As the Karnataka police launched a search operation for VG Siddhartha who disappeared suddenly Monday evening, the spotlight fell on his diversified group’s debt woes in a slowing economy, alleged pressure from private equity investors wanting to sell their shares in the company, and enforcement action by the income-tax department.
Not only do these issues find mention in Siddhartha’s note to the board of directors of Coffee Day Enterprises Ltd and his employees, the publicly-listed company’s latest annual report also bears testimony to its rising liabilities.
The coffee chain – Café Coffee Day – started by Siddhartha in 1993, has about 1,600 outlets across India and some other countries including the Czech Republic and Austria, Malaysia and Egypt. It has over 18,000 employees, owns plantations in Chikmagalur, and had ventured into vending. The group had diversified into real estate, logistics, information technology and metals.
Read | Who is VG Siddhartha?
Listed on BSE and NSE, the company raised about Rs 1,150 crore through a public issue in November 2015. In 2018-19, Coffee Day Enterprises posted a net profit of Rs 128 crore on a turnover of Rs 4,264 crore.
The group has, of late, been battling to repay its debt which topped almost Rs 4,500 crore. In an earnings’ call on May 24, 2019, the company informed analysts it had accumulated a gross debt of Rs 4,500 crore and a net debt of Rs 2,400 crore. R Ram Mohan, CFO of Coffee Day Enterprises informed that while the holding company had a net debt of Rs 300 crore; Sical, the group’s metal and mining company had net debt of Rs 1,300 crore. Tanglin Developments Limited, a real estate firm of the group, had Rs 800 crore in debt and the group’s coffee business’ debt was around Rs 300 crore.
Though the group had raised debt from banks, mutual funds and NBFCs among others, Siddhartha’s letter to the board made public Tuesday also points to pressure from a private equity partner to buy-back its holdings in Coffee Day Enterprises. It said the private equity partner exerted pressure on him and his businesses.
“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 me to succumbing to the situation,” said Siddhartha in the letter.
While Siddhartha also wrote about enforcement action by tax department in the letter, the department said it acted as per legal provisions. In a press statement, the Office of Principal Chief Commissioner of Income Tax, Karnataka and Goa, Bangalore (B.R. Balakrishnan) said the provisional attachment of shares was made to protect the interests of revenue out of the income admitted by him based on “credible evidence gathered during searches”. The department had attached Mindtree shares held by Siddhartha and Coffee Day which delayed the Larsen and Toubro deal to buy Mindtree. “This was very unfair and has led to a serious liquidity crunch,” Siddhartha’s letter said.
In its statement, the tax department, also pointed out that Siddhartha had “admitted unaccounted income of Rs 362.11 crore and Rs 118.02 crore in the hands of V G Siddhartha and M/s Coffee Day Enterprises Ltd, respectively, in the sworn statement.” The attachment of shares was a “normal requirement to protect the interests of revenue, it claimed.
A source in the financial services industry said Siddhartha was under pressure from a distress debt fund that had provided Siddhartha’s family with funds in January-February 2018 to buy-back shares of Coffee Day Enterprises from KKR, a global PE firm, which was then looking to pare down its holding.
In February 2018, when KKR reduced its holding in Coffee Day from 10.33 per cent to 6.07 per cent, the exit seems to have been extended by the promoter family. Shareholding data filed with the stock exchanges show that on the same day in February 2018, the shareholding of Malavika Hegde (wife of VG Siddhartha) jumped from 1.44 per cent to 4.05 per cent.
The source confirmed that “recently there was pressure on Siddhartha and his family from the debt fund to repay the money it had provided to the family to buy KKR’s shares”.
An email sent to KKR did not elicit any response.
The CEO of a leading mutual fund said that as per Siddhartha’s description the group seems solvent and nowhere close to bankruptcy. “It is very strange to believe that someone will take an extreme step for normal business stress,” he said.
In desperate need to raise funds, Coffee Day Enterprises and Coffee Day Trading Limited, both promoted by Siddhartha’s family, sold their entire stake in Mindtree Limited, a global IT consulting and service company, to Larsen and Toubro Ltd. The group received funds to the tune of Rs 2,100 crore (net of expenses and taxes). In a statement post approval of the deal, the company said, “The proceeds would be used to pare down the Coffee Day Group’s debt.”
“Repaid completely in TRR. Because before last — before market [sell], we consolidated all the debt to Tanglin Retail Reality. We repaid INR 2,400 crores in the Tanglin Retail Reality,” Ram Mohan, CFO of the company said in the earnings’ call on May 24, 2019.
In its May presentation, Siddhartha, however, maintained all was well within the group. The company said while its holding firm did not have any cash, Sical and Resorts had Rs 100 crore each and Tanglin had around Rs 550 crore. It further said that while Coffee Day Trading had around Rs 200 crore another company had Rs 460 crore. Besides, Way2Wealth, a brokerage firm of the group, was said to hold around Rs 300 crore and Tanglin Retail Reality to have around Rs 400 crore in cash.
In fact, in his letter to his board members Siddhartha said, “I have endorsed a list of our assets and tentative value of each asset. As seen below, our assets outweigh our liabilities and can help repay everybody.”
Shares of Coffee Day Enterprises on Tuesday plunged by 20 per cent to Rs 154.05 on the stock exchanges after its Chairman and Managing Director VG Sidhartha was reported ‘missing’. The board said “it is evaluating and assessing the situation, formulating appropriate steps to ensure business operations are unaffected, and has resolved to co-operate with authorities”.
The board of Coffee Day had an emergency meeting on Tuesday to assess the situation. “The board is confident that the professional management of the company and each of the entities in the Coffee Day Group and their respective leadership team, will ensure continuity of all business operations consistent with past behaviour,” the company said in a stock exchange filing.
The board also reviewed a copy of the letter purportedly signed by Siddhartha dated July 27, 2019 and shared a copy with relevant authorities. “The board has also sought the assistance of local and state authorities, who are doing their utmost, and relevant officers of the company are cooperating with the authorities as requested,” the company said.
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