How to spot another Gensol? Zerodha’s step-by-step guide on red flags in corporate governance

Gensol scam: The Securities and Exchange Board of India (SEBI)'s latest crackdown against Gensol Engineering has sparked a heated debate over the existing red flags in corporate governance. In a sharp warning to retail investors, discount brokerage Zerodha, in its latest post, has provided a list of methods to spot red flags in corporate governance and potentially notice another ‘Gensol’, to avoid any unnecessary lapses in the securities market.

On Tuesday, April 16, SEBI, in its order against Gensol Engineering, barred promoter brothers Anmol Singh Jaggi and Puneet Singh Jaggi from directorships in listed companies, stopped the company's planned stock split action, and named a forensic auditor to investigate the matter further.

Zerodha's Varsity took to microblogging platform ‘X’ (formerly Twitter) and said in a post, “SEBI’s debarment of Gensol and its promoters from the securities market has resurfaced the discussion on corporate governance.”

Varsity is an extensive and in-depth collection of stock market and financial lessons authored and created by Karthik Rangappa, Zerodha's chief of education. Varsity is freely accessible and one of the largest online financial education resources. Amid the reignited discussion on corporate governance after SEBI's actions against Gensol, Zerodha said retail investors can spot ‘red flags’ in corporate governance by noticing some key monitorable:
 

How to spot another Gensol? Zerodha's 5-step guide:

1.'Opinion' in Auditor's Report

When studying a listed firm, check for the "Independent Auditor's Report" in its annual report. The first section of the Auditor's Report is titled “Opinion” or “Unqualified Opinion.” It is a red flag if titled anything else." According to Varsity, a few other ways to spot red flags in corporate governance are:

-Qualified Opinion: Lack of complete information
-Disclaimer of Opinion: Lack of information and unreliable financials
-Adverse Opinion: The auditor outright disagrees with the financials provided by the firm.

According to Varsity, a company with an ‘Opinion’ or ‘Unqualified Opinion’ is not necessarily clean in its corporate governance. It only means that the auditor has not found any issue with the financials. Gensol’s financials seem clear. But corporate governance runs beyond just financials.

2.Annual corporate governance report

The corporate governance report must be detailed. All listed companies submit a comprehensive corporate governance report annually. It details the board members' age, experience, and remuneration and outlines the board's procedures. “The more details a corporate governance report has, the better it is.”

3.Reservation of profit, board seats

According to Zerodha, all companies are also required to:
- Reserve a portion of their board seats for female and independent members.
- Spend a portion of their profits on corporate social responsibility (CSR)
- Report the percentage of male-female employees
- Report the remuneration of board members and key managerial personnel.
 

4.High pledge by promoters

Gensol’s promoters, Anmol Jaggi and Puneet Jaggi, were not drawing any salary. However, nearly 75 per cent of their stake in Gensol was pledged. "It is a common tax-saving practice not to draw a salary and borrow against shares. Such a high pledge on promoter shares is also a red flag," said Varsity.
 

5.Unclear corporate Actions

Some firms might operate within the law, but their actions might show some red flags.
-Announcing buybacks when the share price is well below its peak.

-Paying dividends despite reporting losses or paying dividends by adding debt because a parent entity needs funds.

-Convoluted holding structure: Parent A holds 50 per cent in B. A and B together own 50 per cent of C. C has used some funds to buy shares in B. "Such a structure is legitimate but confusing. It can also be used to manipulate the stock price or funnel funds. Gensol is a case in point," said Zerodha.

-Related-party transactions are commonly used to embezzle funds. Loans given to related parties are an easy red flag. Loan guarantees for related parties are liabilities but not reported on the balance sheet. Nearly 13 per cent of Gensol’s revenues came from related parties.

"Despite the checks, if you miss spotting red flags, perhaps the firm has forged documents, issued misstatements, falsified sales/profit numbers, evaded taxes, and/or used company funds for personal or family affairs - issues usually detected only in an investigation," said Zerodha's Varsity in its step-by-step guide on how to spot red flags in corporate governance.

SEBI's crackdown against Gensol Engineering

SEBI'S order, which came after it investigated a complaint received in June 2024, pointed to serious governance lapses, fund diversion, and falsified document submissions. The complaint alleged share price manipulation and misappropriation of company funds. The probe unearthed what it described as a "complete breakdown" of internal controls and corporate governance.

“The promoters were running a listed public company as if it were a proprietary firm,” said SEBI whole-time member Ashwani Bhatia in the order. “Company funds were routed to related parties and used for unrelated expenses—as if the company’s funds were the promoters’ piggy bank.”

This is an interim order by SEBI while the capital markets regulator conducts a full investigation, and the promoters are at liberty to challenge it. Still, the SEBI directive comes as yet another setback for the solar energy solutions provider that is already facing downgraded debt and seized promoter shares.