Presentation on

MFS
by ICMR Center for Management Research

The ITC Classic Story

Presented by:

Group 3
Priyanshi Garg - PGP/23/102
Samyak Chaudhary - PGP/23/109
Abhishek Gautam - PGP/23/373
Avanish Nagar - PGP/23/381
CLASSIC: THE ITC FOSTERED BABY
• It is named after ITC’s premium cigarette brand ‘Classic’ (incorporated
in 1986).
• Classic was an NBFC and it did very well in the initial years and
developed a strong network to mobilize retail deposits.
• When the markets crashed in 1992, Classic had to face heavy losses.
• Like most other finance companies, Classic too saw the 1995-96 stock
market downturn taking a toll on its performance.
• In 1996, ITC had to infuse Rs 60 crore in Classic by buying up group
company shares held by it.
Classic Failure
• Venturing into non-core competent financial services
• Ignorance of niche segments like automobile finance
• 1995-96 stock market downturn: Attempt to grow big too
fast; ignored the need for lean organization, Investment in
‘boom stocks’ lost value in market downturn
• Complicated cross holdings in group companies, without any
rationale
• Lack of Risk Management
Troubled times
• Negative cash flows, huge asset liability mismatch – assets wholesale in
nature, liabilities retail
• In late 1996, almost half of the executives on board of the tobacco to
hotels major ITC Ltd. were in jail on charges of FERA and excise violations
• The scandals in ITC impacted Classic and led to withdrawal of funds by
the fixed deposit holders
• Funds worth over Rs 50 crore were withdrawn within a few days after the
crisis broke out (CRISIL downgraded rating to FAA- from FAA+ in
nonconvertible debentures, to A+ from AA for fixed deposit scheme)
• ITC was desperate not to let Classic go, but nothing seemed to work out
for Classic. Then, ICICI stepped in to rescue Classic
 THE CLASSIC POST-MORTEM
Factors that led to decline of Classic:

• Structural anomalies like cross holdings in other group companies

• Classic had to hold large amounts of shares of other ITC group companies like ITC
Bhadrachalam and International Travel House, whose share prices were low
• 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
• Consultants McKinsey & Co and Arthur Andersen emphasized the need for untangling
Classic from the corporate maze of cross holdings in the group companies, no action
was taken to do so
• Classic sold its heavily eroded investments in Morgan Stanley and Jaiprakash Industries
after the Rs 285 crore loss

Consultant Suggestions:
• McKinsey wanted to form Classic into a single financial services company by merging various group companies involved in
financial services
• McKinsey further recommended that Classic should reduce its investment banking exposure, concentrate more on asset
financing and re-enter niche segments like automobile finance
• Arthur Andersen talked about the need for a leaner organization with strong management

ITC Statement - “Reorganizing the business is very much on our agenda but our immediate concern is to keep the company liquid
Factors that led to decline of Classic:

• A huge asset-liability mismatch: A liquidity crunch led to miss on installment repayments (Volume of
overdue payments reached as high as Rs 300 crore

• 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 had become increasingly dependent on public deposits. Public deposits, deemed to be a rather
volatile source of fund, reluctance of banks to fund NBFC operations

• The credit rating agency, (CRISIL) downgraded Classic’s rating for its fixed deposit scheme and non-
convertible debentures from AA to A+ and from FAA+ to FAA-, respectively in June 1996 and further to A-
and FA, respectively in December 1996. the inherent risk in corporate plant and machinery financing had
an adverse impact on the company’s asset quality

• Classic was also reported to have made a tactical error by shifting its focus from its primary business of
hire purchase and leasing to secondary market operations. Only about 55% of Classic’s business was in hire
purchase and leasing, while the rest was in stock market operations
THE MERGER
• Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), or ICICI would be in a
position to absorb Classic’s losses and bad loans.
• deal was struck with ICICI at a swap ratio of 1 ICICI share for 15 shares of Classic
• In January 1998, shareholders of Classic approved the company’s amalgamation with ICICI with 99.93% of the
votes in favor of the resolution.
• However, a section of ICICI shareholders, holding shares of both ICICI and ITC Classic, opposed the merger
resolution claiming that the merger ratio was unfair and was ‘leaked’ to the market. the price dropped and
adjusted to the merger ratio much before the announcement of the ratio by the company
• They also alleged that if the market price of the share was one of the considerations, then the fall in the price of
the share just before the merger was a clear indication that the swap ratio was already in the market before the
announcement.
• dissenting shareholders were in minority, the resolution was successfully tabled.
• ITC and its affiliate companies subscribed to a preferential share issue of Rs 350 crore of ICICI as part of the merger proposal, nominal
interest of Re 1 for every Rs 1 crore of share capital issued for a period of 20 years.
• The infusion of funds in ICICI by ITC was to take care of any future liabilities arising out of the merger.
• ITC provided Rs 272 crore to repay secured creditors, for investment losses of 1/4th Classic’s stockbroking and mutual funds subsidiaries
• It was decided to prepay Classic’s creditors to reduce its interest burden. ICICI accepted to absorb the Classic personnel as per its
requirements
• ITC also assumed the liabilities and obligations in relation to all guarantees and indemnities issued by Classic.
MERGER POST-MORTEM
Media: “ITC to hand Classic on a platter to ICICI”
• ITC bringing in substantial funds, providing cushion against bad debts and loans and accepting and unfair swap ratio
• For ICICI’s win:
• The biggest benefit for ICICI was Classic’s retail network comprising eight offices, 26 outlets, 700 brokers and a depositor-
base of 7 lakh investors.
• ICICI planned to use this to strengthen the operations of ICICI Credit (I-Credit), a consumer finance subsidiary that ICICI
had floated in April 1997.
• An additional benefit for ICICI was in the form of the Rs 110 crore tax-break because of Classic’s losses and the provisions
for bad loans for net profits of Rs 572 crore during the first half of 1997-98 .
Problems:
• While ICICI was happy over getting a large deposit base of about seven lakh, high interest rates offered by Classic - about 16%.
• Also, deposits aggregating Rs 550 crore were to mature by 1999, threatening to be a cash outflow burden on ICICI.
• However, ICICI tried to average out the interest outgo by asking the depositor coming in for renewals to switch over to ICICI
books that had AAA-security
• ICICI soon began the ‘clean-up operation’ of Classic’s balance sheet by substituting high-interest liabilities. As 75% of Classic’s
clients were ICICI clients as well, ICICI was confident of recovering 8-16% of the outstanding amounts from various parties.