BENGALURU: The probe into the financial troubles of Coffee Day Enterprises (CDEL), which runs the Cafe Coffee Day chain, has laid the blame on late promoter VG Siddhartha’s inability to create a profitable business model.
The report – which also exonerated private equity (PE) firms and tax authorities from harassment charges – said Siddhartha built the business on the back of high-cost borrowings and private equity (PE) investments carrying high rates of returns.
The report by former CBI DIG Ashok Kumar Malhotra and Agastya Legal and made public on Friday, indicated that the business model created a serious liquidity crisis, which coupled with macroeconomic developments, restricted Siddhartha’s ability to borrow further, leading him into a vicious cycle from which he could never emerge. As TOI has previously reported, the macroeconomic developments were around the IL&FS crisis, which put all NBFC borrowings more difficult, and the slowing economy, which made it difficult for Siddhartha to sell some of his real estate holdings.
The investigation was ordered following Siddhartha’s suicide in July last year. In a letter that he had allegedly written prior to his death, he had admitted that he had failed as an entrepreneur. But he also partially blamed PE investors in his company and income tax authorities for the extreme step he was taking. He said he fought for long to rescue the company, but he eventually gave up as he “could not take any more pressure from one of the private equity partners forcing me to buy back shares, a transaction I had partially completed six months ago by borrowing a large sum of money from a friend.” He had also alleged harassment by income tax authorities over a deal to sell his stake in Mindtree.
But the report on Friday, while acknowledging that there may have been reminders from PE investors to repay, said that those were not “beyond normal industry practices” and as per “accepted legal and business norms.” The report also said that there was no documentary evidence to establish harassment from tax authorities. “Nevertheless, a perusal of the financial records during the relevant period suggests a serious liquidity crunch which may have arisen due to the attachment of Mindtree shares by the Income-Tax Department,” the Malhotra and the law firm said.
As TOI reported on Friday, the investigation report has found that a private firm owned by Siddhartha, Mysore Amalgamated Coffee Estates (MACEL), owed Coffee Day about Rs 2,700 crore. “We understand that a significant portion of the aforementioned money have been probably spent to buy back equity from PE investors, repay loans and to pay interest apart from funding certain other private investments which are outside the scope of this investigation. Consequently, these amounts are not precisely ascertainable,” the report said.
CDEL’s 2019 annual report shows that loans or advances given to MACEL jumped to Rs 2,226 crore in that fiscal, from just Rs 724 crore in the year before.
There is no problem if related party transactions are adequately disclosed but what has drawn attention is the fact that MACEL, which is into coffee trading, reported an ever-increasing erosion of its net worth in the last five years. Siddhartha in his letter had said that even those in the CDEL management did not fully know the transactions that he had done. The investigation report confirmed that, saying only Siddhartha knew of the transactions and not his senior management.
In her first public statement since her husband’s death a year ago, Malavika Hegde, wife of Cafe Coffee Day founder VG Siddhartha and a director in the company, said the share of challenges for the company are “far from over” and “corrective course of action needs to be adopted” even though the investigative report has been submitted.
In an email to employees, she said: “I am resolutely committed to the future of Coffee Day as a going concern. We have significantly brought down our debt level from Rs 7,200 crore at the start of last year to Rs 3,200 crore now. We think we can bring it to a more manageable level with our plans to sell a few more of our investments shortly.”
Hegde said that while she is still a novice, her mission has been to uphold the legacy of her deceased husband. “He has left me a job to do, to settle every lender to the best of my ability, to grow the business” and to enthuse and foster employees. “While we are going through a challenging time, we will ensure the brand legacy continues,” she said.