitalias, Enforcement, directorate, ITC executives, excise duty evasion, share price manipulation, corporate image

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