Tough test: Staff salaries may again be hit at edtech major Byju's

NCLT has asked Byju's to keep funds via rights issue in escrow account and it cannot be withdrawn till the disposal of the matter, according to the sources

Byju’s is expected to encounter another cash crunch, potentially impacting the daily operations of the educational technology (edtech) firm, including salary payments to its 15,000 employees.

The National Company Law Tribunal (NCLT), in its order on February 27, has instructed the edtech firm to place funds obtained from the rights issue in an escrow account.

However, these funds cannot be withdrawn until the resolution of the matter related to the rights issue, according to sources.

This action is part of the oppression and mismanagement petition filed against Byju’s by four of the company’s investors.

“The funds from the rights issue were expected to support the company’s operations for the next few months,” said a person familiar with the matter. “However, they cannot be withdrawn until the matter is resolved.”

The person mentioned that Byju’s might appeal to the NCLT to permit the use of funds, as the tribunal has directed the firm to keep the funds in a separate escrow account, unretrievable until the matter is disposed of.

According to sources, the edtech firm has secured a 100 per cent commitment of $200 million from “several existing investors on a super pro-rata basis” for its rights issue, which concluded on February 28.

Byju’s must now convene an extraordinary general meeting within 30 days and secure over 50 per cent of the votes to expand its authorised share capital.

“However, the company could have utilised the funds from the rights issue before that,” added a source.

At the NCLT on February 27, Byju’s and its investors locked horns over the company’s $200 million rights issue in a petition alleging oppression and mismanagement. The company law court directed the embattled edtech firm to respond in writing to the investors’ plea within three days and reserved its order. The tribunal also issued notices to the Ministry of Corporate Affairs and the Registrar of Companies.

Experts explained that a rights issue invites existing shareholders to purchase additional new shares in the firm. This strategy is often adopted by financially strained companies to raise capital when needed, typically for debt repayment, equipment purchase, or expansion. Existing shareholders receive securities called rights, allowing them to purchase new shares at a discount.

Salman Waris, managing partner at tech law firm TechLegis Advocates & Solicitors, said that funds raised via the rights issue can be used for business expansion, asset acquisition, debt repayment, or as working capital for company operations, with certain limitations.

“However, if the money is kept in an escrow account, it cannot be used until the trigger for release of the escrow has been met or occurred,” said Waris. “This means the whole purpose of Byju’s raising capital via rights issue may have been defeated.”

Earlier this month, Byju Raveendran, founder and chief executive officer of the beleaguered edtech firm, announced that the company had credited all pending January salaries to employees over the two days. This information was communicated to employees in another letter sent on February 4.

“I have been moving mountains for months to make payroll, and this time, the struggle was even bigger to ensure that you receive what you rightfully deserve,” Byju Raveendran had said in the letter.

Cash-strapped Byju’s criticised “certain investors” in an internal note to employees, alleging a conspiracy against the company and an attempt to oust its founder Byju Raveendran during a crisis.

Byju’s is grappling with multiple challenges, including a cash crunch, delays in financial reporting, and legal disputes with lenders. The company has raised a total of $5.08 billion from investors.