Unravelling the mystery behind the death of India's coffee magnate
In death, V.G. Siddhartha unfortunately attracted the kind of publicity he had sought to avoid throughout his life. The intensely private businessman, who had built one of the best known consumer retail brands in India, Cafe Coffee Day, had avoided drawing attention to himself. But even before his body with a blood stained face and clenched fists was fished out from the backwaters of Netravati river by local fishermen at the break of dawn on July 31, his disappearance 36 hours ago, and the typed and signed letter he purportedly left behind, put his life and business dealings under scrutiny and triggered intense speculation.
The letter, which he had reportedly written two days before disappearing, was addressed to the board members and the CCD family. It said, "My intention was never to cheat or mislead anybody, and I have failed as an entrepreneur." He blamed himself for failing to create a profitable business model and also blamed severe extraneous pressures from PE firms, lenders as well as the tax department for taking an extreme step.
From his days as a young and ambitious stock broker in Mumbai in the 1980s to building a conglomerate over the next two decades, Siddhartha was always a big picture man. His death has not only raised some uncomfortable questions for corporate India but also about his businesses. On the surface, while his listed business - Coffee Day Enterprises (CDEL) - was facing severe cash flow problems and was highly leveraged, there seemed little reason for Siddhartha to have taken such an extreme step. At a consolidated level, his business was making profits, and the recent sale of shares in the mid-sized IT firm Mindtree to L&T had given the company enough cash to reduce its debt to a more manageable level. The coffee retailing operations seemed on a solid footing, but like many businesses, it was facing a liquidity crunch.
There were businessmen who had far greater debt problems, and Siddhartha's businesses at least seemed to have enough assets to cover the debt by a good margin.
As days go by though, more evidence points to Siddhartha having taken on debt in his private capacity to buy land and invest in long gestation projects, and angry lenders hounding him for quick returns. There is also a political angle to the tale. Siddhartha was the elder son-in-law of S.M. Krishna, former CM of Karnataka, a former Union Minister and a former Congress stalwart who had recently joined the BJP. But despite his father-in-law changing sides, Siddhartha had close friendships with many Congress politicians from Karnataka, including strongman D.K. Shivakumar. Close friends and prominent business leaders from Bengaluru speculated that he might also have got caught in the crossfire between the two parties.
In the letter, Siddhartha's also talked about an income tax probe. Was he talking about the 2017 I-T raids on his companies and his premises, which purportedly uncovered undeclared income, or something more recent?
Some of the answers will never come out - including the exact role his political friendships played or the kind of pressures he felt from the tax department. But as more details are revealed, it is increasingly apparent that despite his land assets (over 12,000 acres of coffee plantations as well as a SEZ), he had borrowed to the hilt and was possibly unable to keep good on his promises to his lenders and PE investors.
While his apparent suicide may have given his senior management and family some additional time to make good his promises, the problems are far from over. But let us come to that part a bit later.
The only child of a wealthy family of coffee planters from Chikkamagaluru in Karnataka, Siddhartha moved to Mumbai in the 1980s after completing his Masters in Economics from Mangalore University, to pursue a career in finance. His two-year stint with JM Financial gave him enough insights into the world of stock brokerage and the money in high inter-market arbitrage. After returning to Bengaluru, Siddhartha borrowed around Rs 7.5 lakh from his father to set up his own trading business, Sivan Securities, which later became Way2Wealth Investment Consultancy. A portion of the profits from Sivan was used to systematically buy coffee plantations across Karnataka.
By the early 1990s, Siddhartha aspired for more as opportunities came along his way. By then he had married Malavika, the daughter of S.M. Krishna. From an ancestral holding of a few hundred acres, Siddhartha had by then acquired close to 6,000-7,000 acres. The Infosys IPO came along. This was a turning point, which shaped and defined some of his most profitable investments in the information technology sector over the next decade and a half. In 1993, on the advice of investment banker Nimesh Kampani, he bought around 60,000 shares of undersubscribed Infosys ahead of its listing. He exited the stock in six months making 6x returns. Tiger Ramesh, CEO, Magnasoft, one of Siddhartha's companies, recalls: "When he invested in undersubscribed Infosys and made a windfall gain out of the stock, that was his first experience with what IT could do in the stock market." His subsequent investments into other IT firms, especially Mindtree, was a no brainer said Ramesh.
