Itc Global Embroiled In Four Irregular Deals

Documents which are being investigated by the Enforcement Directorate point to various violations which include:

ITC Global advanced loans amounting to US$ 9 million to a number of companies within the Chitalia-owned EST group of companies, apparently without taking prior approval from the Reserve Bank of India. Under FERA, RBI clearance is mandatory for all foreign currency loans extended by an Indian company.

ITC Global acquired the Singapore-based Hup Hoon -- a company which was initially set up with the help of the Chitalias at the insistence of ITC Global in March 1991 and in violation of the permission given by the Indian government which prohibited it from investing in other ventures.

 

The company and its subsidiary Hup Hoon advanced loans to the Chitalia-owned Usena Food to indirectly invest US $ 1.8 million in the GDR issue of ITC in 1993, instead of investing directly. The transaction which is being investigated is alleged to be in violation of Indian laws which prohibit either direct or indirect purchase of GDRs by subsidiaries of their parent company.

ITC Global susbstantially reduced its income tax burden in 1993 by including its profits from the sale of ITC GDRs as part of the qualifying income (which was taxed at a rate of 10 per cent). But it was later discovered that the profits were from non-qualifying transaction where the tax rate was much higher at 27 per cent.

Decisions in all these cases were taken in ITC Global without the approval or authorisation of the ITC board which was unaware of these transactions till much later.

The documents also bring to light various questionable deals executed by the firm. In August 1996, ITC Global paid US $ 603,564 to buy 80,000 ITC Classic shares (whose value has now fallen to $112,676) when the firm failed to meet its debt obligations and the investment did not have the clearance of the ITC Global board.

The company's lawyers, Allen & Gledhill, had sounded a note of caution on the loans given by ITC Global to various Chitalia firms. The law firm said that while these transactions were permitted under Singapore law, "The only caveat we should put on this relates to India laws. If the direction or indication of commercial interest by you would not be legally permitted under Indian law, then the veil may be lifted on the ground of the company having used as a vehicle to evade (as opposed to legally avoid) legal obligations under the Indian law".

The point is again reiterated in an internal note purportedly written by ITC director Saurabh Mishra on October 14, 1996, a day before the ITC board meeting. The note, which discusses the loan issue, says "as we know foreign currency loans can be extended by the Indian corporations only with the prior approval of the RBI/GoI. In that sense this transaction(of ITC Global) may be construed as a violation of Fera.

The use of a third party (the Chitalia-owned Usena Foods) by ITC Global and its subsidiary Hup Hoon to invest in ITC's GDR issue has also come under scrutiny by the company's lawyers. Allen & Geldhill in their written opinion dated September 6 said that "if the laws in India would prohibit the subscription by ITC Global...then the subscription directly or indirectly would be in violation of Indian law". Mishra's note again confirms the fear when he says "we understand that the purchase of GDRs by subsdiaries of the concerned company may constitute a violation in India".

On the question of acquisition of shares of Hup Hoon by ITC Global, Mishra notes that as per the affidavit filed in the Singapore court by Sriram Khattar of ITC Global it is clear that: