It was exactly a year ago that the suicide of VG Siddhartha shook the nation. The seemingly visionary and successful founder of Café Coffee Day (CCD) had allegedly left behind a tragic note, admitting to serious financial difficulties and saying, “I gave up” and “I could not take any more pressure.” Siddharth’s body was fished out of a river on 31st July, two days after he had gone missing.
The truth about those admissions is slowing coming out. Two newspapers have reported the contents of an investigation into Coffee Day Enterprises Ltd (CDEL) that was to be completed by 31st March. The board has hired Ashok Kumar, formerly of the Central Bureau of Investigation (CBI) and MR Venkatesh, a lawyer and a chartered accountant, to investigate Siddhartha’s letter. This happened after E&Y India, which had been appointed to take over CDEL’s finance functions last year, recused itself, citing conflict of interest.
On 17th March, The Mint scooped
the investigation findings to say that Rs2,600 crore was missing from the books through several related-party transactions with 48 subsidiary companies. It says, the diversion of funds had been going on for over a decade, but the money mostly went to service high cost borrowings from a set of private equity investors and venture funds.
On 23rd July, a report in The Economic Times (ET) suggested
that the hole in CDEL’s books may be significantly higher, at Rs3,500 crore-Rs4,000 crore, and alluded to ‘suspicious circular transactions’ between Siddhartha’s private company, Mysore Amalgamated Coffee Estates (MACEL) and CDEL group companies. According to ET
, the money was used to service high-cost borrowings from international funds and partly to ‘bankroll some of his investments’.
This seems to tie-in with the revelations in Siddharth’s suicide note and reports
about the CCD group having outstanding loans of over Rs11,000 crore comprising high-cost borrowings, often backed by unsustainable personal guarantees.
According to ET, investigators attribute the debt crisis that eventually broke Siddhartha to the “movement of cash between public and private companies while maintaining strict silos within the organisation to avoid disclosure of the true financial picture.”
The report has yet to be made public; but, if these finding are true, then it appears that all the changes mandated by SEBI and the government have made little difference to how companies are being run.
Structure for Obfuscation: In CDEL’s case, while the holding company was listed, all the main businesses were in 48 subsidiaries. These included major ones like Coffee Day Global (the coffee retailing unit), SICAL Logistics, Tanglin Real Estate Development, Coffee Day Resorts and Way2Wealth Securities. This structure probably helped obfuscate the difference between Siddharth’s personal business vehicles, such as coffee estates or trading companies, from the subsidiaries spawned by the listed entity and created a fertile environment to move funds between the two sets of entities without detection. Worse, the most profitable businesses remained private.
Siddhartha was a politically connected person (PCP) by marriage and had his early training in one of Mumbai’s leading investment and broking company. Although he was considered a visionary who spotted the potential of Infosys (and co-underwrote its public issue in 1993 along with Enam Securities), MindTree, Kshema Technologies (sold to Mphasis), etc, there was always talk about his access to funds of powerful politicians from the south, with all the dubious baggage and pressure that it involves.
On the financial side, Alpha Grep, a subsidiary of his brokerage and wealth management company, Way2Wealth, is under investigation over the high frequency trading (HFT) scandal at the National Stock Exchange (NSE) since 2015. All this ought to have attracted greater attention by the regulators and auditors, but did not.
According to ET, the core of the problem were the circular dealings between a private company, MACEL, which is 90% owned by Siddhartha’s father and CDEL. MACEL had an asset base of just Rs30 crore in FY18-19 with revenues of Rs4 crore and accumulated losses of Rs80 crore. But it had borrowed a whopping Rs4,000 crore from Coffee Day group entities.
Satyam Redux: Siddhartha’s last letter says: “I am solely responsible for all mistakes. Every financial transaction is my responsibility. My team, auditors and senior management are totally unaware of all my transactions. The law should hold me and only me accountable, as I have withheld this information from everybody including my family.”
The ET report says Siddhartha “single-headedly oversaw cash management and deployment of funds, thereby blurring the lines between his personal companies and the public ones.” Does the investigation confirm this absolutely simple modus operandi where the private firm returned funds to CDEL before the audit was due and transferred them back immediately thereafter?
So the big fat reserves shown by the listed entity were practically non-existent, the board and senior management knew nothing and the auditors failed to raise red flags.
How is this even possible 11 years after Ramalinga Raju’s confession and similar claims sent shockwaves across the world? Mr Raju also claimed that he had committed a massive, long running fraud, single-handedly by retaining a complete grip over finance, while appointing professional managers to run operations.
Mr Raju apparently “created so many silos within Satyam that only a few people at the top really knew what was going on,” said Ram Mynampati, Satyam’s former chief operating officer (COO) in an interview.
Even in Satyam, like in IL&FS, it was not possible for anyone to cook the books for years without active collusion by auditors. The same is true of CDEL. The circular deals should have been detected easily enough by both, statutory and the internal, auditor, if they were not complicit.
Auditors Speak Up
Things remain shaky at CDEL. Earlier this month, it reported a consolidated net profit of Rs1,672.41 crore for the April-June quarter as against Rs21 crore in the previous quarter, all because of the sale of Mindtree shares. Around the same time, Nitin Bagamane, the interim COO has quit and the statutory auditor, BSR & Associates, quit citing ‘commercial considerations’. BSR also flagged the reliability of information and numbers received from group companies, especially pending the board-ordered investigation report.
The official investigation report is supposed to be released soon; but the portions scooped by the media so far do not touch on one key issue.
Disguised Lending: Siddharth’s last letter said, “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.”
At the time of his death, it was widely believed that the reference was to KKR India. KKR had sidestepped the issue in a statement released then, which said, “We believe in VG Siddhartha and had invested in the company about nine years ago. We sold approximately 4.25% (of our total holding of approximately 10.3% in the company) in February, 2018 on the stock exchange and have not sold any shares before or after.” Sanjay Nayar, head of KKR India, resigned from CDEL’s board last November.
Will the investigation tell us if KKR India or any other investor had also lent/invested in Siddhartha’s private companies that were helping themselves to CDEL reserves? Did they know about the circular dealings? The Mint report mentioned earlier, quotes a source saying, “Siddhartha provided his early backers such as Darby Overseas Investments Ltd, the private equity arm of Franklin Templeton Investments, and Sequoia Capital with annual returns of as high as 23%, mostly through loans.."
Are ‘private equity’ investors allowed to act as lenders by structuring their loans as equity investment? If the investigation reports proves this, shouldn’t the Reserve Bank of India (RBI) have something to say about such disguised lending, especially when they know that promoters are fudging facts, siphoning money, or hiding information about their personal borrowing (against shares of listed companies) that has to be disclosed to stock exchanges?
Things had reached a point where mutual funds had also turned into lenders and helped promoters fudge their borrowing and evade disclosure to stock exchanges in the Zee-Essel group, Yes Bank and Anil Ambani’s ADAG. Their actions caused huge losses to their own investors without attracting any punishment. Unless such collusion is stamped out through strict action and penalties, just tinkering with rules of governance and disclosure will only be a burden on those who actually follow the rules.