BYJU’S rights issue: a much-needed lifeline or an overplayed hand?

Speaking at the Manorama News Conclave in 2019, Byju Raveendran explained to a rapt audience how trust affects humans and makes them behave responsibly.

“When people give you so much freedom, you will never exploit that,” he stressed, before continuing, “When someone trusts you so blindly, you will think twice before you do anything wrong.”

He was, of course, referring to his parents and how growing up in a small village in Kerala shaped him. But many investors who put money into his now beleaguered edtech firm, BYJU'S, will likely find his speech amusing and, well, frustrating.   

They trusted him, gave him free rein, and—at least from their perspective—he didn't do the right thing. 

And they did give him a long rope. Since last July, BYJU’S encountered a series of challenges: the Davidson Kempner issue, resolved by Ranjan Pai’s intervention; escalation of the $1.2-billion term loan B dispute, leading to insolvency proceedings; bankruptcy filing by BYJU’S' American unit Alpha; government-initiated inspection of BYJU’S' accounts; SFIO probe for financial reporting and governance failures; and show cause notices from ED for FEMA violation, and the departure of CFO Ajay Goel after just six months. And this is not even the complete list.

So it's no wonder that their patience eventually ran out. Several venture capitalists, founders and edtech industry experts told YourStory on the condition of anonymity that the game of brinkmanship being played out in courts between the current BYJU’S management and its investors is a direct result of Raveendran’s manoeuvres, and it came to a head with the launch of the rights issue. 

These experts, founders, and VCs, who did not want to be identified due to the sensitive nature of the topic, claimed that the rights issue was not just about the money being raised but also about control of the edtech firm.

But in doing so, Raveendran had overplayed his hand. The investors—the industry experts alleged—realised that Raveendran was trying to pull a fast one on them, and they had no other option but to take him head-on and drag him to the courts. 

“He (Raveendran) was trying to shortchange the investors by offering the rights issue at a heavily discounted value, anticipating that they wouldn't participate,” said the founder of a venture capital fund. 

In January, BYJU’S floated a rights issue to raise $200 million through equity rights at an enterprise valuation of about $220 million, marking a 99% reduction from its peak valuation of $22 billion. Non-participating investors faced the risk of seeing their ownership diluted to nearly zero.

More importantly, if the investors didn’t participate in the rights issue, Raveendran’s grip on BYJU’S would have tightened. “The founders aim[ed] to take control of the company and potentially wipe out the investors,” said the venture capitalist quoted above, adding that this would have been “unacceptable” to them. 

The founder of a large, rival edtech firm that YourStory spoke to explained: “If Raveendran invests $40 million to $50 million now, and if other [major] investors refrain from contributing, he could potentially secure a [larger] stake in the company, significantly more than his current ownership.”

He said the investors understood these implications. “For example, Prosus has already invested over $500 million. Choosing not to contribute additional funds entails risking the loss of that investment. It presents a scenario where some may gain, while others face the prospect of losing everything. Why would investors agree to such terms?” 

Unlike many other investors, Prosus has not sold a single share of BYJU’S since it first invested in the company, according to data collated by market intelligence platform PrivateCircle. The CapTable reported in early February that the investor provided banner returns to some of BYJU’S early investors, including Peak XV Partners (Sequoia Capital India) and the co-founders, Divya Gokulnath and Riju Ravindran, by acquiring their shares in secondary transactions.

In its defence, the edtech firm said the $200-million rights issue was initiated to provide crucial financial support to address immediate liabilities, including pending salaries to employees. 

Raveendran had earlier this month said the company was unable to disburse salaries as the funds were inaccessible due to legal disputes. This is because the funds from the issue have been deposited in a separated escrow account, following a directive from the National Company Law Tribunal (NCLT). 

They cannot be withdrawn until the resolution of a lawsuit—filed by a group of four investors, namely Prosus, General Atlantic, Sofina, and Peak XV—alleging oppression and mismanagement by the company’s management.

But on March 10, BYJU’S said it disbursed a part of the pending salaries for all employees for February and promised to pay the balance once it gets access to the funds from the rights issue.

BYJU’S and Prosus declined to comment. General Atlantic, Sofina, and Peak XV did not respond to queries sent by YourStory via email at the time of publishing.

