Byju Raveendran Vs Investors: Who Will Emerge Victorious In The Battle Royale At BYJU’S?

In the run-up to the crucial extraordinary general meeting (EGM) at BYJU’S on Friday, February 23, leading shareholders are also contemplating a legal battle against Byju Raveendran, the CEO and cofounder of the company. 

The EGM, called by six key investors of the company — Prosus, Peak XV, Chan Zuckerberg Initiative, General Atlantic, Sofina, Sands Capital — could determine the future course of the edtech giant. 

Besides the EGM, Inc42 has learnt from sources that the group of investors is looking at legal recourse, particularly if their efforts at the EGM are unsuccessful. Investors are looking to secure majority votes (75%) from shareholders to pass a resolution to remove Raveendran from the helm.

Investors are looking to enforce this under the ambit of The Companies Act, 2013, which stipulates the terms for the rights protection of minority shareholders.

However BYJU’S earlier said in an official statement that the shareholders agreement does not permit the investors to vote on CEO or management change.

Meanwhile sources informed us that global investment giant Prosus, which holds a 9.6% stake in BYJU’S after investing nearly $500 Mn, has asked for Raveendran’s ouster before it decides to participate in the ongoing rights issue, which values the edtech giant at $225 Mn post-money, a steep 99% haircut on the company’s previous valuation. 

Prosus is said to have asked the BYJU’S leadership about the criteria for the valuation in the rights issue compared to its last valuation of $22 Bn. BYJU’S has reportedly received a commitment of $300 Mn in the ongoing rights issue, PTI report said, quoting sources. 

If it does not participate in the rights issue, Prosus stands to lose the most among all key investors. The Netherlands-based investment group is expected to invest another $18 Mn to hold on to its stake. 

Peak XV Partners (formerly Sequoia Capital), which has previously divested some of its stake in BYJU’S and currently holds a 7% stake in the company — is calling for the resolution of all impending matters. These include — bringing in more transparency, solving corporate governance challenges and ending the overarching influence of cofounder and CEO Raveendran, sources added. 

Given the numerous ongoing legal battles that BYJU’S is currently entangled in with lenders and vendors in both the US and India, it is likely keen to avert another major legal challenge. If they approach the NCLT, investors may also plea for the company’s dissolution to safeguard their interests, according to a lawyer working with a Mumbai-based corporate advisory firm.

What Has Irked BYJU’S Investors?

Primarily, investors seem to have grown tired of issues around opacity in day-to-day operations, delay in sharing the financial statements with shareholders and not having been kept apprised of the Indian government’s action against BYJU’S and founder Raveendran.

Besides this, the group is concerned about the lack of action on corporate governance problems, which also led to the resignation of three key board members in June 2023. These were GV Ravishankar of Peak XV, Vivian Wu of Chan Zuckerberg Initiative, and Russell Dreisenstock of Prosus. 

The investors had cited communication blockade from BYJU’S management and corporate governance as the reasons behind the exit of the board members. 

In June last year, Deloitte stepped down from its role due to an inordinate delay in filing FY22 financials. BYJU’S then appointed BDO (MSKA & Associates) as its statutory auditor.

Sources added that while presenting its FY22 results, BYJU’S management had disallowed investors from expressing concerns or asking questions. “Only Raveendran spoke and BYJU’S CFO Nitin Golani presented the financials. Why were the investors not allowed to speak?” a representative of a key investor asked. 

Sources added that the existing shareholders had also demanded a third-party audit of the company to examine the company financials — a demand that was turned down by Raveendran.

However BYJU’S had said earlier that its AGM was attended by 60 investors and was “interactive” with the new auditor answering all the questions from the shareholders. 

BYJU’S net loss had surged 81% YoY to INR 8,245 Cr (close to $1 Bn) in FY22 as WhiteHat Jr and other loss-making acquisitions continued to weigh down the bottom line. In FY22, the startup’s total expenses nearly doubled to INR 13,668 Cr. 

As reported exclusively by Inc42, BYJU’S is expected to report total revenue of around INR 6,500 Cr in FY23, 23% higher than the INR 5,298 Cr revenue it has reported for FY22.

Important issues such as the ED crackdown or BCCI’s NCLT case against missed payments only became known to shareholders after news reports, which is a matter of concern, another source close to the investor group told Inc42.

“The BYJU’S management even said that investors are creating an artificial crisis and that the current EGM notice which has gone out to the management and shareholders is stalling the salaries of its employees. How are these two linked?” the source added. 

After the resignation of external directors last year, Raveendran, along with his wife Divya Gokulnath and brother Riju Raveendran, took over the control of the board. They collectively own a 27% stake in BYJU’S and reportedly have been able to persuade many investors to participate in the rights issue. 

“Raveendran will have the say here since the investors have single-digit stakes in the company and do not have the power to suspend the board or even ask for Raveendran’s ouster. Besides, the board can call for a rights issue even if that comes at value erosion to provide working capital and help it survive. The shareholding contracts have not given investors any say on such matters,” another source in the company said.

As per The Companies Act, 2013, undertaking a rights issue, as compared to raising capital by a preferential allotment or a private placement of securities, does not require shareholder approval by a special resolution. Plus, the board has absolute discretion in determining the valuation of the rights issue, which does not need to be determined based on the valuation report undertaken by a registered valuer.

This is why Prosus, Peak XV Partners, General Atlantic, Chan Zuckerberg Initiative and several other shareholders are likely to approach the NCLT to protect their shareholding if the actions sought via the EGM do not pan out. 

K Ganesh, serial entrepreneur and founder of Portea, said there are two options for the investors. “They can either let the rights issue go through or fight this in NCLT, where the company’s survival is at stake. Among these options, the rights issue could be the better option. While the value erosion would be real, at least investors will still have something to hold onto. If the company is forced to wind down, it would be a disaster for everyone.”

Ganesh added that the rights issue is essentially a means to give the company some time to stabilise the business. After six months, the company can also go to investors to raise another external round at a reasonable valuation.

Sriram Subramamian, managing director of InGovern Research Services, acknowledged that the rights issue has been thrust on the shareholders who do not even have board seats. But it will at least prevent BYJU’S from becoming insolvent.

A founder of a Bengaluru-based unicorn expressed shock over the complacency of the BYJU’S shareholder group, especially those who were board members till last year.

“The company has been in the rot for several years now. Surprisingly, the shareholders are now crying foul when they also had board representation but did not raise alarms when the company was acquiring startups without a clear plan and delayed its financials routinely in the past,” he added.

However, legal experts opine that there are adequate laws in instances where the company founders have exerted overarching influence and had a clash with non-promoter investors. While rules exist to preserve the rights of investors, this could result in a major fallout. 

Sources also said that some leading investors and founders in the Indian startup ecosystem have also begun negotiating terms between BYJU’S management and the disgruntled shareholders, as any major scale-down in BYJU’S operations will eventually cast an impact on the tech industry of India as a whole and leave thousands of people jobless.