SEBI Fines Cafe Coffee Day's Parent Company Rs 26 Crore For Violating Laws In Rs 3,535 Crore Fraud?

The Securities and Exchange Board of India (SEBI) has imposed a Rs 26 crore penalty on Coffee Day Enterprises Limited (CDEL), the parent company of the immensely popular coffee shop franchise, Cafe Coffee Day.

The regulator has directed the company to appoint a reputed law firm, in consultation with the NSE, to assist with the recovery of outstanding dues of Rs 3,424.25 crore.

What Former CCD Chairman's Letter Revealed

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The fraudulent diversion and mismanagement of funds within the company amounting to a whopping Rs 3,535 crore first came to light when VG Siddhartha, the chairman of the Coffee Day group, died by suicide in July 2019.

After his suicide, the former CCD chairman left behind a note addressing the Board of Directors, saying that his team, auditors, and senior management were ¡°totally unaware¡± of all his transactions and that the law should hold only him accountable, as he had withheld the information from everybody, ¡°including his family,¡± as per a Moneycontrol report.

At the heart of the corporate governance fiasco is the diversion of Rs 3,535 crore from seven subsidiaries of CDEL to Mysore Amalgamated Coffee Estates Limited (MACEL), a company that is connected to CDEL.

Whole-time Member Ashwani Bhatia imposed a penalty of Rs 25 crore under Section 15HA and Rs 1 crore under Section 15HB of the SEBI Act, 1992. The first section deals with fraudulent and unfair trade practises relating to securities, whereas the second section lays out provisions for the imposition of penalties.

Bhatia has also directed that CDEL, in consultation with NSE, shall appoint an independent law firm of standing and repute to take effective steps for the recovery of the outstanding dues within 60 days of the order. The law firm has been accorded the liberty of working independently from the board of CDEL and has been asked to work under the oversight of NSE, as per the report.

The law firm has also been directed to file a quarterly report with the NSE and CDEL board detailing the progress in the recovery proceedings. On the other hand, CDEL has been directed to place the recovery report before the shareholders in every annual general meeting.

Also Read: How Coffee Giant Starbucks Also Works As An 'Unregulated' Bank

CCD Parent On The Receiving End Of Criticism

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Bhatia sharply criticised the company as well. For the company, he noted that out of the total dues of Rs 3,535 crore as on July 31, 2019, the subsidiaries had managed to recover a paltry sum of Rs 110.75 crore till September 30, 2022, that is, by the end of three years.

No Real Possibility Of Recovering The Money

¡°At this pace of recovery, there is no real possibility of the subsidiaries recovering money even in perpetuity. This also shows a lack of interest on part of CDEL and its subsidiaries to recover the outstanding dues. The company¡¯s submissions that it has started the process of recovery of the outstanding amount from MACEL cannot be given credence. Further, the outstanding dues is the principal amount. If interest, at a reasonable rate, is applied and considered, the liability would be much higher,¡± Bhatia said in his order, as per the report.

The regulator also took the company¡¯s senior management to task for failing to conform with the responsibilities and obligations incumbent on them under the regulations.

He said that the company itself had "admitted that VGS, the promoter and the CEO, was running the entire show within CDEL and its subsidiaries. CDEL has further admitted that VGS used to collect the signed blank cheques and all the fund transfers were done by him. I find that this amounts to an admission by CDEL that the listed company was being run like a personal fiefdom with no checks and balances in place. Nothing, it appears, could have prevented the diversion of funds from the subsidiaries of CDEL."

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