The proposal is believed to be a part of the larger plans framed by the UK-based parent of both ITC and VST, BAT Industries Plc, for consolidation of its Indian presence.
BAT holds in excess of 30 per cent in both companies, and is the single largest non-institutional shareholder in them. BAT's proposal, it is believed, is that once it is allowed management control over ITC Ltd by financial institutions, it will move further and merge its holdings in India into one, so that it can consolidate its presence in every segment of the Indian market.
What may then follow is a separate venture with the merged entity to launch the foreign premium brands of BAT in the Indian market.
Earlier last year, BAT Industries is believed to have negotiated a buyout by VST of Andhra Pradesh Industrial Development Corporation's 26 per cent stake in the company.
BAT itself owns around 33 per cent in VST.
BAT is also believed to have considered the option of expanding VST's operations at some stage into areas parallel to those of ITC (this was when it was unsure of greater say in ITC's affairs).
An ITC source confirmed that the proposal had been drawn up in a rough form, and that it would be discussed by the ITC top brass with BAT.
However, the source said, the proposed merger is a long-term affair, likely to take place only if the UK-based parent is allowed greater management control, if not a major equity stake, in ITC.
The advantage of such a merger would be that it would bring 15 brands owned by VST, including market leaders such as Charms, into the ITC-fold.
This would stamp BAT's presence in every segment in the Indian market and leave a separate venture to deal in its premium international brands.
Financially also this is expected to help VST substantially, since the company's gross margins have been under pressure for some time. Profit before tax barely rose from Rs 38.53 crore in 1993-94 to Rs 40.33 crore in 1994-95.
VST's capital base is low at Rs 15.44 crore compared with ITC's Rs 245.41 crore.