ITC Limited is a public conglomerate company headquartered in Kolkata, India.

Its turnover is
$6 billion and a market capitalization of over $22 Billion. The company has its registered office
in Kolkata. It started off as the Imperial Tobacco Company, and shares ancestry with Imperial
Tobacco of the United Kingdom, but it is now fully independent, and was rechristened to Indian
Tobacco Company in 1970 and then to I.T.C. Limited in 1974.

The company is currently headed by Yogesh Chander Deveshwar. It employs over 26,000
people at more than 60 locations across India and is listed on Forbes 2000. ITC Limited
completed 100 years on 24th August, 2010.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging,
Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel,
Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an
outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards,
Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of
Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.

ITC's aspiration to be an exemplar in sustainability practices is manifest in its status as the only
company in the world of its size and diversity to be 'carbon positive', 'water positive' and 'solid
waste recycling positive.' In addition, ITC's businesses have created sustainable livelihoods for
more than 5 million people, a majority of whom represent the poorest in rural India.

Q1. Analyze the reasons behind Classic's failure. Do you agree that the company's demise was
largely due to ITC's poor handling of the company? Support your answer with reasons.

I completely agree with the fact that the company’s demise was due to ITC’s poor handling of
the company. The reasons for ITC’s Classic Finance are as follows:

 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. This talks about the poor corporate governance
of the company.

 This led to a drastic downfall of ITC Classic Finance (Classic), ITC's flagship financial
services.

 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. Such circumstances were also seen in case of
Satyam case.

 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.' In such a scenario things became
bad to worst.

 Analysts were quick to raise fingers at Classic's negative cash flows, its huge asset liability
mismatch and the slow process of divestment of stakes held by Classic in the ITC group
companies.

 More troubles mounted as redemptions kept increasing - from Rs 750 cr. in mid 1996,
deposits came down to Rs 550 cr. in May 1997. From a peak level of one million depositors,
Classic was left with just six lakh.

 The sustained downturn in the capital markets during 1995-96 added to the company's
woes and soon, key personnel began leaving the company.

 Nothing seemed to be working out in favor of Classic as there were no takers for a
company with non-performing assets of over Rs 350 cr. and an investment portfolio that
was by any standards an extremely poorly executed one.

 Both GE Capital and the Hinduja Group evinced interest in Classic. Since they laid down
very stiff terms for the buy-out and valued Classic much below ITC's expectations, talks did
not proceed further. Nothing seemed to be working out in favor of Classic as there were no
takers for a company with non-performing assets of over Rs 350 cr. and an investment
portfolio that was by any standards an extremely poorly executed one.

 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.
 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.

 Although the company's asset portfolio remained fairly well-diversified in terms of the
client base/industry spread, the high growth rate, and the inherent risk in corporate plant
and machinery financing had an adverse impact on the company's asset quality, resulting
in difficulty in timely recovery of dues from a number of clients.

 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. The company was
blamed to have entered the latter arena to 'get rich quick' by stock market deals, besides
to spread the risk associated with asset financing.

These were the several reasons which led to the downfall of ITC’s classic finance.
Q2. Explain the reasons behind ICICI agreeing to merge with the loss-making Classic. Was
the merger truly a win-win situation for both the parties involved?

Merger was certainly win-win situation for both the entities, though more on the side of ICICI
due to following reasons:

 ICICI’s goal is to move towards universal banking with a spectrum of financial solutions.
Any opportunity to move closer to the goal was to be capitalized by the organization.

 ICICI's could retain only those Classic employees whom it found capable after internal
evaluations.
 ITC and its affiliate companies subscribed to a preferential share issue of Rs 350 cr. of ICICI
as part of the merger proposal.

 ITC provided Rs 272 cr. to repay secured creditors, and to make up for the losses due to the
decline in the investments made by the subsidiaries.

 ICICI had maintained right from the beginning that he would consider the deal as long as it
did not involve any cash outgo.

 As far as ICICI was concerned, it seemed to be a clear 'win' proposition. 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 cr. tax-break because of
Classic's losses and the provisions for bad loans. This was something ICICI badly needed
since its net profits of Rs 572 cr. during the first half of 1997-98 had increased by 71.77%
per cent.

 ICICI sources claimed that the Classic merger did not affect the dividend or the non-
performing assets of ICICI. This was supported by the justification that Classic was a
company with an asset base of just Rs 1000 cr. while ICICI's asset base was as large as Rs
41,000 cr.
Q3. 'Classic should have stuck to its leasing and asset financing business rather than entering
secondary market operations.' Critically comment on the above statement?

