NCLT halts Byju’s second rights issue, freezes funds pending litigation

Mumbai: The Bengaluru bench of the National Company Law Tribunal (NCLT) has restrained Byju’s from using the proceeds from its second rights issue, and instead, directed the ailing edtech firm to park the funds in a separate account till the disposal of the main petition. 

The order, issued late on 12 June, was made public on Thursday. Byju's second rights issue, which began on 13 May and scheduled to conclude on 13 June, was launched after the company failed to meet its capital raising target with its first rights offering in January-February.

“In the present facts and circumstances of the matter, this tribunal hereby restrains the respondents (Byju's) from going ahead with the rights issue, which is in progress, till the disposal of the main petition.” 

“The respondents are further directed to keep the amounts collected so far since opening of the second rights issue in relation to this offer in a separate account which should not be utilised till the disposal of the main petition,” the NCLT bench comprising Justices S.S. Sundaram and Manoj Kumar Dubey said. 

A rights issue is a process through which a company offers its existing shareholders the right to purchase additional shares, usually proportional to their existing holdings, at a discounted price. “Further, status quo with regard to existing shareholders and their shareholding shall be maintained till the disposal of the main petition,” the NCLT added.

An executive familiar with the matter said Byju’s had received some commitments on a pro-rata basis by the end of February, and initiated a second rights issue to enable additional super pro-rata subscriptions required to attain its $200 million capital-raising target. 

However, back then, Byju’s had announced the successful closure of the first rights issue. A super pro-rata subscription allows investors to acquire a larger share of the company.

Also read | Byju's lenders kick off bankruptcy proceedings in the US over $1.2-billion term loan

However, ongoing litigation between investors and the company’s shareholders has prevented Byju’s from accessing any capital raised so far, including proceeds from the first rights issue. 

Investors have alleged oppression and mismanagement, seeking the removal of the founder group, including Byju Raveendran. The validity of the second rights issue has also been challenged by the company's investors.

Also read | Byju’s woes worsen: Rajnish Kumar, Mohandas Pai to step down from advisory panel

The NCLT passed the order during the hearing of the main petition by the consortium of investors, alleging oppression and mismanagement by the cash-strapped firm under sections 241-242 of Companies Act.

Essentially, four investors including South African investor Prosus, Peak XV Partners Investments IV & V, Sofina S A and General Atlantic Singapore TL Pte. Ltd has accused the company of oppression and mismanagement. 

Also read | Out with the board, say angry Byju's investors

Investors contended that Byju’s was raising $200 million in the rights issue at a throwaway valuation of $225 million, which would significantly dilute existing shareholders' stakes. They also argued that no Board resolution was passed by Byju’s for the second rights issue.

Shares Allotted to Riju Raveendran

In a statement, Byju’s said on 15 April that it had secured 55% votes to expand the authorised share capital of the company and approve the (first) rights issue.

However, in the court filing, it ws found that Byjus’s had allotted over 800,000 shares to Riju Raveendran before the crucial vote to increase its authorised share capital for the first rights issue.

Senior counsel Sudipto Sarkar, appearing for the investors, argued that the allotment of shares to Riju Ravindran on 2 March was bad in law and ought to be set-aside. He also objected to the submissions made by Byju’s had headroom for allotting additional shares on 2 March.

Also read | Byju’s was in need of an experienced guide: ex-SBI chief Kumar

Sarkar also argued that due to the siphoning off funds by the management, the company is in dire straits, therefore they should not be allowed to raise further money by going ahead with the seconds rights Issue.

NCLT, in its 27 February order, had directed Byju's not to allot shares without increasing the authorized share capital of the company.