CCD founder V.G. Siddhartha's death: Brewing mystery

The mysterious death of Café Coffee Day founder V.G. Siddhartha raises several questions. Was the financial position of his successful ventures shaky? Did tax terrorism play a role? Or was it the result of an exaggerated sense of honour?

Published : Aug 23, 2019 07:00 IST

The Café Coffee   Day  outlet on Vittal Mallya Road in Bengaluru.

The Café Coffee Day outlet on Vittal Mallya Road in Bengaluru.

VEERAPPA Gangaiah Siddhartha Hegde, the 59-year-old billionaire coffee entrepreneur, was not known to be a flamboyant, in-your-face kind of businessman. He was not a man who liked to give interviews and be in the news. Reticent to the point of driving many a journalist to frustration, Siddhartha preferred to let his business acumen and forays into diverse businesses do the talking. His massive coffee chain, Café Coffee Day, which was established in 1996 and which has grown to nearly 1,800 outlets in 250 cities, created a fashionable coffee culture. The Café Coffee Day tagline said it all: “A lot can happen over coffee.” That is exactly what Café Coffee Day went about doing, transforming the way the traditional beverage, gulped down piping hot in south Indian homes from steel tumblers or sipped out of cups first thing in the morning in restaurants and coffee shops, was drunk, affording patrons with memories of a lifetime.

The coffee chain introduced a buzz and razzmatazz around every cuppa, hot or cold. It dovetailed perfectly with the changing Bengaluru landscape of the mid 1990s when the city’s tree-lined skyline and colonial bungalows began vanishing rapidly, giving way to avant-garde architecture and manicured landscape gardens, and the information technology industry changed with equal vigour the city’s lifestyle. The swanky Café Coffee Day outlets, with the promise of free Internet, cleanliness and classy service, complemented Bengaluru’s ultramodern look as the Silicon Valley of India. Café Coffee Day soon became an iconic brand and a franchise like no other. Despite challenges from rival chains and, more recently, from foreign entrants such as Starbucks and Costa Coffee, Café Coffee Day managed to stay profitable and even maintain a steady growth.

So when news broke out late on the evening of July 29 about Siddhartha’s disappearance, it caused astonishment and surprise. Why would and how could one of India’s most successful entrepreneurs just vanish? Over the next 36 hours, the astonishment melted into disbelief and then despair, as the worst fears were realised. The recovery of Siddhartha’s body in the early hours of July 31, floating nearly 500 metres from where the river Netravathi joins the Arabian Sea close to Hoigebazar (eight kilometres from Mangaluru) only confirmed the worst fears. The body was brought ashore by fishermen. The news of his untimely death under mysterious circumstances, purportedly after jumping off a bridge that spans the Netravathi, has whipped up more questions than answers. Unfortunately, dead men tell no tales.

Pressure from private equity players

Café Coffee Day may have been his most famous business venture, but much before the word “start-up” became common parlance, Siddhartha had launched several of them. An innovator who was not averse to taking risks, Siddhartha was ambitious, always thought big and chased valuations. But did his vastly diverse businesses cause him to go too far and become marooned in a vortex of debt from which he could not rescue himself? Despite having created the brand Café Coffee Day, he was finding it difficult to raise funds. He had also run up huge debts and was reportedly under tremendous pressure from private equity players, who were forcing him to buy back part of the equity they had invested in.

The fact that the stock price of the Coffee Day Enterprise (CDE), the holding company that runs Café Coffee Day, had not appreciated since its initial public offering (IPO) listing in November 2015 has been a huge drawback for the entrepreneur. The CDE issue price was firmed at Rs.328 in the IPO but listed at Rs.313, and finally closed at Rs.270.15 on the opening day. Except for a brief period in the first half of 2018 (when it touched a high of Rs.374.60 on January 22, 2018), the CDE’s share price never crossed its initial listing price. Also, hardly any mutual funds hold shares of the CDE. The underperforming CDE scrip has had other ramifications. Money market analysts explained that Siddhartha’s borrowings from private equity entities were often through compulsorily convertible debentures, a debt instrument that converts into an equity instrument at a certain date, with the “PE funds operators getting to exit with a certain amount of guaranteed return”.