In parallel, Siddhartha was also investing time in his family's coffee business. He led several representations to the Centre on behalf of coffee growers, to free up coffee for exports from the controlled pooling regime. "He was young, determined, sharp and also an influential man. He knew what potential coffee had," recalls Bopanna, who was a part of the coffee growers delegation. Once coffee as a commodity was freed up, Siddhartha's dreams for coffee really took off. He set up Amalgamated Bean Coffee Trading Company (ABC) to export green coffee in 1993 and dabbled with the idea of an internet cafe shop on Brigade Road in Bengaluru.
HIGHS AND LOWS OF COFFEE
On his return to India from a trip to Singapore, Siddhartha wanted to set up a cafe like he had seen there. Poornima Jairaj (wife of K. Jairaj, a retired IAS officer from the Karnataka cadre), who was working with Sivan Securities, joined hands with Siddhartha to set up the first cyber cafe in the heart of Bengaluru's central business district in 1996. "The idea was to sell coffee but in a space where internet can be free. It was a revolutionary idea in the mid-1990s," recalls K. Jairaj. But the real foundation began in 2000. S.M. Krishna was the Chief Minister at that time. Siddhartha had already set up several companies like Ganga Coffee Curing Works, A.N. Coffee Day International, Tanglin Developments, Giri Vidhyuth (India), Vaitarna Holding, Vakrathunda Holding, and Vaitarna Timber Trading. His businesses ranged from coffee trading and plantation to real estate and financial investments.
The current holding company, Coffee Day Enterprises or CDEL, which is listed, was originally formed as a partnership firm in February 2008 under the name Coffee Day Holding Company. It was converted into a private limited company, Coffee Day Holdings. The name changed to Coffee Day Resorts in 2010, which eventually became Coffee Day Enterprises Private Ltd, for which a fresh certificate of incorporation was issued by the Registrar of Companies on August 6, 2014. The company went public in January 2015.
During 2000-10, the companies achieved significant milestones. In 2000, through his investment company Global Technology Ventures, Siddhartha invested in Mindtree for about 7 per cent stake. Over the years, this increased to 20 per cent. Ashok Soota, a Co-founder and former CEO of Mindtree, recalled how they couldn't have asked for a better investor to start the company. "We were really, really lucky with our first two VCs. He was a superb investor and he gave us all the freedom," Soota had said in an earlier interview with BT. Siddhartha also introduced Mindtree to some of its critical clients like Franklin Templeton, and later convinced the company to move into his 'Global Village' on Mysore Road developed by one of subsidiaries. "He clearly saw the upside to his investment but at the same time, he wanted to be a 'White Knight'," said Soota. Global Technology Ventures (now Coffee Day Trading), another subsidiary, had by then already funded close to 17 IT start-ups including Mindtree, Kshema Technologies, Arzoo.com, Liqwid Krystal and iVega Corp, among others.,
These were busy years for coffee, related businesses and the construction business. The 'Fresh & Ground' coffee powder retail stores of CCD expanded across South India. In 2005, CCD set up its first international cafe in Vienna through a subsidiary. In 2006, Tanglin Development launched its first SEZ 'Global Village' and also a hospitality venture, Coffee Day Holiday Resorts, under the brand name 'The Serai' in Chikkamagaluru. By late-2000, Starbucks was seriously looking at India, and Siddhartha wanted to have scale before more competition arrived.
K. Ramakrishnan (Ramki), former President of Marketing at CCD, which he had joined in 2010 and stayed on till the pre-IPO days, said: "As a boss he was inspiring and demanding at the same time. He could envisage the future and simultaneously attend to the minutest details." Siddhartha's vision was to make CCD one of the top cafe chains in the world, and he would say, "I want an Indian brand like CCD to take the pride of place in Times Square and Orchard Street. That will be a moment of pride for India and us," recalls Ramki.
The period that saw massive expansion, also saw debt piling up. The company needed funds for both operations and capex. In 2010, Standard Chartered Private Equity (Mauritius) II Ltd, KKR Mauritius PE Investments II Ltd, and Arduino Holdings Ltd (which later transferred the debentures to NLS Mauritius LLC) invested close to $149 million. Compulsorily convertible preference shares held by Standard Chartered Private Equity (Mauritius) II Ltd and the compulsory convertible debenture held by KKR Mauritius PE Investments II Ltd and NLS Mauritius LLC was converted into equity shares at the time of listing. By June 2015, the consolidated debt was of around Rs 2,700 crore.
