When Startups Lose Trust

THE TAKE 

Governance Gaps And Tax Scrutiny Are Catching Up With India’s Startup Hype

Another startup imploded last week.

This time, it was BluSmart, a Delhi-based electric cab company that abruptly suspended operations — grounding some 8,500 cars, leaving thousands of drivers in the lurch, and freezing customer funds parked in the company’s app.

Allegations of fraud and financial mismanagement are flying thick and fast, with the spotlight on Gensol, a publicly listed company run by the same promoter brothers. 

Reports allege that hundreds of crores were diverted, including towards a Rs 43 crore apartment for their mother, investments in other startups, and even a fancy golf kit.

BluSmart, the consumer-facing fleet, operates primarily in Delhi. Gensol, by contrast, is largely a B2B solar engineering and construction player. But Gensol bought the cars and leased them to BluSmart, so the links were strong.

A new owner might materialise but  will have to reckon with a more fundamental question: whether the cab aggregator business model based on electric vehicles can work, even with subsidies and investors still betting on mobility and electric vehicles as a path to sustainability and climate tech.

The BluSmart–Gensol promoters’ shenanigans will be discussed for some time to come, with perhaps more time than necessary spent on the objects of their affection, so to speak.

Because nothing attracts attention or kicks off a dinner party conversation like a Rs 26 lakh golf set — which surely puts wealth, and the leisure time potentially devoted to spending that wealth, in perspective. Not to forget the company funds that were inappropriately used to buy them, of course.

When Compliance Turns To Scrutiny

The BluSmart fiasco erupted in the same week as another troubling story came to light. This also involves some startup companies which received notices from the Income Tax Department in recent months asking them to explain funds deposited in their accounts over the last five years.

The investments in this case appeared to have come from Singapore, and the section quoted was Section 68 of the Income Tax Act—a fairly blanket rule that allows the tax authorities to question unexplained credits in a taxpayer’s books.

The notices currently issued require companies to establish the source and identity of the foreign investor, their creditworthiness, and the genuineness of the transaction.

The approach and treatment are very similar to the angel tax, where the Income Tax Department questioned the premium an investor may have paid to acquire shares in a certain company, and then proceeded to treat that investment as income.

Thus making the company in question liable to pay 30% tax on that figure.

In this case, the sweep is broader, because it is not just the value that is being questioned, but whether the funds that came in were investments to begin with.

The Income Tax Department has also sought, in some of these cases, details of the investors and their financial backgrounds. The details asked for are such that they are quite challenging for companies or individuals to share — particularly across borders.

The Income Tax notices clearly follow some method, even amid all the madness.

 “When information about a taxpayer’s foreign accounts or investments received through treaty partners doesn’t reconcile with their income-tax returns, it triggers automated scrutiny,” an official told Business Standard.

“In particular, transactions are being scrutinised under the Principal Purpose Test, an anti-abuse provision included in bilateral tax treaties, to assess whether the primary intent of routing funds through Singapore was to unlawfully claim treaty benefits or avoid taxes,” the source said.

Going by past instances, it is quite likely that some investments into Indian companies were established as round-tripping, or funds sent overseas illegally and then routed back. Or perhaps the bona fides of the investors were found suspect, at least in the eyes of Indian regulators.

I now go back to Trade Minister Piyush Goyal’s comments two weeks ago, admonishing Indian startups for pouring their engineering genius into delivering Chinese fried rice in record time, while their Chinese counterparts were setting records with AI breakthroughs like DeepSeek.

The country’s startup ecosystem pounced on Goyal and pointed out how difficult it was to do business in India. Other leading voices spoke of the many challenges in running a business in the country, whether in domestic or export markets.

The Illusion of Tech Triumphs

It was also argued that delivery boy jobs are still jobs in a country that continues to struggle with generating enough employment for its massive youth workforce.

And that raising billions of dollars to build an app and the attendant logistics infrastructure that can get you a shampoo in 10 minutes was as close to genius as the system would allow.

An earlier edition of The Take has already dwelt on this and argued that this is a flawed construct.

No one stops you from delivering a can of soda in 10 minutes and creating wealth for yourself in the process but one can surely ask — as Goyal did — if that is the pinnacle of technological achievement for a country with as much talent as India.

The Take also pointed out that we tend to overlook how India launches the cheapest satellites in the world and uses AI to drill for oil — carried out by engineers paid a fraction of what their food delivery coding counterparts earn.

And then there are, of course, other startups working in core technology areas ranging from AI to space tech but the comments were triggered by the most visible examples and quite likely where the maximum capital investment and drain is happening.

Bottomline is the BluSmart episode does not help the startup ecosystem case of being different and deserving better treatment.

To return to regulation, the larger problem lies in our inability to accept that we are trapped in a perpetual mating dance between the regulators and the regulated, small and large.

Unfortunately, this is not going to change, however much we hope to.

Rashesh Shah, founder of multi-asset finance company Edelweiss, told me in an interview just last week that he wouldn’t start a bank even if offered a licence—because the sector is simply too regulated.

And margins are dwindling too.

According to him, regulation in banking and finance has only tightened since 2018, when the IL&FS crisis broke out—a collapse that saw the public sector-backed NBFC default on massive loans.

The people who draft and enforce regulations like Section 68, which we discussed earlier, are not unlike us, at least until the point where we diverge into private or government jobs.

