Taking Stakeholders For A Ride

 There are always more fish in the sea, than ever come out of it, say the scriptures. After passing a large number of orders dealing with delinquent behaviour in the market, and imposing penalties designed to keep undesirable persons out of the market, SEBI must be wondering how many more persons that take liberties with law and regulations have to be apprehended and dealt with. Gensol Engineering Limited (GEL) is a case in point. Ordinarily, persons that wish to enrich themselves at the expense of companies, or even society, resort to devious methods that are not obviously challenging the legal system. In GEL, we have a case where the promoters have thrown caution to the winds, and not tried too hard to stay out of the gaze of the Regulator. Some of their activities are serious transgressions that reflect a complete disregard for regulation and for Regulators.
 
In his detailed interim order dated April 15, 2025, the Whole-time Member (WTM) of SEBI has analysed the various liberties taken by the 3 notice receivers, and laid bare the brazen manner in which the greed of the promoters has brought the company to grief. The order takes note of the impressive growth of the company in the initial years in terms of financial performance, as also in the increase in the number of shareholders from 155 in 2020 to 1,09,872 as on March 31, 2025. After 4 years of being listed on the BSE SME Platform, the company migrated to the main board on BSE and NSE in 2023. Shortly thereafter the shenanigans seem to have surfaced.
 
The list of fraudulent acts committed by the promoters and the company makes very thought-provoking and worrisome reading. To begin with, there was falsification and misrepresentation of documents. Having borrowed from several sources, including 2 public sector lenders, the company promptly commenced the process of serial defaults. At the same time, they kept their healthy credit rating alive by producing forged conduct letters, purportedly issued by Indian Renewable Energy Development Agency (IREDA) and Power Finance Corporation (PFC), to the effect that GEL was regular in its debt servicing. When the rating agencies reached out to these 2 lenders, they came to know that no such letters had been issued, and that the documents produced by the company to the rating agencies were forged. This brings to mind a similar instance of fraudulent behaviour in a celebrated IT company nearly 2 decades ago, when the letters certifying bank balances produced to the statutory auditors came from the Chairman’s office, and not from the banks. This is not a case of delayed disclosure, incomplete disclosure or wrong disclosure. It is the articulation of a blatant falsehood, with intention to mislead the rating agencies.
 
In his detailed interim order, the WTM of SEBI has meticulously brought out the web of companies that had been used for routing of the funds received from the bank, for the ultimate benefit of the 2 promoters. The web of companies would have done great credit to a hardworking spider.
 
In an interesting observation, SEBI seems to have noted that the promoters were treating the company like a sole proprietorship, and not like a listed entity. There came into being a number of Related Parties with the sole purpose of being vehicles for illegitimate routing of funds. Before the credits were received in some of these companies, the bank balances were abysmally low, and this should have raised questions in the minds of those that got to know of the transactions. Funds that were meant for acquisition of vehicles were used for personal benefits, including the acquisition of a costly residential property in Gurgaon, initially in the name of the mother of one of the promoters, and thereafter in the name of a company.
 
This is a case where the greed of the promoters led to the grief of the company and its various stakeholders. The lessons that can be drawn from this unsavoury episode are far too many to be captured in a newsletter. Our focus therefore is on the various dramatis personae involved.
 
To begin with, there are 2 promoters who thoroughly misconducted themselves by throwing caution to the winds, and cocking a snook at legal and regulatory provisions. There was no single avenue that they left unexplored. Even CSR funds were diverted to the personal accounts of the 2 co-founders. There were quite a few cases of transfer of company money to close relatives. The claim that there was a manufacturing facility in Pune turned out to be baseless since the NSE official who visited the alleged manufacturing premises found 2-3 labourers and, on enquiry, found an electricity bill, that reflected consumption of an amount much smaller than what a manufacturing unit would have consumed. Similarly, the Related Party BluSmart Mobility Private Limited received far less vehicles than what had been originally indicated to be made available. The funds paid to another Related Party for procuring the vehicles was much more than the cost of vehicles that were delivered. It would appear that in every transaction, with every Related Party, money had been siphoned off, and no eyebrows were raised by any of those to whom these should have been obvious red flags.
 
The role of the lending agencies is also not free from suspicion. It is a known fact that a genuine borrower, wishing to borrow a much smaller sum of money for legitimate business purposes, is led on a merry go round chase with forms, processes and collateral requirements obstructing the speedy disbursement of loans. Yet, on the other hand, institutions seem to have parted with funds, without doing the right kind of checks, and without resorting to stringent post lending monitoring procedures. Proactive steps by the lenders should ordinarily have resulted in these irregularities coming to surface earlier.
 
