Who Owns ITC?
Yogi Deveshwar, who served as the Chairman of ITC Ltd for over two decades till his death, had once said that the ITC model of a significant proportion of ownership with public financial institutions like LIC, UTI etc., (roughly 35% then) but with no actual control by the government on the operations was the right model for running the public sector enterprises!
He could not have been more prescient, except that ITC works more like a public sector company, than the public sector working like the ITC of Deveshwar’ dreams!
British American Tobacco Plc (BAT), the erstwhile majority owner of the company and the ITC management have been at logger heads in the past on the ownership of the company since the Indian management continuously stonewalled BAT’ move to gain a controlling stake.
The tussle found its nadir when the predecessor to Deveshwar, K L Chugh, was exited post a bitter board room spat in which the latter was accused of some wrong doing based on the audit findings of Lovelock & Lewes on issues relating to exports.
In the three decades since that episode, BAT could move the needle, little. The efforts to hike its stake when it was possible under the regulations was continuously thwarted. It was also denied the NOC required under the law for starting a wholly owned subsidiary in India.
It’s ask of the separation of the cigarette business from the other unrelated diversification undertaken since 1975 when the foray into the hotel segment started has not only been unaddressed, but more such investments have happened over the years.
Statutory warning -smoking is injurious to health
It has also suffered a systematic erosion in the percentage of shareholding due to the significant expansion of the equity base on account of the grant of bountiful stock options to the top executives of the company.
The present shareholding of BAT is ironically even a tad lower than the combined holding of LIC, SUUTI and the PSU non-life insurers.
Post 2010, the Government policy went completely against any increase in foreign holding in tobacco related industries. Both the local management of ITC, and the KK Modi clan in the case of its competitor, Godfrey Philips India Ltd, successfully played the ‘swadeshi’ card and ensured that their terrain became unassailable and the foreign investor became their captive than the master.
Currently, ITC has two big blocks of shareholders, GoI (indirectly) and BAT, together holding almost 60%.
BAT has no turf to play on and GoI has no interest to play!
Given the above scenario the successive Chairmen and CEO together with a group of loyal top executives who are remunerated obscenely with cash and non-cash component like ESOPs, have the complete freedom to run the company the way they desire.
Much of the malaise in the system, especially in the way capital has been splurged on diversification is the result of the absence of an owner with the generational stake for deploying the capital in the most efficient way to get returns better than the peers.
A question that may arise is why BAT did not overtly show its opposition to the way ITC has been making unrelated diversifications in the garb of de-risking the over weight of tobacco business to its fortunes?
BAT has been trapped so to speak given the policy of the Government. Practically, its stake in ITC is incapable of being sold for anything more than a distress price. No foreign buyer can enter ITC due the FDI restrictions applicable to tobacco business.
And realistically, no Indian group can or will step in. ITC management knows that BAT is at its mercy, literally!
Purely on commercial consideration BAT should exit if the price is right as it has no real chance of getting a full-scale play in the tobacco market in India now or at any time in the future as the policy framework may only get stricter for this industry.
Though BAT’ stake is worth almost Rs1.7tn by today’ market price, it is facing a hostile bowler with no bat of any sort to counter!
BAT has a loan on its books of GBP 44bn and any decent price it can sell its stake for would mean a big reduction in its debt level. However, this happening is more unreal than a mirage! It should stay pleased with the GBP 438mn dividend it got in CY2022 and may not wish to tick off the present management that can even endanger this flow!!
But under the law, special resolutions can be blocked by it. For example, the latest proposal to demerge the hotel business under a much abhorred structure can be halted if BAT’ doesn’t consent.
BAT should feel shortchanged like every other shareholder has(except may be the GoI proxies!) by this absurd idea, which the management has been trying in vain to justify as the best possible way to generate long term value. Only it has not specified for whom!
If the demerger proposal goes through, BAT will have only a less than 18% stake in the new hotel entity, with not even the limited veto that it enjoys in ITC Ltd.
The 18% may command little value if it tries to hawk, as no strategic buyer would walk in, with the parent holding the brand and 40% shares, with a likely stranglehold on the board.
If at all, ITC hotel Ltd will look more like ITC Ltd if not more stifled with additional bureaucracy!
BAT will end up more marginalized than it currently is and may not even enjoy a board representation in the hotel company as it may have little logic to push for one given that it cannot flaunt any expertise in that domain.
It is not clear whether BAT’ predicament and a possible resolution is part of any political dialogue given the ongoing negotiations on the free trade agreement between the two countries.
BAT’ slim hope can only ride on the presence of an Indian origin PM there and the elections here next summer!
The rest of the ITC shareholders are entitled, even if illusorily, to look to BAT to actually carry the innings on its shoulders!
Post script
1.Till its merger into ITC in 2004, a part of the hotel business was a separate listed entity with ITC holding about 72%. The latest idea is the rediscovery of the wheel may be after paying a fortune to a few global advisors.
2.ITC also has independent directors on its board. But given the general record of this class in acting in the interest of the common shareholders in such corporate actions, they have not been dragged into the discussion.
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