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Why Byju’s Promoters Must Step Aside And Back

An Inspection of EdTech titan Byju's account books has been ordered by The Ministry of Corporate Affairs with a report expected in six weeks

By Govindraj Ethiraj
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Why Byju’s Promoters Must Step Aside And Back

On today’s episode, financial journalist Govindraj Ethiraj talks to Vinod Karki, equity strategist at institutional broker ICICI Securities as well as Manu Gupta, co-founder of Seeds, a non profit that works on building resilience of people exposed to disaster and climate change.

  • <00:55> Time For Byju Promoters To Step Aside As Govt orders inspection of Byjus books
  • <05:11> Everyone is talking about microcap investing, is it really a new thing?
  • <15:52> High-intensity rains are claiming lives, destroying homes and public infrastructure. Can we plan for extreme weather?
  • <24:40> Hmm... Indians paid over Rs 80 crore to apply for Schengen visas which got rejected.


NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it’s Wednesday, the 12th of July and I’m Govindraj Ethiraj coming to you from Mumbai, India’s financial capital!

Our Top Reports For Today

  • Time For Byju Promoters To Step Aside As Govt orders inspection of Byju's books
  • Everyone is talking about microcap investing, is it really a new thing?
  • High-intensity rains are claiming lives, destroying homes and public infrastructure. Can we plan for extreme weather?
  • Hmm... Indians paid over Rs 80 crore to apply for Schengen visas which got rejected.

Byju’s Promoters Should Go

There is usually an unfortunate but steady build-up to corporate bad news, particularly if it involves only peeling back layer after layer till almost nothing is left.

Bloomberg is now reporting that the Indian Government has ordered an inspection into the account books of education-technology titan Byju’s, which saw the resignation of its auditor Deloitte and three board members and investors last month.

The Ministry of Corporate Affairs has sought a report in six weeks, sources told Bloomberg asking not to be named as the information isn’t public. The inspection follows an internal assessment of the company’s state of affairs and — based on findings of the inspection — the government will decide if the matter needs to be escalated to the Serious Fraud Investigation Office, something that has been repeatedly reported and mentioned in the last few days in the context of the same inspection of books.

Just the last action would in itself would not be worrisome, as would not be many other problems that this education company is facing.

Also, the sequence of events, going by past experience, is building up like a rising drumbeat, starting with an Enforcement Directorate raid in April end or just about two months ago and now the Ministry of Company Affairs, looking into books.

But add them all up, previously culminating in the departure of the auditor and the investor-directors, it is not looking good.

It does not help that the Government put out a general and gentle reminder that an auditor cannot absolve itself of responsibility of fraud by resigning were it to have occurred to its tenure.

The National Financial Reporting Authority put out a circular on 26 June saying auditors should not be under such misconceptions.

And also referred to a Supreme Court judgement dated May 3 which again involved, well, Deloitte Haskins but involving an older case of IL&FS, another beleaguered, scandal-ridden company.

There are entrepreneurs and businesspeople who stick it out because they are convinced either of their innocence, competence or mortality. And sometimes do succeed in holding out till better days come.

In this case, it does not appear that Byju is on a strong wicket in any of these aspects.

At this point of time, the only way out for the Byju promoters is to step back and down totally and allow a truly independent board - if they can institute one to take over.

Yes, the founders might be completely innocent of all accusations and slurs, except of course of crashing the dreams of investors’ and other assorted admirers in the tech ecosystem but they should return to run the company only after the haze that is deepening by the day has lifted.

It is extremely inconceivable at least as far as I can see that their continued presence can help nurse back the company to any semblance of normalcy.

And things will get worse if some skeletons begin to tumble out of the cupboard. Remember that a big-name auditor wouldn’t have resigned and three investor directors would not have for all practical purposes abandoned their investment if something wasn’t wrong.

And finally, remember that the Government of the day (or any day) is quite alive to such unravellings and the impact that can have on the overall investment climate and the image of India being a startup nation and the rest of it. And it will move fast if it has to.

For all the criticism of the Government’s handling of the Adani-Hindenburg issue, note that Sebi which reports to the Government has now mandated all foreign portfolio investors must make additional granular level disclosures if they hold more than 50% of their Indian equity assets in a single group.

This was a major bone of contention in the Hindenberg accusations which accused Adani of holding and thus manipulating its stock price through ghostly overseas entities.

How this will play out and if FPIs will wriggle out by finding some other vehicles is not of course clear right now.

But the course of action for the founders of Byjus, the poster boy for all things great in the startup world, is quite clear.

The Microcap Frenzy

Early last month, investment bank Goldman Sachs put out an interesting report which we profiled in The Core Report on June 6.

It said that India had produced the largest proportion of multi bagger stocks among 10 major emerging and developing markets.

Goldman identified some 269 stocks which fit this 10-bagger definition over 20 years after studying some 6,700 stocks.

More importantly and relevant to today’s theme is that at least half of these multi-baggers had a market capitalisation of $50 million or less than Rs 400 crore going by current rates.

Which brings us to micro-caps, stocks that hover in the Rs 500 crore to Rs 1,000 crore market capitalisation range today. Though the definitions may vary, depending on which brokerage or securities house.
Before we come to some questions and posers, a quick update.

