ITC: A Great Conspiracy?
Is ITC's complicated history turning it into a meme stock? Or is there a shining light at the tip of the cig?
ITC is the saga of an Indian company that went from being the most influential stock to becoming the reason of despair for its shareholders.
This despair has now taken the form of humor and has elevated ITC to India’s favourite meme stock company. Today, let's map ITC’s journey from its glorious days to current sorrows.
Tracing ITC’s roots
Indian Tobacco Company.
While India is in the name of the company, its origin is not Indian. It wasn’t an Indian promoter who formed ITC. It was a British Company.
British American Tobacco (BAT) formed ITC in 1910 as a 100% subsidiary, headquartered in the then capital of India, Calcutta.
Today, BAT (the second-largest tobacco company in the world) holds only about 29.42% stake in ITC. What happened? Why did BAT dilute its stake in a crown jewel like ITC? Was it free will, or was it a conspiracy?
Back in 1910, ITC was only a cigarette selling company for BAT. The real deal was Peninsular Tobacco Company that was involved in cigarette manufacturing in India. Now, holding shares in multiple companies (that too in multiple nations) has its own hassles.
By 1919, BAT had transferred its holding in the manufacturing and procurement businesses in India to ITC. The company was growing steadily, spreading its wings in multiple industries. Everything that needed to go into creating a box of cigarettes was being gradually and strategically taken up under ITC’s wings (this process is called backward integration).
And then came the independence movement that created ripples in ITC’s distribution network. Yet, the company managed to emerge stronger from those turbulent times. What BAT failed to foresee was that its wings won’t be clipped by its own capabilities, but by the norms imposed by the Government of India.
India, a young independent country, with fresh wounds of slavery, strived to find its own way in the world. For this to happen, regulations were imposed on the multinational companies to reduce their stake in the country.
Complying with the same, ITC came out with a public offer and by 1969, BAT’s stake in the company was reduced to 75%.
And by 1986, its stake was reduced to a meager 31% (this was BAT’s own doing though. It had an opportunity to invest in ITC, but it decided to stay out of it).
The Indianisation of ITC
With BAT’s reduced control, in 1969, the first Indian chairman of ITC, A.N Haksar, laid the foundation of the Indianisation of ITC. At the same time, India came up with a Monopolies and Restrictive Trade Practices Act, which forced ITC to reduce its share of cigarette business to less than 50%. But what could it do to remain afloat?
At that time, BAT was globally diversifying its business into paper and pulp, cosmetics, and the food industry. Taking a leaf of inspiration from its parent entity, ITC diversified beyond tobacco, into hotels and paper.
But a turn of events in Britain and the ideologies of BAT and ITC would soon be at loggerheads.
Back home, in the late 1980s, BAT’s diversification invited trouble for them. It was jolted by a takeover attempt. It succeeded in fending it off and decided to focus on its tobacco industry.
On the other hand, management of ITC was convinced that with tightening norms on cigarettes in India (the high excise duties, of course!), times would soon be uncertain and the company needed to diversify to remain in business.
In the year 1991, as the Indian economy opened up to the rest of the world (courtesy the Balance of Payment Crisis), BAT eyed to regain control of its Indian counterpart (by increasing its stake to 51%). It was not only the clash of ideologies that pushed BAT to introspect this move. BAT’s number one competitor in the US (R.J Reynolds) had announced its entry into the Indian market. And BAT wanted to be fully armed to compete on Indian grounds.
Alas! The company that gave birth to ITC was denied full rights over its own baby. A baby that it was forced to abandon.
BAT’s takeover attempts
The then chairman of ITC, Mr. Chugh, was a staunch believer of diversification and with his autocratic ways of management, he was a big pain in the ass for BAT. The company found an opportunity to blame Chugh as ITC’s diversification into financial services, branded edible oils, and international trading ran into huge losses.
What unfolded next was nothing less than a corporate thriller.
In March 1995, Chugh was called for a meeting with BAT officials in London. Here, BAT made its intentions of acquiring controlling stakes in ITC clear, and also demanded Chugh’s resignation. But Chugh was not going to back out that easily.
In a bid to prevent the takeover, Chugh drew public sentiments in his favour by villainising BAT as a foreign company that wanted to invade the Indian jewel, ITC. His efforts were not in vain.
BAT was pushed into a corner at the EGM (Extraordinary General Meeting - a shareholder’s meeting conducted on short notice to discuss important matters) convened in the same month.
BAT played its first move. In return for approving diversification into the power sector, it demanded Chugh’s resignation. But the move was countered by Chugh’s trump card, the financial institutions that held 33% stakes (more than BAT’s stake) in the company. They backed Chugh.
Well, BAT understood that getting rid of Chugh was not going to be easy and eventually conceded in May 1995. It assured Chugh that it did not have any takeover plans.
But, did they really concede? Just like that?
While the tussle between BAT and ITC was intensifying, BAT silently raised issues regarding the corporate governance of the company. The audit committee confirmed that ITC was involved in certain questionable agreements. Chugh and other senior directors went to jail on account of those charges for a brief period. But soon, Chugh’s name was cleared of all charges. In December 1995, Chugh called a press conference and resigned.
Woah. But, what’s even more surprising is that BAT gave a handsome severance package and a ‘Chairman Emeritus’ status to Chugh. (Smells like a rotten rat! Is something amiss?)
But the danger of BAT lurking in the background, waiting to pounce on an opportunity to acquire majority stakes in ITC could not be discounted. Chugh’s successor, Deveshwar, along with the government and the financial institutions made all attempts to keep BAT at bay.
When UTI (Unit Trust of India) collapsed (a collapse that deserves its own piece) in 2001, the market was filled with rumours that UTI will sell its 14% stake in ITC to BAT. But, rumours are just rumours.
UTI was split into UTI Mutual Fund and SUUTI, and UTI’s holdings in ITC were transferred to SUUTI, which continues to hold stakes till the present date.
In 2010, the government closed doors for future FDI in the tobacco industry. Thus, shutting the door on further investment from BAT. However, the government still could not reduce its holding in ITC below 25% because of BAT’s existing stake in the company. It could not let BAT influence the trajectory the company takes. And, this notion was again confirmed by an episode that ensued in 2018.
In 2018, ITC proposed an ESOP scheme (Employee Stock Option Plan - employees are paid with shares of the company). Such schemes require a special resolution with 75% votes of shareholders, to be approved. Now, BAT being the single largest shareholder in the company (with 29.53% stakes), blocked the proposal.
The fear? With more shares being issued, BAT’s stakes in the company could go below 25%, blocking its strategic decision-making power in the company in the future.
Even after all these efforts to keep BAT at bay, ITC earns maximum revenue from cigarette sales (~Rs. 20,333 crores in FY 2021, which is 43% of the company’s revenue)!
But, its grand ambitions to scale up its FMCG business is biting the dust. While the stock market roared, ITC languished. Patience is running thin and its performance is disenchanting the hopeful investors.
Is ITC’s glorious days behind it or is this the beginning of a new era?
Got some feedback or suggestion? Join us on WhatsApp list and keep ‘em coming!
PS: Humans operate the channel, and we reply to all messages :)
Detailed and well-written. Thanks you!😃