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Is Byju’s End Near? After Prosus Slams Byju’s, Shareholder’s Revolt, Corporate Governence Issues And Struggle for Stability, Will Byju’s Be Able To Pull Through?

The troubles at Byju’s began when several key investors, including Prosus, decided to quit the startup’s board.

In a scathing statement, Prosus expressed disappointment in the company’s reporting and governance practices, alleging that Byju’s had disregarded advice and recommendations despite repeated attempts by Prosus’ director to provide guidance. The development is significant, considering that Prosus has been one of the earliest backers of Byju’s and has never sold any of its shares in the company.

Byju's , Prosus

Adding to the concerns, global auditor Deloitte also resigned, citing a lack of communication from Byju’s regarding its financial statements for the year ended March 31, 2022. This raised questions about the company’s financial transparency and reporting practices, further eroding investor confidence.

Moreover, Byju’s aggressive global expansion strategy, which cost the company over $2.5 billion in recent years, has rattled some of its investors. As market conditions shifted, the startup had to postpone its listing plans, lay off thousands of employees, and seek ways to cut costs.

The rapid growth without adequate governance measures in place has put the company under scrutiny and raised concerns about its ability to sustain its operations.

Prosus’ scathing statement and subsequent resignation from the board have put Byju’s at a critical juncture. As a long-standing and committed supporter of Indian entrepreneurship, Prosus’s actions signal serious apprehensions about Byju’s future prospects.

“While the companies and sectors we work with in India and across the globe are high-growth and rapidly evolving, our stakeholders rightly expect that we hold ourselves and our investee companies to the highest standards of corporate governance and reporting,” it added in a written statement.

Byju’s Governance Concerns, Investors Express Discontent

Byju’s, is facing increasing scrutiny from its major investors, including Prosus and Peak XV Partners. Both investment firms resigned from the company’s board due to concerns over internal controls and governance issues.

Prosus, an early and steadfast backer of Byju’s since 2018, acknowledged the company’s considerable growth. However, it also pointed out that over time, Byju’s reporting and governance structures did not keep pace with the company’s scale.

Despite repeated efforts by Prosus’ Director to provide guidance, the executive leadership at Byju’s frequently disregarded advice concerning strategic, operational, legal, and corporate governance matters. Consequently, the Director decided to step down from the Board as it became clear that fulfilling fiduciary duties to the long-term interests of the company and its stakeholders was becoming increasingly challenging.

Though Prosus no longer has a representative on Byju’s Board, it still remains optimistic about the potential of the company in revolutionizing access to quality education in India and globally. As a shareholder, Prosus intends to assert its rights and collaborate with other shareholders and government authorities to safeguard the long-term interests of the company and its stakeholders.

In response to Prosus’ comments, a spokesperson from Byju’s acknowledged the investors’ observations and stated that definitive steps have been taken to improve corporate governance and financial reporting.
Meanwhile, investment firms Peak XV Partners and Prosus jointly resigned from Byju’s board due to concerns about the company’s internal controls.

Peak XV communicated to its limited partners about the planned markdown of its holding in Byju’s. The decision to mark down the investments reflects the investors’ lack of visibility into the company’s up-to-date audited financials and their inability to influence corrective measures.

This is the first time investors have publicly raised concerns about financial and corporate governance irregularities at Byju’s. The company has faced delays in filing its audited results for FY22 and has drawn inquiries from the Directorate of Enforcement and the Ministry of Corporate Affairs.
Besides, Byju’s has been engaged in a prolonged dispute with lenders over a substantial $1.2-billion term loan.

Peak XV further revealed that Ravishankar’s resignation from Byju’s board on June 6 was due to dissatisfaction with the company’s management, citing issues related to internal processes, governance, and audit.

“For several quarters, we and other investors have made continued efforts and sent numerous notices to the company’s management in an effort to obtain more accurate information, and to push the company to improve transparency, internal controls and governance processes. However, with ve with very limited shareholder rights in the company and the founder having the ability to retain control of the board of directors, we have been unable to drive changes that we believe were necessary…” the letter said.

The recent actions of Peak XV LP and Prosus, resigning from Byju’s board and expressing concerns about the company’s governance, follow closely after Byju’s and its lenders indicated their intention to reach an agreement on changes to the conditions of the company’s $1.2-billion term loan B. This agreement is expected to expedite the disbursal of the loan and put an end to the ongoing litigation between the two parties.

Despite stepping down from the board, Prosus remains optimistic about Byju’s potential and the role it plays in revolutionizing access to quality education. As a major shareholder, Prosus intends to assert its rights and collaborate with other shareholders and government authorities to safeguard the long-term interests of the company and its stakeholders.