Several mutual funds that started collecting funds for microcap or smaller cap schemes have closed or are closing their doors.

In the last week or so, Nippon India Mutual Fund - which is advertising quite heavily right now and Tata Mutual Fund stopped lump sum investments into their funds.

Both are allowing systematic investment plan-based investments which come in smaller but predictable doses from usually smaller investors.

The reason they don’t want large chunks of money is they don’t want to be saddled with more money than they can invest, at least judiciously. And obviously, there are not that many liquid options.

There are some fairly obvious questions. Are microcaps a new name essentially for what Goldman was calling small caps two decades ago? And by extension, is it a way of approaching the market differently since mutual funds and brokerages have to find new ideas to pitch to customers and clients?

The interesting thing, which in some ways fits with the areas we cover at The Core.in is that close to 70% of stocks in the microcap universe or smaller cap universe are industrial, including manufacturing and then onto areas like discretionary consumption.

The most important question of course is whether there is any steam left in this microcap wave and is it, just that we have found the right definition, coming to an end?

To get a larger sense on what this microcap wave was all about, I spoke with Vinod Karki, Equity Strategist at institutional broker ICICI Securities.


Meanwhile, the stocks that Karki and team have picked as part of their top picks in their coverage universe include

Wonderla Holidays, Somany Ceramics, Greenpanel, Sansera Engineering, ISGEC, Fusion MicroFinance, Repco Home Finance, Nazara Tech, Tatva Chintan, Astra Microwave, Kewal Kiran and Gokaldas Exports.
Some of these are older companies and I heard of them after a while. If you really want to think long term, I guess this is where you start to look.

The Goldman report by the way said that sectorally, domestic cyclical sectors (investment and consumer cyclicals) have produced the largest number of multibaggers (54%). Specifically, cement, chemicals, capital goods and consumer durables and retail have seen the largest number of multi-baggers.

Disaster Resilience

Data can deceive too. The topline numbers tell you that this year’s monsoon was delayed - as we know - but that the rains in the last week or so have made up for the deficit and as a matter of fact we are in surplus.
What this hides is the fact that there are considerable variations within and across the country with sharp deficits in some parts of the country like east, central and south and high surpluses in others, like northern India.

Heavy rains have killed at least 42 people with rivers overflowing and landslides in hilly areas. Many are feeling a sense of dread and deja vu seeing the all too familiar WhatsApp videos of sludge tearing through towns and bridges and concrete structures being washed away.

The damage to life and property, both private and public does find its way into headlines but the damage to livelihood and the local economies usually does not and that is why perhaps the issue deserves more attention.

Given that weather patterns are changing and the intensity increasing, what is it that we can learn from or take away and more importantly, better prepare in the coming days?

I reached out to Manu Gupta, co-founder of Seeds, a non-profit started almost 30 years ago that works on building resilience of people exposed to disaster and climate change.

Seeds have worked in many parts of the country in different ways to build resilience, one example I can quote here is their groundwork in Assam where they built flood-resilient houses on bamboo stilts for local communities. Or using concrete materials and better technologies to make houses more flood resilient elsewhere in the state.

I began by asking Manu Gupta to describe what he was seeing right now from his vantage point as someone who has worked in disaster response.

Hmm... Schengen Misery

You might call this adding fuel to the fire.

What’s common to Algeria and Turkey and us, here in India? Well, Algerian nationals were ranked top in terms of Schengen visa applications denied in 2022. They were followed by India and then Turkey, according to SchengenVisaInfo.com.

India saw some 121,188 applications being rejected, which would add up to roughly Rs 87 crore, assuming only adults applied. But children between 6 to 12 pay half the application fee and children less than 6 years are free. So quite likely the total sum will be around Rs 80 crore or even less.

But even if it was Rs 70 crore, let's say, it is high.

But the Indian visa rejection rate was 18%, so roughly five times as many have applied, maybe half a million and likely that many travelled too. India’s rejection rate is higher than the average rejection rate across the world, which stood at 17.9% in 2022.

The only country with higher visa rejections than India is Algeria, where 1,79,409 of 3,92,053 visa applications were rejected.

The rate of rejection and the money lost here does not reflect the clearly harrowing time many travellers, including people I know have had in recent months trying to make it to Europe in summer.

Visas have been delayed, flights have been missed and money has gone down the drain. Not to mention the stress of the whole process.

Hopefully, things will improve all around next summer for Indian travellers or they will find newer destinations.
Before I go.

28% Tax On Turnover Of Online Gaming Companies

The Goods and Services Tax (GST) Council on Tuesday decided to impose a 28 per cent tax on the turnover of online gaming companies, horse racing and casinos, finance minister Nirmala Sitharaman said.

The panel, headed by the Union finance minister and composed of representatives of all states and UTs, decided on the tax rate based on the recommendation of a group of ministers that looked at taxing casinos, horse racing and online gaming, the Business Standard reported.

The issue before the GoM (group of ministers) was whether to impose a 28 per cent GST on the face value of bets, or gross gaming revenue, or just on platform fees.

Ms Sitharaman said the tax will be levied on the entire value.

The tax on online gaming companies would be imposed without making any differentiation based on whether the games required skill or were based on chance.

That’s It From me, have a great Wednesday!