Barely two months after the Securities and Exchange Board of India (SEBI) cracked down on Coffee Day Enterprises Limited (CDEL) by imposing a penalty of Rs 26 crore on it, the market regulator has now penalised another company which was a key beneficiary of the large-scale diversion of funds amounting to Rs 3,535 crore.
On March 28, a day after the SEBI order, Coffee Day Enterprises stock opened lower, extending losses to fourth day in a row. At 10:30 am, the stock was quoting at Rs 28.55 on the NSE, lower by 2.8 percent from the previous close. The stock has declined over 10 percent in the last four trading sessions.
Mysore Amalgamated Coffee Estates Ltd (MACEL) was directed to pay a penalty of Rs 1 crore by the market regulator. Funds worth Rs 3,535 crore were diverted from seven subsidiaries of CDEL to MACEL. The diversion of funds accompanied by the news of the suicide of Chairman and MD of CDEL VG Siddhartha led to a downward spiral in the stock price, which crashed from Rs 285 on April 1, 2019 to Rs 66 on August 19, 2019. VGS died by suicide on July 29, 2019.
Just to recount the facts, the fraudulent diversion and mismanagement of funds within the company first came to light when VG Siddhartha, the chairman of the Coffee Day group, committed suicide in July 2019. He left behind a note addressing the Board of Directors 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”.
The Adjudicating Officer Sakkeena PV noted that MACEL acted as a pass-through entity for the said fund diversion and has aided and abetted CDEL in such a large-scale fund diversion.
"I am not inclined to accept the contentions raised by MACEL that it had business operations with CDEL and the funds were transferred in lieu of the same. MACEL was acting as a pass-through entity for such large-scale diversion of funds of a listed entity and the shareholders of CDEL were not aware of such large-scale diversion till the time of the demise of VGS. MACEL was also a family concern of CDEL, who without having any financial fundamentals or business operations accepted such huge funds from CDEL and has, therefore, effectively aided and abetted CDEL in such diversion. I also find that such a huge diversion of funds had impacted the price and had resulted in price fall as alleged in the SCN." the regulator observed in the order.
Meanwhile, the regulator has dropped allegations revolving around the disclosure of related party transactions, and other charges under the prevention of fraudulent and unfair trade practices against Malavika Hegde, R Ram Mohan and Sadananda Poojary, the promoter director, CFO and compliance officer of the company respectively.
They, however, have been admonished.
"The noticees being the promoter director, CFO and Compliance officer of the listed entity, should have been more cautious and careful and should have followed the spirit of the pre-amended regulation by treating the concerned transactions as related party transactions and following the norms applicable to such transactions. Having said so, considering the fact that the relevant regulations as it stood at the relevant time did not cover transactions involving subsidiaries of a listed company, the allegations levelled against Malavika Hegde, R Ram Mohan and Sadananda Poojary respectively are dropped," the regulator said.