When CDEL decided to do an IPO looking to raise Rs 1,150 crore in 2015, it was the IPO the market had heard of since Bharti Infratel. One of the main objectives was to reduce the debt by about Rs 630 crore, so that the debt servicing costs could come down and money could be used for further investment. CDEL had raised over Rs 334 crore from anchor investors ahead of the IPO, while in March, the firm had mobilised Rs 100 crore in a pre-IPO funding from Nandan Nilekani and Rare Enterprises (promoted by Rakesh Jhunjhunwala), among others. But the IPO opened to a lukewarm response. It was over-subscribed 1.8 times, and the non-institutional investors category only got 53 per cent subscription. On the BSE, the stock listed at Rs 313 - 5 per cent below the issue price of Rs 328.
A former investment banker who did not wish to be named, said, "It was not really the response Siddhartha was expecting. He was quite disheartened that the market could not see his vision."
According to the 2016/17 annual report filed by the company, the gross revenue from the coffee business increased by Rs 1,827 crore, contributing 51 per cent to the consolidated top line. The substantial increase in revenues came from setting up of new cafe outlets and deployment of new vending machines. Revenue from the retail division increased by 14 per cent from Rs 1,253 crore in 2015/16 to Rs 1,423 crore in 2016/17. Cafe Coffee Day (CCD) by then had 1,682 cafes in 241 cities and 537 CCD Value Express kiosks, 415 Fresh & Ground Coffee retail stores, 41,845 vending machines in corporate workplaces and hotels.
The company's net debt, as on March 31, 2017, stood at Rs 2,972 crore (including short-term borrowings amounting to Rs 541 crore). Data (Ace Equity), however, reveals that the company's free cash flow was a negative Rs 533 crore at the end of 2015/16. In fact, by the end of December 2016, the promoter group had already pledged more than half (54 per cent) of their holdings to raise money largely for the construction business (Tanglin) and the hospitality business. Many people, including Nandan Nilekani, warned Siddhartha against over-leveraging, says a business associate close to him. "He was very optimistic about the market. What could one do?"
Stock markets had taught Siddhartha that patience was an essential virtue for an investor. But to expect PE funds to stay invested for a long term was a miscalculation on his part. In the fourth quarter of 2017/18, KKR's shareholding had come down from 10-plus per cent to 6 per cent. (Interestingly, this was bought by Malavika Hegde, Siddhartha's wife.)
Things had come to such a pass that the total debt became overwhelming. The overall liquidity crisis in the banking system only added to Siddhartha's troubles - his cost of funds increased. By March 2018, Siddhartha had quit the board of Mindtree to concentrate on CDEL. Former Mindtree Chairman, Krishnakumar Natarajan, in an earlier interaction with BT, had said that Siddhartha was finding it difficult to spare 10-12 days annually to Mindtree board commitments.
What role did the taxman play?
The letter reportedly typed and signed by V.G. Siddhartha alleges harassment by B.R. Balakrishnan, the previous Director General-Investigations, Income Tax, Karnataka and Goa Range. The company's and Siddhartha's shares in Mindtree were attached and on two separate occasions, a Mindtree deal was blocked. He alleged that the tax department took possession of Coffee Day Global shares (CDGL) even though the company filed revised tax returns. Siddhartha called it unfair and said it had led to a serious liquidity crunch. The income tax department retorted to claims in a press release after outrage on social media under #taxterrorism. The department said the search on a prominent politician's case (D.K. Shivakumar) had led to credible evidence of concealed transactions by CCD and after search operations on Siddhartha's company and other properties, he had admitted to not revealing unaccounted money of around Rs 480 crore. BT spoke to another senior DG level officer who was earlier in Bengaluru. "He (Balakrishnan) is a man who is credited with some successful investigations and known to run quite effective operations," the officer said. Explaining the procedure, he said search operations are either conducted by an assistant commissioner or a deputy commissioner level person. The search papers, however, would need authorisation from the Commissioner of Income Tax, and the DG briefs and oversees the processes. While Balakrishnan may have been overseeing the investigations, Siddhartha should have taken legal steps, instead of ending his life, the tax official said.
Months before his reported suicide, Siddhartha was looking at ways to refinance his existing debt and also raise fresh money for day-to-day requirements.
