Startups Byju’s and Paytm are facing regulatory scrutiny and allegations of mismanagement, causing a significant impact on India’s thriving tech economy.
“There’s been a bit of a reality check over the last few years in terms of how to keep corporate governance practices at a sustainable and world-class level,” said Karan Mohla, general partner at venture capital firm B Capital Group.
Paytm, formerly a fintech star in India, has been embroiled in controversy since March 2022, when the Reserve Bank of India ordered the fintech giant’s banking subsidiary to halt new client onboarding with immediate effect.
A second examination “revealed persistent non-compliances and continued material supervisory concerns in the bank,” the central bank stated on January 31.
Paytm was not permitted to accept new deposits into its accounts or digital wallets beginning in March of this year.
Paytm, which has yet to become profitable, is also apparently under investigation by the government anti-fraud agency for possible violations of foreign currency laws.
On February 26, One97 Communications, Paytm’s parent firm, announced in an exchange filing that founder and CEO Vijay Shekhar Sharma had resigned from the board of Paytm Payments Bank.
During the pandemic, Paytm benefited on India’s digital payments surge, citing a 3.5-fold increase in transactions. Paytm’s stock price has dropped by about 70% since its IPO in November 2021, despite significant investment from SoftBank, Alibaba Group, and Ant Financial.
SoftBank and Ant Group are reportedly reducing their holdings in the payments provider, according to local media.
“Venture capital investors and founders have a greater responsibility to ensure that the company’s governance is sound,” said Ashish Wadhwani, co-founder and managing partner of IvyCap Ventures.
Byju’s, once India’s most valuable startup, is likewise fighting to survive. The Indian edtech startup’s valuation has plummeted from $22 billion to $1 billion, and it is dealing with a number of issues, including alleged accounting irregularities and mismanagement.
The underperforming company, which provides services ranging from online lectures to offline coaching, drew billions of dollars in investment during the pandemic, when regular classes were closed.
According to Bloomberg, the Indian government requested a review of Byju’s finances and accounting processes on July 11.
“I believe that the development with Byju’s would permanently scar the sector because people will not view it as a one-off incident. They would look at it as part of a bigger edtech viability issue,“ said Bhavish Sood, general partner at Modulor Capital in India and a former research director at Gartner.
Inflationary valuations
The COVID-19 pandemic has propelled India’s digital revolution.
From online schooling and food delivery to online shopping, tech companies experienced an increase in demand for their products and services.
According to India’s Economic Survey for 2021-2022, the government acknowledged over 14,000 new companies in 2021, up from 733 in 2016 and 2017.
As a result, India now has the world’s third-largest startup ecosystem, trailing only the United States and China, according to the poll.
In 2021, a record 44 Indian firms earned unicorn status, with a valuation of $1 billion or more, bringing the total number of unicorns in India to 83.
According to Tracxn, venture funding for Indian businesses would reach a record $41.6 billion in 2021.
However, the tide has since turned.
ca global venture pital for Indian startups fell 83% in 2023, fra recor om d high of $7 billion in 2021, as capital dried up amid mounting macroeconomic risks, such as higher . interest rates
Byju’s valuation plunged 95% as investors reduced their holdings in several rounds. It was most recently reduced to $1 billion afte BlackRock reduced r its stake in Byju’s last month, according to media sources.
The regulatory crackdown also had a impact on significant Paytm, reducing its valuation to $3 billion as o March 7 f , according to LSEG statistics. That represents a significant drop from the almost $20 billion valuation when it was listed in November 2021.
“There is no doubt that valuations were very stretched in 2021, early 2022,” stated Wadhwani of IvyCap Ventures. “Some companies have done IPOs at valuations which were just not tenable and that caused a lot of stress in the market.”
Byju’s is experiencing a liquidity crunch, having announced in January that it will raise a $200 million rights issue of shares to cover “immediate liabilities” and other operational expenses. According to reports, the company is struggling to pay debts and employees‘ paychecks.
“Companies that don’t have cash are being forced to do down rounds,” Wadhwani added, referring to investment rounds in which companies raise capital at a lower valuation than the preceding round.
“Companies which don’t have a sustainable model are obviously going to go out of business because no one is going to fund them at crazy valuations,” he said.
“But also again, businesses which are run on fundamentals will continue to get funding.”
