TREACHEROUS TIDES

The recent controversy surrounding Bharatpe, Zilingo, GoMechanic and 4B Networks has highlighted the demand for strong corporate governance in Indian start-ups

One of Warren Buffett’s most famous quotes is: “Only when the tide goes out do you learn who has been swimming naked.” Well, the tide is receding in the Indian start-up world.

With funding dropping to a trickle from the deluge of 2021, and investors growing cautious in H2 2022, many high-growth domestic start-ups such as BharatPe, Zilingo, Infra. Market, GoMechanic and Trell have found themselves at the centre of corporate governance issues and forensic audits.

This has led to concerns around the ‘growth at all costs’ mentality in the Indian start-up ecosystem, the third largest in the world. To be sure, the recent issues at start-ups are a global phenomenon.

Global crypto exchange FTX faced scrutiny over allegations of insider trading, leading to the arrest of its founder. The Cambridge Analytica scandal exposed the mishandling of personal data. Theranos’ governance lapses involved a dominant founder-CEO, misrepresentation of capabilities, and a lack of transparency, leading to legal consequences and loss of trust.

Similarly, Wirecard’s fraud case highlighted the weaknesses in internal controls and external audit oversight, and collusion between executives and external parties.

This is not a new phenomenon. Across cycles, frauds have usually been unearthed right after a period of market boom.

After the dot-com bust of 2001 too, several companies were found to use aggressive accounting practices or indulge in outright fraud.

Similarly, after the infrastructure boom between 2003 and 2007, several infrastructure companies in the listed and unlisted space ran into trouble with government agencies, banks, shareholders and other stakeholders.