Itc Classic Case Study
The ITC Classic Story
TROUBLED TIMES
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. It was at this point that the downfall of ITC Classic Finance (Classic), ITC’s flagship financial services 49% subsidiary, began.
The scandals in ITC had a massive damaging effect on the ITC brand and corporate image. The impact got reflected on Classic too and it was inundated with desperate fixed deposit holders wanting to withdraw their funds. Funds worth over Rs 50 crore were withdrawn within a few days after the crisis broke out. The continuing uncertainty on fund flows into the company and the eroded value of its portfolios began scaring off potential investors and foreign partners as well. International Finance Corporation (IFC), which was to provide a credit of $ 45 million to Classic, also held back the offer till ‘things cleared up.’
|Analysts were quick to raise fingers at Classic’s negative cash flows, its huge asset liability mismatch |[pic][pic] |
|and the slow process of divestment of stakes held by Classic in the ITC group companies. Like the | |
|proverbial ‘final nail in the coffin,’ Classic declared a Rs 285 crore loss in June 1997, which almost | |
|wiped out its entire net worth. | |
Meanwhile, troubles mounted as redemptions kept increasing - from Rs 750 crore in mid 1996, deposits came down to Rs 550 crore in May 1997. From a peak level of one million depositors, Classic was left with just six lakh. ITC gave Classic a Rs 75 crore credit line to maintain cash flow to meet the redemption pressure. There were even reports that Classic had to take inter-corporate deposits[1] to fund the outflow. The sustained downturn in the capital markets during 1995-96 added to the company’s woes and soon, key
TROUBLED TIMES
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. It was at this point that the downfall of ITC Classic Finance (Classic), ITC’s flagship financial services 49% subsidiary, began.
The scandals in ITC had a massive damaging effect on the ITC brand and corporate image. The impact got reflected on Classic too and it was inundated with desperate fixed deposit holders wanting to withdraw their funds. Funds worth over Rs 50 crore were withdrawn within a few days after the crisis broke out. The continuing uncertainty on fund flows into the company and the eroded value of its portfolios began scaring off potential investors and foreign partners as well. International Finance Corporation (IFC), which was to provide a credit of $ 45 million to Classic, also held back the offer till ‘things cleared up.’
|Analysts were quick to raise fingers at Classic’s negative cash flows, its huge asset liability mismatch |[pic][pic] |
|and the slow process of divestment of stakes held by Classic in the ITC group companies. Like the | |
|proverbial ‘final nail in the coffin,’ Classic declared a Rs 285 crore loss in June 1997, which almost | |
|wiped out its entire net worth. | |
Meanwhile, troubles mounted as redemptions kept increasing - from Rs 750 crore in mid 1996, deposits came down to Rs 550 crore in May 1997. From a peak level of one million depositors, Classic was left with just six lakh. ITC gave Classic a Rs 75 crore credit line to maintain cash flow to meet the redemption pressure. There were even reports that Classic had to take inter-corporate deposits[1] to fund the outflow. The sustained downturn in the capital markets during 1995-96 added to the company’s woes and soon, key