BluSmart bust makes investors rewrite the fine print

Financial and governance irregularities at Gensol Engineering and its affiliate BluSmart have pushed investors to strengthen the terms of investment contracts, lawyers told The Times of India. These events follow a string of similar issues at Indian startups that had already made investors more cautious, but recent developments are prompting even tighter legal safeguards.

According to Maulin Salvi, who leads the corporate governance practice at Nishith Desai Associates, investors are now asking for additional disclosures, such as the sources of income of founders and promoters. “They are also expanding the definition of bad leaver events and making the due diligence process more rigorous,” said Salvi. In the past, only criminal complaints against founders would qualify as bad leaver events, enabling investors to remove them. The scope is now being widened to include breaches of non-compete clauses and violations of investment terms.

Salvi also said, “Following a series of lapses at startups, LPs (limited partners) are seeking more accountability from venture capital investors today. Many contracts are also coming with deferred payment options (funds which investors disburse to companies) rather than upfront payments.”


Winnie Shekhar, a partner at IndusLaw, said the BluSmart incident in particular has led investors to reassess the downside protections included in venture deals. Downside protection refers to measures put in place to secure an investor’s capital in case of failure or misconduct. “We are seeing a clear shift towards tighter controls – liquidation preference stacking, veto rights on risky spends, and sharper monitoring covenants are becoming more common,” Shekhar said.

BluSmart, once positioned as a challenger to Ola and Uber, has suspended its operations. This followed a regulatory investigation that found Gensol promoters Anmol Singh Jaggi and Puneet Singh Jaggi had diverted funds raised through loans intended for purchasing electric vehicles for BluSmart, and instead used them for personal expenses. Lenders to the companies are now exploring all legal options to recover their money.

In a separate incident, startup Medikabazaar recently removed its founder and former CEO Vivek Tiwari from its board, following allegations of fraudulent activity. In response to such developments, investors are increasingly insisting on clauses that allow them and the board to remove promoters and change management in the event of fraud or financial misconduct. These rights would apply regardless of whether the wrongdoing occurred before or after the investment, said Vivek Sriram, a partner at Khaitan & Co.

In a globalised investment environment, the design of contracts has become even more critical. This includes broadening the scope of both audits and due diligence processes. For example, audits should now cover not just the company but also its allied entities. “In the case of BluSmart, prime facie it seems that such clauses were missing,” said Anusha Soni, managing partner at AT & Partners.

She added that investors must include proper checks and balances in their contracts to guard against such lapses.