ED raid likely to hit edtech giant Byju's $700-million fundraising plan

The Directorate of Enforcement’s (ED’s) recent searches at Byju's premises that led to the seizure of “incriminating” documents are expected to adversely impact the fundraising efforts of the edtech giant, according to industry sources and experts. 

The Bengaluru-based firm, which achieved a valuation of $22 billion in a funding round in March last year, is in the process of raising $700 million from investors, according to the sources. However, the company may face challenges in convincing investors for fresh funding and ensuring that the money reaches its bank accounts, until it gets clearance from the ED authorities.

The ED move is also expected to have an impact on the Rs 8,000-crore IPO plans of its subsidiary, Aakash Educational Services (AESL), according to sources. Besides that, if any shareholder specifically goes to the Securities and Exchange Board of India objecting to the IPO, Sebi may take note of it. Aakash was acquired by Byju’s for $1 billion in 2021.

“This company has not filed its latest annual accounts and has been delaying that. There's obviously something wrong if you can’t file your annual accounts on time,” said an industry executive aware of Byju’s strategy. “The firm may face a crisis to raise fresh funding. Which fund manager in the world will put money into a company that hasn't filed its annual account?”

Byju’s was expected to file its FY22 results with the Ministry of Corporate Affairs (MCA). Other edtech unicorns, such as Unacademy, upGrad, Vedantu, PhysicsWallah, and Eruditus, have already filed their FY22 financials. 

The company should have filed its annual results with the MCA by September last year. But, it has been delaying that for over seven months now. Before this, the company filed its FY21 results in September 2022, after a nearly 18-month delay.

Byju’s declined to comment about the impact on its fundraising efforts due to the ED’s searches. However, company sources said that the process to raise $700 million is on track and the firm would close the deal soon. They said the firm is also planning to file its results soon but didn’t give any specific date.

The ED on Saturday conducted searches and seizure action at three premises of Byju’s, 

under the provisions of the Foreign Exchange Management Act (FEMA). These three premises are two business units and one residential property in Bengaluru connected with Byju Raveendaran and his company ‘Think & Learn Private Limited’.

During the search and seizure action, various incriminating documents and digital data were allegedly seized. FEMA searches also revealed that the company reportedly received foreign direct investment to the tune of Rs 28,000 crore (approx.) during the period from 2011 to 2023.

Legal experts said that the development is likely to make existing and future potential investors worried. They may demand explanations with regard to the investigation.

Salman Waris, managing partner at technology law firm TechLegis Advocates & Solicitors, said if the ED after investigation finds that there had been a violation of Section 4 of the FEMA by any Indian resident or entity that has acquired, held, owned, possessed or transferred the foreign exchange, foreign security or any immovable property, it can cease the company assets in India equal to that valuation.

“Since there’s always a chance of funds seizure in such cases, only very convincing explanations can satisfy the investors,” said Waris. “Hence, if a violation of laws is proved during the ED investigation, investors can definitely hold back committed funds under the clauses of a term sheet, even if it’s binding because such developments affect the public perception of the company.” 

The ED statement also said that the company has not prepared its financial statements since 2020-21 and has not got the accounts audited, which is mandatory. Hence, the genuineness of the figures provided by the company is being cross-examined by banks. The investigation against the platform was initiated on the basis of various complaints received from various private persons.

“Nobody knows, tomorrow if an investor puts money in the company and the ED decides to freeze that account,” said a person familiar with the matter.

Last year, the MCA asked Byju’s to explain why it did not file its audited financials for the year ended March 2021. It also sent Byju’s parent company a letter asking it to explain the 18-month delay in filing audited accounts. The other challenge is that earlier this year, Byju’s reportedly sought more time from lenders to renegotiate an agreement governing a $1.2-billion loan that is in breach of covenants, according to people familiar with the matter. 

Raveendran, founder and chief executive officer of Byju’s, said the company has taken all efforts to fully comply with all applicable foreign exchange laws. In a letter addressed to the employees, Raveendran said all the company’s cross-border transactions have been duly vetted by both firm’s professional advisors and counsel and advisors and counsel of the investment funds and other sophisticated counterparties.

He said all such transactions are routed only through regular banking channels and the Reserve Bank India’s (RBI)-authorised dealer banks and the requisite documentation and statutory filings have been duly submitted. 

“I want to reassure you that we are fully cooperating with the authorities,” Raveendran wrote to employees.

Byju’s has raised a total funding of $5.8 billion from investors like Qatar Investment Authority (QIA), Sumeru Ventures, Vitruvian Partners, BlackRock, Chan Zuckerberg Initiative, Sequoia, Silver Lake, Bond Capital, Tencent, General Atlantic and Tiger Global. The firm has over 150 million learners.

The US-based asset manager BlackRock has reportedly reduced the valuation of the Byju’s by about 50 per cent to $11.5 billion. This is a sharp decrease from the $22 billion at which the edtech decacorn was last valued in 2022. Byju’s posted losses of Rs 4,588 crore in FY21, 19 times more than the preceding year, according to the latest available financial report. The firm was targeting to be profitable by March this year. Early this year, Byju’s handed the pink slip to 900-1,000 employees in a fresh round of layoffs, according to media reports, although sources in the company said the move was part of the “optimisation” strategy that the edtech giant had announced last year that included sacking 2,500 workers.