BluSmart Lapse Calls for Stricter Disclosures of Promoters

Financial irregularities and governance lapses at Gensol Engineering and its affiliate BluSmart have prompted investors to bolster the terms of investment contracts, Times of India reported. The development follows a slew of events that have cast a shadow in the Indian startup ecosystem, demanding even stricter legal safeguards.

As per Maulin Salvi, who leads the corporate governance practice at Nishith Desai Associates, investors are now seeking additional disclosures, like the sources of income of founders and promoters. “They are also expanding the definition of bad leaver events and making the due diligence process more rigorous,” said Salvi. Previously, only criminal conduct against founders would qualify as bad leaver events, enabling investors to remove them. The scope is now being extended to include breaches of non-compete clauses and violations of investment terms.

He also said, “Following a series of lapses at startups, LPs (limited partners) are seeking more accountability from venture capital investors today. Many contracts are also coming with deferred payment options (funds which investors disburse to companies) rather than upfront payments.”

Winnie Shekhar, a partner at IndusLaw said that the BluSmart incident has prompted investors to reassess the downside protections included in venture deals. Downside protection refers to measures applied to secure an investor’s capital in the event of failure or misconduct. “We are seeing a clear shift towards tighter controls – liquidation preference stacking, veto rights on risky spends, and sharper monitoring covenants are becoming more common,” Shekhar said.

BluSmart, once a competitor to Ola and Uber, has suspended its operations. This followed a regulatory investigation that found Gensol promoters Anmol Singh Jaggi and Puneet Singh Jaggi guilty of diverting raised funds for personal expenses. These funds were raised via loans, which were intended for purchasing electric vehicles for BluSmart. The lenders of the company are exploring all the legal routes to recover their money.