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Corporate lawyers in India’s startup ecosystem see innumerable kinds of “founder-issues” before the Series C stage of a venture’s fund-raising. Discord among founders, a founder’s inability to lead as the company scales rapidly, or boorish and nasty behaviour of founder(s). No surprises there.

What makes the fracas inside BharatPe a different beast are two reasons.

One, it has a 49 percent stake in Unity Small Finance Bank, which will call for a different order of accountability and transparency in a sector regulated by the Reserve Bank of India.

So, its books of account and management need to be clean. If that isn’t the case, the BharatPe Board headed by Rajnish Kumar needs to ensure a clean-up happens.

Two, the founder issues at BharatPe simply aren’t the kind lawyers in India are used to seeing in a company at the Series E stage! It raised $370 million in a Series E round less than six months ago!

There is the tiny matter that the round was led by Tiger Global, which has been instrumental in nudging management overhauls in its companies like The Viral Fever — even Flipkart.

Since January 19, Co-founder and Managing Director Ashneer Grover has gone on a leave of absence. And, there is discord between him and the BharatPe Board in a very public and open spat.

If the fintech company has to raise another round in future, its management will need to be different. The Board needs to be in charge, even as investors keep up appearances that they haven’t recast the management.

Currently, Sequoia leads the cap table with a 19.6 percent stake, followed by Coatue’s 12.4 percent stake. Founders Ashneer and Shashvat Nakrani have 9.5 percent and 7.8 stake of Resilient Innovations, which runs BharatPe.

“Even if investors sense a problem, they don’t have the time to keep a close eye on operations, where they can impose ethical conduct,” says a corporate lawyer, who requested anonymity.

“At the same time, they can’t be seen to engineer a management overhaul,” he adds. “That’s the job of the Board.”

BharatPe’s pivotal change

But if there is a key moment in BharatPe’s eventful year, it is the extraordinary general meeting that took place on August 20, 2021.

In a significant move, founders Ashneer and Shashvat brought Suhail Sameer onto the Board of BharatPe.

This moment assumes significance because Suhail would drive operations, as Chief Executive Officer (CEO) of BharatPe, which would involve hiring more than 10 CXOs in consultation with the founders.

Over a period of 12 months, the founders were convinced about his operational chops, and they brought him onto the board of directors in August 2021.

But also, on the BharatPe Board, if the two founders don’t see eye to eye on a matter, the board of directors can take Suhail’s call, which theoretically is dictated by his managerial experience.

This is a huge factor for investors to ensure the proper functioning of a Board is driven by founders’ passion and a non-founder CEO, while coming across as being non-interfering.

“As companies grow, and reach BharatPe levels, founders have delivered on their promise of building a company,” says another corporate lawyer, requesting anonymity.

“And because they have delivered on their promise, they tend to negotiate individual rights for themselves. That way, remaining founder(s) and investors can’t gang up and fire a founder,” he explains.

In most large tech startups, Boards have to deal with the behaviour issues of founders, he adds. It can be nasty, brash and arrogant behaviour — the very qualities that seemed OK while growing the company to a bigger scale.

When instances of behaviour issues go up, the Board has to discern between ’employment of a founder’ and his ‘position on the Board’.

“Here, the shareholder agreement becomes extremely nuanced in terms of the way it works,” says the first lawyer. “Very often, such a founder resigns from employment but continues to be on the Board of a company,” he adds.

In the case of Ashneer, he has established his machismo so far.

In early January, a leaked audio file went viral on social media, featuring the voices of a man and a woman who are swearing at and threatening a bank employee, for his failure to help secure financing for participation in the IPO of FSN E-Commerce Ventures, which owns and operates beauty commerce company Nykaa.

The voices allegedly belong to Ashneer and his wife Madhu Grover.

On Twitter, Ashneer claimed that the audio clip was “fake” and that a ‘scamster’ was trying to extort $240,0000 in Bitcoins from the couple, leaking the audio clip as they refused to buckle. This tweet was later deleted by Ashneer.

To make matters complicated, a 12-point legal notice dated October 30, 2021 surfaced. The legal notice was sent by the Grover couple on email to Uday Kotak, Managing Director and CEO of Kotak Mahindra Bank, Oisharya Das, CEO of Kotak Wealth Management, Shanti Ekambaram, Group PResident of Consumer Banking at Kotak Mahindra Bank and KVS Manian, Whole Time Director – Corporate, Institutional and INvestment Banking and Wealth Management at Kotak Mahindra Bank. The legal notice was signed by boutique law firm Regstreet Law Advisors’ founder, Sumit Agrawal.

The legal notice stated that the Grover couple was keen to avail IPO financing to the tune of Rs 250 crore each, which was denied at the eleventh hour by the bank.

On January 9, Kotak Group placed on record its objections to the ‘inappropriate language’ used by Ashneer against an employee. In its statement, the Kotak Group said that ‘appropriate legal action was being pursued.’

Following this episode, Ashneer on January 19 informed the Board at BharatPe of his decision to take a voluntary leave-of-absence from the company till end of March.

His brashness on Shark Tank India and in an explosive interview to Moneycontrol.com (published on February 4, 2021) have established instances of nasty behaviour.

BharatPe’s response to the Moneycontrol interview on Friday: “We are deeply pained that the integrity of the BharatPe Board or individual Board members is being questioned time and again through misrepresented facts and baseless allegations.”

But, matters assume different proportions if a large and fast-growing startup’s Board has to deal with allegations of fraud or misappropriation of funds linked to a founder.

If the Board, which has initiated an internal audit review in late January, establishes instances of fraud, Ashneer can’t seek refuge in the shareholders agreement.

“From a general principles perspective, one will have to look at the agreement in detail now, and how it interplays with the law. But the law ultimately prevails over what the agreement says,” says the second corporate lawyer.

For now, Ashneer is Managing Director of BharatPe. And CEO Suhail Sameer has the backing of Co-founder Shashvat.

That leaves two things on paper: what the BharatPe Board does about the findings of the internal audit. And then, every director will cast their vote.