The Death of India’s Coffee King Should Be a Lesson

(Bloomberg Opinion) -- On Monday, Indian entrepreneur V.G. Siddhartha asked his driver to bring him to a bridge close to the southern city of Mangaluru. Then, according to the driver, Siddhartha got out to take a walk. He was not seen again; his body was recovered on Wednesday morning.

In a typewritten note released by the news agency ANI, Siddhartha -- founder of India's largest chain of coffee shops, Cafe Coffee Day, and a prominent early investor in the successful IT services company Mindtree Ltd. -- appeared to apologize for “failing to create the right profitable business model.” He said pressure from his private equity partners and other lenders, as well as harassment from the income tax department, had become unbearable.

We don't know for certain which partners Siddhartha had in mind, or why they were allegedly “forcing” him to buy back shares. We do know that the income tax department had been pushing him; with typically bad taste, the taxmen attempted to rebut Siddhartha's accusation of harassment by saying that they were only “protecting the interest of revenue” by blocking the entrepreneur's access to his Mindtree shares at a time when he desperately needed liquidity to reduce his debt.

It's not necessary to have an opinion on all of Siddhartha's transactions to recognize how fragile the position of any entrepreneur is in today's India. A flood of private equity money from abroad may appear to have made entrepreneurship attractive. But many of these funds want to be treated like debt-holders, with a minimum guaranteed return.

And the problem runs much deeper than financing. In the India in which I grew up, you couldn't get a decent cup of coffee. In fact, if you wanted to meet someone, there was literally nowhere to do it. Siddhartha solved both those problems: Cafe Coffee Day, in India, is a symbol of air-conditioned civility. Its 1,700 brightly lit stores are an accepting and globalized environment accessible to young people in even the smallest and most fly-bitten Indian towns.

In Vienna, the city that invented coffeehouse culture, a bustling Cafe Coffee Day with its bright red upholstery stands proudly near the Opera and the legendary Cafe Mozart, where Graham Greene wrote “The Third Man.” India has produced few world-beaters in the past couple of decades; I'd argue CCD is one of them.

And yet Siddhartha wrote in his note: “My intention was never to cheat or mislead any anybody, I have failed as an entrepreneur.” The tragedy is that he needed to emphasize that distinction. For the past eight years, ever since an anti-corruption movement seized the imaginations of India's middle class and then was coopted by Prime Minister Narendra Modi to smooth his path to office, India's citizens and officials have constantly confused those two things -- business failures and fraud. The working assumption on TV news shows and in drawing-rooms is always that anyone who failed using borrowed money defrauded their investors and the public.

Businessmen whose bets have gone bad must fear arrest as well as bankruptcy. In particular, as in many other countries, tax raids can be used as bludgeons against anyone politically exposed, even legitimate businessmen.

The income tax department operates through fear: People in business never know when inspectors will turn up or what they will do. In this case, Siddhartha's troubles may not have been unrelated to the fact that he was the son-in-law of a politician once prominent in the opposition Indian National Congress party. The income tax department raided the homes and offices of another high-profile Congress politician in 2017, at precisely the time he was attempting to preserve an opposition government in Siddhartha's home state of Karnataka. Tax officials now admit that their allegations against Siddhartha arose from those raids.

The government, staring at a fiscal hole equal to an entire percentage point of GDP, isn't likely to let up on squeezing Indian business. The last federal budget included a slew of laws giving taxmen of all stripes even more power, including the power effectively to arrest on suspicion -- in, of course, “the interest of the revenue.”

That's a pity. India has few natural resources, a relatively unskilled population, not enough capital and a state that seems most efficient at being predatory. One of the few things the country has going for it is the energy and creativity of its entrepreneurs. We need more, not less, of the sort of businessman who can build a world-class brand and change millions of lives.

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”