The ITC Classic Story

THE CLASSIC POST-MORTEM

Many management consultants remarked that though Classic emerged as a full-scale financial services company in early 1990s, it never matured from its original status as an asset financing subsidiary. A majority of Classic's problems stemmed from the structural anomalies like cross holdings in other group companies. Although consultants McKinsey & Co and Arthur Andersen (who had been mandated to go into the details of restructuring Classic in the mid 1990s), had emphasized the need for untangling Classic from the corporate maze of cross holdings in the group companies, no action was taken to do so.

A Classic source^[3] remarked, “McKinsey could not even figure out why some of the financial services companies existed and why Classic should hold equity in such companies.” McKinsey wanted to form Classic into a single financial services company by merging various group companies involved in financial services such as Classic Infrastructure Development Ltd., International Travel House Summit, Sage, Pinnacle, ITC Agrotech Finance and a host of other small companies. McKinsey further recommended that Classic should reduce its investment banking exposure, concentrate more on asset financing and re-enter niche segments like automobile finance.

After the Rs 285 crore loss was recorded, Classic sold its heavily eroded investments in Morgan Stanley and Jaiprakash Industries, which helped in covering the losses to a certain extent. However, its portfolio still comprised shares that had seen heavy erosion in their values. Classic had to hold large amounts of shares of other ITC group companies like ITC Bhadrachalam and International Travel House, whose share prices had also taken a beating. The company could not even sell these shares because of their low prices. Though ITC bought back Rs 69 crore worth of Bhadrachalam shares, financial analysts remained skeptical of Classic's portfolio. Some of its investments in group companies like Greenline Construction, Minota Aquatech and ITC Agrotech Finance etc. were illiquid for all practical purposes and only artificially inflated the company's net worth and the asset values.

Classic also had a huge asset-liability mismatch. Its asset-financing portfolio was functioning fine till September 1995, when due to a liquidity crunch it had to miss on installment repayments. Eventually, the volume of overdue payments reached as high as Rs 300 crore. A Classic executive said, “Most of our assets are wholesale in nature while our liabilities are retail. When the market got gripped by a panic, all wanted their funds, but we cannot make our assets liquid at such short notice.”

In 1995, Classic had entered into a lease and buy-back deal of used electricity meters with the Rajasthan State Electricity Board (RSEB). Later, RSEB defaulted on lease rentals worth Rs 40 crore, forcing Classic to make provisions to repossess the meters and settle the losses. Classic's real estate forays also did not prove to be beneficial for the company. Analysts also remarked that the fact that over the years, Classic had become increasingly dependent on public deposits. Public deposits, deemed to be a rather volatile source of fund, had to be resorted to by Classic mainly due to the reluctance of banks to fund NBFC operations during that period. This later resulted in the heavy redemption rush putting a strain on the company's cash reserves.

^[3] Quoted in Business India, February 24, 1997.

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