I completely agree with the fact that Classic should have stuck to its leasing and asset financing
business due to following reasons:

In investing parlance, risk refers to the probability of a monetary loss or actual returns from an
investment being lower than the expected returns. There is an inverse relationship between
investing risk and return. Investment options that are risky need to offer higher returns than
those that are less risky in order to attract investors and make it worthwhile to take on the
additional risk.

A US Treasury bond is considered to be among the safest investments and equities are
associated with higher risks. However, every investment involves risk, the difference being in
the degree and the type.

Capital risk: This refers to the risk of losing the capital invested.

Currency risk: If one holds assets in a foreign currency, changes in the exchange rate can cause
fluctuations in the asset value. A decline in the value of the foreign currency vis-à-vis the
investor’s domestic currency will result in a reduction in the value of the asset in terms of the
home currency. This is known as currency risk or exchange rate risk.

Liquidity risk: The risk associated with a delay in the trade of an asset is known as liquidity risk.
An asset sale may be difficult due to the small size of the market or low demand, preventing the
owner from converting the asset into cash.

Credit risk: The risk associated with the inability of the borrower to repay the principal is known
as credit risk. For instance, the owner of a corporate bond could suffer losses in case the issuing
company declares bankruptcy and is unable to redeem the bond.

Inflation risk: Inflation erodes the value of a currency. The possibility of the value of an asset
declining due to contraction in the purchasing power of a currency is called inflation risk.

Interest rate risk: The possibility of devaluation of an interest-baring asset (such as bonds,
stocks and loans) due to a change in the interest rate is known as interest rate risk.

Market risk: This refers to the possibility of a decline in the value of an investment due to a
change in price. Price fluctuations may be caused by changes in the interest rate, foreign
exchange rate, inflation or demand and supply situation.

Legal risk: The risk associated with changes in laws and regulations is called legal risk.
Counterparty risk: This refers to the risk of the other party in an agreement defaulting. For
instance, the risk faced by an option owner of the other party not selling the underlying asset as
agreed is called their counterparty risk.

There are a number of other risks that an investor may be exposed to. Before making a choice
of investment, it is critical to understand the risk involved and ways in which one can minimize
risk exposure.

Economic Risks

One of the most obvious risks of investing is that the economy can go bad. Following the
market bust in 2000 and the terrorists’ attacks in 2001, the economy settled into a sour spell.

A combination of factors saw the market indexes lose significant percentages. It took years to
return to levels close to pre-9/11 marks, only to have the bottom fall out again in 2008-09.

For young investors, the best strategy is often to just hunker down and ride out these
downturns. If you can increase your position in good solid companies, these troughs are often
good times to do so.

Foreign stocks can be a bright spot when the domestic market is in the dumps if you do your
homework. Thanks to globalization, some U.S. companies earn a majority of their profits
overseas.

However, in collapses like the 2008-09 disaster, there may be no truly safe places to turn.

Older investors are in a tighter bind. If you are in or near retirement, a major downturn in
stocks can be devastating if you haven’t shifted significant assets to bonds or fixed income
securities.

Inflation

Inflation is the tax on everyone. It destroys value and creates recessions.

Although we believe inflation is under our control, the cure of higher interest rates may at
some point be as bad as the problem. With the massive government borrowing to fund the
stimulus packages, it is only a matter of time before inflation returns.

Investors historically have retreated to “hard assets” such as real estate and precious metals,
especially gold, in times of inflation.
Inflation hurts investors on fixed incomes the most, since it erodes the value of their income
stream. Stocks are the best protection against inflation since companies have the ability to
adjust prices to the rate of inflation.

A global recession may mean stocks will struggle for a protracted amount of time before the
economy is strong enough to bear higher prices.

It is not a perfect solution, but that is why even retired investors should maintain some of their
assets in stocks.

Market Value Risk

Market value risk refers to what happens when the market turns against or ignores your
investment.

This happens when the market goes off chasing the “next hot thing” and leaves many good, but
unexciting companies behind.

It also happens when the market collapses - good stocks as well as bad stocks suffer as
investors stampede out of the market.

Some investors find this a good thing and view it as an opportunity to load up on great stocks at
a time when the market isn’t bidding down the price.

On the other hand, it doesn’t advance your cause to watch your investment flat-line month
after month while other parts of the market are going up.

The lesson is do not get caught with all you investments in one sector of the economy. By
spreading your investments across several sectors, you have a better chance of participating in
growth of some of your stocks at any one time.