ITC Ltd is currently engaged in talks with its single-largest shareholder, BAT Industries, for a possible deferred licensing arrangement for the foreign brands BAT proposes to introduce in India. This development represents a possible break-through in an impasse between the two companies over the issue.
The ITC committee of directors is opposed to BATs proposal for a joint venture to manage its brands in India. BAT, in turn, is reluctant to license out its brands to ITC in India. The British company fears that its brands may not be satisfactorily handled.
The financial institutions (FIs), which have a significant presence in ITC, also prefer a licensing arrangement which they perceive as beneficial for the companys shareholders to the joint venture route.
Some FI representatives on the ITC board said the Indian tobacco company has now proposed to BAT that the foreign brands should not be licensed to ITC immediately, but after some time. Till then, a contract manufacturing arrangement could be implemented, the sources added.
``ITC would like it to be decided now that there would be a licensing arrangement from a future date, the sources said, confirming that the Indian tobacco major and BAT had discussed such an option.
``The issue is not what the FIs want. Things have to be worked out in a way which benefits every side, added the sources.
The other proposal would broadly entail ITC acting as a contract manufacturer of the BAT brands, including Benson & Hedges and State Express 555, in India. ITC would also market the brands, keeping them under its brand portfolio to take on the other foreign brands which are planning entry into India.
ITC is opposed to the joint venture proposal principally because it would be required to make 50 per cent of the total investment of about Rs 400 crore, apart from paying BAT a 5 per cent royalty for the brands. The company feels such an arrangement may not be in the best interests of its shareholders.
Accordingly, the best option is considered to be one whereby ITC would manufacture and market the foreign brands, showcasing them in its own brand portfolio, while a wholly-owned BAT subsidiary would retain brand control and ownership. ITC could become a licensee at a later stage.
At various points during the tug-of-war over the international brands, ITC insiders had pointed out that there was no reason for BAT to feel uneasy about having ITC as a licensee, since the Indian tobacco company had successfully handled premium brands like India Kings and built it up over many years.
It was, therefore, felt that there was no reason why ITC could not handle the international brands of BAT as and when they came into India.
A section in ITC, at one point, had also felt that an unnecessary scare was being created over the entry of foreign cigarette brands from other global tobacco majors, even though ITC was well equipped to handle foreign competition.
