BECG/003

IBS Center for Management Research

Indian Hotels The Ajit Kerkar Controversy

This case was written by D.Sirisha, under the direction of Sanjib Dutta, IBS Center for Management Research. It was
compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation.

2002, IBS Center for Management Research. All rights reserved.

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 BECG/003

Indian Hotels The Ajit Kerkar Controversy

I was begging for two years for money from various people.
- Ajit Kerkar, former CMD, Indian Hotels.
Indian Hotels had done very well under Kerkar, but the focus had been on expansion. As a result,
the company had become countrys largest hotel chain. But only five properties contributed nearly
80% of the revenue, while the rest was a drain on the company.
- Ratan Tata, Chairman, Indian Hotels and Tata Group.
There are no investigations into the acquisition of Cox and Kings. The so-called investigation at
best could be a routine inquiry by the investigating agency in response to a mischievous complaint
by a former employee of Taj who was dismissed from the services of the company.
- Ajit Kerkars comment on the investigation by the Economic Intelligence Bureau.

INTRODUCTION

On September 2, 1997, in the board meeting of Indian Hotels Co. Ltd. (IHCL), Ratan Tata took
over as the chairman of IHCL, after the former chairman and managing director, Ajit Baburao
Kerkar (Kerkar), was made to resign. R.K. Krishna Kumar (Kumar), managing director of Tata
Tea, was appointed the new Managing Director and S. Ramakrishnan of Tata Industries was made
the Deputy Managing Director.
Kerkar was asked to leave after two allegations of FERA violations surfaced: the non-repatriation
of dollar deposits by two foreign airlines, which had offices on the Taj premises in Mumbai; and
issue of Global Depositary Receipts (GDR) by IHCLs subsidiary, Oriental Hotels, amounting to
about US$30 million. The Tatas leveled serious charges of misdemeanor and irregularity against
Kerkar, who had by then become a legend in the hotel industry for turning a single loss making
property (the Taj Mahal Hotel in Mumbai) into a reputed international chain. Commenting on
Kerkars exit, a leading national daily wrote, Building an international hotel chain during the
most draconian days of the Foreign Exchange Regulation Act (FERA) obviously could not have
happened without plenty of tightrope walking and some maneuvering on either side of the law.
The exit of Kerkar put an end to the era of entrepreneur-manager style of management
encouraged by JRD Tata. It was replaced with Ratan Tatas style, which was more oriented
towards maximizing shareholders value through group vision, better disclosure practices,
transparency in corporate conduct and proper succession planning.

THE RISE OF KERKAR

Kerkar joined IHCL in January 1962 as assistant catering manager. He began his career with J.
Lyon & Company in London where he qualified in hoteliering. Climbing the ladder quickly,
Kerkar became the general manager of the badly managed and poorly run Taj Mahal Hotel,
Mumbai, in 1968. In 1970, he became its managing director. Kerkar was one of the super
managers appointed by JRD Tata, who were given full freedom to run the different wings of the
family empire in their individual ways.

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 Indian Hotels The Ajit Kerkar Controversy

Over the next 27 years, Kerkar built up IHCL as Indias largest and most profitable hospitality
company. In the 1970s, IHCL expanded in a major way in Delhi, Madras, Goa and Rajasthan. This
was seen as a major achievement for Kerkar as he succeeded despite very little financial help from
the Tatas. By the 1980s, the once sick hotel had turned into a chain embracing the US and Europe.
Kerkar funded the expansion of the IHCL flagship Taj Hotel by floating different companies, with
different partners. Kerkar pioneered the concept of Rajasthans palace hotels and resort hotels of
Goa. He enhanced Indias status as a tourist attraction by developing Rajasthan and Goa as tourist
destinations.
Kerkar had a well-polished public image and established himself as a capable executive. He was
regarded as the man who almost single-handedly converted a one-hotel company into a thriving
hotel chain with an international presence. Ultimately however, the Kerkar era came to an end on
August 30, 1997, not with canap and champagne, but with anger and acrimony.