Then there are the Independent Directors (IDs). How all these transactions either escaped their attention, or were studiedly ignored, is a matter that investigative agencies will have to address sooner rather than later. While the role of IDs in such situations is to be decided with reference to Section 149(12) of the Companies Act, 2013, there is no defence available in case of irregularities that were so many, and so pronounced, as to remain unnoticed. While the provision in the Companies Act, 2013 makes Non-Executive Directors responsible only for matters that they get to know through a formal Board process, there is the requirement of acting diligently. The available facts do not lead to the conclusion that the IDs had acted diligently, since this was not one dubious transaction, but a series of blatant violations of the law and the regulations.
 
It is interesting to note that one day after SEBI’s orders dated April 15, 2025, 3 IDs resigned citing different reasons for resignation. The portions of the resignation letters reproduced below tell their own tale, and do not merit detailed analysis or comment.
 
1 ID sent his resignation by mail at 7.49am on April 16, 2025 stating “I am aware that my decision comes at a time when the company is facing a difficult time. However, my professional commitments at Patna are coming in the way of my contributing to the company in a useful manner. I sincerely feel that a more experienced person in my place is required on the Board as an ID to steer the company through in these difficult times.” Having stated the above reasons for exiting the Board less than a full day after SEBI’s orders, the Director concerned also stated “my admiration for your leadership and resilience remains unwavering.”
 
Another ID stated by his resignation letter of April 16, 2025 sent at 1.37am that “Recent developments and news in the media has pained me immensely.” He left the Board because “the way things have unfolded and come to light, I am not in a position to continue as ID.” He wished the very best for the company, the shareholders and other stakeholders.
 
The third ID, who resigned on April 16, 2025 at 4.18pm stated that in July/ August of 2024, he had “tried reaching you” to seek clarity on the debt position of the company, and had also offered assistance to reduce the interest cost through a debt restructure route. “While you had messaged me that you would call back, it never progressed. I had also spoken to Mr Parmar on 2-3 occasions and asked him for a meeting with the CFO, which never seemed to materialise.” He had indicated in 2024 his intention to resign, but was told to hold on till the IPO of a Related Party was successfully concluded. He further stated that his present employment restricts him from taking up an ID role in companies. Having stated that he did not hear back from the Chairman, and from the Company Secretary, Mr Parmar, for several months, he indicated that he would like to thank the Chairman for giving him the opportunity to serve on the Board and added that he was “grateful for the support extended to me by fellow Board members and the management during my tenure as ID.”  Presumably the support extended by management included not responding to his messages, and not getting back to him on the issues raised by him.
 
Given that there were a number of Related Parties, and transactions with all of them, it is not clear whether the Audit Committee of the company studied these transactions from the angle of the transactions being in the ordinary course of business and at arms length. Clearly, these were seemingly disregarded as matters of no concern.
 
During the entire process of promoters playing ducks and drakes with company finances, the investors were continuously misinformed. Even after the irregularities came to public notice, the promoters sold a portion of their stakes without public disclosures, blindsiding the investor community. Further, as SEBI has observed, even the proposed share split was a ruse to mislead the minority investors.
 
Audit quality is one of the aspects that needs to be carefully examined. With forgery, misrepresentation, fraud, accounting irregularities, and the like, it seems difficult to believe that the auditors had no inkling of the nature of activities being undertaken by the company. A few observations regarding audit are contextual. As per the Annual Report for FY 24, the Audit Committee had 5 meetings. Internal audit was outsourced, and it did not directly report to the Audit Committee. The statutory auditor was paid non-audit fee of Rs 6.5 lakhs, in addition to a fee of Rs 12 lakhs. Interestingly, both the statutory auditor and the secretarial auditor gave clean reports. These are likely to be some of the issues that get covered by the probe by the Ministry of Corporate Affairs, and the ongoing proceedings in SEBI.
 
There is no gatekeeper who emerges with credit in these series of transactions. The auditors and the Directors clearly seem to have fallen short of expectations. Lenders would need to do a thorough analysis to discover how the company was able to take them for a ride, and to resort to stratagems such as forging letters, and certifying the company’s conduct as a borrower making repayments in time.
 
It is said that one swallow does not make a summer. It is dangerous to get into the comfort zone that this is an isolated incidence of corporate fraud. It is important for SEBI to quickly complete the proceedings, and to pass final orders, which will send a clear signal to the stakeholders and the market that it has no room for persons who misconduct themselves so blatantly and brazenly. As has been observed in another context, no person or institution is entirely useless. This company and its promoters serve as an example of entities and individuals who have no business to be in the market. The reputation of the corporate ecosystem will suffer if the action taken is not speedy or sufficiently deterrent.

The author is Chairperson, Excellence Enablers, Former Chairman, SEBI, UTI, IDBI

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