Behind the scenes: What happened between Byju’s and board members?

On June 6, Byju's initiated a lawsuit against its term loan B lenders, accusing them of engaging in predatory practices. Concurrently, the company did not pay $40 million in interest. Byju's said it would halt further payments since the legitimacy of the term loan B was being disputed.

Shortly thereafter, there was a buzz that three directors – GV Ravishankar of Peak XV Partners (formerly Sequoia Capital India), Vivian Wu from Chan Zuckerberg, and Russell Dreisenstock from Prosus had resigned from the board of the world’s most valued edtech company and India’s most valued startup.

Sources said Byju's' decision to go after its lenders was possibly the last straw, capping months of simmering tensions over the way the company was run. Besides, they may have wanted to avoid the liabilities associated with being a board member under India’s company laws, considering the startup’s delay in filing FY22 (2021-22) financials, which typically leads to a penalty being levied on directors, but more importantly, damages their reputation.

Moneycontrol had reached out to the company seeking clarification on the board members’ alleged discontent and potential resignations. However, Byju's denied these claims then. Co-founder and CEO Byju Raveendran stated that a board meeting was held on June 5, when it approved the initial public offering of its unit, Aakash Educational Services.

Nevertheless, where there's smoke, there's usually fire. Sources said the resignations took place between the first and second week of June, and almost 50 shareholders were informed about them on June 18th. With Byju’s going down the denial route again, the investee firms issued separate statements late on June 23rd.

What gives?

Byju's declined to comment. Queries sent to Peak XV Partners, Prosus and Chan Zuckerberg Initiative did not elicit any response.

Lack of transparency

For over a year, non-promoter board members had sought greater transparency regarding Byju's operations. Raveendran is known to run a tight ship, and exerts complete control over fundraising, operations and communications.

A source close to one of Byju's early backers and largest shareholders remarked, "Only he (Raveendran) knows what's happening and was rarely questioned about it, given that he had built a $22 billion empire encompassing numerous successful businesses. But operating privately is distinct from being unforthcoming about important matters such as lender issues. Raveendran was uncooperative with the board when it came to addressing the lender problem."

A person with knowledge of the matter said Raveendran was asked to sue the lenders by Byju’s forthcoming investors. Byju’s has been looking to raise $700 million in an equity funding round from a Middle East-based Sovereign wealth fund for almost three months. But the company has not been able to close it yet amid issues such as searches conducted by India’s financial probe agency, the Directorate of Enforcement, and a tiff with lenders.

As it turned out, the three board members had tendered their resignations in the second week of June, during the initial denial by the company to Moneycontrol. However, Raveendran had yet to accept their resignations.

Retention attempts

Raveendran tried to persuade the board members to reconsider their decisions and presented them with various options, including expanding the board and enhancing transparency.

"All options were considered and discussions took place between the investors and Raveendran," said an individual aware of the talks, on condition of anonymity.

“There were multiple emails exchanged between GV Ravishankar and Byju Raveendran in the last six months. The discussions centred on appointing independent directors to the board, resembling that of a public company, being more transparent about operations, and particularly, being more open about financial matters.”

However, these failed to materialise. On June 18, Byju's convened a meeting with over 50 of the company's top investors. During the meeting, the three non-promoter board members confirmed their resignations to the shareholders. However, Byju's had not officially accepted the resignations.

On June 22, Moneycontrol reported on the resignations, which the company again denied. Observers explained the denial was due to a technicality.

"Until the company accepts the board members' resignations, they can deny their departure. Once accepted, the company must officially file the resignation letters with the Ministry of Corporate Affairs and appoint new directors within 30 days," explained an observer knowledgeable about the technicalities.

A formal acceptance

Finally, on June 23, Byju's and the three investors—Peak XV Partners, Prosus, and Chan Zuckerberg Initiative—formally accepted the resignations.

Byju's attributed the departures of the board members to the respective investors' shareholding falling below a specific threshold. However, the investors themselves did not disclose their reasons for resigning.

