The Securities and Exchange Board of India’s (SEBI) recent interim order on Gensol Engineering spotlights how easy it still is for promoters of listed companies to siphon off company funds and manipulate market perception and stock prices. SEBI’s investigations suggest that Gensol’s promoters, Anmol Singh Jaggi and Puneet Singh Jaggi, diverted business loans granted to Gensol by PFC and IREDA for personal use. They presented forged documents to credit rating agencies and built a façade of strong order wins for Gensol’s Electric Vehicles (EVs). They are also alleged to have used Gensol’s funds to trade the stock.

While many have questioned the due diligence practices of lenders and statutory auditors to Gensol, and rightfully so too, it is also worth asking how it escaped the notice of the five independent directors (IDs) on the company’s Board. The IDs in this case, as in many cases of misgovernance before, seem to have either been unaware of promoters’ misdoings or were mute spectators. Three of the five IDs have tendered their resignations after the SEBI order. Under the Companies Act and SEBI’s LODR regulations, IDs are broadly tasked with the responsibility of satisfying themselves on the integrity of financial statements, ensuring strong internal controls and intervening on behalf of shareholders. Audit committees, made up of majority IDs, have wide-ranging powers to scrutinise financial statements, approve related party deals and monitor end-use of public funds. Yet, most cases of corporate fraud come to light only when the company defaults on debt or an external whistle-blower writes to the regulator.

After the IL&FS default, it was discovered that the IDs on its Board saw nothing wrong in its opaque operations routed through 256 group entities, its stark asset-liability mismatch and outright violations of RBI rules. In the Dewan Housing Finance case, IDs seem to have missed the company maintaining two separate sets of books and granting loans to fictitious entities. In Gensol Engineering, SEBI has found a sizeable shortfall between the loans availed to acquire EVs and actual EVs bought. The company’s manufacturing unit, which was reporting large order wins to the exchanges, was found to be a leased facility with hardly any operations. The promoters seem to have set up multiple private firms through which they routed loan funds to buy luxury apartments and golfing sets. It is difficult to believe that the IDs were not aware of these misdemeanours.

In the past, IDs have claimed that they did not have deep knowledge about finance to detect financial engineering. Regulations should perhaps insist on financial qualifications for IDs. However, a bigger reason why IDs function as figure-heads is that they often happen to be people close to or well-known to the promoters. It is not surprising then that they look the other way. The regulator should take IDs to task for their negligence and blacklist them from appointments in other entities.

Published on April 22, 2025