VG Siddhartha’s Cash Flows Were Choked: Can India Inc Thrive Thus?

The brutal manner in which IT department went about making its tax demands has worried everyone.

Tax terrorism had virtually frozen Siddhartha’s ability to maintain regular cash-flows.

(Photo: The Quint/Kamran Akhter)

Last night I met a couple of senior foreign investors. “What’s happening in Bangalore?” one of them asked me. “The alliance was bound to come apart,” I replied, mistakenly assuming he was alluding to the fall of the Congress-JDS government. “No, no,” he interjected. “I am talking about VG Siddhartha. The man had such huge assets. Why would he kill himself over a tax notice?”

It is, perhaps, the question all of India Inc is asking today. Siddhartha’s assets weren’t restricted to the popular Café Coffee Day chain. He is believed to have land and property worth over Rs 15,000 crore. He had investments in other companies, including Sical Logistics and was an early investor in Infosys.

Siddhartha’s Last Letter Holds the Key

VG Siddhartha’s last letter lays the blame on an unholy trinity - one private equity ‘partner’, other lenders, and most importantly, a former income tax DG. Questions have also been raised about the financial transactions that he says he undertook, of which his auditors and senior management were “totally unaware”. Cafe Coffee Day’s board has announced that there will be a detailed investigation of these transactions, and some skeletons might drop out of the company’s cupboard.

The reason why Siddhartha’s letter resonates with entrepreneurs and investors is because his story is extremely commonplace in India today. Everybody knows that the basic rule of funding a new-age business idea, where profits are going to come a few years down the line, is to sell equity. Young entrepreneurs, especially in the start-up space usually fallback on Private Equity firms.

But, often, the PE firms buy shares with the condition that there’ll be minimum guaranteed returns. In effect, this is no different from taking a loan and paying interest on it. Entrepreneurs give in because getting PE money makes their business look good and gives them publicity. It also attracts second level investors.

If the business doesn’t do well, entrepreneurs have no option but to sell increasing amounts of their own stake to give the returns they had guaranteed to their PE investors. Once that option runs out, they start taking loans. Sometimes money has to be raised from questionable entities simply to meet the cash-flow requirements. In any case, buying and selling of assets, taking loans, raising money is a red-rag for the Income Tax department.

IT department attached nearly 75 lakh Mindtree shares that were owned by CCD and VG Siddhartha.

Siddhartha’s letter mentions instances of how he was allegedly “harassed” by a “previous DG income tax in the form of attaching our shares on two separate occasions to block our Mindtree deal and then taking position of our Coffee Day shares”.

Action by Income Tax Department

The first was in September 2017, when the tax department claimed that Café Coffee Day had not declared income of Rs.650 crore. His home was raided along with offices at 20 locations. There were allegations of money laundering as well over a small transaction, but that was dismissed by the Enforcement Directorate.

Although, CCD had started making profits over the past three years, most of it came from, what is termed as ‘other income’ outside its core business. Siddhartha was under huge pressure to reduce the company’s growing debt. He tried to sell his stake in Mindtree to raise money.

Tax terrorism had virtually frozen Siddhartha’s ability to maintain regular cash-flows.

But, as he mentions in his final letter, in January this year, the IT department attached nearly 75 lakh Mindtree shares that were owned by CCD and VG Siddhartha. The very next month, Siddhartha got another tax notice, temporarily attaching 46 lakh Coffee Day shares. These actions effectively made it impossible for Siddhartha to raise money to pay back his loans.

Tax Terrorism Choked VG Siddhartha’s Cash Flows

It might well turn out that the tax department had a legitimate case against VG Siddhartha and Cafe Coffee Day, but the brutal manner in which it went about making its tax demands worried everyone. The company’s total declared profits in the past three years was about Rs 185 crore and the tax claims were three times that amount. On top of that, there was a Rs 6,500 crore debt on the books.

Tax terrorism had virtually frozen Siddhartha's ability to maintain regular cash-flows. An entrepreneur can still hope to keep their animal spirits alive in a growing, expanding economy. The Indian economy, however, is running to a standstill. In such a situation, one can only imagine the kind of stress that made VG Siddhartha take his own life.

Siddhartha’s suicide suggests he deeply identified with his company, with the Café Coffee Day brand that almost every urban Indian has heard about. There are thousands of such entrepreneurs in India, who have given up successful careers to start their own businesses.

In the current economic environment, they are barely managing to keep their businesses afloat. Lenders are understandably putting pressure on them, as are private equity investors who want to limit their downside risk. In the middle of this, if they are saddled with unreasonable tax demands, they have very little chance of surviving.

Modi Government’s Pro-Business Image Takes a Beating

The government has repeatedly promised to rein-in the IT department. Nirmala Sitharaman promised to tackle the notorious Angel Tax in her maiden budget speech. But, tax officials complain that they have been set stiff collection targets, and they have no option but to go after anything that doesn’t pass the smell test.

It is telling that CMIE’s data shows that corporate tax as a percentage of pre-tax profit has risen to more than 55% in 2017-18, from less than 24% in 2005-06. This is at a time when overall profit margins of dropped to a new low. The reason why VG Siddhartha’s suicide was top of the mind of the foreign investors last night, is because it is almost a parable of the India story. As one of them said “this government needs to rekindle the animal spirits of corporates. Things like this will only kill it.”

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)