ITC – The FERA Violation Controversy
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Fera Violations...
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. The difference in amount was retained abroad and then passed to the Chitalias, which was eventually remitted to ITC. |
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The ED issued chargesheets to a few top executives of ITC and raided on nearly 40 ITC offices including the premises of its top executives in Kolkata, Delhi, Hyderabad, Guntur, Chennai and Mumbai. The chargesheets accused ITC and its functionaries of FERA violations that included over-invoicing and providing cash to the Chitalias for acquiring and retaining funds abroad, for bringing funds into India in a manner not conforming to the prescribed norms, for not realizing outstanding export proceeds and for acknowledging debt abroad (Refer Table IV and Exhibit III for details of the charges).
Table II
Fera Violations by ITC
ILTD transferred $4 million to a Swiss bank account. The amount was later transferred to Lokman Establishment, which in turn transferred the amount to a Chitalia company in the US. ITC also made payments to non-resident shareholders in the case of certain settlements without the permission of the RBI. This was against Sections 8(1) and 9(1)(a) of FERA; |
The ED also investigated the use of funds retained abroad for personal use by ITC executives. Though the ED had documentary proof to indicate illegal transfer of funds by top ITC executives, nothing was reported in the media. The top executives were soon arrested. In addition, the ED questioned many executives including Ashutosh Garg, former chief of ITC Global, S Khattar, the then chief of ITC Global, the Chitalias, officials at BAT and FI nominees on ITC board.
Meanwhile, the Chitalias and ITC continued their court battles against each other in the US and Singapore. ITC stated that the Chitalias acted as traders for ITC’s commodities including rice, coffee, soyabeans and shrimp. ITC accused the Chitalias of non-payment for 43 contracts executed in 1994. ITC sued the Chitalias seeking $12.19 million in damages that included the unpaid amount for the executed contracts plus interest and other relief. Following this, the Chitalias filed a counter-claim for $55 million, accusing ITC of commission defaults (trading commission not paid) and defamation.
In August 1996, the Chitalias indicated to the Government of India and the ED their willingness to turn approvers in the FERA violation case against ITC, if they were given immunity from prosecution in India. The government granted the Chitalias, immunity under section 360 of the Indian Criminal Procedure Act, following which the Chitalias were reported to have provided concrete proof of large scale over-invoicing by ITC mainly in the export of rice, coffee and cashew nuts. In another major development, a few directors and senior executives of ITC turned approvers in the FERA violation case against the company in November 1996. A top ED official confirmed the news and said that these officials were ready to divulge sensitive information related to the case if they were given immunity against prosecution, as granted to the Chitalias.
The same month, the High Court of Singapore appointed judicial managers to take over the management of ITC Global. They informed ITC that ITC Global owed approximately US $ 49 million to creditors and sought ITC’s financial support to settle the accounts. Though ITC did not accept any legal liability to support ITC Global, it offered financial assistance upto $26 million, subject to the consent and approval of both the Singapore and Indian governments.
In December 1996, most of the arrested executives including Chugh, Sapru, R. Ranganathan, R K Kutty, E Ravindranathan, and K.P. Reddi were granted bail. ITC sources commented that BAT instigated the Chitalias to sue and implicate its executives. BAT was accused of trying to take over the company with the help of the financial institutions (FIs), who were previously on ITC’s side. In November 1996, BAT nominees on the ITC board admitted that BAT was aware of the financial irregularities and FERA violations in ITC. However, BAT authorities feigned ignorance about their knowledge of the ITC dealings and charges of international instigation against ITC.
According to analysts, ITC landed in a mess due to gross mismanagement at the corporate level. Many industrialists agreed that poor corporate governance practices at ITC were principally responsible for its problems. They remarked that nominees of the FI and BAT never took an active part in the company’s affairs and remained silent speculators, giving the ITC nominees a free hand. R.C. Bhargava, Chairman, Maruti Udyog, said, “It is difficult to believe that FIs and BAT nominees had no idea of what was going on. The board members have many responsibilities. They need to ask for more disclosures and information.” Few industry observers also commented that ITC followed a highly centralized management structure where power vested in the hands of a few top executives (Refer Exhibit IV for the ITC board composition in 1996).
However, some other analysts claimed that problems associated with India’s legal system were equally responsible for the ITC fiasco. Subodh Bhargava, Vice-Chairman, Eicher Group remarked, “The root cause for a case like ITC to occur is the complexity of laws in our country and the continuing controls like FERA. We have to admit that the limits imposed on industry are not real and, therefore, every opportunity is sought to get around them. This leads to different interpretations of the law and so legal violations occur” (Refer Exhibit V for a note on FERA and FEMA).
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