Will NCLT increase the weights on the already sinking boat of Byjus'?

Kim Samtaney

NMIMS School of Law

The Factual Matrix

The valuable Ed-Tech start-up of India, Byju’s has been facing trouble since the settling of the pandemic. When the month of January approached its end, Byjus announced the right issue of its shares at a 99% discount for an infusion of cash worth US$ 200 million. The post-money valuation of Think & Learn Pvt. Ltd. dropped to as low as US$ 225 million from a position of US$ 22 billion in valuation.[1] In a late March letter, Raveendran told shareholders that the business had increased authorized share capital to $200 million to cover the $200 million rights issue and that it had received more than 50% of the vote in the postal ballot, which was initially disclosed on March 7 following the Extraordinary General Meeting which was refused to be stayed by National Company Law Tribunal (NCLT).[2] 

The Involvement of NCLT:

Just after the Shareholder’s outrage to remove the CEO and founder, Mr. Ravindran Byjus and his wife from the board, on 23rd Feb. 2024, a bunch of investors led by Prosus, GA, Sofina and Peak XV have filed a petition with NCLT alleging the Bangalore based ed-tech firm of oppression and gross mismanagement. According to investment sources, among other reliefs, the investors want to declare the founders unsuitable to lead the business, establish a new board, declare the rights offer unlawful, and carry out a forensic examination.

Concerns raised by the investors in the NCLT suit include the founders' financial mismanagement, which resulted in the loss of control over Aakash; Byju's Alpha (TLB loan) default; ongoing issues with corporate governance, such as the lack of a CFO and independent director; the oppressive nature of the $200 million rights offer; regulatory non-compliance; and the willful failure to share information with stakeholders. The appeal requests that the recently finished $200 million rights offer be declared null and void as well as a directive that the business refrain from taking any corporate acts that might jeopardize investors' rights. The plea also refers to other insolvency applications submitted by Surfer Technologies Pvt Ltd, TLB lenders, and BCCI, as well as inter-corporate loans obtained on hidden terms.[3] The plea was admitted to be heard by the Bangalore bench of NCLT.[4]

In a different matter, on February 21, Think and Learn, the parent company of BYJU'S, filed a request for a stay of the EGM's decision with the Karnataka High Court. The investors had requested the meeting. The HC declined to postpone the EGM but requested that investors wait until March 13 to implement the resolution that was passed. The Karnataka High Court prolonged the temporary injunction, directing Byju's shareholders to abstain from implementing any resolutions that were approved by investors during the February 23 extraordinary general meeting (EGM). Following an EGM held by a group of shareholders, who voted to remove Byju Raveendran from his post, the court made its verdict. Byju said during the hearing that the investors had lied under oath since there were differences in the dates on which the affidavit that was attached to the statement of objections was filed.[5]

Following this, the NCLT has refused to put a stay on the Byjus EGM that is to be held to increase its authorized share capital through the right issue. The objective was to achieve growth and pull the business out of its operational instability.[6] 

The Tussle with NCLT and High Court

On June 12th, the NCLT passed an order to put a stay on the right issue by directing the Ravindran Byjus-led startup to maintain the status quo. Dealing a further blow to the beleaguered Ed-tech company, NCLT has requested that Byju's halt its "second rights issue" and place the proceeds from the first rights issue in an escrow account. Additionally, it asked the company run by Byju Raveendran for information on who received these shares as part of the "first rights issue." The two rights issues effectively suggest that Byju's was executing the $200 million planned rights offer in two tranches since it was unable to raise the entire amount due to the investors' petition in the NCLT. Byju's has been asked by the NCLT not to spend any of the money that has been obtained through the "second rights issue" thus far. The edtech company was asked to provide the tribunal with a compliance affidavit and note along with information on the share allocation on March 2 and the escrow bank accounts within ten days.[7]

The Legal Prerogative:

The 2013 Company Law does not provide a precise definition of "oppression." However, a court of law defines it as behaviour that manifestly deviates from the requirements of fair dealing and criteria that must be met, particularly with reference to the rights of shareholders.

Although the legislation does not clearly define mismanagement, it might be defined as conducting business in a biased, dishonest, or incompetent way. Members have recourse under Sections 241 to 246 in cases where they are oppressed and the business is being mishandled.

Any member of the company may file an application with the tribunal if he believes that the business is being run in an oppressive way or that a significant change has occurred that does not serve the interests of the members.

The Central Government may potentially submit a similar plea to the tribunal. The tribunal may issue any orders about whether or not the business should be wound up if it determines that the company's operations are being handled in a way that is detrimental to the interests of the public, members, or company.

The Troublesome Background

Earlier in 2021, the start-up raised a $1.2 billion Term Loan from a consortium of Investors at a valuation of 18 billion in a lure to take advantage of low interest rates.[8] The company also has a history of delaying the filing of its financial statements with the Registrar of Companies as it released only standalone FY22 statements in November 2023 clocking losses at Rs 2,250 Crore.[9] Byju's reported that its losses increased to ₹8,245 crore in FY22 from ₹4,564 crore in FY21 when it submitted its FY22 financials to the Ministry of Corporate Affairs.[10] Before this, its FY21 audited statements saw a delay of 18 months and then a readjustment of losses of Rs 4,588 Crores.[11] As a result of this delayed filing of audited financial statements, the terms of the TLB were violated as a result the consortium asked to immediately repay the loan and furthermore in June 2023, the consortium called off the negotiations altogether.[12]

