Staff inspect smart phone components on the visual inspection area of the surface mount technology workshop contained in 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 serious blow as startup darlings Byju’s and Paytm plunge into crisis amid regulatory scrutiny and alleged mismanagement.
“There’s been a little bit of a reality check for the last couple of years by way of easy methods to keep corporate governance practices up at a level which is sustainable and at a world class level,” said Karan Mohla, general partner at enterprise 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 latest customers with immediate effect.
A subsequent audit “revealed persistent non-compliances and continued material supervisory concerns within the bank,” the central bank said on Jan. 31.
Ranging from March this yr, Paytm was not allowed to proceed accepting fresh deposits in its accounts or its digital wallet.
Yet to be profitable, Paytm can also be 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.
In the course of 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 greater than 70% since its IPO in November 2021.
SoftBank and Ant Group are actually reportedly cutting their stakes within the payments company, based on local media.
“Enterprise capital investors and founders have a greater responsibility to ensure that governance in the corporate is sound,” said Ashish Wadhwani, co-founder and managing partner of IvyCap Ventures.
Byju’s, India’s most dear startup at one time, can also be 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 starting from online tutorials to offline coaching, attracted billions of dollars from investors through the pandemic when traditional classrooms were shuttered.
The corporate is under scrutiny after the Indian government reportedly ordered an inspection into Byju’s funds and accounting practices, based on Bloomberg on July 11.
“I feel that the sector goes to be permanently scarred due to development with Byju’s, because people will not be going to take a look at that as an isolated problem. They are going to take a look at it as a bigger edtech viability problem,” said Bhavish Sood, general partner at India-based enterprise 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 corporations saw a surge in demand for their services.
The federal government recognized greater than 14,000 latest startups in 2021 — in comparison with only 733 between 2016 and 2017, based on India’s Economic Survey for 2021-2022.
In consequence, India became the third-largest startup ecosystem on the earth 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 general tally of unicorns in India to 83.
Enterprise funding into Indian startups hit a record $41.6 billion in 2021, based on data from global startup data platform Tracxn.
However the tide has since turned.
Funding for Indian startups plunged 83% in 2023 from the record high $7 billion in 2021, as global enterprise funding dried up amid rising macroeconomic uncertainties, resembling increased rates of interest.
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, based on media reports.
The regulatory crackdown also hit Paytm hard, slashing its valuation to $3 billion as of Mar. 7, based on LSEG data. That is a pointy decline from the nearly $20 billion valuation when it was listed in November 2021.
“There isn’t any doubt that valuations were very stretched in 2021, early 2022,” said Wadhwani from IvyCap Ventures. “Some corporations have done IPOs at valuations which were just not tenable and that caused numerous stress out there.”
Byju’s is facing a money 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 fighting debt repayments and paying staff salaries.
“Firms which do not have money are being forced to do down rounds,” said Wadhwani, referring to funding rounds wherein firms raise capital at a lower valuation than a previous round.
“Firms which do not have a sustainable model are obviously going to exit of business because nobody goes to fund them at crazy valuations,” he added.
“But additionally again, businesses that are run on fundamentals will proceed to get funding.”