BharatPe, Its Investors & Ashneer Grover Need To Fix Much More Than Just The Public Image

When it rains, it pours. Fintech unicorn BharatPe is seeing a new controversy every day and a number of questions about cofounder Ashneer Grover, another cofounder Bhavik Koladiya and a range of corporate governance and consequently due diligence questions for the investors.

If Grover’s reputation as a brash and outspoken personality in the startup world was a precursor to some of these allegations, the others have come in recent months and weeks as the drama around his dealings with investors and a public fallout over a failed financing bid for the Nykaa IPO have unfolded.

Now the cofounder has claimed that BharatPe CEO Suhail Sameer has forced him out of the company amid these controversies. Calling Sameer “a puppet of investors”, Grover has alleged a conspiracy behind sending him away and instituting a probe, according to a Moneycontrol report, which BharatPe has denied.

He also said that Sameer and the company’s general counsel Sumeet Singh manipulated him into going for a leave of absence, which Grover alleged was never his idea. However, last month, Grover claimed that he’s going on leave voluntarily. So which is true?

In the past few weeks, we have seen reports about a range of allegations about impropriety, a lopsided business model and more.

• Was it a voluntary leave by Grover or a firing by the board and the CEO?
• It’s hard to believe the fall from grace for the company, so the other question is how BharatPe will bounce back from this corporate governance crisis?
• And then there are allegations of embezzlement, a weak business model and the resultant due diligence questions.

And VCs such as Sequoia, Coatue, Ribbit Capital and Beenext as well as early investors and angels, who have invested over $700 Mn in the company, have to answer serious questions about shortcomings in their due diligence process before investing millions in BharatPe.

Leave Of Absence Or Firing? 

Under pressure from critics and the public in general, BharatPe has started multiple investigations to clear the air.

Deloitte, which was the statutory auditor of BharatPe, is likely to be questioned on how it missed the alleged financial irregularities, so it could not handle the probe itself. Recently, it onboarded one of the Big Four accounting firms PricewaterhouseCoopers (PwC) to look into the company’s financial operations.

Earlier, the company had appointed A&M, a risk advisory firm to conduct an independent audit of the startup’s internal processes and systems. It was a follow-up after Ashneer and his wife Madhuri Grover took a leave of absence from the company following multiple controversies. In turn, Grover has hired Delhi NCR-based law firm Karanjawala & Co in the legal battle to safeguard his 9.5% holding.

Now that Grover seems to be claiming that he was pushed out of the company, the previous public statements and announcements that claim Grover had himself proposed going on leave seem untrue. And there is more to it.

Of course, this was the unconfirmed feeling among observers too, and something we had pondered in our report at the time. The wording of the ‘leave of absence’ notice left little doubt that Grover was being told to go on leave. But since then more and more trouble has emerged for the company over multiple reports.

Besides this SEBI may also get involved as Grover has filed a legal notice against Kotak Mahindra Bank over its inability to provide INR 500 Cr financing for the Nykaa IPO last year. SEBI is said to have initiated an investigation into Kotak Wealth, the wealth management arm of Kotak, about whether the bank made any commitments to the Grovers.

In his legal notice, Grover had claimed that Kotak’s relationship managers had made guarantees on the allotment, which is what the market regulator will be looking into. But it is this association that triggered the chain of events that led to Grover’s ousting — more on that soon.

It’s not yet clear when the results of these audits and multiple probes will be released or indeed whether any action will be taken against Grover, but reports have indicated that the founder is likely to be forced to give up his stake in the company.

On the sidelines, reports suggest that Ashneer has demanded INR 4,000 Cr for leaving the company.

“What have I done to resign? This is like execution before trial. I am the MD (managing director). I run the company. If the board thinks I don’t need to be the MD and someone else should run the company, please put my Rs 4,000 crore on the table and take the key away from me,” Grover said.

The Cofounder With A Past Conviction

Besides this, the other big problem for BharatPe could arise from the past of Bhavik Koladiya, a former cofounder of the startup and the current group head of product and technology. Till 2018, Koladiya held over a 30% stake in the company, which was later diluted in subsequent rounds as more and more VCs backed the company.

Over its past four funding rounds, the equity held by VC funds in BharatPe has grown from 16.7% to 66.1%, A bulk of the Koladiya’s shares were sold to VC investors in these rounds, while Grover’s own holding fell from 22.7% to 9.5%.

Koladiya was convicted in a credit card fraud case in the US. While his conviction and subsequent sentencing as time served in the US does bar him from holding directorships in the US, the same does not hold true for India. However, the investors in the company, many of whom have US-based limited partners do need to be wary of conducting business with convicted individuals.

Koladiya is the technology and product lead at BharatPe. As such he does have significant control on the operations of a financial services company, which might be another red flag from a due diligence point of view. Grover is the public face of BharatPe. The other official cofounder, Shashvat Nakrani, owns 7.8% stake currently, but Grover is seen as the brand’s ambassador.

While Koladiya does not have any shares in the company directly, sources told Inc42 that Grover and Nakrani are holding his equity for him. Sequoia Capital is said to be aware of this. 

The company’s majority stakeholders include Sequoia Capital with a 19.6% stake, Coatue (12.4%), Ribbit Capital (11%), Beenext (9.6%), among others. Sequoia’s stake growing has come under a cloud of controversy too.

