Amid the financial crisis at Byju’s, exacerbated by the NCLT halting its $200 million rights issue, how will the edtech firm sustain operations with limited cash?

Byju’s faces a new setback as the National Company Law Tribunal (NCLT) has imposed an interim stay on its proposed rights issue. The order came after investors Peak XV Partners, MIH EdTech Investments, General Atlantic Singapore, and Sofina investors filed a petition alleging mismanagement within the company. Consequently, Byju’s must maintain the status quo, preventing a second rights issue and requiring all cash from the first rights issue to remain in an escrow account.

Working Capital Struggles

The edtech giant is grappling with severe working capital issues, including difficulties in paying employee salaries and keeping tuition centers operational. This challenge is magnified by the recent closure of 30 out of 292 centers in March.

Shareholder Dispute

According to Advocate Varun Bajaj, founder of RSD Bajaj Global Firm, Byju’s initial offer was valued at approximately $22 billion. However, the proposed $200 million rights issue saw a drastic drop in valuation to just $225 million, a nearly 99% discount. This significant devaluation alarmed investors, who invoked their anti-dilution rights to protect against such steep devaluation.

Further controversy arose when Byju’s allocated 800,000 shares to Riju Raveendran before a crucial vote to increase its authorized share capital for the initial rights issue. Byju’s stated that the initial rights issue concluded successfully with share allocations to all participating shareholders. Despite this, the petitioning investors continue to accuse the company and its management of misconduct, seemingly aimed at obstructing the second rights issue.

Bajaj emphasized that anti-dilution rights protect investors from value depreciation due to lower valuations in subsequent financing rounds. Investors are concerned that raising funds at a much lower valuation could diminish the value of their earlier investments, prompting legal action to protect their interests.

Future Course of Action

Bajaj suggests that Byju’s could appeal the NCLT order at the National Company Law Appellate Tribunal (NCLAT) and potentially the Supreme Court, arguing that the order could force them into involuntary bankruptcy by restricting fund usage.

Potential Avenues for Relief

K. Ganesh, founder of GrowthStory.in, believes Byju’s could leverage its valuable assets like US-based Epic, Great Learning, and Aakash Educational Services Ltd. Currently, Byju Raveendran and Think & Learn Pvt. Ltd hold the largest share in Aakash at 43%. An IPO for Aakash could provide significant relief for Byju’s. However, Satish Meena, advisor at Datum Intell, doubts an immediate Aakash IPO, noting that part of Aakash is already divested and Byju’s might lose Aakash due to the need for cash amidst ongoing legal battles.

Brand Recovery Challenges

Byju’s online business is not generating sufficient cash flow, and as Meena points out, recovering brand reputation in the education sector is exceedingly challenging. The lack of positive discourse about Byju’s product during tough times highlights the issue. Ganesh notes that Byju’s must pivot its strategy to align with current market conditions post-COVID, as the model that succeeded during the lockdown is no longer viable.

Looking Ahead

Byju’s requires a significant strategy shift to achieve product-market fit and sustain operations amidst increased competition and a tarnished brand image. The company needs substantial funding to meet technological demands, which it currently lacks. The court will hear the matter on July 4, where Byju’s hopes to clarify and resolve these issues.