ITC – The FERA Violation Controversy

The Allegations

According to the deal, the Chitalias later bought the Bukhara venture in 1990 for around $ 1 million. Investors were paid off through the Chitalias New-Jersey based company, ETS Fibers, which supplied waste paper to ITC Bhadrachalam. To compensate the Chitalias, the Indian Leaf Tobacco Division (ILTD) of ITC transferred $ 4 million to a Swiss bank account, from where the money was transferred to Lokman Establishments, another Chitalia company in Liechtenstein. Lokman Establishments made the payment to the Chitalias. This deal marked the beginning of a series of events that eventually resulted in the company being charged for contravention of FERA regulations.

During the 1980s, ITC had emerged as one of the largest exporters in India and had received accolades from the government. This was a strategic move on ITC’s part to portray itself as a ‘good corporate citizen’ earning substantial foreign exchange for the country. In the early 1990s, ITC started exporting rice to West Asia. When the Gulf war began, ITC was forced to withdraw rice exports to Iraq, which resulted in large quantities of rice lying waste in the warehouses. ITC tried to export this rice to Sri Lanka, which however turned out to be a damp squib because the rice was beginning to rot already. There were discussions in the Colombo parliament as to the quality of the rotting rice. This forced ITC to import the rice back to India, which was not allowed under FERA.

There were a host of other such dubious transactions, especially in ITC’s various export deals in the Asian markets. The company, following the Bukhara deal, had set up various front companies (shell or bogus companies) with the help of the Chitalias. Some of the front companies were Hup Hoon Traders Pvt. Ltd., EST Fibers, Sunny Trading, Fortune Tobacco Ltd., Cyprus, Vaam Impex & Warehousing, RS Commodities, Sunny Snack Foods and Lokman Establishment, the one involved in the Bukhara deal. These front companies were for export transactions. It was reported that ITC artificially hiked its profits by over-invoicing imports and later transferring the excess funds as export proceeds into India. Analysts remarked that ITC did all this to portray itself as the largest exporter in the country.

In 1991, ITC asked all its overseas buyers to route their orders through the Chitalias. The Chitalias over-invoiced the export orders, which meant they paid ITC more than what they received from overseas buyers. For instance, in an export deal to Sri Lanka, ITC claimed to have sold rice at $350 per ton – but according to ED, the rice was actually sold for just $175 per ton. ITC compensated the difference in amount to the Chitalias through various means including under invoicing other exports to them, direct payments to Chitalia companies and through ITC Global Holdings Pte Ltd. (ITC Global), a Singapore-based subsidiary of ITC. ITC Global was involved in a number majority of the money laundering deals between ITC and Chitalias. However, by 1995, ITC Global was on the verge of bankruptcy because of all its cash payments to the Chitalias. It registered a loss of US $ 16.34 million for the financial year 1995-96, as against a profit of US $1.7 million in 1994-95. The loss was reportedly due to the attrition in trade margins, slow moving stock and bad debts in respect of which provisions had to be made. It was also reported that ITC Global incurred a loss of $20 million on rice purchased from the Agricultural Products Export Development Authority (APEDA), which was underwritten by the Chitalias. By the time this consignment was exported to S Armagulam Brothers in Sri Lanka through Vaam Impex, another ITC front company, there was an acute fall in international rice prices. The consignee (S Armagulam Brothers) rejected the consignment because of the delay in dispatch. Following this, ITC bought back that rice and exported it to Dubai, which was against FERA.

This resulted in huge outstanding debts to the Chitalias, following which they turned against ITC and approached BAT complaining of the debts and other financial irregularities at ITC in late 1995. BAT, which was not on good terms with Chugh, reportedly took this as an opportunity to tarnish his reputation and compel him to resign. BAT appointed a renowned audit firm Lovelock and Lewes to probe into the irregularities at ITC. Though the audit committee confirmed the charges of financial irregularities at ITC during the early 1990s and the role of the Chitalias in the trading losses and misappropriations at ITC during the year 1995-96, it cleared Chugh of all charges. Chugh agreed to resign and BAT dropped all charges against him. He was given a handsome severance package as well as the ‘Chairman Emeritus’ status at ITC. However according to industry sources, though the Chitalias were on good terms with ITC, it was BAT, which instigated the Chitalias to implicate the top management of ITC. BAT reportedly wanted to ‘step in as a savior’ and take control of ITC with the active support of the FI nominees on the board, which had supported ITC before charges of unethical practices surfaced.

Meanwhile, the Chitalias filed a lawsuit against ITC in US courts to recover their dues. They alleged that ITC used them to float front companies in foreign countries in order to route its exports through them. They also alleged ITC of various wrongdoings in the Bukhara deal. These events attracted ED’s attention to the ongoings at ITC and it began probing into the company’s operations. ED began collecting documents to prove that ITC had violated various FERA norms to pay the NRI Doctors.

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