A huge loss of Rs 5,594 crore by BharatPe has surprised some in the startup world, especially after it was followed by the immediate stepping down of its CEO Suhail Sameer.
The loss is the latest in the unending controversies since the company’s investors fell out with former managing director Ashneer Grover.
Over the course of 2022, a string of high-profile executives left the fintech unicorn. In December, it initiated three separate legal proceedings against Grover and his family.
The company said its revenue rose 169 percent to Rs 321 crore in FY22, compared to Rs 119 crore in the preceding financial year. Meanwhile, it recorded a loss of Rs 5,594 crore during FY22 — which is about 89 percent higher than the Rs 2,961 crore it had registered in the previous financial year.
Amid the chaos, the company said an accounting norm was the reason behind 85 percent of the loss amount.
What’s behind this ballooning loss?
It’s a financial instrument called compulsorily convertible preference shares, according to BharatPe chief financial officer Nalin Negi. He said that start-ups typically raise funds from investors through this quasi-equity instrument, which may have certain conditionalities attached like repayment or buyback in case business milestones are not achieved.
Moreover, when there's an IPO or other secondary share sale on the horizon, this instrument can also be converted into common stock or standard equity shares.
But, there’s a catch. IndAS accounting norms mandate that any change in the fair valuation of CCPS must be recognised as a liability.
“This sort of thing has led to huge losses on the balance sheets of many startups over the years after the IndAS norms came into force. It was not an issue with the Indian GAAP norms that were followed earlier,” said a venture capital investor who did not want to be named.
“For example, a company whose valuation rose from $1 billion to $3 billion in a financial year (FY), and the value of a CCPS rose from $1,000 to $3,000. This company has to recognise an additional $2,000 as a liability for the FY as the value of the buyback right has increased,” he added.
For instance, a foodtech unicorn had not classified the buyback rights that preference shareholders have as a liability a couple of years back. This led to its auditor giving it a ‘qualified opinion’, which happens when an auditor is not convinced or has concerns about a specific aspect of the company’s accounting practices.
“Nowadays, big startups refuse to include any buyback rights within the CCPS provisions to prevent such things from happening. While buybacks may still be implemented at the board level, the CCPS itself may not have that clause,” the VC said.
“As a result, those startups won't rack up huge losses on account of valuation changes,” he added.
In contrast, BharatPe has been classifying it as a liability over the years – it recognised losses of Rs 1,342 crore in FY21 and Rs 702 crore in FY20 as a consequence of the change in the fair value of its CCPS.
However, in August 2021, the fintech unicorn had undertaken an exercise to amend its CCPS clauses and remove the buyback rights. Incidentally, Ashneer Grover was still at the helm of affairs at the time.
While BharatPe’s total loss for FY22 is Rs 5,594 crore, it includes an extraordinary item pertaining to the loss in the change in fair value of CCPS amounting to Rs 4,782 crore.
"This item is a one-off and shall not be there from next year as we have now reclassified the compulsory convertible preference shares from liability to equity," said BharatPe CFO Negi.
According to him, excluding the CCPS conversion, the operating loss of BharatPe was Rs 811 crore in FY22 and Rs 277 crore in FY21.
"This was mostly because we entered new business segments in FY22 such as Swipe and PostPe, which required investments. Our goal is to achieve EBITDA level profitability next year," he added.
