ITC – The FERA Violation Controversy
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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. |
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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. In 1986, ITC established ITC Hotels, to which its three hotels were sold. It also entered the financial services business by setting up its subsidiary, ITC Classic Finance.
In 1994, ITC commissioned consultants McKinsey & Co. to study the businesses of the company and make suitable recommendations. McKinsey advised ITC to concentrate on its core strengths and withdraw from agri-business where it was incurring losses. During the late 1990s, ITC decided to retain its interests in tobacco, hospitality and paper and either sold off or gave up the controlling stake in several non-core businesses. ITC divested its 51% stake in ITC Agrotech to ConAgra of the US. Tribeni Tissues (which manufactured newsprint, bond paper, carbon and thermal paper) was merged with ITC.
By 2001, ITC had emerged as the undisputed leader, with over 70% share in the Indian cigarette market. ITC’ popular cigarette brands included Gold Flake, Scissors, Wills, India Kings and Classic. ITC’s revenues for the fiscal 2001 amounted to 88.16 billion (Refer Table I For ITC’s income and expenditure statements).
Table I
Income & Expenditure Statements
(Rs in billion)
|
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
GROSS INCOME |
42.80 |
47.08 |
51.88 |
59.91 |
69.24 |
77.01 |
80.69 |
88.16 |
Excise Duties etc. |
18.59 |
21.70 |
25.80 |
30.78 |
36.94 |
40.63 |
41.34 |
44.75 |
Net Income |
24.21 |
25.39 |
26.08 |
29.13 |
32.30 |
36.38 |
39.35 |
43.42 |
Cost of Sales |
19.31 |
20.15 |
20.24 |
21.43 |
22.71 |
24.43 |
24.75 |
25.16 |
PBDIT |
4.90 |
5.24 |
5.84 |
7.70 |
9.58 |
11.94 |
14.60 |
18.25 |
PBDT |
3.76 |
4.40 |
5.00 |
6.50 |
8.77 |
10.40 |
13.47 |
17.40 |
Depreciation |
0.26 |
0.38 |
0.48 |
0.63 |
0.86 |
1.02 |
1.19 |
1.40 |
PBIT |
4.64 |
4.86 |
5.36 |
7.07 |
8.73 |
10.92 |
13.42 |
16.85 |
PBT |
3.50 |
4.02 |
4.52 |
5.87 |
7.91 |
9.38 |
12.29 |
16.00 |
Tax |
1.44 |
1.40 |
1.91 |
2.40 |
2.65 |
3.15 |
4.37 |
5.94 |
PAT |
2.06 |
2.62 |
2.61 |
3.47 |
5.26 |
6.23 |
7.92 |
10.06 |
Dividends |
1.01 |
1.34 |
0.61 |
1.08 * |
1.21* |
1.50 * |
2.25 * |
2.70* |
*Including Income Tax on Dividend
Source: www.itccorporate.com
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