Why the Arrest of Stayzilla Co-Founder Vasupal Should Worry Us All

Yogendra Vasupal, CEO of Stayzilla was held on Tuesday over charges of defrauding an ad agency of Rs 1.72 crore.

Yogendra Vasupal, CEO of Stayzilla. (Photo Courtesy: OfficeChai/ Altered by The Quint)

Arun Jain, the ex-chairman of Polaris Software – where I was the Group CFO at a certain point in my career – was arrested in Indonesia in 2002, during a meeting to resolve what appeared to be a business misunderstanding.

He was a well-respected entrepreneur in the fledgling IT sector of the time and the enormity of the event sent shockwaves through the Indian industry. It also exposed the weakness in the contracting abilities of young IT companies and the twin questions of credit and fraud/corruption risk within the larger country risk basket.

Having worked in Jakarta on the board of a major US MNC in the mid-nineties, I was fully aware of the perils of "managing the environment," in the context of strict US laws and the realities on the ground in Indonesia. However, I had the luxury of asserting, rather proudly, to my multi-national colleagues on the board, that "such things do not happen in India".

The reference was to corporate leaders being arrested on trumped up charges by the police, conveniently crossing the line between civil and criminal cases in genuine business disputes and personal use of the state enforcement bodies to settle arguments – in a blatant violation of the law.

Regrettably, it now seems as though unscrupulous people in India are using such tactics, with alarming regularity, to settle business disputes of various hues. Without having the benefit of knowing either party in the Stayzilla row, and thus having the benefit of objectivity, Yogendra Vasupal’s desperation in his blog for justice reflects a depressing state of governance even in India’s most progressive cities of Bengaluru and Chennai.

Also Read: After Stayzilla CEO’s Arrest, Chennai Police Search for Co-Founder

(Photo Courtesy: Stayzilla)

Stayzilla Saga Raises Some Serious Questions

However, what constitutes prima facie evidence remains purely a matter of opinion of the investigating officer. How he decides when the fine line between genuine business failure and fraud is crossed is a moot point and an Achilles heel in our criminal justice system. Basic legal factors, like the lifting of the corporate veil, and arresting the founder of the company for dues of the corporate entity, were not even in the vicinity of consideration.

A mere complaint without substantive, legally tenable proof, would seem enough to arrest any individual for allegations of fraud or any perceived threat. The alacrity with which Yogendra Vasupal was then remanded to judicial custody after the magistrate heard the case late at night, and whisked away to an unknown destination thereafter, reflects a treatment generally reserved only for terrorists or hardened criminals.

Also Read: Stayzilla CEO Arrested; Black Magic Dolls Sent to Threaten Staff

I must clarify though that advertising agencies like Jigsaw operate on the economics of trust – as applicable to any agent – and the business model is essentially one of a pass-through of the client’s payments to the media house after deduction of the agreed margins, which are miniscule.

Hence, when a client like Stayzilla defaults, the advertising agency is taken to the cleaners. As an advisor to some start-ups, this is why I insist, with the benefit of experience, on tempering the exuberance by necessarily building credit risk management processes into any such extended credit arrangements, accompanied by tightly written contracts.

But, given the agency business model, it is perhaps grossly unethical for any client to withhold the entire payment due to poor services as the “services” component constitutes only the small agency media commission of between 2 percent and 4 percent.

Legislative, Administrative Changes the Need of the Hour

I am sure Vasupal will finally be released when the courts intervene, or if he succumbs to the pressure of the situation created to extract his compliance. But the larger issue is of the personal accountability of the concerned enforcement officers. Can a case of criminal intimidation be brought on them? Perhaps not.

And therein lies the bane in our existing system, due to which India in 2017 is progressing the Indonesian way of the mid-nineties with respect to this fundamental aspect of governance. If not addressed urgently, this exploitation of the systemic loophole may well become the norm. PM Modi is the most decisive leader we have ever had and his ever political goodwill is enormous.

He has shown determination and speed in dismantling many entrenched structures in the interest of the common man. I hope it would not be outside the realms of the possibility to expect, in the interest of the mute ordinary citizen, some legislative and administrative changes in breaking this stranglehold which some errant officials exercise over our basic freedom and constitutional rights.

In the interest of the nation, that would be the best outcome to emanate from this chilling episode.

(Prabal Basu Roy is a Sloan Fellow from the London Business School and a Chartered Accountant. The writer presently manages a PE fund and has formerly been a Director and Group CFO in various companies. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)