7 Big Questions For BYJU’S Ahead Of The All-Important EGM

It’s D-Day for BYJU’S as the contentious extraordinary general meeting (EGM) is expected to shine a light on a number of key issues that have plagued the company for the past two years. 

Ahead of the EGM, the management of the beleaguered edtech giant, including CEO Byju Raveendran, cofounder Divya Gokulnath and board member Riju Ravindran, is at war with the company’s investors in many ways. 

Even as the cash-strapped company is looking to raise fresh capital to stay afloat, it is facing the EGM test after pressure from a group of key shareholders. 

And in a few hours (Friday, February 23), we will find out whether the push by investors to reconstitute the company’s board and change its leadership will bear fruit.

Interestingly, ahead of the EGM, the Byju Raveendran-led company dragged its investors to the Karnataka High Court, arguing that the shareholders didn’t follow the procedures under the Companies Act, 2013. 

While the Raveendran family did get a temporary relief from the court, the troubles are far from over.

Sources told Inc42 that the EGM will be held on Friday and most of the investors are expected to vote in favour of the removal of cofounder and CEO Raveendran from the company. 

Big Questions For BYJU’S Ahead Of EGM

Inc42 has seen a copy of the notice for the EGM sent by the shareholder group on February 1, 2024, which raises concerns on several fronts at the company, including the alleged deteriorating financial and corporate governance state.

It is pertinent to note that a day ahead of the EGM, a BYJU’S spokesperson said that neither CEO Raveendran nor the other board members will attend the EGM, which the company has deemed to be invalid. 

However, sources within the investor group told Inc42 that the EGM will proceed as planned and the resolutions would be taken up for voting.

We have kept up with all the latest developments in our live blog tracking the war at BYJU’s, but what exactly is at stake? Here are the seven key questions that BYJU’S, Raveendran and Gokulnath will face at the EGM in a few hours:

Will Byju Raveendran Be Ousted As CEO?

The first point of contention between shareholders and the BYJU’S leadership is around the leadership itself. The investor group wants to replace Raveendran as the chief executive officer given the “the mismanagement and failures”, and have sought a change in management “to prevent further dilution of value”. 

Besides CEO Raveendran’s removal, Gokulnath and Byju’s brother Riju Ravindran will also face pressure from the shareholders to step down from their management roles and as directors. 

However, Byju Raveendran is expected to put up a fight against any attempts to replace him as CEO. Days before the EGM, the CEO said, “The highest duty of an entrepreneur is to support the team and shareholders. I have personally put in $1.1 Bn in the company over the last two years to pay salaries and maintain operations. I view this not as an obligation, but as my Dharma and duty. I have sacrificed everything to not fail in this duty.“

A potential change in leadership would be the biggest signal of the investors wresting control of the company amid its several challenges, but this would still not help BYJU’S dig itself out of the financial and mismanagement hole, especially given the other question that the company has to answer. 

What About Allegations Of Financial Mismanagement?

Investors have also sought answers for the alleged contraventions mentioned in show cause notices sent to the company by the Enforcement Directorate (ED) in November 2023. 

Investors allege that details about the alleged FEMA violation were only made public through news reports and that the company failed in its obligations to inform shareholders about such a large potential issue. 

Further, investors are looking for more concrete answers about the company’s failure to resolve the issues with Term Loan B (TLB), which has now resulted in another insolvency plea being admitted by the NCLT in the past week. It is claimed that the lender issues have ultimately caused severe value erosion for shareholders, resulting in a massive valuation drop during the rights issue. 

Another high profile legal battle is also on the investors’ radar. The management has been asked to explain its strategy in response to the petition filed by the Board of Control for Cricket in India (BCCI) for non-payment of dues which has also resulted in insolvency proceedings. 

The Term Loan B aside, BYJU’S also faced another issue with a lender (Davidson Kempner or DK), where the company negotiated and staked Aakash shares in exchange for a loan. CEO Raveendran is alleged to have repeatedly misled shareholders “about the existence of INR 400 Cr earmarked to partially repay the DK loan”, which was eventually not utilised for the repayment. 

BYJU’S problems with delayed audited financials are well publicised and these are also on the investors’ radar. They are likely to be brought up for discussion at the EGM. The CEO is alleged to have continuously misled shareholders about FY22 and FY23 audited financials, “in total disregard and violation of the Shareholders Agreement dated 28 February, 2019”, the EGM notice said. 

Lastly, the list of financial mismanagement allegations includes a contention that BYJU’S delayed payment of statutory obligations including taxes deducted at source (TDS), provident fund contributions for employees as well as salaries to current employees and laid-off employees

What About The Value Erosion And Failures In Dues Collection?

While most of the complaints against BYJU’s from investors and vendors in the recent past have been about unpaid dues, its management is alleged to have failed in its responsibility to recover approximately INR 1,400 Cr of billings from an affiliated reseller in Dubai (More Ideas General Trading LLC). 

This is especially alarming given the company’s dire need for funding over the last 12 months, investors allege. Investors have claimed that the company paid INR 300 Cr in commission to More Ideas despite 4X the amount pending for recovery. 

