Lessons we can learn from the VGS saga

The unfortunate ‘suicide’ of the founder of Cafe Coffee Day and the purported reasons behind it have thrown up some lessons for the rest of us, bitter though they may be...

There has been some shocking news recently. The business tycoon V.G. Siddhartha, who founded Café Coffee Day (CCD) was found dead in the Netravati River, near Hoige bazar in Mangalore. The circumstances under which he was found revealed that he allegedly committed suicide by jumping into the river from a bridge. Earlier, he had gone missing for more than 36 hours before his body was found by a fisherman.

The inquiry behind his death reveals that it was a case of a planned suicide. He also left behind a letter, purportedly written by him, addressed to the Board of Directors of his company. This letter says that he failed to be a successful business model. The letter also indicates a very disturbed mind, as he had been under tremendous pressure from his creditors and an equity partner who was forcing him to buy back shares. V.G. Siddhartha (VGS) also mentioned harassment by the income tax department and he virtually named one previous Director General of Investigation who caused liquidity problems by attaching his shares in Mindtree, which were under negotiation for sale to L&T.

VGS came from a very rich family from Karnataka. His family has been into coffee plantation since 1870. The family owns an almost 400-yearold palatial home. The plantation owned by the family, to begin with, was about 600 acres and the same increased to 6000 acres when VGS started taking an interest. It is well-known that CCD started by VGS was the biggest coffee shop chain spread virtually all over the country. VGS had given jobs to roughly 20,000 people and was responsible for making coffee popular as never before. He also diversified into other lines of business.

He was married into a well-known political family. His father-in-law S. M. Krishna had held the posts of Chief Minister of Karnataka and of a Union Minister. VGS also figured in the Forbes India list for being the 75th tycoon in 2014.

Too much debt

The suicide of VGS is a very sad incident and it has rattled the corporate world. It may also serve as a de-motivating incident for startups. But, from this unfortunate happening, many lessons have to be learnt by our corporates. But we have to first peep into his business architecture and the resulting outcomes from that. The one main aspect of his alleged suicide, as per his suicide note, was the mounting debt burden on him and his company. Data reveals that debt on his holding company CDEL was to the tune of Rs.6547 crores. In addition, there was also a debt of Rs.3522 crores by his private holding firms, namely, Devadarshini IT, Coffee Day Consolidations, Gonibedu Coffee Estates and Sivam Securities.

Too many ventures

The group was facing severe liquidity problems and one reason was the massive expansion of the group into various sectors and the opening of coffee chains abroad and also of the large purchase of coffee plantation estates. Through Tanglin Development, VGS launched his SEZ, ‘Global Village’ and also his hospitality venture under Coffee Day Hospitality Resorts. ‘The Serai’ was the brand name given to his hospitality business. VGS was a big angel investor to technology company Mindtree, where he held more than 20% shareholding.

Too many entities

More expansion by VGS needed more funds both from equity investors and from loan givers. He created a complex structure for the group so as to maximise the incoming of funds. The complex structure of the VGS group comprised of the holding company, four major subsidiaries, forty step-down subsidiaries and more than half a dozen associates and joint venture companies.

Too opaque

This maze of many entities made it very difficult for lenders, shareholders and regulators to trace the end-use of funds and also their returns. Even auditors were not able to audit the accounts of constituent entities which were eventually consolidated with the accounts of the holding company. The worst thing, VGS being a very private person never shared his thinking process and as a result, many transactions of the group were opaque.

The business model worked well for some time and attracted funds but eventually, it proved to be a recipe for disaster. With the architecture not transparent, it proved impossible to study the asset-liability management. VGS ultimately reached a stage when he did not know how to move ahead. Equity investors lost patience and started demanding buy-back of their shares. No new loan was forthcoming as he was not left with any collaterals. He had also taken personal loans and given personal guarantees to buy very large coffee estates.

"The situation became worse when income tax raids took place against him and his companies in 2017. This raid was a consequential action of a massive search action against a big politician. Documents found in the search action against the politician indicated wrongdoings by CCD and VGS"

Unexplained income

The situation became worse when income tax raids took place against him and his companies in 2017. This raid was a consequential action of a massive search action against a big politician. Documents found in the search action against the politician indicated some wrongdoings by CCD and VGS. According to a statement of the oath given by VGS before the income tax authorities, he confessed about his unexplained income running into several hundred crores.

As per the department, the tax was not paid against the admitted unexplained income and hence to safeguard the interest of revenue, the shares of VGS in Mindtree were provisionally attached. The attached shares were under negotiation for sale to Larsen and Toubro and this hit VGS very hard. The sale could go through only if VGS could make an alternative arrangement with the tax department. The liquidity crunch faced by VGS became worse due to the action by the Director General (investigation) of Income Tax which he termed as harassment.

Took it personally

The perusal of the facts of the business of VGS, vis-à-vis, his alleged suicide note indicates that he equated hard times faced by his business as his personal failure. He concluded that he failed to give a profitable business model. There can never be a business model which just goes higher and higher. Business goes high and low as per several factors, many of which are not within the control of a businessman. As each time a student fails in the examination, he or she should not attempt committing suicide, a businessman when having a hard time in his business too should never do so. This is the first lesson to be learnt from the unfortunate incident.

Be transparent

Second, the business model should always be simple, and transparent. This will help to detect the weak points in the business architecture. Auditors, advisors and fellow board members will always come forward to warn the promoters where things are going wrong. In the case of VGS, he had created a very complex system where nearly 50 entities were the constituents and even the auditors were not able to audit the accounts of some of these constituents. VGS was not able to have full control of many transactions due to the opaqueness of the business model. He kept on taking loans and inviting investments from equity partners but apparently failed to gauge the correlation between fund taken from others and the resulting income.

A business will sink if there is no capability to service the debt or return the investment of partners. There is also another takeaway that there should be proper documentation when the investment is taken from equity participators. It should not be left to the whims and fancies of the investors that they can demand the buyback of their shares anytime, as happened in the case of VGS.

Bite as big as you can chew

Third, businesses should be enlarged only to the extent that they can be managed properly. Ambition to grow is good but it should be realistic. In the case of VGS, he went into many sectors, in addition to his core sector of the coffee business. Apparently, there is nothing wrong, but the newly opened ventures should have been self-sustaining. If the finance of the core sector is siphoned off to nurse the new sectors, then there is always a possibility of total collapse, as happened in the case of VGS.

Lonely at the top

Fourth, it is an admitted fact that there is loneliness at the top. It appears that VGS was very lonely and that he did not have anybody to share his mental condition. It is very important for a successful business to have a team at the top of the pyramid and not just one individual, even if he is the owner. The team has to fight the tough times in the business together and it should not be just one individual, as it happened in the case of VGS, which led him to depression and then alleged suicide.

Tax, necessary evil

Last, the tax department should always be treated as a sleeping partner in your business. If the tax department is evil, then it is a necessary evil. Honest taxpayers have nothing to fear from the tax department. If there is some legal problem with the tax department, then there is a legal solution. In the case of VGS, the genesis of the tax problem faced by him was the legal action of the provisional attachment of his shares against the anticipated tax liability emanating from the search action against him. Unfortunately, VGS took this to heart instead of challenging it legally.

A taxman performs a thankless job in the interest of revenue. He should not be cursed unless he is harassing a taxpayer for his personal gain. VGS in his alleged suicide note has spoken about the harassment meted out by the taxman but in all fairness, he has not accused him of any ulterior personal motive.

Life is precious and should be lived joyfully. Not terminated because of pitfalls in business or career.