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Photo: Reuters
Photo: Reuters

Sebi wants closer look at Coffee Day’s accounting

  • Regulator pulls up coffee chain over misappropriation of funds by its promoters
  • The show-cause notice was sent under sections of Sebi’s prevention of fraudulent and unfair trade practices rules

The markets regulator has sent a show-cause notice to Coffee Day Enterprises Ltd (CDEL), the company that runs India’s largest cafe chain, over misappropriation of funds by its promoters and losses to public shareholders, according to three people aware of the matter.

The Securities and Exchange Board of India (Sebi) has sought details about the funds raised by Coffee Day group under the late V.G. Siddhartha and promoter-level dealings that have resulted in losses for shareholders, one of the three people said, requesting anonymity.

The show-cause notice was sent under sections of Sebi’s prevention of fraudulent and unfair trade practices rules, said the second person, also requesting anonymity.

The latest notice and other ongoing regulatory issues may delay the sale of Coffee Day Enterprises’s assets as the group seeks to repay debt of around 3,100 crore, including promoter-level dues.

Bloomberg reported on 24 September that Tata Consumer Products Ltd may bid for the vending machine business of Coffee Day Enterprises.

Emails sent to Sebi and Coffee Day Enterprises did not elicit any response.

Sarvesh Kumar Sharma/Mint
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Sarvesh Kumar Sharma/Mint


In July, an investigation, led by former Central Bureau of Investigation (CBI) officer Ashok Kumar Malhotra, found that a large sum of money may have been diverted to several promoter group entities.

The investigation report also said that Siddhartha had failed to create the right business model to benefit the shareholders of Coffee Day Enterprises and that the company’s financial records suggested a serious liquidity crunch before his suicide last July.

A significant portion of the money borrowed by one of Coffee Day Enterprises’s promoter entities, Mysore Amalgamated Coffee Estates Ltd (Macel), was spent on buying back shares from private equity investors, repaying loans, paying interest and funding certain “private investments".

The personal assets of Siddhartha were pledged for business loans of the company and its subsidiaries.

He also gave personal guarantees for the company and its subsidiaries and also stood guarantee for his family-promoted entities, which eventually led to the losses for Coffee Day Enterprises.

The investigation report said 3,535 crore is due from Mysore Amalgamated Coffee as on 31 July 2019. It mentioned that out of this sum, 842 crore was due to the subsidiaries of Coffee Day Enterprises as on 31 March 2019 and the balance of 2,693 crore is incremental outstanding “which needs to be addressed".

Through its latest show cause notice, Sebi also wants to know whether the company has made any efforts to recover the money diverted from the company’s (Coffee Day Enterprises’s) promoters to fund promoter transactions and so-called “private investments", according to the second person.

“Failure of a business model is not something that Sebi would like to go into. Its concern is mostly any alleged fraudulent transactions that led to wrongful losses to the public shareholders of the company," the second person said.

In a report filed on 11 September, the auditor of Coffee Day Enterprises said adequate evidence regarding some of the company’s subsidiaries’ compliance with debt covenants or details of defaults in repayments had not been made available to it.

“We are unable to comment on the appropriateness of the transactions, including regulatory non-compliances, if any, and the recoverability of the amounts due in the absence of requisite evidence not being made available to us," the auditor said. It also pointed out that interest on loans to related parties has not been charged in some cases.

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