BharatPe (“the Company”), albeit a late entrant to FinTech, challenged competition and grew in a span of just 3.5 years. The popular online payment apps like Paytm, Google Pay, PhonePe etc., modelled themselves on settlement for a charge, when BharatPe focussed on building an inclusive app to benefit both, merchants and customers. Founded by two IITians, Ashneer Grover and Shashvat Nikarani, in 2018, BharatPe offered – payments to merchants, “instantly without any additional fee.”
BharatPe did a few things to propel its growth:
- Use of the interoperability feature in QR code, resulting in merchants accepting payments from customers using any payment application using a single QR Code, making the system less cumbersome.
- The “swipe machine”, a game-changer, allowed merchants to accept payments with 0%-transaction fee. This expanded the consumer base 3X times and brought the Company to the forefront.
- “12% club”, where merchants can borrow collateral-free loans at a flat 12% interest rate through the BharatPe merchant app. Alongside the borrowing, one can invest at an interest rate of 10% per day. This unconventional investment option allows the investor to withdraw their money anytime without any processing fee.
- BharatPe also has Extra Income Card and Credit Card in their product kitty.
The Company was funded through HNIs and VCs. The current holding makes Ashneer Grover, the single highest individual holding 9.5%with Sequoia at 19.6%.
BharatPe received media attention when its Co-founder & MD engaged in a controversial audio clip with a Kotak Mahindra bank employee, allegedly abusing him over the failure to finance the Nykaa IPO. Concurrently, the Board intended to investigate the financial irregularities in the Company.
To facilitate the probe, Ashneer Grover, along with his wife and some employees, were asked to take voluntary leave which later turned into a mandatory leave of absence.
In a statement, Ashneer replied that if the company wants to expel him, he wants his worth out of the company. Per the last valuation at $2.8 billion, his 9.5% stake stands at a valuation of INR 1800-1900 crore, while he has valued BharatPe at $6 billion – making his stake worth INR 4000 crore.
GOVERNANCE ISSUES
Financial irregularities were discovered within the Company and, Alvarez and Marsal (“A&M”), a management and risk advisory firm, began scrutiny of the Company’s affairs. A&M’s audit revealed two major concerns –
- Discrepancies in recruitment/ Related Party Transactions; and
- Payment made to 30 fake vendors of about INR 53.25 crore.
The Company funds were also used for personal expenses – travels, expensive electronics goods, etc.
Directorate General of GST Intelligence (“DGGI”) confirmed that procurements were done by the Company from non-existent vendors or not operating at the principal place of business. The Company also reversed the already-claimed input credit of INR 9.54 crore and paid a penalty of INR 1.54 crore, taking a loss for dealing with non-existent vendors.
The Company sent a communication to DGGI on the issue. The letter was signed by ‘Deepak Jagdishram Gupta’, a relative of Madhuri Grover (wife of Ashneer Grover), who was responsible for the procurements made to the vendors. The same letter confirmed that the vendors were non-existent and requested to waive the Show Cause Notice of the DGGI.
The expense of hiring candidates through consultancy/agencies was booked by Shwetank Jain, another related party. The recruitment firms involved commonalities – email addresses, physical addresses, formats, and bank branches which were based in Panipat, the hometown of Madhuri Grover. Apparently, Madhuri Grover was involved in clearing such invoices causing known financial losses to the Company, the report said.
LEGAL IMPLICATIONS
Companies Act, 2013 has specific provisions governing Related Party Transactions and permits these at an arm’s length. But these vendors were fake and non-existent, having inflated invoices booked against their names by Related Parties.
BharatPe entered into a partnership with Centrum Financial Service to set up the Small Finance Bank (“Unity SFB”). This partnership was given an in-principal approval by RBI to merge itself with PMC Bank, providing much relief to troubled stakeholders. Considering RBI is now investigating BharatPe for irregularities, the parameters for fit and proper persons could be breached – leading to plausible revocation of the in-principal approval for the said merger.
A&M’s findings led to a full-fledged audit by PwC. As per the terms of the Shareholders Agreement of the Company, the outcome of the audit would allow the Board to oust Ashneer Grover as MD & CEO by simple majority on grounds of gross negligence and wilful misconduct, perhaps misappropriation of Company funds, as a founder.
The DG of GST Intelligence also expanded its probe after A&M’s report.
Against the governance probe, Ashneer Grover has preferred to file an arbitration plea before Singapore International Arbitration Centre (SIAC) which was rejected stating that the governance review at the Company cannot be stopped on the grounds stated.
Ashneer Grover resigned as MD & CEO from the Company on February 28, 2022, while Madhuri Grover, who headed the Controls function of BharatPe, has been fired on the grounds of financial misappropriation.
Sources:
- The Complete BharatPe Controversy of Ashneer Grover and Kotak Bank (startuptalky.com)
- BharatPe saga: Allegations fly thick and fast as firm fires Madhuri Jain | Business Standard News (business-standard.com)\
- BharatPe accuses Ashneer Grover family of siphoning off company funds | Business Standard News (business-standard.com)
- GST fraud probe into BharatPe finds deals with non-existent vendors – Rediff.com Business
- Exclusive | RBI examining corporate governance angle in BharatPe-Ashneer Grover episode (moneycontrol.com)
- bharatpe news: Independent probe finds financial irregularities at BharatPe as pressure mounts on Ashneer Grover and wife – The Economic Times (indiatimes.com)
- Financial scam at BharatPe, founder Ashneer Grover involved: Report (opindia.com)
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