Café Coffee Day: Management Remains in Place despite Fraud, Misappropriation and Diversion of Funds
“A lot can happen over a cup of coffee” is the famous tagline of the much-loved brand which gave Indians their first taste of coffee shops and quality coffee. Well, a lot is happening at Café Coffee Day Enterprises Ltd (CDEL); but none of it is good news for investors.
In recent weeks, orders of the Securities and Exchange Board of India (SEBI) and the National Financial Reporting Authority (NFRA) have confirmed a massive diversion of funds by the late founder of CDEL to promoter group entities and the complicity of auditors in hiding all of this. And, yet, the irony of it is that the ministry of corporate affairs (MCA) is happy to allow the company to be run by Malavika Hegde, wife of VG Siddhartha (known as VGS) who died by suicide after admitting to massive mismanagement of funds amounting to fraud.
Ms Hegde, as the chief executive officer (CEO), presides over a company that has now slipped into the red, as reflected in the continued slide in its share price, down to Rs32.45 (19 April 2023). A couple of weeks ago, I wrote about how market regulator SEBI, in a strange order, had asked the management, headed by Ms Hegde, to appoint a law firm to recover funds diverted to her family companies. Both SEBI and MCA, which ought to be acting in the interest of investors, who now hold 82% of the shares, are watching, even as the promoter holding has declined from 14.6% on 31 March 2022 (of which 45.8% was pledged) to 9.59% on 31 December 2022. The pledged holding is down to 24.6% of promoter holding, most probably due to the sale of pledged shares.
On 12th and 13th April, NFRA issued two orders against the statutory auditors of CDEL group entities which further expose how those who are supposed to act as the gatekeepers and protect all stakeholders are  brazenly compromised. The first order is against chartered accountants (CAs) AS Sunderasha, Madhusadan UA, Pranaav G Ambekar of M/s ASRMP & Co, who were part of the engagement team for Coffee Day Global Ltd (CDGL), and the second against Lavitha Shetty, proprietor of M/s Lavitha & Associates, who was the statutory audit of Mysore Amalgamated Coffee Estates Limited (MACEL). CDGL is a subsidiary of CDEL and the sole buyer of coffee beans produced by MACEL which was almost wholly owned by VGS’s father.
Both orders are based on a reference from SEBI, after a forensic audit revealed diversion of Rs3,535 crore from seven subsidiaries of CDEL to MACEL. The forensic audit discovered that the fraudulent diversion of funds from the listed entity was so brazen that "VGS used to ask the Authorized Signatories to sign a bunch of cheques which were kept in his possession and used them as and when required." This amounts to a massive failure of all checks & balances at multiple levels—internal auditors, directors, professionals (such as the company secretary, heads of finance) and the statutory auditors.
NFRA’s latest orders need to be studied by equity investors to understand the extent to which auditors are willing to compromise and collude to serve promoter interest. In fact, NFRA’s many orders, in recent months, leave us wondering whether fines, debarment and constant tinkering with disclosure norms will ever be a deterrent to statutory gatekeepers with key fiduciary responsibilities.
Let me summarise the audacious wrongdoing that happened under the broad heading of what NFRA calls, ‘failing to meet accounting standards, demonstrating a serious lack of competence’. Statutory auditors did the following:
1. ‘Falsely’ claimed to present a true and fair view of the accounts of CDGL in 2018-19, despite ‘material and pervasive misstatements’ to the tune of a massive Rs7,514.10 crore.
2. Established audit and non-audit relationships with “a large number of Coffee Day Group Companies and the promoters’ family members.” This is just a polite way of saying they were corrupt and compromised.
3. “Failed to exercise professional judgement & skepticism during audit of the transactions of Rs6,958.91 crores entered fraudulently with MACEL,” which were not entirely shown in related-party disclosures. The sheer size of such transactions is astounding.
4. Failed to report that a loan of Rs222.5 crore, which was ‘fraudulently given’ to MACEL, was understated. 
5. Did not disclose ‘fraudulent diversion of Rs130.55 crores’ to Classic Coffee Curing Works, a related entity.
6. Attempted to deceive NFRA by tampering with documents and adding and altering documents to their audit file.
7. Performed the audit in a perfunctory manner, so a misstatement of Rs132.37 crore and Rs69.77 crore in the consolidated financial statements remained hidden.
8. Lavitha  Shetty is charged with failure to evaluate the recoverability of loans of Rs3,235.16 crore made to VGS and fraudulent diversion of Rs3,858.52 crore to personal accounts of promoters, their relatives, entities controlled by them and other related parties.