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Impact beyond BYJU’S

There is also the issue of moral hazard. Investors know that dragging BYJU’S to the courts may end up eroding further value from the company, but not doing so will lead to greater problems. 

One, they are answerable to their limited partners who can begin to ask uncomfortable questions. 

“They [shareholders] have to take a tough stance because it involves risk capital, which they all understand … Investors also understand that venture capital entails risk, but they can’t sit idly and watch this kind of behaviour continue. Otherwise, they risk being sued by their own LPs, who may claim that they participated in this game without holding anyone accountable.” 

Two, by not holding founders accountable for mismanagement, investors may inadvertently encourage a culture of risk-taking and irresponsible behaviour. This can lead to long-term negative consequences for both the venture capital firms as well as the startup ecosystem. 

In fact, the cracks between the investors and the BYJU’S management first became apparent when Peak XV Partners’ GV Ravishankar, Prosus’s Russell Dreisenstock, and Chan Zuckerberg’s Vivian Wu officially stepped down from the edtech firm’s board in June last year, citing governance and reporting lapses.

The investors, led by Prosus, called for an EGM on February 23 to address the ongoing concerns. This was after the requisition notices sent last July and December to the board of Think and Learn Private Ltd—the parent company of BYJU’S—were disregarded. 

However, CEO Raveendran, co-founder Divya Gokulnath, and Riju Ravindran—all current members of the company’s board—skipped the EGM, calling it “procedurally invalid”.

In an email to employees, Raveendran referred to the EGM as a “farce,” highlighting that it was convened without adhering to the proper procedures outlined by both the law and the company’s Articles of Association (AOA).

Following the EGM on February 23, Prosus stated that the shareholders had unanimously approved all resolutions—including the ouster of Raveendran—presented for voting. However, Raveendran claims that only 35 out of 170 shareholders (representing about 45% of shareholding) voted in favour of the resolution.

Raveendran’s claim notwithstanding, Prosus is optimistic about the validity of the EGM meeting and its outcome. 

“As shareholders and significant investors, we are confident in our position on the validity of the EGM meeting and its decisive outcome, which we will now present to the Karnataka High Court in line with due process,” Prosus had noted.

A prolonged legal battle ahead

The matter rests with the Karnataka High Court at the moment, but it could go all the way to the Supreme Court with either of the parties seeking justice at the highest court.

Karnataka High Court’s interim relief—ahead of the EGM—stated that decisions made by BYJU’S shareholders during the EGM on February 23 will be on hold until the next hearing scheduled for March 13.

BYJU’S may seek a court order to stay the resolutions passed in the EGM, said the edtech founder quoted earlier. While it may get a reprieve due to its AOA, investors can reconvene the EGM, as they have the right to do so, he added. 

Where does BYJU’S go from here?

The founder is battling to salvage a company that—according to a seasoned investor with edtech bets—has reached a juncture where a recovery in any form seems “very, very unlikely” unless BYJU’S opts to “just shred the assets into multiple ways”.

The tussle with shareholders, who are eager to address governance, financial mismanagement, and compliance issues at BYJU’S, is expected to be a protracted battle, according to industry experts, unless the two sides find common ground.

“The shareholders are adamant to get him (Raveendran) off, but he will not step back. He will try to fight in court. This will be a long-drawn process unless he finds a middle path with the investors, which should be his approach,” said a senior edtech industry leader, who did not wish to be named. 

Even if a new CEO were to enter the picture, they may not have all the answers immediately as they would need time to understand the nuances and complexities of the situation and decide on the direction for the company. 

“This would mean that the business will lose a lot of market share in the interim,” said the senior industry leader. 

The founder of the edtech company, however, is more blunt. 

“Perhaps six months ago, there was a viable path for BYJU’S to emerge from this as a smaller yet viable company. However, that path no longer exists today, as the investors themselves seek to oust him (Raveendran), alongside the complications with the ED and insolvency filings—too many obstacles to overcome,” he says. 

At the Manorama News Conclave where Raveendran spoke about freedom and responsibility, he also confessed that he liked taking risks.

“Risk-taking is part of life. Uncertainties are like part of life,” he said, “Put me anywhere I will come out of it.”

At the moment, the odds of him coming out of his current predicament are not in his favour.

(The story has been updated.)