Trouble arose because the CDE stock price never appreciated. Private equity investors such as KKR, New Silk Route and Standard Chartered (now known as Affirma Capital), who backed the CDE in 2010 with almost $150 million, found it difficult to exit the company, given the stock’s underperformance. 

Private equity firms generally tend to exit companies in four to five years. According to share brokers, Siddhartha had issues because some of the private equity operators who had funded his businesses were treating their operations as structured debt rather than equity.

Analysts explained that the conglomerate structure of the group, where various unrelated businesses are clubbed under one roof, has been a drag on the success of the group’s coffee and related businesses, and impeded the stock’s buoyancy.

While half the group’s revenues come from coffee plantations, retailing and exports, the other half is a mix of wholly unrelated diversifications in logistics, commercial realty, financial services and information technology. Many of these capital consuming verticals have ensured that returns are not commensurate and this dragged down the overall financials of the group. Investors also view parts of this agglomeration as having political exposure. The financial services firm Maybank Kim Eng noted on July 3 that the shares of the CDE lagged “due to delays in the process of simplifying the corporate structure from a conglomerate to pure play café business”.

IT searches

The Income Tax Department had Siddhartha in its crosshairs. In August 2017, the Department conducted investigations into the financial affairs of senior Congress leader and former Minister D.K. Shivakumar (a close associate of Siddhartha). As part of the investigations, in September that year, searches were conducted at Siddhartha’s residences and offices in Bengaluru, Chennai and Chikkamagaluru, which taxmen say were based on evidence of transactions between the two. Income tax sleuths found undisclosed income belonging to Siddhartha and the CDE totalling Rs.483 crore. The amount was later revised by the Department to Rs.418 crore. With penalties, the Department raised a claim for Rs.636 crore. The 2017 raids were just the beginning.

In January 2019, after media reports indicated that Siddhartha was planning to hive off his stake in Mindtree Ltd, an Indian multinational information technology and outsourcing company headquartered in Bengaluru and New Jersey, United States, the Income Tax Department attached 7.5 million Mindtree shares held by Siddhartha and the CDE. The total value of the shares was worth Rs.655 crore. 

A month later, in February 2019, the Department acceded to Siddhartha’s request to release the Mindtree shares as they were pledged against a loan of Rs.3,000 crore. In lieu of the Mindtree shares, Siddhartha offered the Department 25 million CDE shares, then valued at Rs.667 crores. The Department accepted this. The sale of Siddhartha and CDE’s Mindtree stake (totalling 20.4 per cent) to L&T fetched Rs.2,858 crore, almost all of which was used by Siddhartha to pay off the CDE’s debt.

A portion of the sale proceeds was used to bear the transfer cost of shares, with a further amount of Rs.46 crore being paid towards the first instalment of advance tax of estimated MAT (minimum alternative tax) liability in the case of shares of the CDE. Given that MAT liability is to the tune of around Rs.300 crore, of which only Rs.46 crore has been paid, Siddhartha and the CDE still have to pay Rs.890 crore (Rs.636 crore plus Rs.254 crore) in taxes. But with the CDE’s stock having drastically fallen from Rs.265 per share on February 6 to its present value of Rs.89 (as on August 6), the CDE shares attached by the Income Tax Department are now only worth Rs.222.5 crore, totalling just 25 per cent of what the CDE and Siddhartha owe the tax department. In a letter allegedly written by Siddhartha on July 27, four days before his body was found, and addressed to the board and employees of the CDE, he claimed that harassment from a former Director General of the Income Tax Department, who directed that CDE/Mindtree shares be attached, led to a “serious liquidity crunch in the group”.

Figures garnered and collated from the websites of the CDE, the Bombay Stock Exchange and the Ministry of Corporate Affairs indicate that as on March 31, 2019, short-term borrowings and long-term liabilities of the CDE were to the tune of Rs.6,542 crore. The CDE’s market cap, as on August 2, was Rs.2,110 crore with nearly 70 per cent of his and his family’s holdings pledged as security against loans, and the total debt of the promoter group companies of the CDE (primarily Devadarshini Info Technologies, Combedu Coffee Estates, Sivan Securities and Coffee Day Consolidations) as of March 2018 was to the tune of Rs.1,460 crore.

