GoMechanic Under The Inquiry Mechanism: A Narrative Of Indian Start-Ups And Their Financial Irregularities.
Many of the start-ups like GoMechanic are struggling to get funding and have recently had to lay off employees. Even though, this does not negate the importance of harboring adequate corporate governance norms.
The National Company Law Tribunal (NCLT) issued a notice last week to after-sales service firm GoMechanic about an insolvency petition filed against it. The matter was heard on February 15 and was filed by an operating creditor, Digirovers Solutions Pvt Ltd. It will be heard again on February 27, when the company must provide its response.
The registrar of companies (RoC) has asked for an audit of GoMechanic’s holding entity, Targetone Innovations Pvt Ltd, following claims of irregularities and corporate governance concerns at the firm. According to the sources, Section 264(4) of the Companies Act allows the RoC to launch a probe into the actions of a business when mandated by the Ministry of Corporate Affairs.
After one of the co-founder’s disclosures, the RoC began reviewing their papers. Some financial irregularities and corporate governance concerns necessitate an in-depth probe. As a result, a recommendation to initiate a probe has been made to the ministry, according to a person familiar with the situation. After the order is issued, the RoC has the authority to call the organization’s board of directors and even visit the premises while exploring the company’s actions.
GoMechanic CEO Amit Bhasin accepted financial reporting irregularities at the firm in January and said that the cash-strapped company will lay off nearly 70% of its workers while having its books reviewed by a third party. The company’s passion for surviving the inherent challenges of this sector and manage capital got the best of it, and that led to grave errors in judgment as the business aimed for growth at all costs, particularly in financial reporting, which the firm deeply regretted, Bhasin said in a LinkedIn post.
A brief about the company and the minds behind it.
Amit Bhasin established GoMechanic in 2016 with Kushal Karwa, Nitin Rana, and Rishabh Karwa as an automotive repair business, connecting car owners with repair service providers in their neighborhood. On its website, the company also sells vehicle replacement parts and accessories.
Sequoia Capital, Tiger Global, Orios Venture Partners, and Chiratae Ventures are among the startup’s investors. Tiger Global, Sequoia Capital India, and others contributed $42 million in Series-C capital to the firm in June 2021.
The startup was previously reported to be in discussions to raise $75-80 million in a capital round headed by SoftBank and Malaysian sovereign fund Khazanah Nasional, but the arrangement was called off owing to suspected accounting issues.
This is an appropriate situation for the investors to initiate a class action lawsuit. But, they have made no moves thus except for one of them performing a forensic audit, according to the official. A class action lawsuit permits a group of claimants with a shared grievance against a firm to sue it.
According to some sources, proper research for prospective GoMechanic investors discovered that the company’s income was exaggerated. According to the report, approximately 60 of the more than 1,000 GoMechanic service centres might well have violated accounting rules to heighten revenues and divert funds, according to people familiar with the information who asked not to be identified because they were discussing sensitive information.
Some apparent faults in the accounting record book of GoMechanic.
A fat paycheck to the founders.
A deep dig into GoMechanic’s books of accounts indicates that the founders received a hefty paycheck in the form of incentives in addition to their normal compensation. For the fiscal year 2021-22, the four co-founders of GoMechanic, Amit Bhasin, Nitin Rana, and the Karwa brothers — Kushal and Rishabh — received about INR9 crore in salaries, reimbursements, and incentives.
During 2021-22, four co-founders received pay of INR77 lakh each and reimbursements of INR1-INR2 lakh each. In addition to compensation and reimbursement, Nitin Rana and Rishabh Karwa received bonuses of INR2.9 crore and INR2.7 crore, respectively. The reason for the incentive payout was not mentioned in the company’s annual report. The scale of the dividend for a corporation struggling financially and forced to lay off 70% of its workers raised a warning signal.
Furthermore, the corporation provided a corporate guarantee for a debt obtained by an unconnected entity. According to the company’s annual report submitted to the Registrar of Companies (RoC), GoMechanic achieved a total income of roughly INR97 crore for 2021-22, more than doubling from INR47.22 crore in the last year and more than 5x growth in four years from 2018-19.
The company’s topline increase, nevertheless, came at the cost of growing losses. According to RoC records, GoMechanic’s net loss has increased 23 times in the last four years, from INR4.8 crore in 2018-19 to a staggering INR114.2 crore in 2021-22.
Who is the related party?
During the fiscal year 2020-21, GoMechanic granted a corporate guarantee in favor of a vendor entitled Parcit Autocrazy Private Ltd for an INR5 crore credit facility from Kotak Mahindra Bank. Parcit Autocrazy, situated in Delhi, manufactures vehicle accessories under the brand GoMechanic. The firm was founded in 2019 and has a revenue of roughly INR65 crore, with a net profit of INR76 lakh in 2020-21. Parcit Autocrazy has independent directors and equal stockholders, Ramesh Kumar and Abhishek Rana, connected to Nitin Rana.
A closer look at the firm reveals that it is listed at the home address of Nitin Rana, one of the co-founders of GoMechanic. Parcit Autocrazy’s registered address is the same as Nitin Rana’s registered address with RoC. Parcit Autocrazy’s registered e-mail address is also Nitin Rana’s. Yet, Parcit Autocrazy has not been listed as a linked party in GoMechanic’s books of accounts. Stride Ventures is another investor in both firms. Stride Investments has invested roughly INR100 crore in Parcit Autocrazy in two tranches between November 2022 and November 2023.
Advances and Advances.
A deeper examination of GoMechanic’s books of accounts indicates that the firm has made significant advancements to its vendors and workshops. Advances to vendors were at INR72.36 crore as of March 31, 2022, more than double the INR36.5 crore reported the previous year. Similarly, GoMechanic has made advancements to vehicle workshops totaling INR3 crore. According to the company’s annual report submitted with the RoC, a major portion of these improvements have become questionable.
Apart from advances to vendors and workshops, the corporation has reported the majority of its sales on credit. A substantial fraction of these sales have also grown suspect and have been overdue for a year or more. For example, trade receivables totaling INR2.7 crore have been classified as questionable and have been overdue for 2 to 3 years. Similarly, trade receivables of INR1.7 crore are questionable and are due in 1 to 2 years. Trade receivables of INR41 crore have been outstanding for more than six months but have yet to be recognized as questionable. In the previous year, the same category of trade receivables totaled INR 22.56 crore.
According to the due diligence, GoMechanic inflated revenues and misappropriated cash. However, the claims will not be proven correct or incorrect until the forensic audit is completed. Yet, large quantities of credit sales and advances to vendors that are difficult to recover raise a red signal that the corporation may have exaggerated revenues by classifying them as credit sales that are not recovered later on.
Furthermore, founders receiving large compensations when the firm faces challenges is not a positive sign for investors. Furthermore, the transactions between GoMechanic and Parcit Autocrazy should have been briefed as related-party transactions. Such non-disclosure creates suspicion about these transactions and calls them into question.
For the time being, it will be fascinating to await the outcome of the third-party audit, which might expose the dimensions to which the founders fudged GoMechanic’s financial structures.
The last call.
During the last several years, India’s startup economy has progressively climbed, as seen by over 100 unicorns. Many of these associations are struggling to get funding and have recently had to lay off employees. Even though this does not negate the importance of harboring adequate corporate governance norms.
Edited by Prakriti Arora