A portion of the lenders in the group that gave Byju's $1.2 billion have stated that they had filed for bankruptcy against the company's Epic, Tynker, and Osmo subsidiaries in a US court. Regarding the early repayment of the term loan that the edtech business had obtained through Byju's Alpha, another subsidiary, the lenders had been in talks with the company. While the lenders have attempted to restructure the three subsidiaries under court supervision via Chapter 11 of the US Bankruptcy Code, the parties are still engaged in a legal dispute in US courts on the loan.[13]

It is also alleged that Byju's has not filed the necessary regulatory forms with the income tax department since April 2023 for workers making ₹30 lakh or more monthly. They have also either delayed the deposits of tax deducted at source (TDS) or not filed them at all. This is a punishable offence leading the debt-ridden company to pay interest which is levied at 1.5 per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax was deposited to the government of India.[14]

Conclusion

In summation all the allegations and violations of the laws of the land, it puts a strong indicator towards the mismanagement in the company as pointed out in the petition in the NCLT. It would be interesting but disheartening to see the downfall of India's once a major successful startup that has the guts to fight multinational companies and reform the downtrodden education system.

References 

[1] Byju’s seeks $200 million in a rights issue at 9r9% valuation cut, The Economic Times (2024), https://economictimes.indiatimes.com/tech/startups/byjus-seeks-200-million-in-rights-issue-amid-cash-crunch/articleshow/107230248.cms (last visited Jun 2024).

[2] Peerzada Abrar, Byju’s gets 50% vote on rights issue, asks miffed investors to participate Business Standard (2024), https://www.business-standard.com/companies/news/byju-s-secures-50-vote-on-rights-issue-offers-investors-chance-to-invest-124032900383_1.html (last visited Jun 2024).

[3] Jyoti Banthia, Byju’s investors move NCLT, file oppression, mismanagement lawsuit BusinessLine (2024), https://www.thehindubusinessline.com/info-tech/byjus-investors-move-nclt-file-oppression-mismanagement-lawsuit/article67877957.ece (last visited Jun 2024).

[4] Jyoti Banthia, NCLT to hear Byju’s investors’ “oppression and mismanagement” suit on Tuesday BusinessLine (2024), https://www.thehindubusinessline.com/companies/nclt-to-hear-byjus-investors-oppression-and-mismanagement-suit-on-tuesday/article67888752.ece (last visited Jun 2024).

[5] Jyoti Banthia, Karnataka HC extends interim stay on a resolution passed at Byju’s EGM  BusinessLine (2024), https://www.thehindubusinessline.com/companies/karnataka-hc-extends-interim-stay-on-resolution-passed-at-byjus-egm/article67946712.ece (last visited Jun 2024).

[6] Peerzada Abrar, NCLT refuses to stay Byju’s EGM to raise capital through rights issue Business Standard (2024), https://www.business-standard.com/companies/news/in-a-relief-to-byju-s-nclt-refuses-to-stay-egm-over-rights-issue-124032800929_1.html (last visited Jun 2024). 

[7] Digbijay Mishra, NCLT directs Byju’s to maintain status quo, halts $200 million rights issue The Economic Times (2024), https://economictimes.indiatimes.com/tech/technology/nclt-tells-byjus-to-maintain-status-quo-halting-rights-issue/articleshow/110970782.cms?from=mdr (last visited Jun 2024).

[8] Edtech Unicorn Byju’s raises $1.2 billion via term loan, The Economic Times (2021), https://economictimes.indiatimes.com/tech/startups/edtech-unicorn-byjus-looks-to-raise-1-2-billion-via-term-loan/articleshow/87583914.cms (last visited Jun 2024).

[9] Byju’s files much-delayed FY22 financials, Core Biz Revenue at Rs 3,569 crore, losses at Rs 2,253 crore, The Economic Times (2023), https://economictimes.indiatimes.com/tech/startups/byjus-files-audited-fy22-results-revenue-jumps-2-3-times/articleshow/104962200.cms?from=mdr (last visited Jun 2024).

[10] Jyoti Banthia, Byju’s posts FY22 financials 22 months late, losses balloon to ₹8,245 crore BusinessLine (2024), https://www.thehindubusinessline.com/info-tech/byjus-posts-fy22-results-loss-balloons-to-8245-crore/article67768569.ece (last visited Jun 2024).

[11] Samidha Sharma, Byju’s losses swell to Rs 4,588 crore in delayed FY21 results The Economic Times (2022), https://economictimes.indiatimes.com/tech/startups/byjus-readjusts-revenue-for-fy21-to-rs-2280-crore-losses-swell-to-rs-4588-crore/articleshow/94198872.cms (last visited Jun 2024).

[12] Bloomberg, Byju’s lender's scrap talks to restructure $1.2 billion loan The Economic Times (2023), https://economictimes.indiatimes.com/tech/technology/byjus-lenders-scrap-talks-to-restructure-1-2-billion-loan/articleshow/100672821.cms (last visited Jun 2024).

[13] Byju’s lender's petition to put subsidiaries in bankruptcy in the US, The Economic Times (2024), https://economictimes.indiatimes.com/tech/technology/byjus-creditors-petition-to-put-more-units-in-us-bankruptcy/articleshow/110734676.cms (last visited Jun 2024).

[14] Jyoti Banthia, Byju’s employees allege TDS non-compliance by company BusinessLine (January 17th, 2024), https://www.thehindubusinessline.com/companies/byjus-employees-allege-tds-non-compliance-by-company/article67748890.ece (last visited Jun 2024).