Prosus holds just less than a 10 percent stake in Byju's, while Peak XV Partners holds 7.1 percent. Chan Zuckerberg Initiative has a 2.4 percent stake. Tracxn data shows that in July 2022, the stakes of Sequoia and Prosus declined 10 basis points, whereas Chan Zuckerberg's stake remained unchanged.

Byju's statement that the investors had to vacate their board seats because their shareholding fell below a threshold is unclear, given that the company has not secured new equity funding in the past eight months.

The exit of the three directors left Byju’s with only family members on the board – Raveendran, his wife Divya Gokulnath, and his brother Riju Ravindran.

“We want to reassure all stakeholders that we are actively working towards constituting a diverse and world-class board commensurate with the company’s size and scale,” a Byju’s spokesperson said while formally accepting the board members’ departures on June 23.

All said and done, if Raveendran had always been private about operational matters, what triggered the board members’ departure now?

The probable trigger

As the first person quoted above said, the majority of Byju’s investors are sitting on handsome returns on their investments. The company’s valuation rose 22 times from January 2018, when it turned into a unicorn valued at $1 billion, to March 2022, when it raised funds at $22 billion.

The company’s revenue was more than Rs 2,000 crore even before the pandemic in FY20. With the pandemic-led boost for online learning, Byju’s was set to grow leaps and bounds.

“You have to believe the investors were happy. If a company has grown so much in revenue before an external factor (Covid) and so much in valuation, it suggests the model is working,” said an edtech investor, requesting anonymity.

“The pandemic-driven boost was something all edtech companies looked to capitalise upon and Byju’s was no exception. But then cracks started appearing in May last year. It just went from bad to worse for Byju’s. Certainly, the investors and particularly board members were going to be more cautious.”

The investor has a point. Last year onwards, serious allegations against the company such as non-payment of vendor dues and other statutory payments, and probable foreign exchange violations started surfacing. Byju’s was also probed for pushing poor families to buy their subscriptions by offering loans.

“The company has been under the ED scanner. There are issues with respect to the loan it has raised. If there are any statutory payment dues, the directors are held liable. While even after their resignations, the directors can be held responsible for the retrospective dues, the resignations suggest that the dues are going to increase going forward and in that case, they do not want to be held responsible and liable for that,” said a legal expert.

“The directors, thus, might want to clear themselves of future liabilities,” the person quoted above added.

Moreover, there were questions about the 18-month delay in filing the financial results for FY21. Even for FY22, the company has not filed results yet.

“We, as directors, are advised to step down from boards if there is a more than a three-month delay in filing audited results,” said a venture capital investor who has held board seats in startups and currently sits on a startup’s board.

“Especially if the company has not been able to convey the reason for the delay, we are asked to immediately step down. In Byju’s case, there has been an 18-month delay last year and a 15-month delay this year, so that could be one of the main reasons for the departure,” the investor added.
In case of non-filing of annual returns of a company, both the company and the directors are liable for penalty.

“More than the penalty, there is a huge reputation risk at stake for the directors,” said Shriram Subramanian, founder of governance advisory firm InGovern.

Byju’s said on June 23 the management has engaged with investors in “constructive discussions” on the reconstitution of the board, including the induction of independent directors.

With half of the board resigning, the startup faces a significant challenge that will determine its future. The crisis not only impacts the company's over 30,000 employees but also its subscribers, a $1.2 billion term loan B, and funding of over $5 billion secured from more than 70 reputable investors.

The ongoing issues are also likely to have a ripple effect on India’s startup ecosystem, currently the third-largest in the world. Indian startups already face a worsening funding winter, with global PE/VC firms holding back investments. Additionally, corporate governance lapses at many Indian startups have prompted partners of VC firms to voice caution on India’s startup ecosystem.

“This is not a Byju’s only issue. I have received a number of calls, emails and msgs from my global LPs over the last 48 hours asking if this is symptomatic to the industry as a whole. In particular, if I as a director was aware of issues at my companies and am ignoring them,” Deepak Shahdadpuri, managing director at DSG Consumer Partners, said in a tweet on June 24.

“We as institutional investors have a fiduciary and moral responsibility to our LPs and our founders to hold them accountable. As a company director, I take my job seriously. I am not sure what happened at Byju's but this is already impacting how foreign LPs are viewing India.”