Why Is BYJU’S Under The ED Hammer?

Cornered on many fronts, many fires are engulfing BYJU’S. Despite being one of India’s most-valued unicorns, the edtech giant lands itself in a soup more often than not. From valuation markdowns and stalled growth to sabre-rattling with the law and layoffs, the edtech decacorn troubles seem to be inexhaustible. 

Adding another leaf to its already long list of troubles, the company is now in the middle of a not-so-romantic rendezvous with ED sleuths, who are examining the edtech juggernaut for flouting foreign exchange norms.

Last week, the Enforcement Directorate (ED) landed at the doorsteps of three premises, two businesses and one residential, linked to BYJU’S and conducted search and seizure operations.

The raids were undertaken under the provisions of the Foreign Exchange Management Act (FEMA) and incriminating documents and digital data were seized during the operation. 

The documents revealed that INR 9,754 Cr was remitted to various foreign jurisdictions under the pretext of overseas direct investment between 2011 and 2023. What also came under the scanner of authorities was nearly INR 944 Cr earmarked for advertising and marketing expenses, which also comprised amounts remitted to foreign jurisdictions.

In total, ED disclosed that BYJU’S received foreign direct investment (FDI) to the tune of nearly INR 28,000 Cr ($3.4 Bn as per the latest exchange rates) between 2011 and 2023. 

ED also flagged concerns around the delay in filing of financial statements by the edtech major since the financial year 2020-21 (FY21) and said that it was cross-examining the figures provided by the company from the banks.  

The company announced its FY21 results in September last year, more than 18 months after the fiscal year ended in March 2021. This came amid multiple delays and criticism from the Ministry of Corporate Affairs (MCA), industry leaders and even a Member of Parliament (MP).

Even as the delayed results were strife with controversy, it also changed its revenue recognition method for streaming services to a pro-rata basis over the period of the contract in its FY22 financials, against recognition of such revenues upfront upon the commencement of the contract earlier. The company is yet to file its FY22 numbers.

Further investigations into the matter are on. The agency said that the probe was undertaken based on complaints filed by various private persons. Unlike previous raids at BYJU’S, this time around, ED single-handedly put the spotlight on cofounder and chief executive officer (CEO) Byju Raveendran, who, as per the agency, skipped its summons.

BYJU’S Fires Back

Right after the news of the raids became public, CEO Raveendran wrote an internal memo to employees claiming to be fully compliant with all applicable foreign exchange norms, adding that the company’s all cross-border transactions were vetted by professional advisors.

Raveendran said that all overseas transactions were routed via regular banking channels or RBI-authorised dealer banks, and all required documents and statutory filings were duly submitted before the authorities.

The internal memo also claimed that the FDI-related information sought by ED sleuths during the raids had previously been submitted by the edtech startup’s authorised representatives.

“As we are funded by 70+ impact investors who have satisfactorily done due diligence on our operations, including all FEMA compliance, we are confident that the authorities will also come to the same conclusion,” the internal note read.

Touting his company, Raveendran said that BYJU’S brought more FDI to the country than any other Indian startup.

BYJU’S has so far raised a cumulative of $5.8 Bn in funding across multiple rounds and counts marquee names such as Sequoia Capital, Silver Lake, BlackRock, Prosus, General Atlantic, Tiger Global, and multiple sovereign and pension funds, among others. 

Banks, Lenders Become The Collateral Damage?

Now, various media reports suggest that ED is looking to rope in banks and lenders as part of the overarching probe into the company.

ED plans to write to various financial institutions to seek various details regarding transactions and loans of BYJU’S. The agency plans to cross-verify information such as fund flow and sources of transactions.

The new regulatory trouble complicates matters for BYJU’S, which already seems to be wading through uncharted waters amid a potential debt crisis and ongoing funding talks. 

While lenders have sought a prepayment of $200 Mn and a higher interest rate for restructuring BYJU’S $1.2 Bn Term Loan B, it is also marred by bad press, slowing growth and thousands of layoffs at its subsidiary companies.

The agency is also said to have grilled newly-appointed chief financial officer (CFO) Ajay Goel on the matter, who reportedly was not able to provide clarity on various transaction details sought by ED. However, the CEO remained elusive and sought exemption from appearing before the enforcement directorate, citing family emergencies.

The ex-Vedanta executive Goel was interrogated weeks after he took charge as the new CFO of the company, a position which was lying vacant since December 2021.

The edtech major has been under fire recently for a host of reasons. Recently, minority investor BlackRock slashed the valuation of the company, on its book, by nearly half while the edtech major has also received brickbats for layoffs, delayed financials and lax corporate governance guardrails.

With talks for funding underway, a regulatory sabre-rattling could have a huge impact on any potential fundraise amid an ongoing funding winter chill.

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