Edtech firm Byju’s has faced a fresh jolt after the National Company Law Tribunal (NCLT) ordered an interim stay on its proposed rights issue. The order was passed on a petition filed by investors Peak XV Partners Operations LLC, MIH EdTech Investments (a subsidiary of Prosus NV), General Atlantic Singapore, and Sofina investors (Appellants) who had appealed to the NCLT alleging mismanagement within the company. As a result, Byju’s must now maintain status quo, which prevents it from proceeding with a second rights issue and requires all cash from the first rights issue to be kept ‘untouched’ in an escrow account.
The beleaguered edtech giant is grappling with working capital issues, struggling even to pay employee salaries. There are concerns about the potential struggle to keep other tuition centres operational, especially since the company shut down 30 out of its 292 centres this March.
This raises the question: how will Byju’s Founder Byju Raveendran keep the company running without any cash on hand?
The shareholder dispute
Talking to Business Today, Advocate Varun Bajaj, who is also the founder of RSD Bajaj Global Firm, says that when Byju’s raised this offer, the enterprise value was around $22 billion. However, the round in which it sought to raise $200 million in a rights issue its valuation had dipped to just $225 million, marking a discount of nearly 99%. This alarmed the investors, who invoked their anti-dilution rights, which protect against such a drastic devaluation.
Moreover, Byju’s decision to allocate 800,000 shares to Riju Raveendran ahead of the pivotal vote to increase its authorised share capital for the initial rights issue caused controversy.
When contacted by BT, Byju’s said the initial rights issue concluded successfully with an increase in authorised share capital and the allocation of shares to all participating shareholders. While the law allows the board to allocate unsubscribed shares in the company’s best interest, management opted to offer these shares to existing shareholders (including investors opposing the fund-raising rights issue), ensuring they have ample opportunity to invest in the company.
“Despite this show of good faith, the petitioning investors continue to make baseless accusations against the company and the management, seemingly aimed at frustrating the company’s second rights issue and harassing its founders. Our legal counsel has consistently assured the court that all directives from the previous order have been meticulously followed,” the company said, responding to an email from BT.
But the sudden slashing of valuation distressed investors. Bajaj says anti-dilution rights ensure that investors are protected against a decrease in the value of their investment due to subsequent rounds of financing at lower valuations. When an investor agrees to invest at a certain valuation, they expect the company’s value to either remain stable or increase in subsequent funding rounds. If the company later raises funds at a significantly lower valuation, it dilutes the value of existing shares, effectively reducing the investor’s stake and potentially their returns. In this case, investors are concerned that the proposed funding round at a much lower valuation could diminish the value of their earlier investments. They argue that such a steep discount contradicts the initial valuation pitch of $22 billion and could unfairly impact their ownership stake and overall investment returns.
This discrepancy prompted them to take legal action to protect their interests and uphold the integrity of their investment agreements.
But how will Byju’s keep the show running given the orders to maintain the status quo?
What next?
Bajaj says Byju’s can approach the National Company Law Appellate Tribunal (NCLAT) appeal against the stay. After that it can move the Supreme Court.
“They could go to NCLAT challenging this order, arguing that it could force them into involuntary bankruptcy by restricting the use of these funds. And the NCLT cannot intervene in commercial decisions, but in court, this could be their line of argument,” Bajaj says.
According to K. Ganesh, a serial entrepreneur and founder of GrowthStory.in, one of the leading venture builder platforms, Byju’s good assets like US-based Epic, Great Learning, and Aakash Educational Services Ltd could come to its aid.
At present, Byju Raveendran and Think & Learn Pvt. Ltd together still have the largest shareholding in Aakash Educational Services Ltd. at 43%. “If Aakash goes for an IPO, that would be the biggest relief for Byju’s,” Ganesh adds.
However, Satish Meena, advisor at Datum Intell and co-founder of Sutradhar, thinks that the Aakash IPO won’t happen now. “Some part of Aakash is already divested, and given the legal battle the company is facing, they might lose Aakash as they need cash,” he emphasises.
Brand revival is still a question
Byju’s online business is not producing sufficient cash flow, as Meena points out that in the education sector, once the brand reputation suffers, recovery becomes exceedingly challenging.
“In the last three-four years, nobody came and said that if the company is not doing well, the product is good, the kids are benefiting from it, etc. If that were the case, they could still have generated revenue from it. However, there’s a noticeable absence of discussion about the product itself. Even in challenging market conditions, companies that have provided excellent products or services have often received praise, contrasting with those that went bankrupt,” Meena added.
With the core product facing challenges, Meena raises questions about the viability of their current business model. Ganesh also points out that previously, they bundled tablets with content. Whether students and parents will choose this option remains a critical question worth billions of dollars.
“Growing their valuation is another big concern they will have,” Ganesh pointed out.
Byju’s now requires a significant strategy shift to achieve product-market fit post-COVID. What succeeded during lockdown, when Byju’s reached its peak valuation and made historic deals, no longer aligns with current conditions due to increased competition and a damaged brand image. The demand for technology necessitates substantial funding, which Byju’s currently lacks.
Byju’s say that the court will now hear the matter on July 4, where it expects to further clarify and resolve these matters.