People in the banking circles say he was often spotted in Mumbai. His first big headache was a loan of Rs 800 crore that he took several years ago from HDFC Ltd. That loan was coming up for repayment early this year, which they paid up. The mortgage player was in no mood to roll over or take fresh exposure in any of his group companies, and the money market was anyway tight. The bankers, mutual funds and NBFCs were hit hard with several defaults. Siddhartha, however, managed to convince Axis Bank and Standard Chartered Bank to put in close to Rs 1,000 crore in his businesses. The additional money did reduce his burden, but he was facing refinancing pressure from several fronts. The fund raising had actually started a year ago as the cash flows from companies was not sufficient. Sources say that Siddhartha managed to raise fresh money from Yes Bank, Karnataka Bank, Bajaj Finance, Shapoorji Pallonji Group, Kotak Mahindra Investments, Piramal, and a few other lenders. "He got some Rs 500 crore of new money from these lenders," says a source. Clearly, Siddhartha's debt was rising without any major change in cash flows or revenues. But Siddhartha wanted to project a rosy picture. For example, group company Sical has a mine contract from which he claimed revenue of Rs 10,000 crore spread over several years.
Bankers also say that Siddhartha was running out of collateral. He had put all assets on the table - from pledging the shares of group companies, their assets, strategic investments in other listed companies, corporate guarantee by almost all his large companies, personal guarantee on various group company loans, and fixed deposits of group companies. In fact, the lenders also have a charge on all his cash deposits with landlords of the cafes and also future outlets. "The company often talked about net debt (gross debt minus cash deposits, etc), but the fact was that all the cash and deposits were under the charge of lenders," says a banker who did not wish to be named.
In 2017/18, CDEL started streamlining its reporting to bring in better clarity on its finances. Right from the time of listing, many analysts had pointed out how complex the company's structure was and how the reported numbers failed to show the value that Siddhartha had envisaged. In fact, the auditor's note by BSR & Associates, dated May 24, 2019, states that they did not audit the financial statements of 40 subsidiaries included in the consolidated annual financial results, whose annual statements show total assets of Rs 12,140 crore (March 31, 2019) and total revenue of Rs 4,092 crore. "The consolidated annual financial results also include the Group's share of net profit (and other comprehensive income) of Rs 87.82 crore... in respect of two associates and two joint ventures which has not been audited by us."
A holding company, four major subsidiaries, 40-plus step-down subsidiaries and over half a dozen associates and joint venture companies - CDEL has a complex structure, difficult for public investors to follow. This makes it difficult for lenders, shareholders and regulators to trace the end-use of funds and also the returns. The business model, however, worked well for Siddhartha as he was borrowing at all levels and also funding his new ventures from the holding company. But such a structure is a recipe for disaster as asset liability management becomes difficult. Interestingly, the two-member board-level risk management committee had him and his wife, since 2015. In the past one year, the committee never met. Siddhartha was also managing the affairs of the group almost singlehandedly without top notch professionals.
IL&FS is a recent example where a 3-tier structure (holding company, subsidiaries and special purpose vehicle) eventually brought down the entire company. The analyst community quote another parallel in Videocon Industries, which used the flagship Videocon Industries to fund its telecom subsidiary, a cash guzzler. The failed telecom business eventually hurt the entire business.
Siddhartha was funding his technology park subsidiary Tanglin, step-down subsidiary Tanglin Retail Realty Development, logistics arm Sical and also the resort and hotel business. But revenues from these businesses were not sufficient.
There have been various cases of multiple layers of subsidiaries being used to siphon off money. At CDEL, there are several instances of money transfers or deals that raise corporate governance concerns. For example, in 2017/18, CDEL extended a loan of Rs 356 crore to Coffee Day Hotel & Resort at zero interest. The Companies Act does not allow this, but CDEL took shelter under an exemption clause in the Act, which allows zero interest for tourism, hotels and convention centres. Similarly, there were some related party transactions. CDEL purchased raw coffee from Mysore Amalgamated Coffee & Estates for Rs 39 crore, while at the same time it also sold raw coffee to Kathlekhan Estate Pvt. Ltd for Rs 35 crore. In another instance, CDEL loaned Rs 41 crore to related company Dark Forest Furniture and also purchased fixed assets (furniture) from it for Rs 20 crore.
The locations of some of the subsidiaries also raise doubt. CDEL has subsidiaries in places like Denver, Cyprus, Austria, Czech Republic, and others. The recent income tax raids and investigations would surely look into these areas for any possible siphoning or discrepancies.
