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Last Updated : Aug 01, 2019 08:34 PM IST | Source: Moneycontrol.com

Digging Deeper | How the brew turned bitter for Cafe Coffee Day and VG Siddhartha

That one of the most cheerful and recognisable brands will now be shadowed by the abrupt end of its founder’s life story is a tragedy.

Moneycontrol Contributor @moneycontrolcom

Rima M. | Rakesh Sharma

This week, as the funeral pyre of Cafe Coffee Day's founder VG Siddhartha was lit , the sun set on an eventful life that not just impacted the entrepreneurial landscape of India but also touched millions of lives through its cheery messaging, "A lot can happen over coffee."

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As tributes poured in, the most moving were the tweeted memories of consumers who recalled  first dates or how they bought their first French Press from a CCD outlet. Or were reassured to see a CCD branch on a highway so that they could use the clean washroom and pick up a coffee and a snack. That one of the most cheerful and recognisable brands will now be shadowed by the abrupt end of its founder’s life story is a tragedy.

In this Deep Dive, we will try and understand the hows and whys but first a little bit of context is essential.

The end and the beginning

As businesstoday.in reported, Coffee king VG Siddhartha, whose Cafe Coffee Day (CCD) was India's answer to Starbucks and Costa Coffee, was found dead on the banks of Netravati River in Mangaluru on Wednesday morning. The body was found after 36 hours of an intense search operation by the Karnataka Police and NDRF(The National Disaster Response Force). He was married to former Karnataka Chief Minister SM Krishna's first daughter Malavika.

At the heart of the sad drama, says businesstoday.in among other news sources,  was Siddhartha's letter where he had alleged harassment by the income tax authorities and a private equity partner, which allegedly caused a liquidity crunch in his company.  Faced by rising competition and a debt of over Rs 6,500 crore, Siddhartha said in his letter that he had failed as an entrepreneur. This curtain call was in direct contrast to the optimistic inception of VG's coffee empire in India.

The protagonist of this story was born to a family of coffee planters in Malenadu region of Karnataka's Chikkamagaluru district. He got his master's degree in Economics from Mangalore University. When he was just 24, he joined JM Financial Limited in 1983-84 as a management trainee. In 1996, he founded Cafe Coffee Day, India's first coffee chain in Bengaluru and it went on to become a global brand.

How he got to this point is interesting. After  two years in JM Financial Ltd, he used some family money to buy a stock market card for an amount of Rs 30,000 and a company called Sivan Securities. The company's name, informs businesstoday.in was changed to Way2wealth Securities Ltd in 2000. Siddhartha became a successful full-time investor in the stock market and also owned 10,000 acres of coffee farms by 1985.

We quote, "As the years went by, his wealth doubled with the liberalisation of coffee trading in the 1990s.

He then floated Amalgamated Bean Coffee Trading Company Ltd (ABCTCL) in the year 1993. This company focused on coffee exports and became the second-largest exporter from India. ABCTCL is now known as Coffee Day Global. Siddhartha opened the first CCD store in 1996 at Bangalore's busy Brigade Road. A cup of coffee and an hour of internet surfing used to cost Rs 100 at that time. Siddhartha in the year 2000 invested in tech company MindTree through Coffee Day Global's subsidiary Coffee Day Trading. The coffee king also had an interest in the hospitality sector. He launched hospitality chain Coffee Day Hotels & Resorts in 2006 which operates the Serai and Cicada resorts.

According to Forbes, Siddhartha's net worth stood at $1.2 billion (Rs 8,200 crore) in 2015." Unquote.

Siddhartha also sat on the boards of MindTree, GTV, Liqwid Krystal, Way2Wealth and Ittiam.

businesstoday.in reports further that Coffee Day Enterprises' total tangible assets are valued over Rs 18,000 crore and that Coffee Day Global Limited, that runs the coffee chain, has a footprint of over 1,600 stores with 54,000 vending machines and more than 500 express stores.

