Gensol Engineering crisis highlights importance of corporate governance; 4 key parameters to check

Gensol Engineering share price: Gensol Engineering's stock hit a 5% lower circuit on Wednesday, April 16, after SEBI issued a new order barring the company’s promoters from the capital markets. It also published a detailed report on how the promoters committed fraud with company funds.

The 29-page interim order says the promoters fraudulently misused the company’s funds for their personal benefit. The crisis surfaced when credit rating agencies accused the promoters of misreporting and submitting false papers for rating.

Fund diversion and misuse

The company raised loans worth nearly ₹977 crore from IREDA and PFC, which were allocated for purchasing 6,400 electric vehicles. However, the investigation found that ₹567 crore worth of vehicles were purchased, and the remaining money was spent on personal accounts and related-party transactions.

The promoters diverted the funds to other promoter-linked entities like BluSmart Mobility, Go-Auto and Capbridge ventures. Some of the funds were also utilised for purchasing luxury real estate and golf sets, treating company funds as “promoters’ piggy banks”, said the SEBI’s interim order.

Falsified documents

The company submitted false documents to rating agencies on the timely servicing of debt obligations. Both the rating agencies downgraded the credit rating to default.

Weak internal controls

The company’s promoters rerouted company funds and loans through layered transactions like a proprietary firm, thereby breaking all corporate governance controls.

Forensic audit

The market regulator has ordered a forensic audit of the books of the company and its related entities and has asked auditors to submit the report within six months.

Promoter restrictions

Anmol Jaggi and Puneet Singh Jaggi have been barred from the securities market and from holding any directorial and managerial positions in the company or any listed entities until further notice.

This is not the first time such fraudulent activities committed by the company and its promoters have come to light. Previous instances include Satyam Computer Services, IL&FS, DHFL and Yes Bank. Cases Gensol Engineering highlight the importance of corporate governance checks investors should perform before investing in them.

Unbiased board composition

The company’s board should be diversified, independent, and unbiased. Excessive influence of promoters and the management team in the board’s decision-making is a major red flag. In the case of Gensol Engineering, the SEBI’s order highlights that promoters Anmol Singh Jaggi and Puneet Singh Jaggi controlled key decision-making with weak internal controls.

Transparency in financial reporting

Transparent reporting of financial statements and disclosures is crucial for investor confidence in the company. It helps in reducing risks of fraud and misappropriation. In the case of Gensol Engineering, the company gave rating agencies falsified documents related to disclosed debt servicing. This indicates the promoter's intention to hide the real situation of the company’s financial health.

Related-party transactions

The company should report all the related-party transactions with the approval of independent directors and shareholders. Failure to do so indicates the diversion of the company’s funds to different entities for fraudulent purposes. Gensol Engineering diverted part of the funds taken as loans from IREDA and PFC to its subsidiaries like Blusmart and Go-Auto. Some funds were also diverted for luxury purchases like golf sets, real estate and more.

Pledged promoter holding

Promoter holding in the company is a mark of management’s confidence in the business. Higher promoter holding indicates its confidence in the future prospects of the company. Similarly, a highly pledged promoter shareholding indicates poor financial health of the promoter entity, which hints at weak financial management.

In the case of Gensol Engineering, the promoter holding in the company came down to 61.2% in December 2024 from 71.7% in December 2022. In addition, the promoters also offloaded their shares in the open market in the past few days after the rating agencies highlighted the fraud committed by the promoters.

The stock witnessed an exuberant rally from its listing at ₹85 apiece in October 2019 to the record high of ₹1,125 apiece in July 2024. The company was listed on the SME segment and migrated to the mainboard in July 2023 at ₹400 per share.

As the rally continued, the stock gained traction on social media platforms and the attention of retail investors, who ended up buying the stock at the tail end of the rally. Most of them have suffered losses of more than 90% from the recent high.

Gensol Engineering is not the first and definitely not the last case of promoter fraud. Hence, investors need to learn from these cases and perform basic corporate governance checks before rushing to buy such stocks for quick money.