“Siddhartha was buried by the hydraulic pressure of debt”

The founder of Coffee Day Enterprises Ltd (CDEL), the late VG Siddhartha, has slipped into financial quicksand after repeatedly borrowing funds at very high cost, charming banks and private equity firms with his flamboyance. He pledged personal assets, including those of his family members, and hit a tipping point after failing to find an investor to save his business, an investigation report filed with the board reveals. administration of the company.

The 15-page summary of the report seen by
Activity area has several details about the various transactions carried out by Siddhartha which were not detailed in the report submitted to the exchanges on July 24. The latter had stated that Mysore Amalgamated Coffee Estates Ltd, an entity owned by Siddhartha, owes ₹3,535 crore to CDEL subsidiaries.

The full report traces his entire investment journey highlighting that the auditors raised no red flags in their report. “The silence of each watchdog who refused to bark encouraged him to continue his ‘business model’, while silencing all his critics (sic), both within the company and outside. ‘outside’, the report points out.

Debt-driven model

Virtually all personal property of Siddhartha or members of his immediate family had been pledged to facilitate borrowing. To repay each loan taken from private equity investors promising them higher returns, he resorted to new borrowing creating a pyramid of debt. The report pointed out that he had created a debt-driven model to finance his businesses and when the value of the shares, or the value of the business, did not exceed the interest charges, “Siddhartha began to sink. deeper into the proverbial quicksand only to end up being buried by the hydraulic pressure of debt and his own promises. In retrospect, Siddhartha was the hero and villain of the play,” the report states.

In August last year, following Siddhartha’s untimely death, the Coffee Day Enterprises Board of Directors commissioned an investigation under Ashok Malhotra, Retired DIG, CBI to investigate the veracity and claims made in an alleged letter left by the founder.

The report states that Siddhartha hoped an investor would value his company to its full potential and buy his holdings and in the process bail him out, but unfortunately for him he could not find such investors. Prior to Siddhartha’s death, media reported that a soft drink major wanted to buy his restaurant chain, Cafe Coffee Day, for around $1 billion. But the talks reportedly broke down at the last minute.

Higher interest rates

With little or no capital, the late founder borrowed at exorbitant interest rates of up to 18-20% per annum and sometimes even more, “investing in businesses in the hope that the returns from his businesses would not only pay the interest but also pay him for his (other) businesses. However, the proverbial knight in shining armor never came and Siddhartha paid the ultimate price for his own decisions, according to the report.

Siddhartha had provided a personal guarantee and mortgaged his personal assets as security for the loan taken by Coffee Day Enterprises and its subsidiaries totaling ₹5,245.73 crore.

The summary also pointed out that whenever any of the board members asked about his dealings, Siddhartha would charm his way by citing the business model of other companies. “Most importantly, Siddhartha’s commanding personality effectively eclipsed everyone else on the board who was charmed by him into believing rather than questioning his business model.”

The investigative report said Siddhartha had structured the company and its subsidiaries so that everyone worked in strict silos. He had created several finance teams that operated within strict Chinese walls, each largely unaware of what the other was doing. “This structuring, while perfectly legal, was fatal to the very idea of ​​internal control and internal checks,” the report said.

Siddhartha owned several companies that were not part of the CDEL, but large sums of money flowed between them and back, making it impossible for anyone within the subsidiaries to monitor the flow of funds. Siddhartha was the sole commander when it came to deploying raised funds within the company or its subsidiaries. “By this, Siddhartha ensured that he and he alone knew the true financial situation of the company and its subsidiaries,” the report said.

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