Crisis at Byju's: The recent battle between investors and Byju Raveendran can have profound implications for the troubled company

Even the most conservative observers will concede that the Byju’s saga has barely unfolded. The once-storied edtech unicorn has seen a dramatic drop in its valuation and has witnessed a very combative relationship between its promoters and investors. Plus, it is trying to address its precarious financial situation.

Things came to a head earlier this year when Byju’s, once valued at $22 billion, said it would raise $200 million through a rights issue. The company has said that the issue was oversubscribed, without disclosing details. It has been known for a while that the Bengaluru-headquartered entity has been looking to raise at least $1 billion. For the investors, if they did not participate in this issue, they could end up losing almost all their holdings in Byju’s.  
Faced with this situation, the investors called for an extraordinary general meeting (EGM) on February 23, where they voted to remove Founder & CEO Byju Raveendran and restructure the board, which has his wife and Co-founder Divya Gokulnath and brother Riju Ravindran. Raveendran has called this action illegal. This was followed by four investors—Prosus, Sofina, GA, and Peak XV, who hold around 25% stake together—filing an oppression and mismanagement suit against the promoters before the Bengaluru bench of the National Company Law Tribunal (NCLT). They have asked the tribunal to declare the promoters unfit to run the company, appoint a new board, declare the rights issue void, and conduct a forensic audit, among other reliefs. The bench has directed the firm to keep the proceeds of the issue in an escrow account till the disposal of the plea. Another issue is the failure of Byju’s to file detailed financial results for FY23 with the Ministry of Corporate Affairs.

Quite clearly, the announcement of the rights issue did not go down well with the edtech firm’s investors. “It [has been] implemented in a manner of arm-twisting the existing shareholders to subscribe. Investors get a Hobson’s choice, either to infuse funds or see their shareholding get significantly diluted,” says Shriram Subramanian, Founder and Managing Director of InGovern Research Services, a corporate governance advisory firm.

What’s not clear is why investors have expressed displeasure at this point. “They infused funds despite that and were well aware of the shortcomings of the company, be it the lack of financial discipline, mis-selling, questionable ethics, aggressive accounting, etc. Besides, the board members and investors knew that Byju’s did not have a full-time CFO, and the aggressive and expensive acquisitions also show bad capital allocation decisions,” Subramanian says. He adds that the edtech will need to raise funds “just to pay off liabilities and keep its operations going.”

Meanwhile, Raveendran has called the EGM illegal. According to Ashish Kumar, Managing Partner at Capstone Legal, everything will depend on what is outlined in the shareholders’ agreement and the articles of association (AoA) of the company. “The provisions can vary significantly if there are foreign investors, especially those who invested in the initial stage of the company. Also, the contents of the AoA are not publicly known in the case of Byju’s.”

On the possibility of the investors taking over Byju’s using the NCLT route, he says this is a drastic step and one that is difficult to execute in the Indian business landscape. “Besides, there is no regulator in place for the edtech sector to specifically say if something has gone wrong. The company law then becomes the only way to move on the issue, and it could take a lot of time to reach a conclusion,” adds Kumar. “It will be a hard-fought, long-drawn battle in the NCLT and the courts,” says Subramanian.

What’s clear is that Byju’s has a very tall mountain to climb.  
     
@krishnagopalan