In response to the concerns raised by Prosus and Peak XV, a spokesperson for Byju’s acknowledged the observations made by the valued investors and assured that definitive steps have been taken to enhance corporate governance and financial reporting.

Earlier, Deloitte resigned as Byju’s official auditor, citing delays in receiving the company’s financial statements for FY22. Following Deloitte’s departure, BDO (MSKA & Associates) was appointed as the statutory auditor for the next five years, starting from FY22.

Byju’s co-founder, Byju Raveendran, and Chief Financial Officer, Ajay Goel, assured investors that the audited financials for FY22 would be filed by September, while those for FY23 would be released by December this year. The delay in reporting financials had previously led to a considerable 18-month postponement before the FY21 financials were finally disclosed, showing a loss of Rs 4,588 crore on revenue of Rs 2,280 crore.

As Byju’s navigates these challenges and addresses governance concerns, its ability to meet investor expectations and regain trust will be critical in determining its future trajectory in the competitive edtech market.

The Star Fast Fading
The once confident and star founder, Byju Raveendran, found himself overwhelmed with emotion as crises engulfed his company, Byju’s. In late April, Indian officials conducted a surprise raid at the company’s Bengaluru offices, seizing laptops and publicly connecting the world’s most valuable education-technology startup to potential foreign exchange violations.

Meanwhile, in Dubai, Byju Raveendran, the firm’s founder and chief executive, was grappling with the fallout of the raid, sipping cups of black coffee and answering calls from concerned top investors.
The company had been planning to raise $1 billion in equity from Middle Eastern investors, but this fundraising effort was now in jeopardy. In the face of mounting challenges, Raveendran reportedly broke down in tears while passionately defending his company during these conversations with investors.

Byju’s had been in crisis mode for several months leading up to the raid. Apart from the financial crime-fighting agency’s actions, the company had failed to submit its financial accounts on time, which raised suspicions.

Also, some US-based investors accused Byju’s of concealing a significant amount of funds, leading to legal disputes. Raveendran and Byju’s firmly denied any wrongdoing, but the situation spotlight the challenges faced by Indian startups.

Limited domestic venture capital has led companies like Byju’s to seek support from international investors. However, the funding landscape changed drastically last year, with startup funding hitting a four-year low by the first half of 2023. As a result, companies have faced increased scrutiny over their corporate governance practices, hindering India’s aspirations to compete with tech capitals like the US and China.

“If the situation is not contained quickly and guardrails are not put in place at Byju’s, it will affect India’s image as an investment destination among overseas funds,” said Jacob Mathew, a chairman of investment banking at Incred Capital Ltd.

The Remarkable Journey
Raveendran’s remarkable journey from a private tutor to the helm of a $22 billion company captivated global investors, including prominent names like Sequoia Capital, Blackstone Inc., and Mark Zuckerberg’s foundation.

During the pandemic, Raveendran’s visionary strategies allowed Byju’s to dominate the majority of India’s ed-tech market.
However, as classrooms reopened, concerns about Byju’s financial situation started to tarnish the company’s reputation. Investors raised questions about Raveendran’s delay in appointing a chief financial officer and his rapid acquisition of over a dozen companies worldwide.

Also, the company experienced an exodus of employees, firings, and the resignation of board members, while many of its teaching centers faced declining attendance.

Supporters of Raveendran attribute these missteps to the passion and inexperience of an ambitious founder who expanded too rapidly. On the other hand, critics argue that he acted recklessly by withholding financial information and lacking rigorous accounting practices. In India’s startup ecosystem, Byju’s stands as a prominent example of a business that scaled rapidly during a booming economy without adequately preparing for potential challenges.

The Personal Journey
Raveendran’s journey had humble beginnings in a village in Kerala, where he attended a local school, often skipping classes to play football and independently pursue learning.
After a brief stint as an engineer, he started coaching students at a college in Bengaluru, where enrollment rapidly multiplied. His innovative teaching methods, including projecting lessons onto giant screens in sports stadiums, set him apart in India’s education landscape, where quality instructors were scarce.

Recognizing the potential of digital education, Raveendran founded Think and Learn Pvt Ltd., the parent company of Byju’s, in 2011, co-founding it with Divya Gokulnath, a biotech engineer and former student whom he later married.

By 2015, Raveendran had taken a bold step forward by digitizing his business and launching a self-learning app focused on subjects like math, science, and English for primary school students.

Byju’s journey from a small coaching center to a technology-driven education powerhouse is a testament to Raveendran’s vision and innovation. However, the company now faces critical challenges that demand careful planning and transparent governance practices to sustain its success and fulfill its mission of transforming education in India and beyond.

