Byju’s Promoters Sold Shares Worth $408 Million Yet Mass Layoffs, No Salaries And EPF, Where Is The Money Going?

Byju’s Promoters – Share Sales and Discounts.

Byju Raveendran, Divya Gokulnath, and Riju Ravindran reportedly individually sold significant numbers of shares during the secondary transactions. The combined value of the shares sold amounts to $408.53 million in 40 secondary transactions since 2015.

These share sales often occurred at a discounted valuation compared to the primary valuation of the company at the time of the sale. PrivateCircle’s report reveals that an average discount of 53% was observed in secondary sales, with Byju’s selling company stock to investors such as Silver Lake Partners, Blackrock, T Rowe Price, and Chan Zuckerberg.

However, a spokesperson for Byju’s clarified that the proceeds from these sales were reinvested back into the company to fuel its further growth.

Change in Promoters’ Shareholding
Over the years, the promoters’ shareholding in Byju’s has significantly decreased. In 2015-2016, their stake dropped from 71.6% to 54.7%, further declining to 34.7% in 2019. By 2023, their combined stake had been diluted to 21.2%.

Notably, the founders also purchased shares from multiple individuals with Raveendran buying 31,960 stocks, Gokulnath 4,666 scrips, and Riju around 100 stocks between 2012 and the current year.

Challenges Faced by Byju’s
Byju’s is currently grappling with various challenges. These include board resignations, legal disputes related to a substantial loan of $1.2 billion, layoffs aimed at capital-saving measures, and delays in releasing financial statements. News of the resignations came the same day auditor Deloitte disclosed it was resigning because Byju’s had delayed releasing financial statements for 2021-22.

These issues have raised concerns about the company’s financial management and allocation of funds, particularly in relation to recent reports of salary payment delays and failure to contribute to EPFs.

Last week, Raveendran sought to assure investors and employees by stating that he was personally invested in the company, even taking a loan in his individual capacity to fund the acquisition of Medical test prep company Aakash.

The Shah Rukh Khan Factor
In an additional setback for Byju’s, there have been reports of Bollywood actor Shah Rukh Khan potentially severing ties with the edtech company. Shah Rukh Khan had been associated with Byju’s since 2017.

This potential departure could have significant implications for Byju’s, which has been embroiled in controversies surrounding its finances. The company has struggled to repay its investors, leading to lowered valuations. Furthermore, Byju’s laid off over 5,000 employees as part of cost-saving measures.

So the questions that arise in the case of Byju’s are plenty –
– Regarding the recent reports about Byju’s missing salaries and not paying Employee Provident Funds (EPFs), there seems to be a discrepancy between the share sales and the financial challenges faced by the company.

– While the promoters have indeed sold shares in the secondary market, claiming to reinvest the proceeds, it is unclear why the company is facing issues with salary payments and EPF contributions. These concerns raise questions about the financial management and allocation of funds within the organization.

– Auditor Deloitte disclosed it was resigning because Byju’s had delayed releasing financial statements for 2021-22.

Therefore, could Byju’s have indeed resorted to fraudulent practices to inflate their financial performance to deceive investors?

Thus, leading to a distorted understanding of the company’s true health and potential, here are some ways that it could have, in actuality, done so –

Revenue Manipulation, One standard method used by startups, exemplified by Byju’s, involves booking revenue that spans multiple years as a lump sum in a single year. For instance, if a two-year course is sold, the entire payment is recognized as revenue for the first year. This practice may have distorted the financial results, creating an inflated perception of the company’s performance.

Misallocation of Expenses, Some startups exclude tech personnel salaries from the profit and loss account to boost profits. Instead, they classify these expenses as part of the cost of developing intangible assets or software products, which are recorded on the balance sheet. (Salaries and EPF not paid in many instances of Byju’s employees)

This practice artificially inflates profits and fails to represent the company’s operational costs accurately.

Premature Sales Recognition, Certain companies anticipate sales orders from repeat customers in the upcoming month and prematurely raise invoices on the last day of the previous month to meet sales targets. Recognizing revenue before actual purchase orders create a false impression of higher sales figures, potentially deceiving investors.

Consignment Sales, Another deceptive tactic involves shipping products to an agent, often a related party, and treating them as a sale. By recording revenue for the consigned goods, startups inflate their financial performance without actually completing a genuine sale.

Misrepresentation of Advertising Expenses, Some startups allocate a significant portion of their budget for advertisement expenses to inflate their revenue figures. For example, they might spend ₹120 to sell a product worth ₹100 but report to investors that they only spent ₹40, attributing the remaining ₹80 to branding expenses. (On November 2022, BYJU’s announced that they had onboarded Lionel Messi as a brand ambassador for the company’s social impact arm, Education for All; Shahrukh Khan has been associated with the brand since 2017)
This practice distorts the actual customer acquisition cost and misrepresents the company’s financial position.

Revenue Recognition in Marketplaces, For marketplace businesses, revenue should ideally be derived from transaction commissions. However, some startups record the entire Gross Merchandise Value (GMV) as revenue, disregarding the fact that only a portion represents their actual revenue. This practice leads to an inflated revenue figure and misleads investors.

Manipulation of Expenses, Startups may engage in creative accounting by categorizing normal expenses such as repairs, maintenance, and even interest payments on loans as capitalization into fixed assets. Additionally, they may capitalize tech salaries as software development costs instead of recording them as direct expenses. These tactics artificially inflate the value of assets and understate operating expenses.

Misleading Inclusion of Other Incomes, To artificially boost revenue, some startups include rental incomes or interest income in their revenue figures (sale of shares, perhaps).

This practice creates a false impression of the company’s core operational performance, leading to a distorted understanding of its financial health.

Manipulation of Inventory Valuation, A common tactic employed by startups involves increasing the value of closing inventory. By doing so, they can show lower material purchases required to fulfil sales orders, thus artificially inflating profits.
This technique inaccurately depicts the company’s cost structure and profitability.

Sales Inflation through Customer Loans, Startups may offer loans to customers to incentivize product purchases, artificially inflating sales figures without actually receiving cash. This practice misrepresents the company’s revenue generation and creates a distorted perception of its financial performance.

The Last Bit, In light of the developments mentioned above, Byju’s promoters have sold shares worth millions of dollars since 2015, apparently reinvesting the proceeds back into the company. Despite this, recent reports have highlighted challenges faced by Byju’s, including financial difficulties and controversies.
The company’s financial management and its ability to meet obligations, such as salary payments and EPF contributions, have come under scrutiny.

Additionally, the potential exit of Shah Rukh Khan, coupled with other setbacks, has further added to the company’s woes. Transparency and clarity from Byju’s management are crucial to address these concerns and restore confidence in the company as a leading player in the edtech industry.