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Amid the public battle between BharatPe’s former managing director and cofounder Ashneer Grover and the company’s board, investors and management, the Ministry of Corporate Affairs is reportedly looking into key parts of the operations of the fintech unicorn. According to a report by The Morning Context, which builds on earlier reports about an MCA probe into the company, BharatPe is being asked by the ministry to reveal details about its business.

The MCA probe is said to be looking at the peer-to-peer lending business, the company’s investments in mutual funds and securities as well as the stake holding of former cofounder Bhavik Koladiya and the stock options offered to some independent directors such as BharatPe chairman Rajnish Kumar and Keval Handa.

The MCA is also reportedly seeking details about the internal governance and financial review of BharatPe, which was conducted by Alvarez & Marsal (A&M), which the company had claimed was the reason it had sacked Ashneer Grover and his wife Madhuri Jain Grover.

BharatPe has found itself under a spotlight ever since the leaked phone conversation between the Ashneer Grover and Kotak Mahindra bank employee over IPO financing issues. While at the time, it was believed to be a private issue for Grover, this has snowballed into bigger questions about the company, its operations, its financials amid the lack of due diligence by its many investors.

Interestingly, these are some of the major questions that the wider ecosystem has been asking for the past few months, as the Grover-BharatPe battle grabbed the limelight. While so far BharatPe has remained silent on many of these questions in the public scrutiny, the company will naturally be compelled by the ministry to reveal these details. So, in a way, this is the very due diligence that many of its marquee investors have missed, and now the company has to go through this process under the magnifying glass of a central government ministry.

BharatPe’s 12% Club Under Scrutiny

The central government ministry is said to be primarily looking at how the company built its P2P lending business which is called 12% Club. The company is said to have disbursed INR 3,000 Cr ($401 Mn) in P2P loans and further it has also extended a total credit line of INR 1,000 Cr through the buy-now-pay-later product Postpe.

Under the P2P model, BharatPe offers 12% returns to merchants who invested with its partner lenders. The amount invested by these merchants was in turn lent to other merchants through partner NBFCs and other lenders, to be repaid at an interest rate of between 20% and 25%.

In the process, the fintech unicorn is said to have a healthy margin of 9%-12% for each of these P2P loans, after accounting for the 12% returns it provides to the lending merchants.

The MCA is looking to ascertain the revenue from that 12% Club has brought for the company and whether BharatPe directly lent from its books instead of through the merchants, which it is not allowed to do owing to the fact that it does not have a lending licence.

MCA Looks Into BharatPe’s Mutual Fund Investments

Besides BharatPe’s P2P lending, the ministry is said to be looking at why nearly 70% of the company’s assets have been invested in mutual funds and other securities.

Investments such as this are typically seen in startups that raise large rounds and the interest earned from such investments is reported as other income in addition to revenue from operations.

In the case of BharatPe, however, the MCA is looking into why such a huge portion of its assets have been parked in mutual funds and other securities. According to the TMC report, the RBI’s fifty-fifty criteria for automatic NBFC classification is likely to come into play and complicate life for BharatPe further.

As per the criteria, any company that is in a principal financial business will automatically be classified as an NBFC if over 50% of its income is through operations and over 50% of its assets are invested in financial instruments. And if BharatPe is unable to prove its fitness for this criteria, it could have to incur penalties.

Decoding Bhavik Koladiya’s Holdings In BharatPe

The other major inquiry is said to be about Bhavik Koladiya’s shareholding in the company. Having founded the company along with Shashvat Nakrani, Koladiya sold most of his stake and gave up the cofounder title too.

This is largely due to the fact that Koladiya was convicted in a credit card fraud case in the US in 2015.

Till 2018, Koladiya held over a 30% stake in the company, but this was diluted in the many funding rounds for the company 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%.

This conviction and his subsequent sentencing for time served in the US for a financial crime does bar him from holding directorships in the US, and would have complicated matters for BharatPe in talks with foreign investors. While he’s no longer counted as a founder in the company, Koladiya is said to be the group head of product and technology.

Earlier, BharatPe had told Inc42, “Bhavik Koladiya is an Independent Consultant and does not have any direct management role in the company. He acts as a mentor for the Technology and Product teams.”

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

However, it is not clear whether such an arrangement was disclosed to the Registrar of Companies, according to The Morning Context story, which would result in a violation of the Companies Act.

Does Rajnish Kumar Own Stock Options In BharatPe?