Barring financial services and hospitality, other segments like coffee business, office space leasing and investments were all doing well. At the end of 2017/18, the PAT for six verticals stood at Rs 148.26 crore as against Rs 81.64 crore in 2016/17 and the net adjusted debt stood at Rs 3,323 crore. By the end of June 2018, close to 50 per cent of the promoter group share and 39 per cent of Siddhartha's shares were also pledged.
Between July and December 2018, the liquidity squeeze only increased for the group. By December 2018, the promoter group share pledging had gone up to 79 per cent and 70 per cent for Siddhartha. His talks with PE investors to offload 20 per cent in Mindtree hit a roadblock after the tax department attached the shares. The shares were later released, and much to the displeasure of the founders of Mindtree, Siddhartha sold his total stake to L&T at Rs 980 per share. Post-tax, around Rs 2,100 crore from the sale was used to service debt. Before this, CDEL had sold its stake in Global Edge Software for Rs 98 crore.
At a group level, at the end of 2018/19, CDEL had revenues of Rs 4,264 crore as against Rs 3,788 crore the previous year. PAT increased to Rs 128 crore from Rs 106 crore a year ago. The company is yet to publish its annual report for 2019, but according to CMIE estimates, the total debt for 2018/19 is around Rs 6,547 crore. The company was already in talks with Coca-Cola and lTC for partnering in the vending business and even a possible stake sale to further reduce debt.
Even though CDEL's consolidated debt was Rs 6,547 crore, the group companies were profitable individually. For a large corporation with substantial assets, most analysts still believe that the debt was manageable even though the free cash flow was negative. This raises a question over which are the debts that Siddhartha reportedly refers to. Data collated by BT shows that CDEL and four of the promoter group (private) companies had outstanding pledges of nearly Rs 3,500 crore. Moreover, Siddhartha also stood as personal guarantor to debts of over Rs 1,000 crore. There is no clarity on how these funds were used. In all, the debt may be around Rs 11,000 crore.
In a turn of events that no one had imagined, on the evening of July 29, Siddhartha went missing from a bridge across the Netravati river in Mangaluru. His body was found in the river 36 hours later. In a letter that he is said to have written, he mentions his overall asset valuation at close to Rs 18,000 crore to pay off all the debts. It also mentions transactions that the board and others in the management team were not aware of.
WHAT NEXT FOR COFFEE DAY ENTERPRISES?
Following the demise of Siddhartha, the board of CDEL has appointed independent director S.V. Ranganath as the new interim Chairman. The board also constituted an executive committee comprising Ranganath, Nitin Bagmane as COO, and R. Ram Mohan as CFO, to exercise the powers of a CEO. Interestingly, CDEL never had a CEO; as CMD, Siddhartha was carrying out the function of a CEO.
The company released a statement saying the executive committee would look at explore opportunities to deleverage the Coffee Day Group, and that the audit committee and executive committee will hold discussions with the statutory auditors and other advisors in the next board meeting on August 8, to probe the transactional details mentioned in the letter. However, market analysts say the company's top priority now should be to simplify the organisational structure. A Mumbai-based analyst, who did not want to be named, said: "Either consolidating the entities or giving more clarity and data pointers on the segments will help the company as markets can then read it better." Another senior analyst said, "There is a need to strengthen the management and the board, and an external CEO from an FMCG or retail background would make more sense now
Apart from the stake sale in Mindtree, Siddhartha was also trying to sell a part of his real estate business under Tanglin. The company was said to be in an advanced talks with Blackstone, the world's largest asset manager. Global Village, the property on Mysore Road, is spread over 90 acres and has almost 4.5 million sq. ft built-up area. It is estimated to have an annual rental cash flow of Rs 250 crore, and a valuation of around Rs 3,600 crore. Sources in the company say the new executive committee could look at opening new channels of communication to close the deal.
Siddhartha was also in talks to sell a substantial stake in the flagship brand, Cafe Coffee Day, to Coca-Cola. Industry analysts point out that after Coca-Cola bought out Costa Coffee, a stake in Coffee Day Global would mean a substantial footprint for them in one of the biggest consumer markets in the world. He valued Coffee Day Global's retail business in India at Rs 7,000-8,000 crore.
For Siddhartha 'a lot happened over coffee'. For creating a brand like Cafe Coffee Day, he will be remembered far beyond his tragic death.
With inputs from Anand Adhikari.
Data by Niti Kiran