The BAT- ITC Tussle

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The Warring Factions Contd...

The main conflict between BAT and Chugh however was over BAT's intention of acquiring a 51% stake in ITC.³ After the liberalization of the Indian economy in the early 1990s, BAT wanted to acquire majority shareholding in ITC. In early 1994, Chugh reportedly wrote to BAT stating that he supported this move. He even set up a team headed by the company's Finance Director to work on the stake-hike proposal.

At a board meeting in November 1994, BAT proposed a nomination committee to screen future board appointments. Chugh saw ulterior motives behind this move. In a February 1995 board meeting, the differences between Chugh and BAT deepened when Chugh wanted to include Y C Deveshwar (Deveshwar) in the nominations committee and BAT strongly opposed the move. Things worsened when BAT came to know that Chugh had changed his mind regarding the stake-hike issue. Chugh claimed that he opposed BAT's move only because he did not want ITC to be reduced to being just a tobacco company. Chugh claimed that under his regime, ITC had done very well financially (Refer Exhibit II). He also played his swadeshi card, posing as an Indian professional making valiant efforts to ward off an MNC marauder. This won him a lot of favorable publicity in the media. In March 1995, Chugh was called for a meeting with BAT officials in London. During the meeting, BAT made clear its intentions to increase its equity stake in ITC. It also demanded Chugh's resignation.

Chugh asked for a week's time to submit his resignation and returned to India. Instead of complying with BAT's wishes, Chugh held a meeting with his close associates including Deveshwar, R.P.Agarwal, R.K.Kutty and Mukesh Palta (Vice President of ITC's tobacco division.) It was at this point that BAT raised the issue of financial irregularities in ITC.

BAT expressed alarm at the manner in which Chugh had apparently 'departed from the standards of professional management.' BAT's accusation was made on the eve of the EGM convened in March 1995 to approve ITC's diversification into the power sector (deemed to be Chugh's pet project.) The venture implied a considerable financial commitment from BAT. BAT made it clear that it would approve the diversification only if Chugh resigned. Chugh, however, refused to do so.

At the EGM, BAT was surprised to see two nominees from UTI and ICICI on the board. Media reports said that the FIs had acted in concert with ITC, in a 'well laid-out plan' to thwart BAT's attempts to remove Chugh. However, the FIs strongly denied this allegation and claimed that their nominees had been co-opted only because substantial FI money was involved in ITC's proposed diversification plans.⁴

Thereafter, Chugh presented his case before the media. BAT seemed to have been completely taken aback by these actions, and realized that it would not be able to put down Chugh easily. In May 1995, Broughton met Chugh to assure him that it did not have any takeover plans and that it would support ITC's diversification efforts.

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3] While BAT owned 100% of Imperial Tobacco earlier, it had to reduce its stake later on to 40% with the change in government regulations. BAT refused to participate in the 1982 rights issue of ITC and after this its shareholding came down from 40% to 33%.
4] BAT did not get along well with the financial institutions (FIs), as their holding in ITC was higher than BAT's. In August 1996, BAT strongly opposed an agreement between the FIs and ITC, which allowed ITC to take fresh loans from the FIs. BAT argued that ITC could meet its fund requirements by cutting down capital expenditure, reducing dividend and cutting down operational and manpower costs. Analysts claimed that the real reason for BAT's opposition was that it did not want FI nominees on the ITC board. If ITC took fresh loans from the FIs, they would be able to nominate their directors, and this was something that BAT did not want.