Simantini Dey of News18.com reports that in the last 23 years, CCD has managed to open outlets in 28 states . And as Suneera Tandon and Saumya Tewari of LiveMint put it poignantly , "A lot happened over coffee to modify India’s tea-drinking culture." And most of it, they say had something to do with the first-mover advantage as the homegrown CCD was the de facto coffee server for the country’s youth during the 1990s and early 2000s.

LiveMint says, this was made possible especially in a post-liberalized India, when the opening of the economy in 1991 created a wealth of jobs and aspirations among middle-class Indians leading to a surge in popularity of the coffee chain.

The piece also quotes Santosh Desai, managing director and chief executive of Future Brands Ltd. who thinks that  Café Coffee Day, in that sense did in India what Starbucks did globally and the chain’s expansion collided with a cultural shift in India, which was turning mobile.

“On-the-go quasi offices were springing up in the 90s and early 2000s and CCD was right in the middle of it," Desai told Mint. Shubhranshu Pani, managing director, retail services, JLL India also told Mint just how  CCD built the café ecosystem in India, and expanded the out-of-home coffee drinking habit beyond just the top metros; this was especially true as they expanded in residential areas, opening up small stores in dense catchments. In 2005, the chain expanded overseas, opening its first international outlet in Vienna.

The gathering storm

In 2017, Siddhartha was accused of tax evasion. Raids by the I-T department targetted over 20 locations, including his offices in Mumbai, Chennai, Bengaluru and Chikmagalur. The documents seized during raids revealed that Siddhartha had concealed income worth Rs 650 crore from the I-T department, says businesstoday.in.

A statement from the I-T department said, "The searches in a group involved in coffee, tourism, information technology and other areas concluded with an admission of previously concealed income exceeding Rs 650 crore. The detection of undisclosed income is expected to be a much higher figure," adding, "There are a number of other issues including violations of other statutes on which there is no disclosure but relevant evidence has been found, these will be pursued effectively with vigour, energy and imagination."

the businesstoday.in report says further that  Siddhartha  had sold his 20.41% stake in Mindtree to Larsen and Toubro (L&T) for Rs 3,269 crore through a block deal this year and he also planned to sell technology park subsidiary Tanglin Developments to Blackstone. However, the proposed sale fell through after he decided against it in June 2019.

News reports also extensively covered how soft drinks giant Coca-Cola had reportedly initiated preliminary talks with Cafe Coffee Day (CCD) recently to acquire a substantial stake in India's largest coffee chain. According to businesstoday.in, Siddhartha sought a valuation of Rs 8,000 to Rs 10,000 crore from Coca-Cola for the stake sale in his coffee chain.

The Mint piece also points out that  what was complicating matters further was the intensifying competition in India’s coffee chain market and this was  making CCD even more uneasy. We quote, " same-store sales growth at CCD fell from 8.2% in Q4FY18 to 5.4% for the quarter ended 31 March. In the same period, the chain expanded at a modest pace, from 1,722 to 1,752 outlets.

According to Business Standard, the family of V G Siddhartha, may now accelerate the process of finding buyers for the retail chain. apart from Coca-Cola, some names of interested players doing the rounds include Tata Global Beverages and Jubilant FoodWorks.

Controversy and conjectures

As the conjectures float around, what remains at the heart of the tragedy is the letter, that Siddhartha supposedly wrote just before his death and claimed harassment by the IT department among other things.  Income-Tax Department on Tuesday however denied charges of harassment, saying that  the businessman had admitted holding stash income after raids were conducted against him and his concerns.

As a piece in India Today recalled, in an unverified letter, Siddhartha had said there was a lot of harassment from the previous DG of the Income-Tax Department in the form of attaching  shares on two separate occasions to block a Mindtree deal and then taking possession  of  Coffee Day shares, although revised returns have been filed.

