A long protracted legal battle ahead for BharatPe and Ashneer Grover, lawyers say

Ashneer Grover

At precisely 12:04 am on Tuesday, March 2 - Ashneer Grover mailed in his resignation from BharatPe, declaring that he was stepping down from the position of board director and quitting as managing director.

Per the company, this came minutes after Grover received the discussion agenda of an upcoming board meeting, which included deliberation on the report submitted by PwC regarding his actions and the further course of action to be taken on the basis of that. On Tuesday evening, the company called for a board meeting that began at around 9 pm and continued well into midnight.

On Wednesday morning, BharatPe levelled serious charges of embezzlement against Grover and his family. The note also clarified emphatically that “Mr. Grover is no longer an employee, a founder, or a director of the company”. This, despite Grover maintaining that “he would continue to remain the single largest individual shareholder of the company with 9.5 percent equity”.

Did Grover resign to prevent a termination? And will that really change things for him?

Resignation vs Termination

According to reports, Grover’s shareholder agreement (SHA) mandates seeking prior consent of the board and majority investors before submitting resignation. The absence of the same will trigger a clawback, wherein the board reserves the right to buy back a founder's stake at a nominal value if any independent review establishes impropriety and insubordination on the part of the party.

In all, around 1.4 percent of Grover’s total equity can be taken back, per the agreement. For the rest of it, other legal action and recourse would have to be initiated. Add to that the serious allegations of financial fraud levelled against Grover, and this is where the whole resignation versus termination debate turns murky.

A corporate lawyer, who was a partner at one of the prominent legal firms associated with the case, said on condition of anonymity, “Voluntary resignation in case of fraud could be treated the same as a termination for cause if the employment agreement and the SHA cover such a scenario. Such a clause would mean the implications of termination and resignation in case of fraud or wilful misconduct or moral turpitude are the same.”

And while 1.4 percent of the 9.5 percent equity held by Grover might not make a significant difference overall, “siphoning of funds, as alleged by BharatPe, is a criminal offence which may involve tax evasion and hawala, which makes it not entirely a private matter, but rather necessitates prompt legal action,” noted Virag Gupta, an advocate at the Supreme Court.

But in order to take back more control in the form of equity from Grover, a long protracted battle awaits the company. Notably, “A selective buyback of one shareholder's shares in preference to others is very difficult to achieve under the law,” Gupta said.

Karthik Seshadri, a partner at law firm Iyer and Thomas, notes the troubles involved: “It will make for a complex legal battle. There's a lengthy procedure, the board has to have a lot of resolutions passed. So taking back those shares is very complex and won't happen easily.”

“BharatPe does seem to possess some concrete information in order to make such accusations but unless they are able to establish and get a decision against Grover stating that he has siphoned away company monies and thus is liable to pay it, and some judicial authority decides the same, you cannot go and attack somebody’s property, without even giving them a fair chance,” Seshadri explains.

Experts concur. “His overall shareholding remains with him. The only question is whether the investors have a call option on Grover’s shares in case of such an event. If the contract and the SHA mention the same, which they apparently do, the investors will have the right to exercise a call on his shares at fair market value (or at a discount). However, it is unlikely that they will call an event of default,” said one of them.

Contrary to the narrative of BharatPe and him being one and synonymous, something that Grover has been trying to push through for a long time, CA Manish Gupta pointed out that “being the managing director does not mean he has full control over the company. Above him are the board of directors and major stakeholders who function in a controlling capacity. The managing director is responsible for the day-to-day activities of a company, but he cannot take or make all decisions on his own, all the time”.