BharatPe had applied for an NBFC licence to lend to merchants directly, but its bid was rejected by the Reserve Bank Of India in 2020. Following this, BharatPe entered into a joint venture with Centrum Financial Services to take over the operations of beleaguered Punjab & Maharashtra Cooperative (PMC) Bank.

The small finance bank licence was seen as a major coup for BharatPe at the time and was considered its ramp to the big leagues from being a payments-centric player. It had also roped in former SBI chief Rajnish Kumar as an independent director and chairman of its board to lead its banking ambitions.

Amid the public dispute with BharatPe, Ashneer Grover had alleged that Kumar owns stock options in the company and thereby questioned his actions and involvement in the governance review. Grover had alleged that any governance review involving Kumar or Koladiya was ‘riddled with premeditation, bias and prejudice.’

The MCA is reportedly said to be looking at these allegations of Kumar being given stock options by BharatPe, which would cast a dark cloud over the former SBI chief’s ability to be unbiased in any independent reviews. Besides Kumar, the ministry is also questioning the company on whether Keval Handa, the former Union Bank Of India chairman and another independent board member, also has been given stock options.

A Temporary CFO For BharatPe, But Questions Linger

Of course, any potential action taken by the MCA or the RBI is likely to worsen the situation for BharatPe, which has already paid fines in relation to financial irregularities and evasion of Goods & Services Tax.

As it looks to wade through the choppy waters, the fintech unicorn has appointed an executive from Alvarez & Marsal (A&M) as its chief financial officer (CFO) for the interim, with a search for a permanent CFO ongoing. While stating that everyone in the boardroom is aligned on BharatPe’s growth plan, Rajnish Kumar had also hinted at a BharatPe IPO within the next 18-24 months. He also stated that the boardroom will expand with new independent directors coming in the future.

However, one of the biggest unanswered questions is how Madhuri Jain Grover was named as the head of controls at a financial services company without any background in economics, accounting or finance. Jain Grover joined the company in 2018, as per her LinkedIn profile.

Her profile states that she earned an undergraduate degree from the National Institute Of Fashion Technology in Delhi and prior to BharatPe, she is said to have worked with several fashion labels such as Satya Paul. The profile does not indicate whether she had the credentials to lead the critical function of controls at BharatPe, a role which involves compliance with financial regulations.

As head of controls for BharatPe, Jain Grover was in charge of many of the compliance processes within the company. Sources within the company have alleged that she had an outsized influence on the operations due to her relationship with Ashneer Grover.

In fact, leaks from BharatPe’s internal review process alleged her involvement in a recruitment commission scam as well as payments to non-existing vendors. She then wrote to independent consultant Alavarez & Marsal questioning these leaks.

As per these leaks, several invoices to fake vendors were allegedly created by her brother Shwetank Jain, who is founder of tobacco brand Hash, which counts Ashneer Grover, and BharatPe CEO Suhail Sameer among its investors.

How much of this will be scrutinised by the Ministry Of Corporate Affairs or the RBI remains to be seen. The report does not state whether Jain Grover’s alleged actions will be investigated, but the MCA is said to be looking at the findings of the internal review.

Is The MCA Doing The Due Diligence That Investors Missed?

Sequoia Capital India, Coatue, Ribbit Capital and Beenext, Insight Partners, Steadview Capital are the venture capital firms that have backed the company over the past four years, while it has also raised venture debt from Alteria Capital, InnoVen Capital and Trifecta, besides having angels like Akshay Munjal, Kunal Shah, Amit Lakhotia, AngelList partner Utsav Somani and Nipun Mehra on its captable.

Interestingly Ashneer Grover had gotten into a heated argument with Sequoia’s Harshjit Sethi in August 2020 over delays from Sequoia Capital in committing to BharatPe’s Series B round. This had caused a lot of back and forth between Grover and Sethi. At one point, Grover suggested that Sequoia should exit the cap table due to its commitment-shy ways.

It’s noteworthy that Sequoia did not invest in Series B or Series C rounds for BharatPe, which took place between August 2020 and February 2021. But then it made a comeback as an investor in BharatPe’s mega $108 Mn Series D in February and $370 Mn Series E funding rounds in August 2021.

The question, of course, is did these array of investors overlook some of the issues that the MCA has raised now during their pre-investment due diligence process. And the very issues that the Ministry of Corporate Affairs is investigating now are the major concerns that had come up in relation to the lack of due diligence by some of the biggest investors in India.