Twenty-six years ago, IIM-Ahmedabad graduate Shantanu Prakash thought it was a good business opportunity to sell computers to schools. The idea was good and his brainchild Educomp Solutions was able to clock in Rs 1,000 crore revenue in 12 years and catered to 20,000 schools.
Cut to 2020, Prakash's company Educomp Solutions is bankrupt and on February 11, he was booked by Central Board of Investigation (CBI).
The CBI on February 11 registered a case against Educomp Solutions, Prakash and another individual for alleged bank fraud.
So how did the messiah of the ed-tech sector slide down a slippery slope? Industry insiders said that the early success of Prakash business was purely because of his entrepreneurial spirit and aggression. This same aggression could also have been the result of his downfall.
"Shantanu would manage to bring 50 schools on board even as we were struggling with one. We often noticed that these schools were not fully serious about the payments or contract continuity," said the Vice- President of a rival firm.
Shantanu Prakash, founder of Educomp | Picture by Amit Verma, Forbes
Pioneering the concept of ‘smart classrooms’, Shantanu Prakash and his firm Educomp Solutions quickly progressed from selling computer to schools to selling technology for digitising educational content.
Educomp had the first mover advantage in the edtech sector and tasted quick success. The company was listed in 2006 and listed at Rs 125 per share. Over the next few years, word spread about Prakash’s venture and several entities were set up trying to replicate his business model.
Within two decades, Educomp set up more than 25 offices across the globe and by 2012 revenue touched Rs 1,000 crore through the ‘smartclass’ model. The stock also touched an all-time high of Rs 1,130 in January 2008.
Just five years after the IPO, Educomp had begun selling its products to almost 20,000 schools all across India. By now, Prakash was touted as the messiah of the education sector.
Prakash slowly started getting impatient. He was of the view that the company needed to grow bigger faster. A series of acquisitions followed. He entered segments like online test services and skilling.
However, competitors say, was that Prakash's unfettered ambitions got the better of him. Entering the K-12 schools segment, one which was dominated by legacy.
“Shantanu definitely started to bite more than he could chew. If he only focussed on the core business, the company would have survived,” said the chief financial officer of an education firm.
Simultaneously, the private schools started getting aggressive on pricing. Private schools have tremendous pricing power. Prakash’s Educomp was able to book sales at any cost but was not able to deliver the products due to a pile-up of receivables.
Once the company started getting a bad name for delays, the debt troubles began from 2012. Former company employees said that Prakash underestimated the borrowings. From a high of Rs 1,076 crore in FY12, Educomp’s revenue dropped to Rs 733 crore in FY13. From there it was a downward spiral.
The borrowings rose from a mere Rs 366 crore in FY08 to a whopping Rs 2,332 crore in FY17. In every transaction, Prakash was the face behind getting loans sanctioned.
“He started borrowing one after another. On one hand, business consolidation was getting delayed and it was increasingly getting difficult to get investors. Shantanu was mistaken because he thought his brand name was enough to keep the coffers full,” said a former senior management official of the company.
Moneycontrol tried to contact Prakash but was unable to reach him.
Around the same time senior officials of Educomp started to quit. Murmurs started about the company going bust. Prakash, being a first generation entrepreneur, did not give up.
In August 2012, Boston Consulting Group (BCG) was engaged to do a strategic review of Educomp. Post this, a decision was taken to exit the non-core business. Three core areas of digital content (SmartClass), K-12 school business and higher education segment were identified.
Prakash thought that hiving off businesses would help them the top position again. In 2013, Educomp made two exits in what it called non-core segments. The company sold its entire 50 percent stake in the vocational training firm IndiaCan, to its joint venture partner Pearson. It also sold 50 percent stake in Eurokids International Limited to a group of investors led by GPE India.
"Shantanu refused to look at the problem. It was clear that the bank debt would catch up sooner or later. This was due to the fact that the way he was doing business was flawed. Questions on how the books were accounted also remain," said a former employee who worked with Prakash.
Cost cutting measures were being taken. Prakash thought that a leaner workforce would mean better efficiency. This led to a loss of almost 3,500 jobs in 2013-14.
The biggest problem with Educomp was that it was selling smart class on an outright basis and recognised revenue (75 per cent of contract value) over two years. This has resulted in a drop of revenue and profits. The expenses, on the other hand, were mostly fixed in nature (like salaries and administrative expenses) so EBITDA (earnings before interest, taxes depreciation and amortisation) and profit before tax dropped significantly.
While Prakash thought that the company would be able to recover once the payments process was streamlined, Educomp could be resurrected. However, by then banks had started knocking their doors seeking a repayment.
Prakash was in a fix. He announced in July 2013 that it Educomp has approached banks for corporate debt restructuring (CDR). By then the market had an inkling that a downfall was imminent. The stock price dropped drastically to Rs 23 by December 2013 and the market cap was eroded significantly. The stock hit a rock bottom of 99 paise intraday before closing at Rs 1.08 per share on February 12.
However, some signs of revival came in when Prakash was able to get an approval for the CDR scheme was already approved earlier comprising working capital debt of Rs 399.04 crore and long term debt of Rs 83.05 crore.
Prakash's charm was no longer working. Lenders started getting impatient even as he struggled to get delinquent schools back to track in 2015. The debt piled up to Rs 3,000 crore since Educomp was unable to pay loans. All funding requests were out-rightly rejected despite Prakash making personal requests.
A bigger shocker came when the statutory auditor (Haribhakti & Co.) said that they were unable to make a 'fair' view of Educomp's financials due to some inconsistencies in the company’s balance sheet.
This was the first time that Prakash’s name was being dragged for alleged fraud. However, he consistently denied that wrongdoing. Once his name was tainted, there was no going back for either him or the company.
He, however, maintained that his 'business model' had failed and 'it did not work'.
Once the insolvency framework was finalised, Educomp went to the National Company Law Tribunal (NCLT) for insolvency in May 2017. However, various reports pointed that the company transferred its core business to other entities before filing for bankruptcy.
Even the bidders for Educomp, namely Boundary Holdings and Ebix Inc were found to have prior business relationships with Educomp.
Competitors were initially shocked about the alleged 'fudging' of accounts. Prakash was known to be ‘out for business’ but not a fraudster. But with allegations piling up one after the other, it was clear that there were some issues with the company's books and that Prakash was aware of it.
In early 2019, Serious Fraud Investigation Office started probing Educomp for alleged fund diversion and inflated land deals. The chief executive of a large education-technology firm said that by then Prakash’s credibility had deteriorated despite him pleading innocent on all occasions.
With the CBI now probing Prakash, Educomp for cheating a consortium of banks (led by State Bank of India) of Rs 1,955.36 crore, it looks like it is a done deal for the first education entrepreneur of the country.
CBI alleged that officials like Prakash used forged documents as genuine, diverted and siphoned off the banks’ funds and cheated the lending banks.
A revival is nowhere in sight. For Prakash, who borrowed Rs 1 lakh from his father to start Educomp Solutions, how he manages to get out of this sticky situation will be keenly watched.