THE ALLEGATIONS AGAINST KERKAR

The negative attitude of the Tatas toward the hotel business forced Kerkar to raise funds in his
private capacity. Kerkar took the help of a group of investors, including the biscuit and cashew
millionaire Rajan Pillai, for the Goa venture. The Tatas had just 6% of the equity in the venture.
The Taj in Chennai and the Malabar Hotel in Kerala were built with the help of another group of
investors. Kerkar later claimed that from the very beginning he wanted all the companies
belonging to the Tata group to take large stakes in each of the hotels so that they remained forever
secure as Tata entities. In the 1980s, Kerkar used the same financial strategy that he followed in
India to set up hotels in the UK and the US. These complex financing arrangements resulted in
many companies with interconnected loans and exposures, and minimized the equity control of
IHCL and the Tatas over the Taj group. It also became one of the major charges against Kerkars
corporate governance.
The Tatas blamed Kerkar for FERA violations in the agreement between IHCL and Singapore
Airlines for the latters office in the Taj Mahal Hotel in Mumbai. According to the Tatas, IHCL
management directed Singapore Airlines, to pay security deposits amounting to $4.91 million to
Taj International Hotels Hong Kong Ltd., instead of receiving the money directly in India. For
more than three and a half years, the management kept this money overseas without the knowledge
and approval of the board and the statutory authorities. The transaction came to light after Ratan
Tata received a letter from Singapore Airlines requesting for a 10% reduction in the deposit asked
for by the Taj. However, Kerkar strongly refuted this allegation. Kerkar said that the money was
paid to Taj Hong Kong only as ample measure of security, since there were several cases of
entities that leased premises and did not vacate them.
Kerkar was also alleged to have laundered money to help Cox & Kings (UK) to finance its
acquisition of 40% stake in Cox & Kings (India)1 by Anthony Good2. Good was a British national
and a close associate of Ajit Kerkar. Good was also associated with Good Relations India Ltd., a
public relations firm wholly owned and promoted by Cox & Kings. It was also alleged that Cox &
Kings was actually controlled by Kerkars son, Peter Kerkar; Good merely acted as a conduit for
the funds to enable the takeover of Cox & Kings (India). Moreover, Peter was a 50% beneficiary
of the 40% stake acquired by Good. However, Kerkar maintained that the acquisition of shares by
Cox & Kings (UK) did not involve any cash dealings. The stake was allotted to Cox & Kings (UK)
in consideration of transfer of the Indian business of the company to Cox & Kings (India).

1
Cox & Kings (India), an affiliate of the Taj Group was a Rs 110 crore travels and tours company.
2
Anthony Good had a 50% stake in Cox & Kings (UK).

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 Indian Hotels The Ajit Kerkar Controversy

However, it was alleged that the funds provided to Good to acquire the stake in Cox & Kings
(India) were made available by siphoning off profits from overseas hotel operations of IHCL in the
US and other countries and from the sale of Baileys Hotel in London.
The changing shareholding pattern of Cox & Kings (India) was one of the major causes of tension
between Kerkar and the Tatas. During 1992-96, the Kerkar family increased its stake in the
company from 17% to more than 30%. Thus Cox & Kings became a company controlled by
Kerkar rather than an affiliate of the Taj Group.
Questions were also raised on the manner in which an overseas fund floated by Cox & Kings
(India) failed to make proper disclosures. It was claimed that the company was setting up a bank,
for which Cox & Kings Travel and Finance Limited had received the required approvals from the
RBI. But, the RBI had issued only a letter of intent, which was cancelled later. The fund named as
The India 21st Century Fund was launched in November 1995, in association with J Henry
Schroeder Bank A G of Zurich. The fund was listed on the Luxembourg stock exchange for
investing in Indian companies. Kerkar was on the board of the fund. The fund was open for
subscription from November 10, 1995. About $15 million was collected for the fund.
In another significant development, the Enforcement Directorate (ED) and RBI questioned IHCL
in October 1997 whether IHCL had obtained prior clearance under Section 27 of FERA before
entering into a technical and consultancy services collaboration with Asian Resorts and
Restaurants Associates Ltd. (ARRA). ARRA entered into technical and consultancy services
collaboration with IHCL on July 5, 1974, the day of its incorporation in Hong Kong,
As per the agreement, which was valid for twenty years, ARRA was to pay HK$20,000 p.a. to
IHCL for the consultancy rendered and 1.5% gross income for technical services rendered. Terms
of payment between the companies changed in 1981. It was then agreed that IHCL would receive a
lump sum amount of US$12,50,000 for five years for the years 1981-86. Also, ARRA was given
the rights to use the Taj International Hotels name in all its operations abroad. Initially, ARRA was
using the name of the Taj Group of Hotels and Restaurants name. The ED and RBI alleged that
IHCL had not obtained the required clearance under Section 27 of FERA before entering into these
agreements with ARRA. The allegation was based on a letter written by Kerkar to the Union
revenue secretary mentioning that IHCL had not obtained prior approval for the agreements with
ARRA.
At the same time, Kerkar was also accused of misusing his position to prevent full subscription to
the Gateway Hotels and Gateway Resorts (GHGR), an IHCL subsidiary. GHGR was involved in
managing the hotels and resorts in small towns and cities. The 100% stake in the company was
held by IHCL and other Taj group companies including Taj Investment & Fin., Taj Services Ltd.,
Taj Trade and Investment Co. Ltd., Taida Trading and Investment Co. Ltd. and Taj Enterprise Ltd.
A crucial 30% of the stake was not put up for subscription. Later, the unsubscribed stake was
allotted to companies controlled by Kerkar and his friends and relatives, thereby creating value to
those companies.
In October 1997, Kerkar was also asked to resign his positions in two IHCL associates, PIEM
Hotels and Benaras Hotels. He was the chairman of PIEM Hotels and a director on the board of
Benaras Hotels. The PIEM Hotels group comprised the Hotel President in Mumbai, Taj Residency
in Bangalore, Taj Review in Agra and Taj Residency in Indore. Benaras Hotels managed Hotel Taj
Ganges, the erstwhile palace of Vibhuti Singh in Varanasi. Commenting on the Boards decision,
Kerkar said, The Board of the two companies has the right to remove anybody. I wish the new
chairman and new directors good luck and hope that they do even better than what I achieved
during my tenure.

