New Alignments At Itc

ON November 5 evening, a visibly exhausted Yogesh Chandra Deveshwar emerged from the Enforcement Directorate’s (ED) Calcutta office, after 18 hours of interrogation spread over two days. "They (ED offi-cials) are very professional, and I’m fully cooperating with them," was all he had to say. In those 18 hours, Deveshwar had fina-lly admitted to his knowledge of at least one instance of FERA violation, worth $2 million. It had been pointed out by auditors in April 1996, and Deveshwar agreed to submit a full report on it to the ED within 15 days. As Deveshwar was leaving the ED premises, in Mumbai, a four-man team from32-per cent shareholder, London-based BAT Industries, led by Managing Director Anthony Johnston, was concluding its meeting with top managers from Indian financial institutions (FIs), which hold a 38 per cent stake in ITC. The press release issued an hour later from the Industrial Bank of India (IDBI), whose Chairman S.H. Khan led the FI team, said: "Both FIs and BAT were of the view that... it is necessary, on a priority basis, to have a comprehensive look at the corporate structure, relationship with group companies and subsidiaries, delegation and internal control mechanisms and bring back the operations of the company to normal level as expeditiously as possible." 

"Right now it’s difficult to say what will happen," K.C. Mittal, chairman, General Insurance Corporation (GIC), who attended the meeting, told Outlook. Said P.V. Narasimham, IDBI nominee on the ITC board: "The ITC board is meeting on November 15 and decisions will be taken then." 

A BAT spokesperson in Mumbai was more forthcoming: "Names of who will run the company will come much later. At the moment we are concerned with the running of day-to-day business which is getting affected, what with most people behind bars or in hospital." Could a BAT manager head ITC? "A lot of sensitivities are involved here. We aren’t so eager to run the company as to see it being run well. We are pressuring for changes in the corporate governance style and asking for procedures to become more transparent. There have to be necessary checks and balances. It cannot be as it has been till today where Deveshwar claims that he didn’t know what the chairman was doing (when Deveshwar was vice-chairmen under K.L. Chugh)." 

What appeared clear, however, was that BAT and the FIs had not managed to agree on a united agenda. No agreement emerged at the talks, admits London-based BAT director Michael Prideaux. "They discussed a wide range of options but there were no decisions," he says. But the important thing, as BAT sees it, is that BAT and the FIs are talking, and not confronting one another over Chugh as they did earlier. "We believe relations with them are better than they used to be," says Prideaux. "We have both lost and now we are both working together. We will not pursue any unilateral course of action." 

The central issue in the BAT-FIs meeting was a strong non-executive element on the ITC board, a long-standing BAT demand. BAT’s own board has Lord Cairns as nonexecutive chairman, five non-executive directors and four executive ones. BAT’s rallying cry in this has been the recommendations of the Cadbury Committee on corporate governance, set up in 1992 by the British Government to develop a Code of Best Practice for British companies. The panel came into being after the massive scandal around the Robert Maxwell-run pension funds, which threw up the question: while Maxwell was illegally siphoning money out of these pension funds, what were all the non-Maxwell men on the funds’ boards—the non-executive directors—doing? 

The Cadbury report recommends that non-executive directors must review the performance of the executive closely, and "take the lead where potential conflicts of interest arise because the specific interests of the company may at times diverge." "But we are sensitive to what might be appropriate to an Indian context," says Prideaux. "The Cadbury recommendations, as Sir Adrian Cadbury has himself said, are no panacea. If the FIs and other people feel that this is not appropriate in an Indian context, so be it. But, common sense would suggest in the light of developments in ITC that what it needs is fresh blood from outside." In their talks with the FIs, BAT managers seem to have stressed what follows the "but".

However, one can also ask that simple Maxwell question again: what were BAT’s nominees doing on the ITC board when the $100-million FERA violation was apparently taking place? BAT initially accused Chugh of gross financial irregularities and then exonerated him. "Chugh obtained legal opinion from two very senior figures in the Indian legal establishment indicating that there had been no violations," says Prideaux. "The board had to accept that and so it was arranged for Mr Chugh to go with dignity." Says BAT’s Mumbai spokesperson: "It is very difficult for a foreigner to be able to pinpoint if what looks like a violation to him is applicable according to the law of another company. We had to accept the local legal opinion." The same can’t be the excuse for the FI nominees since they know the laws of the land. And the fact that the very first point that the IDBI press release quoted above makes is that the FI nominees were unaware of the wrongdoings—and hence, by implication, innocent of any blame—appears to indicate that the FIs are worried.

And of course BAT strongly denies any role in pushing the Indian Government to crack down on ITC. Or that BAT turned ITC’s former business partners, the US-based Chitalias, against ITC; ITC’s troubles have snowballed only after the Chitalias decided to turn approver for the Government and reveal all. "The notion that BAT has put the Chitalias up to this is preposterous," says Prideaux. "This is a desperate accusation from desperate men."

Outlook put the name of a New Delhi-based BAT liaison man to Prideaux; several highly-placed corporate and Government sources accuse him of feeding Indian newspapers with an endless stream of correspondence between ITC managers and the Chit-alias and finally forcing the Government to act. "He helps us in Delhi," admits Pride-aux, but no, he has not been lobbying against the ITC management. So what exactly does he do for BAT? "He provides us with intelligence on how things are developing." As the interrogations of current and former ITC managers continue at the ED office, the FIs and BAT are preparing for the November 15 board meeting where matters will be thrashed out in detail. Naturally, if the company’s hierarchy has to be restructured the way BAT wants—non-executive chairman and executive managing director (currently, ITC has an executive chairman and no managing director)—it will not happen overnight.

The FIs, even if they agree to BAT’s proposal (or rather, if they are told to agree by the Union Finance Ministry which, after all, controls FI decisions), may not want to send a signal that they are bowing to pressure from a British company. That sort of message could have political implications. Instead, the FIs could opt for a compromise solution for the time being: depute an FI nominee to take charge of the day-to-day operations for some time, and then play it by the ear. "What the final structure of the company will be is difficult to say," says BAT’s Mumbai spokesperson. "Whoever is not proven guilty will stay. Decisions to run the company for the interim period of course will be taken sooner than the conclusion of investigations. But a company cannot run headless. Of course, Yogi Deveshwar is still there." Of course.