ITC – The FERA Violation Controversy
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The Aftermath-Setting Things Right
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 ITC inducted three independent, non-executive directors on the Board and repealed the executive powers of Saurabh Misra, ITC deputy chairman, Feroze Vevaina, finance chief and R.K. Kutty, director.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. This committee was headed by the Chairman and included chief executives of the main businesses to run the day-to-day affairs of the company until the company had a new corporate governance structure in place. ITC also appointed a chief vigilance officer (CVO) for the ITC group, who reported independently to the board. ITC restructured its management and corporate governance practices in early 1997. |
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The new management structure comprised three tiers- the Board of Directors (BOD), the Core Management Committee (CMC) and the Divisional Management Committee (DMC), which were responsible for strategic supervision, strategic management, and executive management in the company respectively.
Through this three-tiered interlinked governance process, ITC claimed to have struck a balance between the need for operational freedom, supervision, control and checks and balances. Each executive director was responsible for a group of businesses/corporate functions, apart from strategic management and overall supervision of the company (See Exhibit VI for the restructured corporate governance practices at ITC).
However, the company’s troubles seemed to be far from over. In June 1997, the ED issued showcause notices to all the persons who served on ITC’s board during 1991-1994 in connection with alleged FERA violations. The ED also issued notices to the FIs and BAT nominees on the ITC board charging them with FERA contravention. In September 1997, the ED issued a second set of show-cause notices to the company, which did not name the nominees of BAT and FIs. These notices were related to the Bukhara restaurant deal and the irregularities in ITC’s deals with ITC Global.
In late 1997, a US court dismissed a large part of the claim, amounting to $ 41 million, sought by the Chitalias from ITC and ordered the Chitalias to pay back the $ 12.19 million claimed by ITC. The Chitalias contested the decision in a higher court, the New Jersey District court, which in July 1998 endorsed the lower court’s order of awarding $ 12.19 million claim to ITC. It also dismissed the claim for $ 14 million made by the Chitalias against ITC. The judgment was in favor of ITC as the US courts felt that the Chitalias acted in bad faith in course of the legal proceedings, meddled with the factual evidence, abused information sources and concealed crucial documents from ITC. Following the court judgment, the Chitalias filed for bankruptcy petitions before the Bankruptcy Court in Florida, which was contested by ITC.
In early 2001, the Chitalias proposed a settlement, which ITC accepted. Following the agreement, the Chitalias agreed to the judgement of the Bankruptcy Court, which disallowed their Bankruptcy Petitions. As a part of this settlement ITC also withdrew its objections to few of the claims of Chitalias, for exemption of their assets. However, ITC’s efforts to recover its dues against the Chitalias continued even in early 2002. The company and its directors inspected documents relating to the notices, with the permission of the ED, to frame appropriate replies to the notices. It was reported that ITC extended complete cooperation to the ED in its investigations.
However, the ED issued yet another show-cause notice (the 22nd notice so far) to ITC in June 2001, for violating section 16 of FERA, in relation to ITC’s offer to pay $ 26 million to settle ITC Global’s debts (under section 16 of FERA, a company should take prior permission from the RBI, before it can forgo any amount payable to it in foreign exchange). ITC replied to the showcase notice in July 2001, stating it did not accept any legal liabilities while offering financial support to ITC Global. On account of the provisions for appeals and counter-appeals, these cases stood unresolved even in early 2002. However, ITC had created a 1.9 million contingency fund for future liabilities.
Although the company went through a tough phase during the late 1990s, it succeeded in retaining its leadership position in its core businesses through value additions to products and services and through attaining international competitiveness in quality and cost standards. Despite various hurdles, the company was a financial success, which analysts mainly attributed to the reformed corporate governance practices. What remains to be seen is whether the company would be able to come out unscathed from the various charges of unethical practices against it.
Questions for Discussion:
- Take a look at the international trading deals ITC carried out in association with the Chitalias and critically comment on the company’s role in the Bukhara restaurant scam.
- Examine the charges of FERA violations, excise evasion and share price manipulation against ITC. In the light of these allegations, do you think the company was right in claiming it was not guilty?
- While ITC blamed the Chitalias and BAT for its troubles, some others blamed the legal framework that forced companies to resort to dubious business practices. Where do you think or with whom do you think the fault lies? Give reasons to justify your answer.
- What were the consequences faced by the company on account of these charges. What were the initiatives taken by the company to remedy the situation and how far do you think they are adequate and effective to eliminate recurrence of such unethical practices in future?
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