Govt considers SFIO action against Gensol Engineering and promoters

Experts opine that regulators and policy action need to evolve due to the social media impact and the financial influencers getting paid for endorsements

The government is considering initiating a probe by the Serious Fraud Investigation Office (SFIO) against Gensol Engineering and its promoters, according to sources familiar with the matter.

 

“It is under consideration at this stage. A final decision will be taken soon,” a government official said.

 

Meanwhile, the Ministry of Corporate Affairs (MCA) is conducting due diligence in the alleged fund diversion case involving Gensol Engineering, through the offices of the Director General (DG) and the Registrar of Companies (RoC), a senior government official told Business Standard.

 

“We are a regulatory ministry and are currently examining the matter. The MCA will step in once the DG and RoC submit their reports,” the official added.

 

The development follows an order last week by the Securities and Exchange Board of India (Sebi), which said that the sharp decline in the promoters’ stake was not organic but allegedly engineered through a web of false disclosures, sham transactions, and fund diversions.

 

These actions, Sebi said, effectively led to an almost complete promoter exit, leaving unsuspecting investors exposed.

 

Company law experts said this development should reignite the debate on introducing mandatory board evaluation and performance assessment as a compliance check for high-risk ventures.

 

“This incident reaffirms the principle laid down in the Satyam case that auditors are not mere record-keepers but watchdogs with a statutory duty under Section 143 of the Companies Act to report frauds and irregularities,” said Sonam Chandwani, managing partner, KS Legal & Associates.

 

Legal experts noted that the failure of auditors to have raised red flags regarding the forged conduct letters and inconsistencies in fund flows between Gensol and BluSmart could amount to professional misconduct under Section 132 of the Companies Act, invoking jurisdictions of the National Financial Reporting Authority.

 

“Sebi had the whistleblower complaint in June 2024 but seems to have acted only after rating agencies flagged the issue. The need is not more regulations but better enforcement,” said Shriram Subramaniam, InGovern Research. 

 

Several startups have been in the news for their misadventures, which often stem from a valuation mania, pressure from investors, and unethical practices by founders.

 

“There is a tendency to romanticise startup founders and dilute scrutiny in the name of ‘vision.’ A board's role is not to cheerlead but to challenge,” Chandwani added.

 

Experts opine that regulators and policy action also need to evolve due to the social media impact and the financial influencers getting paid for endorsements.

 

Meanwhile, the Gensol episode brings to light again the loose ends of vigilance in corporate governance that are required to be tightened by Sebi, the MCA, and other authorities.

 

“Whistleblower policies have to be made more stringent and protective in nature so that the same can instill confidence in employees and stakeholders without having to wait till the last minute,” said Amit Kumar Nag, Partner, AQUILAW.

 

One of the key lessons from the Gensol saga is the importance in maintaining a clear demarcation between the interests of the promoters and the company, especially where financial transactions or operational decisions may benefit related entities.

 

“This case brings into sharp focus the fiduciary responsibilities of the Board, particularly independent directors, in overseeing the conduct of management and ensuring adherence to governance norms,” said Rajesh Sivaswamy, senior partner, King Stubb & Kasiva, Advocates and Attorneys.