Governance matters: Startups need strong, independent boards for growth

The Gensol Engineering case of alleged fund diversion by promoters for personal use is being counted among the biggest frauds in the Indian startup world. While it’s a loss of face for the much-celebrated entrepreneurship in the country, it also raises questions on the regulatory environment in the startup universe. Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey has, in an interview with this newspaper, said misgovernance issues, like in the case of Gensol, are not a systemic problem and that guardrails and governance standards are in place to prevent corporate frauds. Even as the Sebi chief believes that a regulatory reboot may not be required, he has stressed the need for proactive action from independent directors, boards, and auditors to rein in instances of greed and egregious conduct on the part of errant companies. This seems to be the right approach to prevent corporate frauds rather than make the regulatory environment more stringent. This is true especially for startups because they typically represent innovation, rapid growth, and young companies with limited resources.

 

There have been several other cases of startups — across fintech, edutech and more — being found deficient in regulatory compliances. With Gensol, and its consumer-facing sister company BluSmart, coming under the Sebi lens, the list of startups caught on the wrong side of the law has grown longer. On Tuesday, the stock market watchdog debarred Anmol Singh Jaggi and Puneet Singh Jaggi — promoters and directors of Gensol Engineering — from the securities market for alleged fund diversion and fraudulent practices.

 

A stronger boardroom and bold independent directors could keep startups in check and prevent instances of promoters misusing funds meant for business. Along with that, external auditors have to ensure that company funds are not promoters’ “piggy bank’’. In the case of Gensol, neither the board nor the auditors appear to have done their job well. The founders bought an ultra-luxury apartment in Gurugram, spent large sums of money on acquiring golf equipment, and transferred crores to relatives’ accounts, instead of expanding the electric-vehicle fleet, for which the company had taken loans from two government agencies. From the loans raised between FY22 and FY24, the founders allegedly diverted substantial amounts, estimated at ₹262 crore, for personal indulgences, through complex transactions.

 

While the Gensol shares, which have declined around 90 per cent in the past 12 months, hit a lower circuit this week impacting shareholders, consumers have also been hit hard because the electric-cab service — BluSmart — has halted its operations without any notice. BluSmart offered an alternative to consumers in the cab-aggregator space, which is dominated by Uber and Ola, both backed by foreign investors. With BluSmart grounded, consumers have to deal largely with a duopoly situation, though ride-hailing service Rapido is gaining popularity in some cities.

 

A Kellogg School research conducted a few years ago showed that globally startups tended to be treated more leniently than other organisations when it came to ethical conduct. But it is high time unethical practices were red-flagged by independent board directors and auditors early on. Also, startups must remember that they don’t have the free pass to blur the line between business and personal. The status of unicorns and decacorns may give startups a high as they reach for dizzy valuations, but bypassing the ethical way of doing business can be their endgame.