Byju’s Governance Fail: Cleared of Fraud, Bankruptcy Dropped

Byju's Latest News: Finally, the most criticized and controversial edtech company of the past year, Byju's, has received some good news. News that could at least bring some relief to Byju Raveendran, if not its billionaire investors and $22 billion valuation.

A year-long investigation by India's Ministry of Corporate Affairs (MCA) has cleared the edtech giant Byju’s of financial fraud. According to sources, the probe, which has not been made public yet, found no evidence of fund siphoning or financial account manipulation. However, the investigation did uncover significant corporate governance lapses that have contributed to the startup’s mounting losses, according to sources familiar with the matter.

There's another big win for the edtech giant. According to sources, Teleperformance withdraws its bankruptcy plea against Byju's as the matter has been settled, according to NCLT. An insolvency plea was filed by Teleperformance Business Services India, the Indian branch of the French customer services company Teleperformance, against BYJU'S. Teleperformance claims that Byju Raveendran's company failed to pay outstanding dues amounting to approximately INR 3-4 crore.

Byju's Corp Governance Shortcomings Highlighted

While Byju's was cleared of fraud, the MCA's investigation revealed deficiencies in the company’s corporate governance. These shortcomings have exacerbated the financial challenges faced by Byju's, which has been struggling to manage its rapid expansion and cash flow issues. The investigation noted that the company failed to bring in adequate professionals to oversee finances and compliance, leading to operational inefficiencies.

The report also pointed out that Byju's did not fully disclose details of its acquisitions to all directors, often calling meetings to approve such deals at short notice. This lack of transparency and proper governance contributed to the internal turmoil and financial instability within the company.

Byju's Investor Concerns and Board Resignations

The investigation's findings come amid ongoing tensions between Byju’s founder Byju Raveendran and some of the company’s major investors. Last year, three prominent investors—Prosus Ventures, Peak XV Partners (formerly Sequoia Capital India), and another unnamed party—resigned from the board due to disagreements over business processes and internal controls.

On June 24, Dutch-listed technology investment firm Prosus has written off its 9.6% stake in Byju’s, highlighting the ongoing financial difficulties faced by the Indian edtech company. Over the years, Prosus invested $500 million in Byju's, making it one of their largest edtech investments in India, which has since turned problematic. In March 2023, Prosus valued Byju’s at approximately $5.1 billion. Additionally, the firm has reduced its investment in Primrose Hill (ZestMoney) from $38 million in FY22 to zero.

These investors have been vocal about their dissatisfaction with Raveendran's management, calling for his removal. Despite the investigation clearing him of financial fraud, it remains unclear whether Raveendran will continue to lead the company given the identified governance issues.

According to inside sources, the key highlights from the MCA Report are as follow:

Customer Complaints and Refunds

The MCA inspection was initiated following complaints filed by the National Commission for Protection of Child Rights (NCPCR) and the Registrar of Companies (ROC). These complaints accused Byju’s of pressuring customers to continue using its services and not issuing refunds. The MCA report found that Byju’s customer support is comprehensive and customer-centric, offering multiple help channels and a dedicated onboarding team. Most unprocessed refund requests were from customers who had exhausted the refund policy period. Byju’s often provided alternatives such as transferring the course to a sibling or offering free access to Byju’s Tuition Centres.

Financial and Employee Practices

1. Byju’s has a paid customer base of 7.5 million students. Out of 4,390 complaints, 2,856 have been resolved, with pending complaints forming just 0.02% of the total paid customer base.
2. Employee costs were not excessively capitalized. Mergers and acquisitions (M&A) skewed the distribution of employees, but Deloitte confirmed proper examination of employee costs.
3. No issues were found with the change in accounting policy for revenue recognition. The policy shift was necessary due to the introduction of multi-year products.

Delays and Auditor Changes

4. Delays in preparing financial statements for FY22 and calling the AGM were due to various factors, including foreign investment inflow, M&A activities, and lack of experienced finance professionals. The AGM was eventually held on December 23, 2023.
5. Deloitte’s resignation as the statutory auditor was due to resource constraints. MKSA & Associates were promptly appointed, ensuring no audit disruption.

Governance and Transparency

6. The MCA acknowledged that Byju's could have been more transparent. Nominee directors resigned citing governance issues, but Byju's provided evidence that significant matters were taken to the board and resolutions passed unanimously.
7. The MCA noted that Byju’s is a private limited company, and thus not all corporate governance provisions are mandatory. However, Byju’s has paid appropriate penalties for lapses and is making efforts to improve governance practices.

Financial Performance and Investment

8. The performance of Byju's US-based subsidiaries was impacted by COVID-19, high inflation, and fluctuating consumer confidence.
9. Byju’s used INR 9,025 crore for M&A from 2014 to 2022, returning an income of INR 4,287 crore. Phase 2 acquisitions (2020 onwards) are still too recent to fully evaluate.

Future Outlook and Efforts to Stabilize and Innovate

Despite the relief from the fraud allegations, Byju’s faces significant financial and legal challenges. Once valued at $22 billion, the company’s valuation has plummeted, with Prosus recently writing off its 9.6% stake to zero. In its annual report, Prosus cited inadequate information on Byju’s financial health, liabilities, and future outlook as reasons for the write-off.

To navigate through these turbulent times, Byju Raveendran has been actively seeking ways to stabilize the company's core operations. This includes exploring generative artificial intelligence for hyper-personalized learning, aiming to keep Byju's competitive in the evolving education sector.

After the MCA's findings, there seems to be an urgent need for Byju’s to overhaul its corporate governance practices. As the company works to address these issues and rebuild investor confidence, it remains to be seen whether Raveendran can steer Byju’s back to stability and growth. The coming months will be crucial for Byju’s as it navigates these challenges and seeks to regain its footing in the competitive edtech market.