In the latest episode of RizingTV’s “Private Eye”, Shriram Subramanian, Founder & MD – InGovern Research Services, and Romit Dey, Partner of M&A and Restructuring – AP & Partners, explore the Gensol-BluSmart debacle, how they think regulators should react to what’s transpired so far and more. Did related-party opacity lead to governance collapses? Did retail investors become involuntary shock-absorbers for BluSmart and make them have to inherit the downside of this debacle? Would mere penalties just be a rounding error for a company that has a market cap in thousands of crores? And is this more than just some paperwork lapse: is this a full-blown criminal conspiracy?
Here are some meaningful takeaways from the discussion:
– It’s always a red flag when a company has a ₹4000 crore market cap without having an institutional investor hold shares in it. Something of that size would have entered the radar of institutional investors, prompting them to dig deep and do research. Furthermore, BluSmart was always fundraising either by itself or by associated companies without any known management bandwidth.
– When it came to the Gensol-BluSmart governance set-up, there were too many related-party transactions, too many influencers talking up the stock and there was a PR-esque focus, rather than an actual delivery of numbers. Other issues include misappropriation of a loan from major public-sector NBFCs intended for EV purchases, amounting to misuse of public funds.
– There has been gross negligence in terms of the fiduciary duties of promoters towards public shareholders. Instead of realizing their responsibilities, the promoters used company money for their own benefit, as opposed to the stated end-use.
– Some of the startling revelations in the interim order include the promoter submitting no-objection and conduct certificates from entities that denied providing those certificates and falsely claiming to operate a factory at an address where none existed.
– To stop fraud, regulators shouldn’t look at imposing penalties or abstaining from the market as the be-all and end-all, they should come in hard and put the guilty parties behind bars. Regulations to that effect should be amended. – India’s markets and regulators are not as mature as US regulators, such as with how they dealt with FTX and Theranos founders, but with cases, like the Gensol-BluSmart debacle, the India markets will mature and create swiftness in reaction by regulators to serve the public interest at large.
– Typically, in VC-funded companies, shareholders have a right to inspect and audit. In the case of what came to light, when there might be fraud, there might be a clawback of promoter shares or unvested shares. Investors at BluSmart are likely to do a forensic audit and if something is found wrong, action will be taken in accordance with the shareholder agreement.
– Sometimes, Independent Directors (IDs) are not given any real powers and aren’t heard by promoters. An ID at BluSmart was said to have been trying to reach the promoters for a long time with zero success. When something like that happens, the responsibility of the ID is to flag the matter to SEBI or to investors or to resign outright.
– Even if it’s a smaller venture, the sustainability of the company is very important. Growing slowly and steadily & working towards building a long-term company that will outlive one’s legacy is the way to go for founders.
– Investors shouldn’t go with the FOMO factor. There are tons of investment opportunities, so there’s no need to rush to invest in a company just because it’s “hot”. One should look at the ethics and ethos of the promoter, even if business is good.
