According to Maulin Salvi, who leads corporate governance practices by Nishith Desai Associates, investors are now asking for other disclosures, such as the income streams of founders and promoters. “They are also expanding the definition of bad-benefit incidents and making the due diligence process more stringent,” Salvi said. In the past, only criminal complaints against founders had become bad public welfare activities, allowing investors to remove them. Now, the scope is expanding to include violations of non-competition clauses and violations of investment clauses.
“After a series of missteps by startups, limited partners (limited partners) are looking for more accountability from venture capital investors today. Many contracts are also related to deferred payment options (the funds that investors appear to the company) rather than advance payments.”
Induslaw partner Winnie Shekhar said the Blusmart incident in particular has led investors to reevaluate the downside protections included in the Venture transaction. Downside protection refers to measures taken to ensure investor capital in the event of failure or misconduct. “We see a clear shift to stricter controls – stacking of liquidation preferences, vetoing the risk spending, and sharper surveillance covenants are becoming increasingly common,” Shekhar said.
Blusmart, once positioned as a challenger to Ola and Uber, has suspended its business. This was after a regulatory investigation that Gensol promoters Anmol Singh Jaggi and Puneet Singh Jaggi transferred funds raised through loans to buy electric vehicles for Blusmart, instead using them for personal expenses. The company’s lenders are now exploring all legal options for recovering funds.
In another incident, startup Medikabazaar recently evacuated its founder and former CEO Vivek Tiwari from the board after allegations of fraudulent activities. To cope with such developments, investors are increasingly insisting that they and the board will remove promoters and change management in the event of fraud or financial misconduct. Khaitan & Co. Partner Vivek Sriram said these rights will apply to misconduct before or after investment, and the design of contracts becomes even more important in a global investment environment. This includes expanding the scope of the audit and due diligence process. For example, audits should now cover not only companies but their joint entities. “In terms of Blusmart, Prime Facie appears to be missing,” said Anusha Soni, managing partner at AT&Partners, adding that investors must include appropriate checks and balances in the contract to prevent such mistakes.
