As much as Rs 3,500-4,000 crore was missing from the books of the listed Coffee Day Enterprises due to these transactions, the probe is likely to report.
A probe into Coffee Day Enterprises (CDEL) is expected to reveal details of suspicious circular transactions between Mysore Amalgamated Coffee Estates (MACEL), a private firm of the late VG Siddhartha, the owner of Coffee Day group, and various group companies.
The investigation, ordered by the board of CDEL after Siddhartha’s suicide last July, is expected to show that several of these financial dealings were conducted without maintaining an arm’s length, are culpable under Indian laws, and were not followed up with proper disclosures, said people with knowledge of the report’s findings.
As much as Rs 3,500-4,000 crore was missing from the books of the listed Coffee Day Enterprises due to these transactions, the probe is likely to report.
The investigation was conducted by former Central Bureau of Investigation DIG Ashok Kumar Malhotra and Avastha Legal’s MR Venkatesh.
Funds to Help Siddhartha Service Borrowings
The funds were purportedly routed to MACEL to help Siddhartha service high-cost borrowings and buy back shares from investors who were often promised high returns. It was also used to bankroll some of his investments.
However, the report is unlikely to get into granular details of MACEL’s business dealings, since it was outside the scope of the probe.
Siddhartha’s family and CDEL’s executive committee declined to comment on the report.
Malhotra and Venkatesh were brought in by the CDEL board a month after Siddhartha’s death last year to examine the contents of the a letter allegedly written by the late founder to Coffee Day’s board describing massive debt burden and pressure from tax authorities and lenders. It also claimed Siddhartha bore sole responsibility for the company’s financial transactions.
The duo was also asked to scrutinise CDEL’s books of accounts after EY — which was originally assigned the task — rescued itself citing ‘certain conflict of interest’, the Bengaluru-based company had said then.
The probe report, which is likely to be submitted to the CDEL board and made public in the coming days, however gives a clean chit to the tax authorities and PE investors, who were alleged by some to have driven the first-generation businessman over the edge.
No documentary evidence was available to support the charge of harassment by tax officials though the report is likely to mention that the attachment of shares by the income tax department had impacted Siddhartha’s cash flows.
DEBT BINGE
The probe is believed to have held Siddhartha’s compulsive debt binge, continuous refinancing or rollover of high-cost loans with even higher cost borrowings — some even at 18-20% rate of interest — responsible for creating a perilous business model that led to a debt trap.
The debt-fuelled expansion led to over Rs 10,000 crore of outstanding loans for the Coffee Day group in FY19, including Siddhartha’s personal loans and guarantees.
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Movement of cash between public and private companies while maintaining strict silos within the organisation to avoid disclosure of the true financial picture further precipitated the crisis.
MYSORE MYSTERY
Siddhartha listed his holding company CDEL in 2015. It has no business of its own but owns about 49 subsidiaries.
Of the various arms, only Coffee Day Global (the coffee retailing unit), SICAL Logistics, Tanglin Real Estate Development, Coffee Day Resorts and Way2Wealth Securities have substantial operations.
This is the reason why even as CDEL’s consolidated revenue was Rs 4,466 crore in March 2019, its standalone revenue was a paltry Rs 124 crore — mostly from coffee trading and research activities.
Swathes of coffee plantations (estimated at 12,000 acres), timber and furniture units and investments in technology companies such as Mindtree as well as in the pharma sector were all done through Siddhartha’s private companies like MACEL.
MACEL, which is into bean trading and owns 900-1,000 acres of coffee plantations, was 90% owned by Siddhartha’s father Gangaiah Hegde, who passed away a month after his son’s tragic death.
The company once traded on the Bangalore and Madras stock exchanges and was acquired by Siddhartha in 1996. There is still a small block of public shareholders whose whereabouts are unknown.
Regulatory filings with the Registrar of Companies show the company has a thin asset base (Rs 30 crore of fixed assets in FY19), revenues of Rs 4 crore, and accumulated losses of Rs 80 crore between FY17 and FY18. But it has borrowings of Rs 4,000 crore. Most of the loans are from other corporate entities — either Coffee Day group companies or related parties. The funds were advanced to Siddhartha and his personal firms.
FUND CIRCULATION
Certain transactions reveal that money was borrowed from subsidiaries of the listed CDEL, but entries also show that such sums were either partly or fully repaid. For example, MACEL gave advances of Rs 3,537 crore to Siddhartha in FY19 and received advances of Rs 2,177 crore from him. In the same fiscal, Tanglin Development gave advances of Rs 2,614 crore to MACEL, which was repaid, as per its balance sheet. Coffee Day Global has advanced Rs 3,840 crore to MACEL, of which the latter has repaid Rs 3,779 crore.
These advances to Siddhartha and other related parties have been interest-free and of indefinite maturity.
MACEL, the report is said to mention, owes subsidiaries of CDEL an undisclosed Rs 2,700-3,000 crore. Additionally, it is also liable to pay around Rs 900 crore for formal business transactions.
Cumulatively, Siddhartha’s private firm owes Rs 3,500-4,000 crore to CDEL, much of it due to undisclosed related-party trades.
Directors and senior management of CDEL or its arms were unaware of the financial dealings with MACEL, said the people mentioned earlier. The minutes of board meetings of group companies also have no mention of these, the persons added.
Interestingly, even the auditors failed to raise red flags when cheques were received by group subsidiaries from MACEL, often just before the close of a quarter, only for the money to return to Siddhartha’s private company in the first few days of the following quarter.
It is, therefore, likely that the consolidated cash reserves of nearly Rs 2,500 crore reported by CDEL in March 2019 existed only as book entries, since the money was in continuous circulation.
This became easy as Siddhartha single-headedly oversaw cash management and deployment of funds, thereby blurring the lines between his personal companies and the public ones.