And now, they inhabit a world where the boundaries between honesty and dishonesty have blurred beyond easy recognition.

Everyone, including a salivating media, revered startups to the point where they seemed to operate outside the usual confines of business — in a rarefied atmosphere where there were few rules and no gravity.

Until Byju’s—the biggest of them all at the time—self-detonated amidst a string of governance scandals that now serve as case studies in themselves.

Caught In A Loop Of Reform And Repetition

Byju’s and BluSmart are not the only examples.

There have been several other governance failures, including Paytm—another once-revered icon—where the Reserve Bank of India imposed curbs on the unlisted Paytm Payments Bank Ltd. after years of warnings about data flows between it and Paytm, the listed entity that trades as One97 Communications Ltd.

So yes, we would all like the Income Tax Department to go easy on companies. 

We would all like them to focus on making it easier to do business.

But easier to do business for what?

If it turns out that many, notably large companies, neither follow the law in letter nor spirit — and perhaps never intended to — then what exactly is a taxman supposed to do?

Particularly since the most revered corner of the economy — the startups — are increasingly turning out to operate with the same moral compass as companies and promoters who came before them.

This is not to suggest that every company should be sent show cause notices, or that the honest should suffer for the misdemeanours of the dishonest few. 

But the law in India is wired to think that way.

The more we change it, the more it stays the same. We may drop certain provisions in the name of reform, only to reinstate new ones, citing how some promoter or company pulled a fast one and cheated the exchequer of crores.

I’ve sat through many discussions where tax officials have quoted gory examples of loot and pillage to justify a new section or guideline.

Can this change?

I’d like to say yes, but it’s extremely unlikely—at least in my lifetime.

The latest attempt to simplify and introduce a new Income Tax Bill, 2025, has already been dismissed by experts as little more than a renumbering exercise. 

Work is still underway, longer than what was earlier hoped and suggestions are currently being invited by a parliamentary panel examining the draft.

We have to live with more complex regulations than in most other places. That doesn’t mean we can’t build businesses or succeed—it just takes more effort and greater determination.

And we have to keep pushing for fewer rules and lighter implementation of those already in place.

We cannot give up that fight. But we must also accept that the mating dance between the regulator and the regulated will continue.

The Rs 43 crore flat reminded me of Deewar, the iconic Bollywood film where two brothers — one a policeman, the other a criminal — compete for their mother’s love.

In this case, of course, both brothers have likely turned out to be crooks. Possibly, they could have expressed their affection for their mother in some other way.

CORE NUMBER

Rs 8,500 crore

This is the total net inflow into Indian equities by FPIs during the week ending April 18, according to Financial Express. Despite a Rs 2,352 crore pullout on April 15, subsequent buying worth Rs 10,824 crore signalled a sharp rebound. Analysts attribute this reversal to a weakening US dollar and India’s relatively strong 6% growth outlook amid global trade tensions. Still, FPIs have withdrawn Rs 23,103 crore so far in April, taking the total outflow since January to Rs 1.4 lakh crore, reflecting the cautious sentiment around US tariff shocks and global economic uncertainty.

—✖️ No Production At Gensol! Markets regulator, the Securities and Exchange Board of India  (SEBI), found no evidence of manufacturing activity at Gensol Engineering’s electric vehicle (EV) plant in Pune. A National Stock Exchange (NSE) official visited the site after SEBI’s recent order to bar Gensol from the securities market, as the regulator found Gensol guilty of misappropriating public funds. This comes after a recent SEBI probe found that Gensol’s founders used funds meant for EV production for their personal use. 

—☎️ MTNL’s Debt Mounts. State-owned telecom operator Mahanagar Telephone Nigam Limited (MTNL) announced on Saturday that it has defaulted on loan repayments of Rs 8,300 crore to multiple banks, including Union Bank of India, Bank of India and Punjab National Bank. The Economic Times reported that in total, MTNL owes Rs 33,568 crore to banks and to state governments. MTNL’s troubles come at a time when the operator is dealing with declining revenues, a shrinking subscriber base, and intense competition from private telecom players.

— 🖥️ Low Growth for India’s IT Sector. ​India's leading IT firms — TCS, Infosys, and Wipro — reported disappointing Q4 FY25 results. TCS's net profit declined by 1.7% to Rs 12,224 crore, while Infosys's net profit fell by 11.7% to Rs 7,033 crore. These results highlight the challenges faced by India's $283 billion IT sector, as clients delay discretionary spending and adopt a cautious approach to new projects. Analysts project muted revenue growth for FY26, with potential impacts from global economic factors and US trade policies.

—📦 DHL Suspends Big Shipments. Logistics firm DHL has temporarily suspended global shipments above $800 to individual US consumers, citing a surge in customs red tape triggered by Trump’s new tariff regime. Previously, goods below $2,500 could enter with minimal checks, but now shipments over $800 require formal entry — a process demanding detailed documentation, inspection, and longer clearance times. This unintended consequence has overwhelmed DHL’s systems. While low-value deliveries continue for now, a looming May 2 crackdown on China-linked shipments could further squeeze global e-commerce flows. 

👥 THE TEAM

✍️ Zinal Dedhia, Salman SH, Kudrat Wadhwa | ✂️ Rohini Chatterji | 🎧 Joshua Thomas