Coffee Day Founder Played a Dangerous Financial Game

Bengaluru: Café Coffee Day founder VG Siddhartha seems to have financially brewed a strong decoction which he could not gulp. And with debts rising upto his nose, the ‘Coffee King’ just vanished mysteriously on a bridge across the Netravati near Mangaluru.

Figuratively, Siddhartha had crossed the debt bridge a bit too far for a return. Huge debts can be a dangerous one-way street. If reports are true, he had kept his auditors and his father-in-law SM Krishna and his family out of the money play that he was indulging in – somewhat similar to what Satyam founder Ramalinga Raju did in Andhra Pradesh while cooking up the financial books.  

According to sources, the CCD founder’s debt exposure was around a whopping Rs 8,500 crore. Add another few crores from friends and money lenders and Siddhartha would have been in the dirty league with defunct Kingfisher founder Vijay Mallaya. Ironically, both are from Karnataka.

A banker told FPJ on condition of anonymity that Siddhartha’s problem was not sudden. Two years ago he had approached his bank for a loan of Rs 200 crore. But when the bank did due diligence, they were shocked to see the mounting debts and a lack of proper business plan.

Yet, the bank was ready to stick out its neck since Siddhartha was a PSP (politically sensitive person) being the son-in-law of former CM of Karnataka, former Union External Affairs Minister and former governor of Maharashtra, S M Krishna. Hence, the bank asked Siddhartha to provide a ‘comfort letter’ from SM Krishna stating that the loan would be repaid with interest. But Siddhartha refused to do so and the loan did not materialise.

The banker told FPJ that public sector banks or angel funding companies would never have funded Siddhartha because his balance sheet had red all over. Moreover, his coffee business had stagnated and there was no business plan. Siddhartha was a loner at the top – he was a founder with no co-founders around. Co-founders would always be of use in correcting financial misadventures.

With public sector banks playing a safe game, the CCD founder seems to have knocked at the doors of Non-Banking Financial Companies to take money to just service his earlier debts. He also reportedly took money from friends, money lenders and others at a huge interest rate. All this kept mounting up.

For long, Coffee Day had struggled under a massive debt burden even as Siddhartha was also under the lens of tax authority for transactions including a stake sale in IT firm Mindtree. He was also caught stashing huge amount of black money.

The banker admitted that Siddhartha had huge properties and possible green shoots of liquidity.  Earlier this year in March, Siddhartha had sold his entire 20.32 per cent stake in the Bengaluru-headquartered IT services firm Mindtree to engineering major, L&T for around Rs 3,200 crore. This was used to partially pare some debt from Coffee Day Enterprises’ balance sheet.

It was also reported that Blackstone was in talks to buy a majority stake in Siddhartha’s real estate venture Tanglin Developments for around Rs 2,800 crore. Tanglin has a tech park — ‘Global Village’, which is a 4-million-sq ft tenanted office space located on a 120-acre campus in Bengaluru, and counts Accenture and Mphasis among its tenants, besides having the headquarters of Mindtree.

There were also reports that soft drink major Coco-Cola was planning to buy out Café Coffee Day for a huge undisclosed sum.

But all this was not enough to pay off the debts and the huge services (interests) attached, the banker said.

He pointed out that Café Coffee Day had a total debt of around Rs 6,550 crore as on March 2019 from known sources. The group’s coffee business, which includes some exports, reported revenues of Rs 1,777 crore in FY18 and Rs 1,814 crore in FY19. This was not enough even to service the debts, let alone paying up the capital amount.

Hours after Siddhartha went missing, shares of Coffee Day Enterprises Ltd dropped 20 per cent on Tuesday, eroding Rs 813 crore from its market valuation. The scrip tumbled 19.99 per cent to Rs 154.05 — its 52-week low as well as its lower circuit limit — on the BSE. On the National Stock Exchange (NSE), shares plummeted 20 per cent to its lowest trading permissible limit for the day as also its one-year low of Rs 153.40 apiece.

Meanwhile, Karnataka Bank on Tuesday said it has no exposure to Coffee Day Enterprises, though the company’s global unit has an outstanding loan of Rs 152 crore. “This is to clarify that our bank does not have any exposure to Coffee Day Enterprises Ltd, an entity listed on BSE and National Stock Exchange of India Ltd,” Karnataka Bank said in a regulatory filing. “However, Coffee Day Global, one of the unlisted group companies (erstwhile Amalgamated Bean Coffee, a customer of the bank since 1996) is enjoying credit facilities with the present outstanding of Rs 152.48 crore,” it added. The loan to the global unit constitutes 0.29 per cent of total advances of the bank.

Global buyout major KKR said KKR in a statement said it had invested in the popular coffee chain nine years ago and part-exited the investment last year, virtually denying any pressure from the private equity partners to buy back shares.

Meanwhile, the board of Coffee Day Enterprises, parent of coffee chain Cafe Coffee Day, met a day after Siddhartha went missing.

“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 board said in a statement following the emergency meeting.

“In the interim, the board is evaluating and assessing the situation, formulating appropriate steps to ensure business operations are unaffected, and has resolved to co-operate with authorities,” it added.

The Coffee Day board has five members, not including Siddhartha. They are Malavika Hegde, Siddhartha’s wife, SV Ranganath, a retired IAS officer, Sanjay Omprakash Nayar, non-executive director and CEO of PE firm KKR India, Independent Director Albert Hieronimus, and Sulakshana Raghavan, an Independent Director and MD of Landor.

The immediate task in front of the board would be to select an interim chairman in the absence of VG Siddhartha and chart out the future course for the company.

“In this hour of need, we are counting on the support and strength of all our stakeholders including employees,  customers,  lenders, contractual counter parties, media, and well-wishers and request all to keep their morale high,” the board said.