India’s biggest coffee baron is currently brewing drama at mid-sized IT outsourcing firm Mindtree.
For months, VG Siddhartha, founder and owner of coffee shop chain Café Coffee Day, has been in the news for reportedly being in talks to sell his 21% stake in the Bengaluru-based tech company.
However, on Jan. 26, the deal hit a roadblock after the income tax (I-T) department restricted (pdf) him and his holding company, Coffee Day Enterprises, from transferring their shares in Mindtree for a period of six months.
The attachment of shares is in anticipation of a possible future tax demand if Siddhartha were to sell his shares. The number of shares on which the restriction has been imposed constitutes 4.56% of Mindtree’s total share base.
In reaction to this turmoil, Mindtree’s shares on BSE opened 1.5% lower today, on Jan. 28, at Rs872.80 ($12.26) apiece.
Siddhartha was one of Mindtree’s first backers, buying a 6.6% stake in the company when it was founded in 1999. In 2011, he increased his stake by buying out the then founder-chairman Ashok Soota’s holding.
What’s the deal?
The I-T department’s move leaves Siddhartha with a 16.5% stake in Mindtree that he is free to sell. This, according to analysts, could potentially derail his plans.
“Large buyout investors will not settle for a minority stake. They will also want a pie of the founders’ stake or the support of around 35% shareholders. Siddhartha’s stake, as it stands today, may not be as attractive to the investors,” a Mumbai-based investment banker told Quartz, requesting anonymity.
“Even if the shares are released by tax authorities the investors buying out the stake will have to carry the risk of any future litigation, which will further impact his plans of selling. Moreover, Siddhartha’s stake doesn’t come with board rights,” he added.
According to the rules laid down by the Securities and Exchange Board of India (SEBI), an acquirer needs to hold an over 25% stake in a company to reach the trigger point for an open offer to buy out the founders’ stake. Currently, Mindtree founders—Subroto Bagchi, NS Parthasarathy, Krishnakumar Natarajan, and Rostow Ravanan—together hold an around 13.32% stake.
But the Mindtree founders are not willing to sell out, according to investment banking sources that spoke to Quartz.
Mindtree did not respond to an email query.
Cracking a deal with the Mindtree founders for a sellout “is a difficult task,” an investment banker said. “The company works a lot like Infosys, wanting to keep the power in the founders’ hands.”
The timing
This turbulence has come at a time when Mindtree, like most of its peers in the Indian IT space, is struggling with business.
On Oct. 19, its shares fell 18%—its biggest single-day fall in seven years—after it reported muted September quarter numbers. And between October and December 2018, the shares fell by 25% in reaction to media reports about Siddhartha entering into talks with potential investors to sell his stake.
Media reports have said that Siddhartha was in advanced discussions with Larsen&Toubro, among others, to sell his shares.
In a filing to BSE (pdf) on Jan. 26, Coffee Day Enterprises said it would take required action in the next few days to get a portion of Mindtree shares released by the I-T department.
Siddhartha-owned Café Coffee Day retail chain had previously faced income tax raids in 2017 and reports suggested that documents showing Rs650 crore of concealed income were seized during the search operations.
However, Café Coffee Day in its filing stated that there is no tax liability payable by the company and its subsidiaries as per the revised returns filed. “The promoter has discharged all the tax liability along with the revised returns. Further, there is no undisputed tax liability for the promoter and the company,” the company said in the filing.