Soon after the L&T’s takeover of Mindtree, leads indicated that Coca-Cola Company, which was desperately looking to reduce its dependence on sugary, carbonated drinks, was in early talks to buy the Café Coffee Day chain, which according to various estimates was then valued at $2 billion. But the leads have turned cold.

From venture capital to coffee business

Born into a family of Vokkaliga coffee planters from Chikkamagaluru, Siddhartha after finishing his college education from Mangaluru decided to skip the family’s coffee plantation business and instead pursue a career in merchant banking. He interned with JM Financials as a management trainee for nearly two years, learning the nuances of the trade from JM Financials’ Mahendra Kampani. Returning to Bengaluru in 1983-84, he acquired the stock-broking card of Sivan Securities and formed his own investment and venture capital firm. (Sivan Securities was later renamed Way2Wealth Securities.) He started investing the profits from his fledgling firm to buy coffee plantations in Chikkamagaluru district. There was now no stopping him. In 1993, it was Sivan Securities along with Vallabh Bhansali of Enam and Morgan Stanley that rescued Infosys’ IPO from tanking by underwriting the float. But he did not hold on to the stock for too long, a decision which, he admitted, was a mistake. However, over the years since the IPO, Siddhartha made several investments in the information technology sector, the most notable being in Mindtree, when, starting from 1999, he invested over a period of time about Rs.350 crore.

In 1993, Siddharatha started taking a keen interest in coffee plantations. Realising that there was a serious mismatch between the prices Indian farmers were getting and the prices in the international market, he was part of a delegation of coffee planters who convinced the then Finance Minister Manmohan Singh to remove the restrictions on who coffee farmers could sell their produce to. He set up a coffee trading business that soon became India’s largest coffee exporter, and the extent of his estates multiplied manifold. He also set up another company for trading in coffee, called Amalgamated Coffee Beans, now known as Coffee Day Global.

Over the years, Siddhartha acquired and invested in businesses ranging from logistics and commercial real estate to plantations, resorts, logistics, tech holdings and wealth management services. While the coffee business is valued at Rs.4,800 crore, the total value of the conglomerate is Rs.7,200 crore. (Tanglin Rs.1,290 crore, Sical Rs.610 crore and Way2Wealth Rs.470 crore.)

Siddhartha was married to Malvika, the elder daughter of former Karnataka Chief Minister and Union Minister S.M. Krishna. Krishna’s second daughter, Shambhavi, is married to the liquor baron Vijay Mallya’s stepbrother, Umesh Hingorani. Siddhartha was rarely seen in the company of his father-in-law; nor did he parade his political connections. His connections were nevertheless high profile; his political, social and business ties often intersected. The grapevine is full of stories, including one that claims he raised campaign funds for Krishna and money to pay the kingly ransom that was given to the bandit Veerappan to release the Kannada matinee idol Rajkumar whom Veerappan had taken hostage in July 2000. 

It was Siddhartha’s political ties that were arguably the beginning of his end. 

Krishna, it is alleged, switched allegiance to the Bharatiya Janata Party (BJP) in early 2017 after spending a lifetime in the Congress, only to provide some protection for Siddhartha from Central agencies.

To many who knew him, Siddhartha had the business acumen, knowledge of the financial markets and the clout to come out of the debt that was plaguing him. Then why did he, as is being alleged, jump off the bridge leaving behind a note in which he states that there was no serious or severe asset-liability mismatch? Was Karnataka’s political power play a reason for his income tax troubles? Or is the BJP’s sloganeering on the ease of doing business under its regime just grandstanding? Is tax terrorism a real issue? Was the decision to buy back equity from private players based on prudence or an exaggerated sense of honour? Why did he suddenly rescind on hiving off a portion of his real estate assets? Why did Siddhartha defer at the last minute plans to sell his real estate venture, Tanglin Developments Ltd, to the New York-based private equity giant Blackstone Group Lp for an estimated Rs.2,700-2,800 crore? Or did Siddhartha judge himself too harshly?

His last letter probably summed it up: “After 37 years, with strong commitment to hard work, having directly created 30,000 jobs in our companies and their subsidiaries, as well as another 20,000 jobs in technology company where I have been a large shareholder since its founding, I have failed to create the right profitable business model despite my best efforts.”

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