The Enforcement Directorate’s (ED’s) investigation into edtech firm Byju’s for alleged violation of Foreign Exchange Management Act (Fema) is likely to impact the company’s fundraising plans and the initial public offering (IPO) of its subsidiary, Aakash Educational Services.
Analysts FE spoke to said it is quite likely that investors will seek explanations from the company with regard to the investigation and may even withdraw any commitment made by them.
Byju’s is currently in the process of raising $700 million, including from international investors. It is also mulling a Rs 8,000-crore IPO for its subsidiary, Aakash Educational Services, which was acquired by edtech major for $1 billion in 2021.
Tushar Agarwal, advocate, Supreme Court, said any further actions by ED after this search may certainly affect the fundraising plans of Byju’s because such developments affect the public perception of the company. “If ED after investigation, finds that any Indian resident or entity has acquired, held, owned, possessed or transferred the foreign exchange, foreign security or any immovable property in contravention to the Section 4 of Fema, ED can seize the, value equivalent, of such foreign exchange, foreign security or immovable property which is situated in India,” Agarwal said.
R Sudhinder, senior partner at Argus Partners said there’s always a chance of fund seizure in such cases, so only very convincing explanations can satisfy the investors. “If a violation of laws is proved during the ED investigation then investors can definitely hold back committed funds under the clauses of a term sheet even if it’s binding,” Sudhinder said.
Naomi Chandra, partner, Singhania & Co also said if an individual investor seeks to withdraw its participation in a funding round despite a binding term sheet, then it would be classified as a civil dispute depending on the arbitration agreement.
“In a term sheet, there could be force majeure clauses or a separate pre-written clause that allows an investor to withdraw from the funding,” Chandra said. She also pointed out that if any shareholder specifically goes to Sebi objecting to the IPO, then Sebi may take note of it.
“Technically an IPO cannot be withheld by Sebi unless there are specific and independent indications of market violations by the accused company. However, ED proceedings resulting in serious penal actions like freezing of accounts, arrests of senior officials etc, in matters like the present one, is likely to make a strong case for Sebi to take congnizance of the matter,” Chandra added.
According to ED’s statement late last week, the investigation was initiated based on complaints from various individuals. It said the company’s founder and CEO Raveendran Byju allegedly failed to appear during the investigation despite multiple summons.
The ED is scrutinising Byju’s foreign direct investment (FDI) of ₹28,000 crore and overseas direct investment of ₹9,754 crore made between 2011 and 2023. The company has also booked around ₹944 crore as advertisement and marketing expenses, including funds remitted to foreign jurisdictions.
The agency has raised concerns about the authenticity of the figures provided by the company, as it has not prepared its financial statements since FY21 and has not had its accounts audited, which is mandatory.
On its part, the company has said the visit by ED officials last week related to a routine inquiry under Fema. “We have been completely transparent with the authorities and have provided them with all the information they have requested. We have nothing but the utmost confidence in the integrity of our operations, and we are committed to upholding the highest standards of compliance and ethics. We will continue to work closely with the authorities to ensure that they have all the information they need, and we are confident that this matter will be resolved in a timely and satisfactory manner,” the company has said.
According to reports, ED has also reached out to Byju’s lenders seeking more information on the edtech firm’s existing term loan and other related transactions.
FE had reported earlier that Byju’s is in breach of the covenants of the $1.2-billion loan it took in November 2022. It reportedly failed to provide its financial statements to the lenders according to the stipulated deadline as part of the loan covenant. Following this, a group of lenders who participated in the term loan pushed for faster repayment of part of the loan. In November 2021, Byju’s completed a $1.2-billion term loan B (TLB) raise with a five-year tenure. According to S&P Global, the term loan pledged a 6.78% yield to maturity rate but was an unrated issue.
However, recently, four lenders who participated in Byju’s term loan increased their interest rates for Byju’s. Latest filings of Fidelity, Natixis, Oaktree and American Beacon Funds with SEC show that Byju’s interest rate has increased from about 7% to nearly 13%. The loan that was taken by Byju’s was advised by Shardul Amarchand Mangaldas. While Natixis and American Beacon Funds filings show that Byju’s interest rate has increased from 7% to 12.98%, Fidelity and Oaktree filings show that Byju’s interest rate has increased from 7% to 10.69%. The maturity of the loan falls on November 24, 2026.
