SEBI Unearths Alleged Fraud at Gensol Engineering; Bars Promoters and Orders Forensic Audit

The Securities and Exchange Board of India (SEBI), in an interim order dated April 15, 2025 (Order, which can be viewed by clicking on this link), has taken stringent action against Gensol Engineering Limited (Gensol) and its promoters, citing a “complete breakdown of internal controls and corporate governance”.

1. SEBI’s Prima Facie Findings and Directions

 The Order details a myriad of carefully layered transactions allegedly used to defraud the company and its shareholders. The key findings include, inter alia:

• Siphoning of Loan Funds: Funds borrowed from lenders like Indian Renewable Energy Development Agency and Power Finance Corporation, specifically for procuring Electric Vehicles (EVs), were allegedly diverted and transferred to an EV dealer, Go-Auto Private Limited, which then immediately routed substantial amounts to promoter-linked entities like Capbridge Ventures LLP. These funds were allegedly used for purposes entirely unrelated to the loan’s objective, including the purchase of a high-end apartment from DLF Limited in the name of a promoter-controlled firm.
• Preferential Issue: It is alleged that Gensol funded its own preferential allotment. Gensol transferred funds to a connected entity, Wellray Solar Industries Private Limited, which then transferred the money to the promoters, namely Anmol and Puneet Jaggi. The promoters, in turn, used these funds to subscribe to Gensol’s preferential share issue through their entity, Gensol Ventures Private Limited.
• Falsification and Misleading Disclosures: To conceal defaults in loan repayments, Gensol allegedly submitted forged ‘Conduct Letters’ to credit rating agencies. The company is also alleged to have made misleading disclosures to stock exchanges regarding non-binding memorandums of understanding for EV pre-orders and the valuation of a US subsidiary.

Pending a full investigation, SEBI has, inter alia, restrained the promoters from holding directorships or key managerial positions in Gensol and barred both the company and its promoters from the securities market. SEBI has also ordered a forensic audit of Gensol.

2. Analysis

The Order paints a picture of an utter corporate governance breakdown. The alleged actions – or inactions – of connected stakeholders including the independent directors, audit committee members, chief executive officer, chief financial officer, compliance officer and statutory auditors of Gensol are likely to be the focal point for SEBI during this forensic audit. The failure of Gensol to repay its loans, which initially triggered the entire saga, could lead to the lenders seeking independent relief under the Insolvency and Bankruptcy Code (IBC) framework. The lenders could also potentially invoke pledges created by the promoters on their shares in Gensol to further aggravate the misery for public retail shareholders.

Although there have been a few success stories like CG Power (acquired by Murugappa Group), Satyam (acquired by Tech Mahindra), Fortis Healthcare (acquired by IHH Healthcare Berhad) and United Spirits (acquired by Diageo) where new acquirers came to the rescue of beleaguered companies, companies in similar situations generally tend to suffer. Often, such companies end up getting entangled within the hit-or-miss IBC revival/liquidation framework. Recent examples of companies like Jet Airways and GoAir which could not be revived through the IBC framework highlight its limitations, as these processes are prone to drawn-out timelines and prolonged judicial disputes.

• Way Forward

To safeguard the interests of a company and its retail shareholders, it is critical that the ‘brain’ of the company (its board of directors) is swiftly replaced once there is any suggestion of malfeasance on the part of promoters. Given the systemic and large-scale nature of such episodes, the possible pliability and complicity of non-executive directors and independent directors cannot be ruled out.

Under the existing regulatory framework, there is ample power with the Central Government to replace the board of any company – as was exercised in the infamous Satyam case. To prevent Gensol from suffering the same destiny as many of its counterparts, a pre-IBC corporate revival framework must be explored, including potential third-party takeovers. For an effective revival, reputed bankers and consultants should be hired to conduct a time-bound and transparent auction process to get institutional or strategic investors to acquire and take control of such companies. This could go a long way in saving the livelihood of thousands of employees and economic value for millions of retail shareholders.