Rbi May Grant Exemption To Itc Classic

Preference share funds from parent to be considered as equity

In what could be the biggest concession, and a lifesaver for the ailing ITC Clas-sic Finance, the financial services associate of ITC Ltd, the Reserve Bank of India (RBI) is likely to allow the finance company to treat the Rs 220 crore fund infusion from ITC through preference shares as tier I capital as a special case. RBI, however, is likely to allow this only for a fixed period and with conditionalities.

The RBI top brass and the ITC Classic management are expected to have another round of discussions on the details of the matter today. Significantly, ITC's support to Classic is also conditional to the concessions from RBI.

Essentially, this would mean that ITC Classic can then show the preference share capital, which is a part of tier II capital according to RBI norms, as equity in tier I, something which is generally never allowed. Classic had recently put forward this proposal before RBI for its consideration as part of the string of concessions it is seeking from RBI and the banks.

An RBI spokesperson in Mumbai merely told Business Standard yesterday that "The Classic request is under examination.''

However, sources said there was a distinct possibility that RBI would allow this major concession to ITC keeping in mind the finance company's Rs 650 crore public deposit base, and the fact that this decision could mean the life or death for one of the country's major finance companies. The concession would be granted for a specific time period and for the specific purpose of reviving the company.

The exact specifics of the time period and other details is still to be finalised, and are being discussed by the two sides. The conditions to be imposed, and what Classic would have to do as a result was also in the process of being finalised, the sources said.

"The pros and cons have to be weighed very carefully. This is obviously not a usual case'', sources said. "However, the critical aspect is that the matter pertains to a huge finance company which has been in existence for so many years,'' they added.

The tier I capital is critical for ITC Classic since the capital adequacy ratio of eight per cent cannot be reached by merely infusing tier II capital if tier I is not positive. Classic suffered a whopping Rs 284.9 crore loss for 1996-97 which almost wiped out its entire net worth. Informed sources also said that considering the status of ITC Classic in the financial sector, RBI is likely to take the view that granting the concession to it as a special case would not be out of place. This would spell a major boost for Classic which is desperately trying to work out a Rs 325 crore revival plan out of which Rs 220 crore would come from ITC through preference shares. Classic is already doubling its authorised capital to Rs 400 crore to accommodate this infusion from ITC.

On another front, the bankers to Classic had sought a corporate guarantee from ITC as a precondition to funding Classic but ITC and institutional shareholders in the tobacco major have flatly ruled out the possibility. Under these circumstances, the RBI concession may prove to be just what the doctor ordered for the ailing finance company.