Koladiya’s LinkedIn profile has been edited in recent weeks after the slew of controversy. While earlier he called himself a cofounder in the company leading product and engineering, his profile now simply states BharatPe with no official designation. Sources say he continues to be on the payroll of the company.

But his AngelList profile continues to show me him as the founder of the company.

But there are more holes in the BharatPe ship. Investors might also have to answer questions around BharatPe’s business model of lending to merchants and collecting daily settlement fees as well as its peer-to-peer (P2P) lending.

BharatPe’s Flawed Business Model 

Multiple reports are pointing at alleged embezzlement by Grover and his family and close ones at BharatPe. The company’s sales practises and payments product are also said to have flaws, while in other cases employees have alleged impropriety on the part of the company that have led to regulations by the RBI.

A report The-Ken says that BharatPe has built a loan book on shaky grounds and its Unity Small Finance Bank licence will be critical in sustaining this unstable foundation. The Unity SFB — acquired from the beleaguered Punjab & Maharashtra Co-operative Bank in a JV with NBFC Centrum — is also in jeopardy as SEBI and RBI could revoke the licence in case Grover or other BharatPe directors come under investigation.

Besides this, other reports have alleged that Grover and his family effectively syphoned off incentives meant for hiring and placement consultants for filling CXO roles through shell companies which are linked to Ashneer’s wife Madhuri Grover, who has also gone on a leave of absence.

Before leaving her position, Madhuri Jain Grover was the head of controls at BharatPe, and is said to have authority in hiring and other internal processes. A graduate of the National Institute of Fashion Technology, she worked in the fashion and design industry before joining BharatPe in October 2018. How a person with no experience in the financial services industry or a related academic background ends up in a critical position is another major question.

The position of head of controls is known as the first line of defence within the financial services industry as they look into operational and customer risks, and threats to the financial stability of the company.

The company is also said to have made payments to non-existing vendors. These are allegations that could invite criminal charges, if proven true.

But, of course, outside the legal implications, these are serious red flags that investors should have kept an eye on. Even as BharatPe built this payments-led lending empire and merchant network, it raised millions from the very investors that are now part of the company’s board and looking into the dealings of the company.

That’s something that usually happens before an investment. Investors typically look into the workings of a business to ensure there is nothing in the operations or the cash flow that can hurt their own financial interests. Surely, building a lending book on unstable collateral is a huge warning sign. It is essentially how companies shut down and are dogged by banks and other debtors.

In preparation for the Unity SFB launch, BharatPe had added former SBI chief Rajnish Kumar, as its chairman, adding an industry veteran to its board. Yet this does not seem to have solved some of the larger corporate governance issues within the company.

Where’s The Due Diligence?

Besides Sequoia, Coatue, Ribbit Capital and Beenext, BharatPe’s other investors Insight Partners, Steadview Capital and debt investors like — Alteria Capital, InnoVen Capital, Trifecta Capital Advisors. The company had also raised funding from angels like Akshay Munjal, Kunal Shah, Amit Lakhotia, AngelList partner Utsav Somani and Nipun Mehra.

The question, of course, is did the investors overlook these issues in their due diligence before backing BharatPe?

Sequoia, for instance, had faced off against Grover but chose to continue investing in the company as its valuation kept surging.

Sources told Inc42 that, at the time, Sequoia’s investment in BharatPe in 2020 came on the condition that Ashneer Grover step away from the CEO role. And in came Suhail Sameer to replace him. 

This condition is tied to Grover’s spat with Sequoia Capital’s Harshjit Sethi in August 2020. The argument was over delays from Sequoia in committing to BharatPe’s Series B. Grover had reportedly asked that Sequoia exit the company’s cap table since it had not clearly committed to investing in the company.

Sequoia did not invest in Series B or Series C rounds for BharatPe, but then was back as an investor when BharatPe raised its mega $108 Mn Series D, and $370 Mn Series E funding rounds, which took the company’s valuation to nearly $3 Bn.

The two massive rounds in 2021 indicate that any issues between Grover and Sequoia were ironed out, but in fact, Grover was replaced as CEO of the company by Suhail Sameer in August 2021 when the Series E was announced.

This is not the first time in the startup ecosystem when investors’ due diligence has been questioned. Earlier, Nexus-backed Onsurity was caught in a face-off with Acko for IP theft.

Time For A New BharatPe

Things could change drastically for BharatPe before the end of the year and the company is likely to undergo a major restructuring process. If Grover follows Koladiya in liquidating his stake in the company, Nakrani would be the only survivor from the company’s original leadership team. Speculation is also surrounding CEO Sameer’s future in the company, which BharatPe has denied.

Instead of taking potshots at each other through social media and announcements, Grover, BharatPe and its investors need to fix more than the reputation of the company.

So there could very well be a brand new BharatPe on the horizon. BharatPe’s restructured leadership — whatever shape it takes — will want to distance itself from its past as soon as possible. 

In the past, we have seen companies completely rebrand themselves and turn a corner after major controversies. Interestingly, BharatPe is engaged in a legal battle with Walmart-owned PhonePe over the usage of the Pe prefix. So in a way, a rebranding exercise might serve more than one purpose.

Of course, it will take a lot more than just a new name and livery to fix the deeper issues around BharatPe’s business model and toxicity that has emerged from the fallout of this.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.