SEBI imposes ₹26 cr fine on CCD parent for diversion of ₹3,535 cr

Capital markets regulator SEBI has imposed ₹26 crore fine on Coffee Day Enterprises Ltd (CDEL), which is the parent company of Cafe Coffee Day (CCD), for the diversion of funds worth ₹3,535 crore by its subsidiaries to Mysore Amalgamated Coffee Estates Ltd (MACEL), an entity related to CDEL promoters. SEBI in its 43-page order has asked Coffee Day Enterprises to recover the amount from MACEL and other connected entities and pay the penalty within 45 days of receipt of the order.

The order said from CDEL’s email dated July 28, 2020, it was noted out of its 49 subsidiaries, 7 had outstanding dues from MACEL, of which Coffee Day Global had the highest outstanding dues worth ₹1,112 crore; followed by Tanglin Retail Reality Developments at ₹1,050 crore; Tanglin Developments ₹620 crore; Giri Vidhyuth (India) ₹370 crore; Coffee Day Hotels and Resorts ₹155 crore; Coffee Day Trading ₹125 crore; and Coffee Day Econ ₹103 crore.

Of all the subsidiaries of Coffee Day Enterprises, Coffee Day Global is a major subsidiary -- CDEL owns 82.09% of Coffee Day Global -- and the largest contributor of revenue and profits of the parent company.

The SEBI order said Coffee Day Enterprises, in consultation with the NSE, will appoint an independent law firm, of standing and repute, to take effective steps for the recovery of the outstanding dues.

VG Siddhartha, the chairman of the Coffee Day Group, had committed suicide in July 2019. It was reported that he left behind a suicide note on July 27, 2019, addressed to the Board of Directors and Coffee day family, wherein he revealed he was in deep debt.

After Siddhartha’s passing away, the CDEL board roped in Ashok Kumar Malhotra, retired DIG of the Central Bureau of Investigation, and Agastya Legal LLP, to investigate the books of accounts of CDEL and its subsidiaries.

SEBI started the probe into the matter on its own to ascertain whether funds were diverted to related entities, which resulted in a possible violation of provisions of SEBI rules.

Based on the findings of Ashok Kumar Malhotra, which was submitted by CDEL to SEBI in July 2020, and the SEBI probe, it was found that funds worth ₹3,535 crore were diverted from seven subsidiaries of CDEL to Mysore Amalgamated Coffee Estates Ltd (MACEL).

MACEL was an entity on the personal business side of late Siddhartha and it had a continuing business relationship with subsidiary companies of CDEL. "MACEL was paid advances by subsidiary companies of CDEL… and the amounts were sent through normal banking channels. The personal assets/shares of late Siddhartha were hypothecated or pledged for business loans of the company and its subsidiaries. He also gave personal guarantees for the company and its subsidiaries and also provided personal guarantees of his family members," the report stated.

The report concluded that MACEL owed a sum of ₹3,535 crore to the subsidiaries of CDEL as on July 31, 2019. Out of the above, ₹842 crore was due to these subsidiaries by MACEL as on 31st March 2019 as per the consolidated audited financial statements. “Therefore, a sum of Rs. 2,693 Crore is incremental outstanding that needs to be addressed,” it said.