Business

The Debt and Tax Troubles of Cafe Coffee Day Founder V.G. Siddhartha

From tax harassment and debt woes to allegations of PE and lender pressure, Siddhartha has had his hands full.

V.G. Siddhartha, the founder of one of India’s largest coffee chains (Cafe Coffee Day), has been reported missing, with initial assessments of the situation pointing towards a possible suicide attempt. 

A letter that made its way into the public domain on Tuesday morning, reportedly sent by Siddhartha to the board of Coffee Day Enterprises, blames three major issues that led him to “succumbing to the situation”.

The Wire has not independently verified the authenticity of this letter, nor have the police or the company officially commented on it yet. Multiple media outlets, however, say it was sent to the board two days ago.

The three issues, as per the letter, are:

I would like to say I gave it my all. I am sorry to let down all the people that put their trust in me. I fought for a long time but today I gave up as I 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. 

Tremendous pressure from other lenders lead to me succumbing to the situation.

 There was a lot of harassment from the previous DG income tax in the form of attaching our shares on two separate occasions to block our Mindtree deal and then taking position of our Coffee Day shares, although the revised returns have been filed by us. This was very unfair and has led to a serious liquidity crunch. [Emphasis added by The Wire]

All three of these issues issues revolve around the broader liquidity and debt concerns that Siddhartha and CCD had been facing over the last year, a tense situation that eventually prompted him to sell his stake in Mindtree earlier this year.

Also read | Cafe Coffee Day Founder V.G. Siddhartha Reported Missing, Blames Taxman for Harassment in Letter

As of March 2019, ‘Coffee Day Enterprises’, which is the holding firm for CCD, had a total debt of around Rs 6,550 crore. This likely reduced drastically after Siddhartha sold his stake in Mindtree for about Rs 3,200 crore.

The urgency to sell his stake in Mindtree was magnified in the aftermath of the IL&FS crisis, when troubled lenders refused to roll over debt as they would have normally done.

While Cafe Coffee Day has historically been seen as a beloved chain in India, its sheen had been wearing off over the last decade. Losses jumped from a mere Rs 7.72 crore in FY’09, to over Rs 150 crore in FY’16. On a consolidated basis, the company had reported a PAT (profit after tax) of Rs 6.64 in FY’11, but this rocketed to a loss of Rs 155.75 crore by FY’15.

In the last two years, things started looking upwards, with Coffee Day Enterprises reporting a profit of Rs 48.94 crore in FY’18. The group’s coffee business expected to close FY’20 with sales of over Rs 2,000 crore. In fact, in the last few months, market buzz indicated that Siddhartha may have been looking to sell his equity in CCD to Coca Cola for up to Rs 8,000 crore.

The CCD founder has also had various run-ins with India’s income tax department. In 2017, his offices in Bengaluru were raided in the search for undisclosed income.

The I-T department put out a bland statement at the time saying: “The searches in a group involved in coffee, tourism, information technology and other areas concluded with an admission of previously concealed income exceeding Rs 650 crore. The detection of undisclosed income is expected to be a much higher figure.”

PE troubles?

In his alleged letter to the board, Siddhartha has said he was under other kinds of pressure. The first, from his private equity (PE) partners to buyback shares. While we have very few details of this allegation, it could point towards high-pressure business tactics.

Siddhartha is currently a majority shareholder of his Coffee Day enterprise at 32.75%. Of this, 71.4% stake had already been pledged. His wife, Malavika Hegde, who is the daughter of former Karnataka chief minister S.M. Krishna, is the other significant owner in the company with a 4.05% stake as of June 2019.

The largest PE shareholders include NLS Mauritius LLC, KKR Mauritius PE investments II Ltd and Marina West (Singapore) Pte. Ltd holding 10.61%, 6.07% and 4.63%. Marina Iii (Singapore) Pte. Ltd has a shareholding of 1.04%.

The CCD founder also points out there was “tremendous pressure” from other lenders – it’s unclear who this refers to, and what exactly Siddhartha is speaking of.

Tax troubles?

His letter also refers to the January 2019 incident when India’s income-tax department had attached the shares that he and Coffee Day Enterprises owned in Mindtree Ltd, a move that sparked worries that would prevent them from selling their stake in the IT firm.

In its regulatory filing, Mindtree said that the attachment was for a “tax demand” that was likely to be raised on Coffee Day and Siddhartha.

It was unclear whether this attachment had anything to do with the Rs 650 crore in undisclosed income the I-T department had claimed it unearthed in its 2017 raids. The attachment, according to Mindtree’s filing, also “prohibited for transfer or charge” of 22.2 lakh equity shares of Coffee Day Enterprises Ltd., and 52.7 lakh shares held by Siddhartha.

At the time, Coffee Day enterprises insisted that there was no tax liability on the part of Siddhartha as the company and its promoters had “filed the revised returns” – a claim that the CCD founder makes in his alleged letter to the board as well.

In February 2019, the I-T department appeared to relent and released the attachment on Siddhartha and Coffee Day’s Mindtree’s shares.

However, on the same day, to make up for this, it directly attached 46.01 lakh shares of Coffee Day Enterprises held by the CCD founder.

“V.G. Siddhartha has received an order under section 281B of the Income Tax Act, 1961, on February 13, 2019, provisionally attaching 46,01,869 shares of Coffee Day Enterprises held… with Way 2 wealth Brokers of V G Siddhartha to safeguard the interest of the revenue in respect of likely future tax and penalty obligations in respect of open assessments,” the company said in a regulatory filing at the time.

While the exact contours of the I-T department’s grievance with Siddhartha are unknown, the CCD founder has referred to it as “harassment” and that it led to liquidity concerns and his eventual “succumbing” to the situation.