☕How CCD Brewed a Rs. 3,535 Crore Fraud!
Your favourite coffee shop CCD was secretly running a massive fraud, Here’s how.
Do you know what's juicier than gossip?
Fraud stories.
Don't believe us?
Here's what happened after the recent release of Hindenburg Research's Report on the Adani Group's alleged frauds:
'Adani' has had over 120K+ Google Searches in 36 hours!
'Fraud' has had over 5,000+ Google Searches in 24 hours!
Today we have another fraud in store for you.
This one involves your childhood favourite: Cafe Coffee Day.
SEBI has levied a fine of Rs. 26 crores on CCD’s parent entity Coffee Day Enterprises Ltd (CDEL) for a possible scam of Rs. 3,535 crores!
So, how was this fraud uncovered?
Let's take a look…
🤔 The Beginnings of the Fraud
The first whiff of the scam came after a tragedy: CCD’s founder and chairman VG Siddhartha’s suicide in 2019.
The suicide note stated that all was not well financially at the company.
Three major points that Siddhartha mentioned in his letter were:
The company was facing a liquidity crunch.
Private equity holders were putting pressure on Siddhartha to buy back their shares (probably because the company was in debt and wasn’t profitable).
Alleged harassment by income tax professionals for not clearing dues.
After Siddhartha’s death, officials started an investigation into his claims.
One year later, in 2020, a shocking truth emerged:
The investigation revealed that Coffee Day Enterprises Ltd (CDEL) siphoned off Rs. 3,535 crores from the company’s subsidiaries!
Wait, what?
💡Let's Get Some Context
Most of us know CDEL for owning Cafe Coffee Day cafes (the number one dating spot in the early 2000s).
But CDEL offers a lot more than coffee.
Its 49 subsidiaries have their fingers in many pies: coffee exports, real estate, IT services, logistics and lots more.
Now, a lot of these companies require a regular supply of coffee beans.
So, they have dealings with Mysore Amalgamated Coffee Estates Ltd (MACEL).
These companies paid an excess of around Rs. 2,693 crores to MACEL. There is no purpose of transfer mentioned.
Seems strange?
That’s what we thought until we found out that 91.75% of MACEL’s shares are in the name of Siddhartha’s late father!
So, the company is basically owned by Siddhartha and his family.
And through this company, Siddhartha transferred money (which subsidiaries had paid to MACEL) to other companies or his family members. Here’s how this whole operation worked…
🤔 The Sketchy Details of the Fraud Played Out
Two of the subsidiaries that transferred a total of Rs. 1,420 crores to MACEL had no revenue of their own.
So, why did they transfer such a huge amount? And to a company that had super weak financials according to SEBI?
Short answer: major corporate governance issues.
Apparently, the whole show was being run by Siddhartha, who often made others sign blank cheques to enable transfers.
No one else had any knowledge of this plan!
🤨 How Does this Fraud Affect Us?
The promoter holding in CDEL is currently only 9.59% (of which VGS' family holds 7.23%), the public holds the remaining shares of the company.
If CDEL is in debt, it negatively impacts share prices and in turn, the common public.
In fact, the SEBI has claimed that this fraud is what brought down CDEL’s share prices.
“It was seen that the closing price of the scrip of CDEL was Rs. 285.15 on April 1, 2019 and Rs. 225 on July 2, 2019. The price fell to Rs. 66.05 by August 19, 2019 and further to Rs. 27.95 as on October 29, 2019 (i.e. fall of around 88% compared to the July 2, 2019 share price). From the above price movement, it was amply evident that the concealed act of diversion of funds / financial transactions impacted the price of the scrip of CDEL which resulted in huge losses to investors.”
Such frauds don't just impact shareholders, but also the whole economy.
In fact, it was the IL&FS scam that is thought to have caused the liquidity crunch at CDEL. As banks lost huge amounts in the scam, they tightened their purse strings. This probably led to Siddhartha starting this whole ring of fraud.
This fraud also brings to light the dark side of entrepreneurship: How sometimes entrepreneurship pushes people to extremes.
Sometimes, the pressure could be daunting. Sometimes, it may get a little too much.
✒️ In Conclusion…
CDEL has to pay Rs. 26 crores in fines and pay off the dues to subsidiaries with interest.
Though they contested the charges levied on them under the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations and the Listing Obligations and Disclosure Requirements Regulations, SEBI has given them an appropriate rebuttal.
But so far CDEL has only been able to pay off Rs.110 crores in dues. It is also seeing losses.
Will the company be able to pay off these dues?
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