India’s booming tech sector suffers a big blow as Byju’s and Paytm plunge into crisis
Workers inspect smart phone components at the visual inspection area of the surface mount technology workshop inside the Realme factory in Greater Noida, India: Anindito Mukerjee | Bloomberg | Getty Images
Anindito Mukerjee | Bloomberg | Getty Images
India’s booming tech sector has suffered a major blow as startup darlings Byju’s and Paytm plunge into crisis amid regulatory scrutiny and alleged mismanagement.
“There’s been a bit of a reality check for the last couple of years in terms of how to keep corporate governance practices up at a level which is sustainable and at a world class level,” said Karan Mohla, general partner at venture capital firm B Capital Group.
Paytm, once a fintech star in India, has been mired in controversy since March 2022, after the Reserve Bank of India ordered the fintech giant’s banking unit to stop onboarding new customers with immediate effect.
A subsequent audit “revealed persistent non-compliances and continued material supervisory concerns in the bank,” the central bank said on Jan. 31.
Starting from March this year, Paytm was not allowed to continue accepting fresh deposits in its accounts or its digital wallet.
Yet to be profitable, Paytm is also reportedly being probed by the federal anti-fraud agency on possible violations of foreign exchange laws.
On Feb. 26, One97 Communications, the parent company of Paytm, said 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 boom in India, reporting a 3.5 times growth in transactions. Investors like SoftBank, Alibaba Group and Ant Financial bet big on Paytm, but its stock price has slumped more than 70% since its IPO in November 2021.
SoftBank and Ant Group are now reportedly cutting their stakes in the payments company, according to local media.
“Venture capital investors and founders have a greater responsibility to make sure that governance in the company is sound,” said Ashish Wadhwani, co-founder and managing partner of IvyCap Ventures.
Byju’s, India’s most valuable startup at one time, is also struggling to survive. The Indian edtech startup has seen its valuation plummet from $22 billion to $1 billion, and faces a series of problems including alleged accounting irregularities and purported mismanagement.
The unprofitable company, which offers services ranging from online tutorials to offline coaching, attracted billions of dollars from investors during the pandemic when traditional classrooms were shuttered.
The company is under scrutiny after the Indian government reportedly ordered an inspection into Byju’s finances and accounting practices, according to Bloomberg 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,” said Bhavish Sood, general partner at India-based venture capital firm Modulor Capital and former research director with consulting firm Gartner.
Inflated valuations
The Covid-19 pandemic accelerated the digital revolution in India.
From online education and food delivery to online shopping, tech companies saw a surge in demand for their products and services.
The government recognized more than 14,000 new startups in 2021 — compared to only 733 between 2016 and 2017, according to India’s Economic Survey for 2021-2022.
As a result, India became the third-largest startup ecosystem in the world after the U.S. and China, the survey showed.
In 2021, a record 44 Indian startups achieved unicorn status — valued at $1 billion or more, taking the overall tally of unicorns in India to 83.
Venture funding into Indian startups hit a record $41.6 billion in 2021, according to data from global startup data platform Tracxn.
But the tide has since turned.
Funding for Indian startups plunged 83% in 2023 from the record high $7 billion in 2021, as global venture funding dried up amid rising macroeconomic uncertainties, such as increased interest rates.
Byju’s valuation plummeted 95% after investors cut their stakes in multiple rounds. It was most recently slashed to $1 billion, after BlackRock downsized its holdings in Byju’s last month, according to media reports.
The regulatory crackdown also hit Paytm hard, slashing its valuation to $3 billion as of Mar. 7, according to LSEG data. That’s a sharp decline from the nearly $20 billion valuation when it was listed in November 2021.
“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 is facing a cash crunch, announcing in January that it was raising a $200 million rights issue of shares to clear “immediate liabilities” and for other operational costs. The firm is reportedly struggling with debt repayments and paying staff salaries.
“Companies which don’t have cash are being forced to do down rounds,” said Wadhwani, referring to funding rounds in which firms raise capital at a lower valuation than a previous 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 added.
“But also again, businesses which are run on fundamentals will continue to get funding.”
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Boaz Weinstein, founder and chief investment officer of Saba Capital Management, during the Bloomberg Invest event in New York, US, on Wednesday, June 7, 2023.
Jeenah Moon | Bloomberg | Getty Images
Boaz Weinstein, the hedge fund investor on the winning side of JPMorgan Chase’s $6.2 billion, “London Whale” trading loss in 2011, is now taking on index fund giant BlackRock.
