Coffee Day Enterprise Limited faces six-month SEBI probe

Coffee Day Enterprise Limited faces a fresh Securities and Exchange Board of India investigation, due within an upper limit of six months, after the Securities Appellate Tribunal set aside the earlier Whole Time Member order concerning Rs 3,535 crore transferred from seven subsidiaries to Mysore Amalgamated Coffee Estate Limited. The inquiry must examine beneficiaries, insider-trading issues and possible shareholder restitution.

Why did SAT order a fresh CDEL investigation?

SAT ordered a fresh investigation because it found the earlier Securities and Exchange Board of India inquiry incomplete in its examination of Rs 3,535 crore transferred from CDEL's seven subsidiaries during the investigation period from April 1, 2018 to March 31, 2020. The tribunal's majority order set aside the Whole Time Member order dated January 24, 2023 and directed the regulator to conduct an independent and comprehensive inquiry.

CDEL had 49 subsidiaries and 47.03% public shareholding in the facts recorded by the tribunal. The transfers involved seven subsidiaries and Mysore Amalgamated Coffee Estate Limited, or MACEL, an unlisted company in which V. G. Siddhartha's father held 91.75%. SAT recorded that the funds ultimately rested with Siddhartha's family and related entities, requiring an inquiry beyond recovery between two companies under common family control.

SAT said the regulator had largely relied on the Malhotra committee report, commissioned by CDEL in August 2019. The committee's remit included preliminary examination of accounts, high-risk transactions, cash flows and value at risk, but SAT said it was not asked to undertake a comprehensive investigation of alleged diversion to promoters. The tribunal also noted that the regulator's April 2021 investigation report referred to the committee's findings.

Where did the Rs 3,535 crore from CDEL subsidiaries go?

SAT recorded that Rs 3,535 crore moved from seven CDEL subsidiaries to MACEL and eventually rested with Siddhartha's family and related entities. It identified Rs 3,088 crore received by Siddhartha, Rs 145 crore received by Malvika Hegde and Rs 3.6 crore received by his parents, with the balance described as reaching other family members or related entities.

MACEL is central to the further inquiry because SAT recorded revenue of Rs 1.71 crore and negative net worth of Rs 223.6 crore as at March 31, 2019. During the short FY 2019-20 period, its related-party borrowings rose from nil to Rs 4,328 crore, while loans given to related parties increased from nil to Rs 4,171.52 crore. SAT said these facts warranted examination of MACEL as a conduit entity.

The earlier recovery route had yielded Rs 110.75 crore by the date of the Whole Time Member's order, compared with the Rs 3,535 crore involved in the transfers. SAT said the prior directions required CDEL to pursue recovery from MACEL under National Stock Exchange oversight, despite both entities remaining under the same family’s control. The new inquiry includes examination of bank accounts held by entities, conduit entities and recipients.

SAT also directed the regulator to consider Section 28-B of the Securities and Exchange Board of India Act, 1992. The provision allows proceedings for disgorgement, refund or recovery against a deceased person's legal representative, although it excludes a fresh penalty. The tribunal said no inquiry had identified Siddhartha's legal representative despite Rs 3,088 crore being recorded as transferred to his account.

What must SEBI examine in the CDEL six-month probe?

SEBI must complete the further investigation as early as possible and within an upper limit of six months, then issue orders in accordance with law. SAT said the regulator must independently determine the roles and objectives of stakeholders in the alleged fund-diversion scheme and must not be influenced by the tribunal's observations in reaching its findings.

The directions require statements on oath from concerned individuals, including legal representatives of Siddhartha, to identify ultimate beneficiaries. SEBI must also examine CDEL officials, subsidiary officials and banks on why transactions totalling Rs 3,535 crore did not generate banking alerts. It must test the explanation that authorised signatories handed signed blank cheques to Siddhartha.

The investigation must examine why the alleged use of signed blank cheques did not come to the attention of the compliance officer, board or audit committee. SAT also called for review of mobile numbers linked to bank accounts and of accounts belonging to Siddhartha, Malvika Hegde, his parents, relevant entities and recipients of funds moved from those accounts.

SEBI must additionally investigate whether the SEBI (Prohibition of Insider Trading) Regulations, 2015, or PIT Regulations, were breached. SAT noted that promoter-family holding in CDEL fell from 53.93% at the end of June 2019 to 9.59% at the end of December 2022 following pledge invocation. It said the earlier investigation did not suggest an inquiry into whether insiders avoided wrongful loss by pledging shares while aware of CDEL's poor financial condition.

What happened to the earlier CDEL penalties and recovery approach?

The tribunal's majority order set aside the January 24, 2023 Whole Time Member order and replaced its recovery-focused approach with the further investigation. SEBI must consider the possibility of disgorgement against ultimate beneficiaries and appropriate restitution for CDEL shareholders, rather than limiting the response to recovery by CDEL from MACEL.

A separate opinion from the Presiding Officer reached a narrower result on penalties. It found CDEL could not be held liable under the Prohibition of Fraudulent and Unfair Trade Practices regulations for transfers between subsidiaries and MACEL because the regulator had accepted that CDEL approval was not required under the then-applicable related-party transaction rules.

Under that separate view, the Rs 25 crore penalty under Section 15HA of the SEBI Act would have been set aside and the Rs 1 crore penalty under Section 15HB would have been reduced to Rs 50 lakh. The Rs 50 lakh outcome reflected the upheld failure to disclose Coffee Day Trading Limited as a material subsidiary for FY 2019-20, while another Listing Obligations and Disclosure Requirements violation was not sustained.

The majority direction gives priority to tracing funds and considering remedies for public shareholders, who held 47.03% of CDEL in the facts recorded by SAT. The tribunal said the regulator should examine whether shareholders can be appropriately restituted, including through disgorgement from beneficiaries identified in the renewed inquiry.

Conclusion

SAT's majority order moves the matter from a recovery-and-penalty framework to a new SEBI inquiry into Rs 3,535 crore transferred through seven CDEL subsidiaries, the roles of intermediaries and beneficiaries, and possible PIT Regulations breaches. It does not determine the ultimate recipients, liability or shareholder remedy, which remain matters for the regulator's fresh investigation.

The next disclosed milestone is SEBI's investigation and subsequent order within the six-month upper limit set by SAT. The issues to watch are whether sworn evidence identifies beneficiaries beyond the Rs 3,088 crore and Rs 145 crore recorded, whether Section 28-B is applied, and whether the regulator pursues disgorgement or restitution for shareholders.