We quote India today, "Refuting the charges, the department said in a statement issued in Bengaluru that the provisional attachment of shares was made by the department to protect the interests of revenue, a norm in cases of large tax evasion, and the action was based on credible evidence gathered in the search action that was undertaken against the Bengalurubased group in 2017.

The statement said Siddhartha fetched Rs 3,200 crore from the sale of Mindtree shares, but has paid only Rs 46 crore out of the total Rs 300 crore minimum alternate tax (MAT) payable on the deal. As against the balance MAT liability of Rs 250 crore and tax liability based on search findings to the tune of about Rs 400 crore, the attachment made by the department is less than 40 per cent of the likely tax liability, it said.The raids against the group were carried out as a result of a similar action against a prominent Karnataka politician, and Siddhartha, in a sworn statement, admitted unaccounted income of Rs 362.11 crore and Rs 118.02 crore in his hands and that of Coffee Day Enterprises Ltd respectively, it also said."

Stirring the bitter brew was also the claim by the Income Tax Department  that Siddhartha's available signature was different from that on the letter.

NDTV published a report to track the political brouhaha over the letter that Siddhartha supposedly addressed to board members and employees of the coffee chain. The letter  was accessed by news agency ANI and a twitter war heated between the state units of the Congress and the BJP,  especially after Siddhartha's body was found on the banks of the Netravati river.

While Congress alleged that the Coffee Day founder's death was because of "harassment, decline of India's entrepreneurial position turning virulent by the day, Tax terror & collapse of economy”,  BJP responded by calling the opposition "opportunistic political vultures".

Senior Congress leader and former Karnataka chief minister Siddaramaiah also tweeted, criticising what he called was "tax terrorism... ugly face of politically motivated institutions".

"The death of V G Siddhartha is both disturbing & mysterious. The reasons & the invisible hands that ended his life in this tragic way should be unearthed through impartial & fair investigation," the former chief minister wrote.

The last straw

Deborshi Chaki wrote in Live Mint that details emerging about the circumstances preceding V.G.Siddhartha’s death hint that the late Cafe Coffee Day (CCD) founder was having trouble explaining to lenders the end-use of the funds raised by him in personal capacity.

Mint reports how Siddhartha absolved his family and team of his financial dealings and wrote in the purported suicide note and we quote, “ I sincerely request each of you to be strong and to continue running these businesses with a new management. 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."

Mint also says that according to two people directly aware of the discussions between Siddhartha and lenders, which include private banks and foreign credit funds, a section of lenders had questioned his ability to repay on time while casting doubts on the final value of his assets, including the plantations business spanning over 12,000 acres.

Mint had reported on 30 July Café Coffee Day founder V.G.Siddhartha was in talks to urgently refinance a large portion of his outstanding debt taken in his personal capacity. The debt in question is around ₹2,000 crore and is over and above the consolidated borrowings of CCD group, which stood at ₹6,547.38 crore as of March, according to the people cited above, who spoke on condition of anonymity.

In his letter to the board and employees of CCD,  Siddhartha had pegged the value of the plantations business at over ₹3000 crore which included the value of the land as well as timber assets (Silver Oak Trees) at over ₹1000 crore, informs Mint.

The Mint report goes on to cite  a third person who  heads India operations of a global structured credit fund and we quote ,  “We had reservations about the valuations and felt that actually the value would be less than that and this did provide enough cover for fresh loans. In our conversations with him we were told that a large portion of his personal borrowings had gone towards acquiring land for the plantations business."

On Wednesday, informs Mint, the board of Coffee Day Enterprises Ltd (CDEL), the listed holding company of the group, announced that its board has initiated a probe into past transactions made by the company and Siddhartha.

The company said in the filing, that the board took cognizance of statements in the purported letter from V.G. Siddhartha relating to financial transactions outside the knowledge of the senior management, auditors and the board. While the authenticity of the letter is unverified and it is unclear whether these statements pertain to the company or the personal holdings of V.G.Siddhartha, the board took serious note of the same and resolved to thoroughly investigate this matter.