The Cracks
Cracks in Byju’s once formidable edifice became evident by the middle of 2022 as various problems started to surface. The SPAC (Special Purpose Acquisition Company) boom, which had contributed to the company’s growth, began to wane, and the demand for online tutoring declined.

Despite the challenging circumstances brought on by the COVID-19 pandemic, Raveendran’s approach to seeking more equity instead of focusing on cash conservation and profitability faced criticism from employees.

One significant setback occurred in July, when two key investors, Sumeru Ventures and Oxshott, failed to transfer approximately $250 million as part of an $800 million funding round due to “macroeconomic reasons.

” Raveendran’s failure to verify the investors’ financial capacity before announcing the deal was highlighted as a misstep.

Raveendran’s preference for conducting deals without consulting investment bankers was another area of concern for Byju’s employees. Instead, he relied heavily on Anita Kishore, the company’s chief strategy officer, to handle most transactions.

Meanwhile, Indian officials raised questions about Byju’s financial accounts for the fiscal year ending March 2021. The enforcement directorate, which investigates money laundering and forex violations, sent summons to company officials.
Although no charges were filed against Byju’s after the April raid, the Ministry of Corporate Affairs, India’s company regulator, was reportedly considering opening a formal probe.

Eighteen months after the end of the financial year, Byju’s eventually released its audited statements, revealing staggering losses of 45.7 billion rupees—an alarming 13-fold increase from the previous year. Byju’s attributed the poor performance to accounting practices that deferred revenue to subsequent years, while others pointed out an excessive surge in marketing spending.

Investors became increasingly concerned about the company’s financial health, prompting some creditors, including Blackstone, to offload their holdings. This presented distressed investors in the US with an opportunity to acquire the $1.2 billion loan at discounted rates.

The situation escalated as creditors demanded accelerated payments, citing breaches of terms, including a deadline for filing financial results for the year ending March 31, 2022. Byju’s lenders in the US accused the firm of concealing $500 million and alleged that it was in technical default over the loan due to the lack of regular financial updates.

In response, Byju’s took legal action, skipping a $40 million interest payment and filing a lawsuit in New York, accusing the lenders of “bad-faith negotiating.” The company argued that the debt contract prohibited certain investors, particularly those dealing in distressed debt, from acquiring stakes from lenders. This legal dispute further added to the company’s troubles, exacerbating its already precarious financial situation.

The Shareholders Revolt
As the turmoil surrounding Byju’s intensifies, a shareholder revolt has taken center stage. Three prominent investors, Peak XV, Prosus, and the Chan Zuckerberg Initiative, have recently resigned from the company’s board, signaling their deep concerns about the state of affairs.

Deloitte Haskins & Sells, the company’s auditor, has also stepped down, citing the questionable financial records of Byju’s.
Prosus, in a statement on July 25, expressed disappointment over the company’s reporting and governance structures, which they believe did not keep pace with the rapid growth of the company. This deficiency in corporate governance played a significant role in the resignation of their director from Byju’s board.

In response to the mounting challenges, Byju Raveendran and the newly appointed Chief Financial Officer, Ajay Goel, have taken action by bringing in an affiliate of accounting firm BDO to take charge of auditing. They aim to finalize the long-delayed financial accounts by the end of September.

In an effort to address the cash crunch, Raveendran is counting on a substantial $1 billion equity investment from backers in the Middle East, which is expected to materialize soon. He is also tapping into the support of some of his early backers in India to help navigate the financial challenges.

If the anticipated funds come through, Byju’s may have the opportunity to repay creditors and potentially buy out the disgruntled US-based investors, as indicated by insiders involved in the negotiations. However, the ongoing discussions remain confidential, making the situation highly speculative.
Meanwhile, Byju’s lenders have agreed to work on restructuring the $1.2 billion loan, with a deadline set for August 3.

Despite the recent rough patch, some investors still believe in Byju’s potential and point to its strong assets, including a vast customer base of 150 million users. While the firm’s valuation has taken a significant hit, dropping below $10 billion for most investors, optimists suggest that with good cash flows from certain businesses, value investors may step in with substantial investments to help stabilize the company’s future.
In the face of these challenges, Byju’s is at a critical juncture, where strategic decisions and financial support will determine the company’s path forward. As stakeholders and investors await developments, the future of India’s leading edtech giant hangs in the balance.

The Last Bit, The future of Byju’s, India’s most valuable startup, appears uncertain as it faces mounting challenges and growing scrutiny from key investors and auditors. The recent resignations from the board and the lack of audited financial statements have raised concerns about the company’s reporting and governance practices. Byju’s must take concrete steps to address these issues and restore investor confidence. As the situation unfolds, the company’s ability to sustain its operations and regain trust will be crucial in determining whether the end is indeed near for Byju’s.

 

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