‘Siddhartha was buried by the hydraulic pressure of debt’

Founder of Coffee Day Enterprises Ltd (CDEL) late VG Siddhartha slipped into a financial quicksand after repeatedly borrowing funds at very high cost, charming banks and PE firms with his flamboyance. He pledged personal assets, including that of family members, and reached a point of no-return after he failed to find an investor to rescue his company, an investigation report tabled before the company board reveals.

The 15-page executive summary of the report seen by BusinessLine has several details of the various transactions carried out by Siddhartha which were not detailed in the report submitted to the stock exchanges on July 24. The latter had said Mysore Amalgamated Coffee Estates Ltd, an entity belonging to Siddhartha, owes ₹3,535 crore to CDEL’s subsidiaries.

The full report traces his entire investment journey pointing out that the auditors failed to raise any red flags in their report. “The silence of every watchdog that refused to bark emboldened him to carry on with his “business model,” while simultaneously silencing all his critiques(sic), both within the company and outside,” the report points out.

Debt-driven model

Virtually every personal asset of Siddhartha or his immediate family members had been pledged to facilitate borrowings. To repay every loan taken from PE investors by promising them higher returns, he resorted to further borrowings creating a pyramid of debt. The report pointed out that he had created a debt-driven model to fund his companies and when the value of the shares, or the value of the business were not outpacing the interest costs, “Siddhartha began to sink deeper into the proverbial quicksand eventually to get buried by the hydraulic pressure of debt and his own promises. In retrospect, Siddhartha was the hero and villain of the piece,” the report said.

In August last year, following the untimely death of Siddhartha, the Coffee Day Enterprises board had commissioned a probe under Ashok Malhotra, retired DIG, CBI to investigate the veracity and the claims made in a purported letter left behind by the founder.

The report said Siddhartha was hopeful that an investor would value his business to its fullest potential and buy his holdings and in the process bail him out but unfortunately for him, he couldn't find such investors. Before Siddhartha passed away, there were media reports that a soft drinks major was keen on buying his chain of restaurants, Cafe Coffee Day for about $1 billion. But the talks reportedly fell through at the last minute.

Higher interest rates

With little or no capital, the late founder was borrowing at exorbitant interest rates as high as 18-20 per cent per annum and at times even higher, “investing in businesses hoping that the returns from his businesses would not only pay for interest but also pay him for his (other) ventures.” However, the proverbial knight in shining armour never came and Siddhartha paid the ultimate price for his own decisions, the report said.

Siddhartha had furnished personal guarantee and mortgaged his personal assets as collateral for the loan taken by Coffee Day Enterprises and its subsidiaries aggregating to ₹5,245.73 crore.

The executive summary also pointed out that whenever any of the board members raised questions about his transactions, Siddhartha would charm his way by citing the business model of other companies. “More importantly, the towering personality of Siddhartha effectively dwarfed every other person on the board who were charmed by him to believe rather than question his business model.”

The investigation report said that Siddhartha had structured the company and its subsidiaries in a manner that everyone worked in strict silos. He had created multiple finance teams that operated within strict Chinese walls, each virtually unaware what the other was doing. “This structuring, though perfectly legal, was fatal to the very idea of internal control and internal checks,” the report said.

Siddhartha had several companies which were not part of CDEL but significant sums of money flowed from it to them and back making it impossible for anyone within the subsidiaries to monitor the flow of funds. Siddhartha was the sole command when it came to deployment of the finance raised within the company or its subsidiaries. “By this Siddhartha ensured that he and he alone knew the real financial picture of the company and its subsidiaries,” the report said.