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 Indian Hotels The Ajit Kerkar Controversy

THE END OF THE KERKAR ERA

Kerkars troubles started when Ratan Tata took over as the head of the Tata Empire. Unlike his
father JRD Tata, Ratan Tata proved to be less trusting of his managers. As the Tatas had never
helped Kerkar in any way financial or otherwise, Kerkar commented that he didnt need Ratan
Tata to start telling him how to run his business.
Later, Ratan Tata also came up with the rule that all the affiliates in his empire should pay a hefty
sum for using the Tata brand name, Kerkar didnt accept this ruling. Kerkar also refused to
incorporate the Tata name in the IHCL brand name. Following this, the Tatas were keen to replace
Kerkar.
To nominate Kerkars successor, an IHCL board meeting was scheduled in the last week of August
1997, after which Kerkar was expected to continue as the non-executive chairman. Kerkar decided
to reject the post after the nominees from within the hotel Camellia Panjabi and Leonard
Menezes were given a raw deal. However, Tata directors also decided to blow the whistle on
Kerkar, by informing the RBI about the alleged FERA violations by IHCL and Kerkar.
After Kerkars resignation, IHCL appointed the Chartered Accountancy firms of N M Raiji & Co
and Sahni Natrajan & Bahl to go through the Taj groups transactions. On February 9, 1998, the
two companies submitted their reports to IHCL. The report listed at least six serious FERA
irregularities. It ended with a report on their scrutiny of board minutes between 1994 and 1997 to
check if the IHCL board was informed about the various acts of omission and commission
reported by the accountancy firms. According to the report, except for a transaction pertaining to
the securitisation of loans advanced by the State Bank of India and Bank of India to St James
Court Hotels Ltd., none of the other issues had been brought to the board for consideration.
The six FERA irregularities included:
An amount of $0.5 million advanced to one Salim Assiyabi;
Payment of $4,63,076 in favor of Conil Investment & Trade Inc part of this money was
diverted to J Henry Schroders Bank for the purchase of GDRs of Oriental Hotels Ltd. This was
allegedly not reflected in the Indian Hotels books with some help through false certificates
obtained form J Henry Schroders Bank;
Transfer of $2 million in the account of Piem Hong Kong, with a shortfall in the subsequent
refund of that amount;
The creation of security of Indian assets for an overseas loan taken for St James Court from
State Bank and Bank of India
Acquisition of Cedar Bay Trading Ltd. a single share bearer company by Taj Honk Kong to
park the GDRs mentioned above;
Diversion of funds to Cox & Kings and investments by Piem Hotels Ltd in Piem Hong Kong
and investment by Oriental Hotels Ltd in Oriental Hotels Hong Kong.
On February 16, 1998 Kumar submitted the above findings to the Exchange Control Department
of the RBI. Seeking appropriate authorization in some cases, Kumar offered to cooperate with
RBIs actions. However, the RBI did not pursue the matter any further. Instead, it quietly handed
over the Chartered Accountants report to the Directorate of Revenue Intelligence (DRI).
Unlike the RBI, the DRI refused to adopt a soft line towards Indian Hotels. DRI did not accept the
RBIs decision to overlook IHCLs irregularities. It also refused to accept that the Board of
Directors was completely unaware of various transactions and wanted to know why the directors
had failed to ask appropriate questions about obvious issues. More dangerously for the group, the

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 Indian Hotels The Ajit Kerkar Controversy

DRI, based on prima facie information supplied by IHCL itself, registered the investigation under
the repealed FERA act (FEMA)3. This meant that the much milder provisions of the FEMA Act
would not apply to the investigation.
However, the questions that needed to be answered were Why did the venerable board of
directors not ask questions all these years?; Why did it do so only when it embarked on its plan to
remove Kerkar while Indian Hotels was expanding its operations in India and abroad?

