While imposing a penalty of Rs26 crore, the Securities and Exchange Board of India (SEBI) has asked Coffee Day Enterprises Ltd (CDEL) to appoint an independent law firm to recover its dues worth Rs3,494 crore from the company's subsidiary Mysore Amalgamated Coffee Estates Ltd (MACEL). Out of 49 subsidiaries of CDEL, seven subsidiaries had outstanding dues from MACEL.
In an order issued on 24 January 2023, Ashwani Bhatia, whole-time member (WTM) of SEBI, says, "I note that while a company is an artificial person, it cannot operate by itself. It is the natural persons, i.e. the directors and key managerial personnel (KMPs), who make a company function. In this case, while the directors and KMPs (past and present) of CDEL and its subsidiaries have not been made a party to the current proceedings, I feel that considering the manner of fund diversion, as disclosed, it is imperative to carry out a detailed examination of acts and omissions of such persons by lifting the corporate veil, which is a widely accepted canon of corporate jurisprudence and has been followed by SEBI in many cases in the past."
SEBI also asked CDEL to appoint an independent law firm to recover dues from the company unit MACEL. "MACEL is almost entirely owned by VG Siddhartha (VGS) 's family, having 91.75% shares. At the same time, CDEL is also controlled by VGS's family members...Given the fact that the persons who are in control of the debtor and the claimant are essentially the same, the chances of CDEL taking effective coercive action against MACEL for payment of due amount would naturally be low and thus, the efficacy of the exercise undertaken by CDEL remains doubtful and cannot be taken at face value."
Based on the findings contained in the investigation report of Ashok Kumar Malhotra, submitted by CDEL to SEBI in July 2020, and the detailed investigation carried out by SEBI, diversion of funds amounting to Rs3,535 crore from seven subsidiaries of CDEL to MACEL, an entity related to promoters of CDEL, was revealed.
The order also points out that the money that was transferred from the seven subsidiaries to MACEL has gone to the personal accounts of VGS, his family and related entities and, thus, remains in the system. "The money cannot be said to have vanished. Under these circumstances, can it be reasonably expected that one arm of the family would act against another arm of the same family?"
"Further, would the funds from MACEL be upstreamed back to the seven subsidiaries from which it originated? Given the fact that VGS's family and related entities are the direct beneficiaries of the fund diversion and are deeply conflicted, it would be naive to expect that this money would be shifted to CDEL's seven subsidiaries, where the family currently owns only about 7.23% effective beneficial ownership," Mr Bhatia from SEBI says.
As of 31 December 2020, the principal dues had come to Rs3,494 crore, a reduction of Rs41 crore in 17 months. Mr Bhatia says, "Given that only Rs110.75 crore has been returned by MACEL to CDEL subsidiaries since July 2019, it leads to an inference that the interests of the family are so deeply entrenched as to render any efforts by CDEL to recover the dues superficial and futile."
Even today, Café Coffee Day has good brand recall value and goodwill, the SEBI order says. "However, this goodwill and brand value of the listed entity, i.e. CDEL, was misused to borrow from lenders and move the proceeds to related private entities within the VSG family through MACEL. It cannot be allowed that CDEL, its shareholders and creditors take losses while MACEL and the promoter entities to whom money was transferred from MACEL afterwards get to keep and enjoy the money transferred by the seven subsidiaries of CDEL."
SEBI then imposed a penalty of Rs26 crore on Coffee Day Enterprises and asked it to appoint a law firm to recover dues of its seven subsidiaries from MACEL.
(WTM/ASB/CFID/CFID_1/23008/2022-23 Date: 24 January 2023)