On Friday, Weinstein‘s Saba Capital detailed in a presentation seen by CNBC its plans to push for change at 10 closed-end BlackRock funds that trade at a significant discount to the value of their underlying assets compared to their peers. Saba says the underperformance is a direct result of BlackRock’s management.
The hedge fund wants board control at three BlackRock funds and a minority slate at seven others. It also seeks to oust BlackRock as the manager of six of those ten funds.
“In the last three years, nine of the ten funds that we’re even talking about have lost money for investors,” Weinstein said on CNBC’s “Squawk Box” earlier this week.
At the heart of Saba’s “Hey BlackRock” campaign is an argument around governance. Saba says in its presentation that BlackRock runs those closed-end funds the “exact opposite” way it expects companies to run themselves.
BlackRock “is talking out of both sides of its mouth” by doing this, Saba says. That’s cost retail investors $1.4 billion in discounts, by Saba’s math, on top of the management fees it charges.
BlackRock, Saba says in the deck, “considers itself a leader in governance, but is crushing shareholder rights.” At certain BlackRock funds, for example, if an investor doesn’t submit their vote in a shareholder meeting, their shares will automatically go to support BlackRock. Saba is suing to change that.
A BlackRock spokesperson called that assertion “very misleading” and said those funds “simply require that most shareholders vote affirmatively in favor.”
The index fund manager’s rebuttal, “Defend Your Fund,” describes Saba as an activist hedge fund seeking to “enrich itself.”
The problem and the solution
Closed-end funds have a finite number of shares. Investors who want to sell their positions have to find an interested buyer, which means they may not be able to sell at a price that reflects the value of a fund’s holdings.
In open-ended funds, by contrast, an investor can redeem its shares with the manager in exchange for cash. That’s how many index funds are structured, like those that track the S&P 500.
Saba says it has a solution. BlackRock should buy back shares from investors at the price they’re worth, not where they currently trade.
“Investors who want to come out come out, and those who want to stay will stay for a hundred years, if they want,” Weinstein told CNBC earlier this week.
Weinstein, who founded Saba in 2009, made a fortune two years later, when he noticed that a relatively obscure credit derivatives index was behaving abnormally. Saba began buying up the underlying derivatives that, unbeknownst to him, were being sold by JPMorgan’s Bruno Iksil. For a time, Saba took tremendous losses on the position, until Iksil’s bet turned sour on him, costing JPMorgan billions and netting Saba huge profits.
Saba said in its investor deck that the changes at BlackRock could take the form of a tender offer or a restructuring. The presentation noted that BlackRock previously cast its shares in support of a tender at another closed-end fund where an activist was pushing for similar change.
At the worst-performing funds relative to their peer group, Saba is seeking shareholder approval to fire the manager. In total, BlackRock wants new management at six funds, including the BlackRock California Municipal Income Trust (BFZ), the BlackRock Innovation and Growth Term Trust (BIGZ) and the BlackRock Health Sciences Term Trust (BMEZ).
“BlackRock is failing as a manager by delivering subpar performance compared to relevant benchmarks and worst-in-class corporate governance,” the deck says.
If Saba were to win shareholder approval to fire BlackRock as manager at the six funds, the newly constituted boards would then run a review process over at least six months. Saba says that in addition to offering liquidity to investors, its board nominees would push for reduced fees and for other unspecified governance fixes.
A BlackRock spokesperson told CNBC that the firm has historically taken steps to improve returns at closed-end funds when necessary.
“BlackRock’s closed-end funds welcome constructive engagement with thoughtful shareholders who act in good faith with the shared goal of enhancing long-term value for all,” the spokesperson said.
Weinstein said Saba has run similar campaigns at roughly 60 closed-end funds in the past decade but has only taken over a fund’s management twice. The hedge fund sued BlackRock last year to remove that so-called “vote-stripping provision” at certain funds and filed another lawsuit earlier this year.
BlackRock has pitched shareholders via mailings and advertisements. “Your dependable, income-paying investment,” BlackRock has told investors, is under threat from Saba.
Saba plans to host a webinar for shareholders on Monday but says BlackRock has refused to provide the shareholder list for several of the funds. The BlackRock spokesperson said that it has “always acted in accordance with all applicable laws” when providing shareholder information, and that it “never blocked Saba’s access to shareholders.”
“What we want is for shareholders, which we are the largest of but not in any way the majority, to make that $1.4 billion, which can be done at the press of a button,” Weinstein told CNBC earlier this week.
WATCH: CNBC’s full interview with Saba Capital’s Boaz Weinstein
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