9. MACEL had fraudulent borrowing of Rs4,076.46 crore from banks and related parties, and misstatement of accounts to the tune of Rs909 crore;  Ms Shetty also facilitated a borrowing of Rs130 crore by VGS’s wife. We will come to this later.
10. Lavitha  Shetty  falsely said that MACEL did not need to be registered with the Reserve Bank of India, knowing full well that it was operating as a non-banking finance company rather than a coffee grower.
Remember, innocent investors depend on statutory auditors doing their job under the watch of two audit regulators—NFRA and the Institute of Chartered Accountants of India (ICAI). The shares of CDEL—the public face of this large group of private entities—have crashed from around Rs200 at the time of VGS’s suicide and bombshell revelations in July 2019 to the current level of around Rs35. Institutional investors and mutual funds have also largely exited.
Those who continue to hold CDEL’s shares would surely like to know what action regulators are taking to punish wrongdoing. Also, what is the price that statutory auditors paid for such scandalous collusion and malpractices? Relative to the fraudulent actions, collusion and misstatements, it is a pittance.
M/s ASRMP & Co will pay Rs1 crore and is debarred for just two years. The individual auditors have been fined much less—AS Sunderasha will pay Rs10 lakh, Madhusudan UA, Pranaav G Ambekar and Lavitha Shetty have been fined Rs5 lakh each. All three are debarred for five years each and will be back in business, since many companies may actively seek their services.
As Moneylife wrote on 17th March (read: Nita Cafe Coffee Day Order: SEBI’s Silly Stunt?) and 25th March (SEBI: Reluctant Market Regulator Needs To Press the Reset Button) it is clear that neither SEBI nor the MCA seem to comprehend the gravity of wrongdoing or are refusing to act appropriately for other reasons.
What else would explain the fact that VGS’s wife, who was apparently the beneficiary of a diversion of Rs130 crore (says NFRA), remains the CEO and on the board of directors? In fact, she will implement SEBI’s order to appoint a law firm to recover the money diverted to her extended family and its many firms. MCA, which has the power to protect investors by changing management, remains a silent spectator. The minister in charge, Nirmala Sitharaman, is also our powerful finance minister. In the circumstances, it is hard to believe that the weak and almost clueless actions of one set of regulators and the silence of the MCA are purely accidental. Is it because VGS and his wife are from a powerful and politically-connected family? Clearly, the prevailing maxim with the regulators seems to be “show me the person and I will show you the rule.”
9 months ago
Malavika Hegde, is the daughter of SM Krishna(ex CM) who joined BJP, and the mother-in-law of current DCM D.K Shivakumar.
They have strings to pull in both BJP and Congress. I don't expect any action from the regulators.
11 months ago
Coffee day group promoter family is known to be a fraud from day1 and they bought media to project themselves as entrepreneurs whereas in realty they were just some rich crooks with no worth. Sebi has time and again shown that it has no intention of stopping frauds in Indian market as long as they are getting their due commission in each fraud. SEBI officials in fact are the biggest fraudsters and corrupt in India.
12 months ago
What is sebi doing with so much frauds happening .It is high time sebi/govt should constitute a board to look into immediately in the frauds happening in the share/mf etc markets under sebi since looks like for sebi it is too much to handle
12 months ago
Most of the financial frauds in this country barring perhaps the period after demonetization have happened with the active connivance of CAs. The early 90s were particularly a period when CAs across the country made a killing incorporating public limited companies, floating public issues from companies that existed merely on paper, creating collateral security for crores of rupees for properties that never existed. In the past decade or so new public limited companies hardly germinate and even those sporadic additions appear to be born with excellent health. It would be interesting to analyze the death of public limited companies that germinated between 1990 and 2000. There is a very strong force that operates behind Cafe Coffeeday and the same force was responsible for the suicide of VGS.
Kamal Garg
12 months ago
Clearly there is a failure at multiple levels involving multiple agencies.
12 months ago
Owners/ management get no punishment whatsoever, auditors are always blamed, severely punished! This is "Mahan Bharat"!
12 months ago
Owners/ management get no punishment whatsoever, auditors are always blamed, severely punished! This is "Mahan Bharat"!
12 months ago
What is happening on this with respect to investors
Replied to r_ashok41 comment 12 months ago
The owners walk away with the loot and the investors are left in the lurch with only strong concrete walls to hit their head aainst.
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