Investors are also questioning the “management’s failure to enforce the company’s rights against the Blackstone entities and Mr. J.C. Chaudhry to ensure that the company’s entitlement to their Aakash shares is upheld”. 

The management team is said to have acted in contravention to the company’s counsel’s opinion regarding its obligation under the terms of the Aakash acquisition deal. Lenders of BYJU’S $1.2 Bn Term Loan B approached the Bengaluru civil court in early 2024, seeking an ex-parte injunction on the transaction allowing Manipal Education and Medical Group’s Ranjan Pai to convert a loan of about $250-$300 Mn he had advanced to Aakash Institute into equity.

While the court declined to admit the plea challenging the 40% stake buyout, the matter is far from over as investors are now seeking answers for the prolonged state of uncertainty around Aakash, for which BYJU’S is said to have paid nearly $1 Bn. 

Why Did The Management Conceal Material Information From Shareholders?

Investors in BYJU’S are particularly aggrieved about the so-called failures by the management to disclose a notice of default from Great Learning in April 2022 and its consequences which had a material impact on the value of the Group.

Raveendran and the other leaders in the company have also been alleged to have failed in their responsibility to disclose transfer of funds to Camshaft Capital Fund. The company moved $533 Mn from the $1.2 Bn loan to Camshaft, a three-year-old hedge fund, which many have deemed to be a suspicious transaction. The CEO will be questioned on the level of diligence carried out on Camshaft prior to the transfer of funds and the consequences on the consolidated business. 

Other allegations pertaining to concealment of material information include “failure to disclose potential departures of key management personnel”, “the state of the group’s trading financials and the material discrepancy between MIS or guidance provided relative to actual results”, and “failure to accurately disclose the level of available capital”. 

Assurances by the management about the company’s cashflow breakeven status have also been alleged to have been false, in addition to failures to disclose legal action by lenders, the ED and the BCCI, as mentioned earlier. 

Did The Company Breach Its Obligations To Shareholders?

Most seriously, BYJU’S management is alleged to have committed deliberate and repeated breaches over the years in terms of reporting information to investors and the inspection covenants under the shareholders’ agreement. 

These include lack of information and updates regarding its audited financial statements, management accounts and monthly management reports or MIS of each group company. Investors also claim that the company failed in its responsibility to disclose its cash reserves, outstandings, financial liabilities, and shareholding pattern of group companies. 

Shareholders are also looking for answers on lack of information pursuant to inspection rights held by investors, the lack of observers at board meetings, and allegedly not allowing shareholders to exercise rights in relation to board observer positions despite repeated written and oral requests.

How Did Corporate Governance Lapses Occur At Such A Large Scale? 

The company has been asked to submit its performance review process with reference to evaluating the performance of Raveendran as CEO and managing director, as well as Gokulnath and Riju Ravindran as directors.

Besides this, status updates on critical matters, including the rights issue, the terms of the Aakash acquisition, and further fundraises, have been sought. 

As mentioned above, investors will press for answers on the status of investigations by the ED, the Ministry Of Corporate Affairs, and the Serious Fraud Investigations Office (SFIO). The management is likely to be asked to reveal the steps and measures it will take to improve corporate governance across its group companies. 

Will A New Board And CXO Suite Take The Helm?

Finally, shareholders are looking for clarity on CEO and CFO status for each entity in the BYJU’S group, as well as “interim succession plans including authorisation to hire a third-party to act as temporary CEO for the consolidated entities”.

These requests in the EGM notice are in relation to the replacement of the existing management layer, which as we have pointed out above, are alleged to have abdicated their responsibility in terms of corporate governance lapses. 

The investor group is seeking a reconfiguration of the company’s board to allow proper oversight of the company’s decisions and to prevent further shareholder value destruction. 

Specifically, the management is being urged to have shareholder representation, independent directors, and board committees in its boardroom layer to consider and approve amendments to the shareholders’ agreement and articles of association as may be required given the many changes that are being sought in the company. 

Shareholders want nine members appointed to the board within 15 days of the EGM, three new independent directors within 30 days of the EGM, and three shareholder directors and two company executive management employees on the board within 15 days of the EGM.

Among other personnel changes requested by the company’s shareholders is the appointment of a chief compliance officer and a senior regulatory affairs official to address compliance, regulatory, government affairs 

Byju, Riju and Gokulnath would also have to consider the requests regarding beginning an independent third-party forensic investigation into acquisitions, alleged breaches mentioned above as well as regulatory and statutory affairs. 

The War At BYJU’S

While the company’s shareholders have requested for clarity on the seven issues above, we are not yet sure which of these will be directly addressed by Raveendran and others in the management layer. 

Given the fact that BYJU’s moved the Karnataka High Court looking to invalidate the EGM request and Raveendran and family have decided to skip the meeting, it remains to be seen how the situation pans out. Any resolutions passed at the EGM cannot be ratified as per the HC’s order. The next hearing in this matter is scheduled for March 13, 2024. 

However, what cannot be denied is that Raveendran, Gokulnath and BYJU’S management are on thin ice, even if they are able to fight off the investors on any of the above demands and requests. 

By the end of Friday, the BYJU’S we have known for over a decade might not be the same company, and it could very well send shockwaves across the entire startup ecosystem, given how significant the company has been in India’s startup and tech narrative.