What we can deduce from this tragedy

Mihir S Sharma wrote in Bloomberg,  that though we don’t know for certain which partners  were allegedly “forcing” Siddhartha  to buy back shares, what is clear that the income tax department had been pushing him.  With typically bad taste, says Mohir, the taxmen attempted to rebut Siddhartha’s accusation of harassment by saying that they were only “protecting the interest of revenue” by blocking the entrepreneur’s access to his Mindtree shares at a time when he desperately needed liquidity to reduce his debt.

We quote Mihir and he writes with both feeling and factual accuracy, "It’s not necessary to have an opinion on all of Siddhartha’s transactions to recognize how fragile the position of any entrepreneur is in today’s India. A flood of private equity money from abroad may appear to have made entrepreneurship attractive. But many of these funds want to be treated like debt-holders, with a minimum guaranteed return.

And the problem runs much deeper than financing. In the India in which I grew up, you couldn’t get a decent cup of coffee. In fact, if you wanted to meet someone, there was literally nowhere to do it. Siddhartha solved both those problems: Cafe Coffee Day, in India, is a symbol of air-conditioned civility. Its 1,700 brightly lit stores are an accepting and globalized environment accessible to young people in even the smallest and most fly-bitten Indian towns.

In Vienna, the city that invented coffeehouse culture, a bustling Cafe Coffee Day with its bright red upholstery stands proudly near the Opera and the legendary Cafe Mozart, where Graham Greene wrote “The Third Man.” India has produced few world-beaters in the past couple of decades; I’d argue CCD is one of them.

He also recalls what  Siddhartha allegedly wrote in his type written note: “My intention was never to cheat or mislead any anybody, I have failed as an entrepreneur.”

We quote Mihir again, " The tragedy is that he needed to emphasize that distinction. For the past eight years, ever since an anti-corruption movement seized the imaginations of India’s middle class and then was coopted by Prime Minister Narendra Modi to smooth his path to office, India’s citizens and officials have constantly confused those two things -- business failures and fraud. The working assumption on TV news shows and in drawing-rooms is always that anyone who failed using borrowed money defrauded their investors and the public.

Businessmen whose bets have gone bad must fear arrest as well as bankruptcy. In particular, as in many other countries, tax raids can be used as bludgeons against anyone politically exposed, even legitimate businessmen.

The income tax department operates through fear: People in business never know when inspectors will turn up or what they will do. In this case, Siddhartha’s troubles may not have been unrelated to the fact that he was the son-in-law of a politician once prominent in the opposition Indian National Congress party. The income tax department raided the homes and offices of another high-profile Congress politician in 2017, at precisely the time he was attempting to preserve an opposition government in Siddhartha’s home state of Karnataka. Tax officials now admit that their allegations against Siddhartha arose from those raids."

A report in News Minute also asks the following questions. Did Coffee Day founder VG Siddhartha’s trouble with the Income Tax department stem from his connection and friendship with former Water Resource Minister DK Shivakumar? The Congress leader was a close confidante of Siddhartha’s father-in-law and former Union Minister SM Krishna. Many in political circles also say that Shivakumar has remained a close friend of Krishna’s family even though the latter joined BJP.

According to TOI, the Income-Tax Department found links between DK Shivakumar and VG Siddhartha when the former’s properties were raided in August 2017. Reports suggest that it was these dealings with Shivakumar that landed the Coffee Day founder under the I-T lens.

We quote News Minute, "DK Shivakumar, who has declared assets over Rs 700 crore is also one of the richest politicians in Karnataka. He came under the I-T scanner after his properties were raided in August 2017, the day 44 Gujarat Congress MLAs were flown down to stay at a resort near Bengaluru to ensure Ahmed Patel was re-elected to the Rajya Sabha. Shivakumar was Congress’ troubleshooter to ensure none of the MLAs were poached by the BJP ahead of the Rajya Sabha Election.

