Byju’s and Paytm Crisis Rocks India’s Tech Sector

India’s flourishing tech sector has encountered a significant setback as prominent startups Byju’s and Paytm find themselves in the midst of a crisis, grappling with regulatory scrutiny and allegations of mismanagement.

“There’s been a bit of a reality check for the last couple of years in terms of how to maintain corporate governance practices at a level that is sustainable and at a world-class level,” remarked Karan Mohla, general partner at venture capital firm B Capital Group.

Once hailed as a fintech star, Paytm has faced controversies since March 2022, when the Reserve Bank of India directed the fintech giant’s banking unit to cease onboarding new customers immediately.

A subsequent audit revealed “persistent non-compliances and continued material supervisory concerns in the bank,” stated the central bank on Jan. 31.

Since March this year, Paytm has been barred from accepting fresh deposits in its accounts or digital wallet.

While still striving for profitability, Paytm is reportedly under investigation by the federal anti-fraud agency for potential violations of foreign exchange laws.

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On Feb. 26, One97 Communications, the parent company of Paytm, 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 capitalized on the digital payments surge in India, reporting a 3.5 times growth in transactions. Despite significant investments from SoftBank, Alibaba Group, and Ant Financial, Paytm’s stock price has plummeted more than 70% since its IPO in November 2021.

SoftBank and Ant Group are now reportedly reducing their stakes in the payments company, according to local media.

“Venture capital investors and founders have a greater responsibility to ensure that governance in the company is sound,” emphasized Ashish Wadhwani, co-founder and managing partner of IvyCap Ventures.

Byju’s, once India’s most valuable startup, is also grappling with challenges. The edtech startup has seen its valuation plummet from $22 billion to $1 billion, facing issues such as alleged accounting irregularities and purported mismanagement.

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The unprofitable company, offering a range of services from online tutorials to offline coaching, attracted substantial investments during the pandemic when traditional classrooms were closed.

Byju’s is now under scrutiny following reports that the Indian government ordered an inspection into its finances and accounting practices on July 11.

“I think that the sector is going to be permanently scarred because of the development with Byju’s, because people are not going to look at that as an isolated problem. They will look at it as a larger edtech viability problem,” warned Bhavish Sood, general partner at India-based venture capital firm Modulor Capital and former research director with consulting firm Gartner.

The Covid-19 pandemic accelerated the digital revolution in India, leading to a surge in demand for tech products and services. However, the tide has turned, with funding for Indian startups plunging 83% in 2023 amid global venture funding uncertainties.

Byju’s valuation has dropped by 95%, and Paytm’s valuation has declined to $3 billion, a stark contrast from their peak valuations.

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“There is no doubt that valuations were very stretched in 2021, early 2022,” said Wadhwani from 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 faces a cash crunch, announcing a $200 million rights issue of shares in January to address immediate liabilities and operational costs. The company is reportedly struggling with debt repayments and staff salary payments.

“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,” added Wadhwani. “But also, businesses which are run on fundamentals will continue to get funding.”