QUESTIONS FOR DISCUSSION:

1. Kerkars attitude seemed to be: As long as the ends are achieved, the means do not matter
How far do you think is this ethical?
2. Kerkar had prevented full subscription to Gateway Hotels & Gateway Resorts, and transferred
the stake to companies of his interest. How far do you think it was ethical on Kerkar's part to
misuse his position as IHCLs CMD?
3. The Tatas did not question Kerkar during the years when IHCL was expanding in India and
abroad. Kerkar was questioned only after IHCL was established as the largest chain. Critically
comment how far this approach of the Tatas was justifiable.

3
The Foreign Exchange Management Act (FEMA), 1999, was replaced the Foreign Exchange Regulation
Act, 1973. Any offense under FERA was a criminal offense liable to imprisonment, whereas FEMA
made the offenses relating to foreign exchange, civil offenses. Unlike other laws where everything was
permitted unless specifically prohibited, under FERA nothing was permitted unless specifically
permitted. Hence the tenor and tone of the Act was very drastic. It provided for imprisonment for even a
very minor offense. Under FERA, a person was presumed guilty unless he proved himself innocent
whereas under other laws, a person was presumed innocent, unless he was proven guilty. With
liberalization, drastic measures of FERA were replaced by a set of liberal foreign exchange management
regulations. Therefore, in 1999, FEMA was enacted to replace FERA. FEMA extended to the whole of
India. It applied to all branches, offices and agencies outside India owned or controlled by a person
resident in India and also to any contravention thereunder committed outside India by any person to
whom this Act applies.

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 Indian Hotels The Ajit Kerkar Controversy

Additional Readings & References:

1. Roy Rajarshi, Kerkar to walk away with a slice of Indian Hotels, Business Standard,
May 23, 1997.
2. Indian Hotels Aug 28 board meet to take up MD issue, Business Standard, August 27, 1997.
3. Roy Rajarshi, Spat likely at Indian Hotels, Business Standard, August 28, 1997.
4. An era ends, not with canaps and champagne, but with anger and acrimony,
rediff.com, August 29, 1997.
5. Roy Rajarshi, Conciliation moves afoot in Indian Hotels, Business Standard, August 30, 1997.
6. Roy Rajarshi, Tatas accuse Kerkar of irresponsible dealings, Business Standard,
August 29, 1997.
7. Indian Hotels board meeting today, Business Line, September 1, 1997.
8. Tatas blame IHL brass for FERA violation, Business Standard, September 2, 1997.
9. Board meet today to remove Kerkar, Business Standard, September 2, 1997.
10. Tata takes over to IHL chief, Business Standard, September 3, 1997.
11. Ratan Tata-Kerkar battle set to intensify, Business Standard, September 4, 1997.
12. Tata-Kerkar battle may spill over to Oriental Hotels, Business Standard, September 5, 1997.
13. Cox & Kings vs. Taj with Kerkar in the middle, Business Standard, September 6, 1997.
14. Taj Group in Goa, Business India, September 8-21, 1997.
15. Roy Rajarshi, Ajit Kerkar eased out of 2 Indian Hotels associates, Business Standard,
September 11, 1997.
16. Kerkar not in running for IHL board slot, Business Standard, September 12, 1997.
17. Kerkar severs links with Tata group firms, Business Standard, September 16, 1997.
18. Sampathkumar D, Indian Hotels: The recipe for discord, Business Line, September 28, 1997.
19. Chakrabarty Gargi & Dasgupta Surajeet, Indian Hotels under FERA scrutiny, Business
Standard, October 8, 1997.
20. Did no such thing, says Kerkar, Business Standard, October 10, 1997.
21. How Kerkar muscled on Tajs Gateway, Business Standard, October 10, 1997.
22. Professionalism at Indian Hotels, Business Standard, October 11, 1997
23. Tata comes clean on laffaire Kerkar, Business Standard, October 11, 1997
24. Tata defends Kerkar ouster, pledges change, Business Standard, October 11, 1997.
25. Govt. probe into acquisition of Cox & Kings, Business Standard, October 13, 1997.
26. Kerkar denies laundering charges, Business Standard, October 17, 1997.
27. Varma Sarita M, Kerkars exit may affect Taj plans in Kerala, expressindia.com,
November 16, 1997.
28. Indian Hotels Succession Tussle, Business Standard, January 11, 1998.
29. Summons to Ajit Kerkar, 2 others in Indian Hotel Case, Business Standard, April 30, 1998.
30. Bhattacharjee Dwijottam, Ajit Kerkar owns more than 60% stake in Cox & Kings, says
Taj Affidavit, Financial Express, May 5, 1998.
31. Taj targets Kerkar, Business Standard, May 9, 1998.
32. Dalal Sucheta, Taj Story - Poison Pill can sometimes boomerang, The Indian Express,
January 28, 2001.