VG Siddhartha seeks to clear income tax bump to exit Mindtree

Cafe Coffee Day founder VG Siddhartha will offer alternative security to the income tax department to free up shares in Mindtree that have been attached, stalling attempts to sell his stake in the software company, said people with knowledge of the matter.

This could include shares of other companies, bank guarantees or a bond, said the people cited above. It is not clear whether the shares of Coffee Day Enterprises will be offered.

Siddhartha and his associates hold a 21% stake in Mindtree. The I-T department issued an order "provisionally attaching" 4.5% of the stake in Mindtree belonging to him and his company Coffee Day Enterprises.

Siddhartha is said to be in advanced talks with L&T Infotech and private equity firms KKR and Baring to sell his stake in the Bengaluru-based company. The potential buyers have been trying to persuade Siddhartha to get the Mindtree founders to sell their stakes too as part of the deal, said the people cited above.

The founders, including Mindtree chairman Krishnakumar Natarajan and CEO Rostow Ravanan, have on the other hand been looking to retain management control, they said.

The attachment of the shares for six months was to cover any potential tax liability that may arise out of ongoing assessment following the tax department's searches at Coffee Day in September 2017. While a potential deal could be valued at around Rs 3,000 crore, the shares that are "provisionally attached" under Section 281B of the Income Tax Act are worth about Rs 675 crore.

Siddhartha has a few options to get the shares unblocked, including providing a bank guarantee, said tax experts. The billionaire entrepreneur could also use a 2004 Central Board of Direct Taxes (CBDT) circular, which stipulates that the I-T department should only invoke the section under exceptional circumstances, they said.

Coffee Day Enterprises informed the exchanges that it has filed revised returns in response to the tax department's notices and does not have any tax liabilities.

"The promoter has discharged all the tax liability along with the revised returns," it said in the exchange notice. "Further, there is no undisputed tax liability for the promoter and the company. The required action will be taken to release these shares in the next few days."

Siddhartha couldn't be reached for comment.

Income tax officials told ET that Section 281B is used to safeguard tax revenue and penalties.

Vivek Mallya, a practicing chartered accountant in Bengaluru, said the I-T department's action was "unfair and unfriendly from a business and investment perspective. The provisional attachment for possible tax liability is meant for use in rare circumstances and not when a potential sale of stake is on."

According to him, the income tax department had more than a year to determine the company's absolute tax liability and complete recoveries by now.

The Coffee Day Group founder has been asking for a price of Rs 1,000 per share, according to people aware of the matter. Mindtree founders Natarajan, NS Parthasarathy, Ravanan and Subroto Bagchi hold 3.72%, 1.43%, 0.71% and 3.1%, respectively.

Siddhartha was one of the first venture capitalists in Mindtree. He bought an initial 6.6% stake for Rs 41 a share in 1999. He started increasing his stake from June 2011, first buying out founder-chairman Ashok Soota's stake, and later accumulating shares from the market at Rs 450-475 apiece.