Be Wary Of The Green Halo, Not Just The Risk-Free Returns

As the Gensol Engineering drama unfolds, the many layers of chicanery that went into this operation should prompt a relook at how businesses, especially those that invest themselves with the halo of being environment-friendly, have been allowed to raise money from the public, and from financial institutions.  

Take the case of the investors in bonds issued by BluSmart Mobility, a company owned by Gensol’s promoters. Were the investors in BluSmart bonds adequately aware of what they were investing in? These bonds were sold through ‘Online Bond Platform Providers’, in this case reported to be Yubi, Klub and Centricity. 

SEBI had devised the OBPP regulations in November 2022, in the aftermath of COVID, as the popular enthusiasm for being served everything online-ranging from food and grocery to equities and bonds-multiplied exponentially.  

SEBI believed this would expand debt markets as long as adequate safeguards were in place: the bonds were to be listed, though not necessarily secured. In the BluSmart case, none of these safeguards seemed to have worked.

First, it appears these bonds were not secured. The cabs are in fact owned by BluSmart’s group company Gensol, and hypothecated to Gensol’s lenders, leaving BluSmart’s bondholders with no assets to lay claim on.  

Second, these bonds were unrated, since they were ostensibly being ‘privately placed’. Privately placed instruments, equity or debt, are basically meant to be offered to a limited set of investors who, the law presumes, have the capacity to judge the merit of their investment for themselves. 

But can one really call bonds that are put up for subscription on a public website privately placed? The bonds appear to have been issued in successive tranches, presumably each one with no more than the prescribed number of investors, which only underlines the public nature of the exercise.  

The net result was that the investors in these bonds-mostly individuals-did not have the benefit of any rating to guide them on the quality of their investment and were, in effect, flying blind.

A rating agency would have certainly pointed out that the assets of the company that constitute its primary source of revenue are actually owned by a group company, and a highly leveraged one at that. As per reports, the money raised from BluSmart’s bondholders was to be used for working capital and similar purposes, an indirect way of saying that it would be funding losses or expenses, not creating assets. 

Moreover, these bonds continued to be available on the websites of these OBPPs even after investigations by SEBI into the affairs of Gensol had begun. That event normally would have invited scrutiny or at least disclosure by rating agencies, given the linkages between BluSmart and Gensol.

Some OBPPs marketed these bonds through a stentorian exhortation to investors to “earn higher than FDs,” when in fact the latter half of that sentence should read “by running more risk than FDs.” If there was any note of caution, it would probably be buried in the fine print.

Unfortunately, felicity with fine print is not a trait that adorns the online retail investor.

Lender Blindspots
A question that must be asked of Gensol’s lenders is: why were the assets financed by them leased onwards to a promoter-owned company?

BluSmart was not a subsidiary of Gensol but a parallel entity of the promoters.

Why allow a legal barrier to be created between the assets and the revenue from those assets?

The trustees of these bonds have sought the assent of the bondholders to invoke cross-default and acceleration provisions following a default by the company in repayment earlier in April. As all money would become due immediately, this would very likely lead to a bankruptcy filing.

In the event that BluSmart is referred to bankruptcy, the ensuing moratorium would prevent any immediate payment being made to Gensol—and onwards to its lenders—since it would be an operational and not a financial creditor.

For the same reason, Gensol—and in turn its lenders, assuming they take control—would not even be at the table, since operational creditors are not part of the Committee of Creditors under the Indian Bankruptcy Code.

BluSmart has suspended operations already, but any cash flows arising from sale of the undertaking—or of the part of the fleet that was not owned by Gensol—cannot flow to the latter for repaying loans unless approved by the CoC, that is, the bondholders.

In effect, therefore, Gensol’s lenders have structurally subordinated themselves for any residual recovery beyond the value of the cars they have a charge on—which is inadequate to repay their loans anyway.

The lenders have alleged, rightly so, that the funds they lent have been diverted from their intended end-use.

But this could have been prevented through the simple expedient of disbursing the loans directly to the car manufacturer. 

If you’re buying more than 4,000 cars, as the company did, then surely some hard bargaining with the manufacturers and direct payment to them would have been called for. Instead, the purchase was routed through a dealer, which as per reports is owned, surprise surprise, by the promoters of Gensol!

There is a possibility that advance payments were made but the cars had yet to be delivered.

But even if so, non-delivery for a year sounds a bit stretched—and in any case, the funds or cars would be recoverable from the manufacturers and would not be untraceable.

Non-creation of security beyond a reasonable period post-disbursement is an event of default in any lending rulebook.

If BluSmart was to be a cab-operating company, why buy the cabs in a different company?  Since both were owned by the same promoters, could there have been any assurance of arm’s length pricing of the lease rentals? The arrangement lends itself to being used to artificially dress up BluSmart’s books to make them look good to private equity investors, which included marquee names like BP Ventures, and eventually, had the edifice not imploded, hapless IPO investors.

The lessons from this imbroglio for lenders and investors are many, but unfortunately also very basic.

Businesses can use the halo of being environment-friendly to distract from the skulduggery that lurks underneath.
The basic principles of lending and monitoring of loans remain as relevant and necessary in the age of AI as they always were.

Investors need to think carefully before doling out their hard-earned money to dubious causes—even if these are sold on websites with high-tech-sounding, new-age names.

And regulators too must take a closer look at how easily such investments are being marketed to the public.