The report states that investigation in Siddhartha’s case arose after the sleuths found evidence of financial dealing with DK Shivakumar during the raid. The I-T sleuths had also raided Shivakumar’s financial consultant N Chandrashekhar Sukapuri and during this search, the investigators allegedly found evidence to financial transactions of the Shivakumar’s kin with Café Coffee Day Ltd and M Soul Space.

In its press statement on Tuesday, the IT department had said that the raids against VG Siddhartha was a follow up action to raids in the properties belonging to a ‘prominent Karnataka politician’."

Shivakumar’s brother and Congress MP DK Suresh has also told TOI that the I-T department was in a hurry to attach Siddhartha’s shares in MindTree, in which he held 20.3% stake. “Rules specify that attachment of assets is not to be done at the preliminary stage. In Siddhartha’s case, the assignment is yet to be done and tax demand is yet to be determined, but I-T officials rushed to attach his assets at a time when he wanted to sell them to repay debts,” he told TOI.

The I-T department provisionally attached 74.9 lakh shares of Mindtree in January and released them in lieu of another set of shares.

Speaking to TNM, the Mangaluru Police, which is investigating his death, says that they will question the former Income Tax official mentioned in Siddhartha’s alleged death note and that the letter has been sent to the FSL to verify its authenticity. “The owner of one of the private equity firms Siddhartha had mentioned in the letter is in Mumbai, we will question him and also the former Income Tax DG. Establishing whether the letter is authentic is the first step,” the police said.

Bleak time for big ideas?

Shocked by their founder’s death, Coffee Day Enterprises has formed a new panel but the path ahead is yet hazy.

The shock and disbelief continues to build up as India's corporate icons struggle to make sense of the story.

“You can’t collectively descend upon an entrepreneur and shut the business,” Biocon Chairperson Kiran Mazumdar Shaw had told The Quint, in response to the news of the disappearance of VG Siddhartha. She described the turn of events as “a big shock to corporate India,” and added that Siddhartha could have taken the drastic step to reveal the extent of stress he was under.

She further said that the 59-year-old entrepreneur’s disappearance exposed the treatment meted out to India Inc and that a complex set of factors could have contributed to his stress.

Shaw also added that many businesses today are complaining of tax-terrorism and are often branded as “money launderers, the moment there is some financial stress.”

She  told Quint, “It is like telling Siddhartha that you just shut CCD, we don’t care if you employ thousands of people. That seems to be the indication. Maybe it should not have happened. But you can’t bolt the stable after the horses have left."

Shaw also questioned the role of private equity holders and thinks they  must be investigated as well.

Chairman of Manipal Global Education and former Infosys Director Mohandas Pai, has been the most outspoken of the corporate voices and told Quint  that when there’s too much of power in the hands of officials, it can lead to misuse. “The Parliament should not have given taxmen the power to arrest. Only a court should have the power to issue an arrest warrant,” he said.

Meanwhile, Mindtree co-founder and author Subroto Bagchi told The Quint that he had “no words” to express the the “big dark sense of emptiness” left behind.

Mihir had the last word in his Bloomberg piece when he said that the government, staring at a fiscal hole equal to an entire percentage point of GDP, isn’t likely to let up on squeezing Indian business. The last federal budget included a slew of laws giving taxmen of all stripes even more power, including the power effectively to arrest on suspicion -- in, of course, “the interest of the revenue.”

He signs off and says, " That’s a pity. India has few natural resources, a relatively unskilled population, not enough capital and a state that seems most efficient at being predatory. One of the few things the country has going for it is the energy and creativity of its entrepreneurs. We need more, not less, of the sort of businessman who can build a world-class brand and change millions of lives."

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First Published on Aug 1, 2019 08:34 pm
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