We are just in the second month of 2024 and it seems like the year is not faring well for once-celebrated Indian startups, Byju’s and Paytm. From post pandemic woes to poor management to increased government scrutiny, there’s a long list of reasons as to why these two startups are in trouble. But the bigger question is what’s next? Well, to delve into that lets first understand their journey’s from the highs to the lows.
Byju’s dramatic fall from grace
Byju’s, once a beacon of India’s ed-tech revolution, has encountered significant turbulence, marking a drastic shift from its peak valuation of $22 billion in 2022.
The Meteoric Rise of Byju’s
Byju Raveendran, the company’s founder, started in of by casually tutoring friends for entrance exams, showcasing his natural ability to explain complex concepts in an engaging manner. In 2006, he formalized his passion by founding Byju’s Classes, initially catering to students preparing for competitive exams. The company’s success stemmed from its innovative approach: using interactive videos, real-life examples, and a gamified learning experience to make education accessible and engaging. This resonated with a generation of students seeking alternatives to traditional rote learning methods.
It quickly evolved into a pioneering educational platform, and acquired several educational institutions and startups. By 2015, the launch of its own Byju’s Learning App solidified the startup’s position in the market, eventually earning it the title of India’s first ed-tech unicorn by 2019. Further investments and strategic partnerships with global companies like Disney fuelled their growth. The company secured celebrity endorsements from renowned figures like Shah Rukh Khan, Virat Kohli and Lionel Messi, further solidifying its brand image and expanding its reach. By March 2022, Byju’s valuation reached a staggering $22 billion, making it the world’s most expensive ed-tech startup.
Byju’s Downfall
However, beneath the veneer of success, cracks began to appear. The post-pandemic era brought new challenges as the demand for online education normalized. Byju’s aggressive expansion strategy, characterized by the acquisition of several startups and heavy investment in marketing, came at a cost. Byju’s accumulated significant debt, leading to financial strain and concerns about sustainability. Financial mismanagement allegations, a toxic work culture, and the pressure to constantly acquire new customers added to the company’s woes. Notably, tech investor Prosus marked down Byju’s valuation by 75% in June 2023, a move that underscored the company’s declining fortunes. Additionally, the company’s delayed financial reporting and the resignation of key executives, including the CFO and CTO, raised serious concerns about its governance and operational efficiency.
Byju’s Path Forward
Byju’s current predicament is marked by a tug-of-war between the company’s leadership and major investors. Key investors, including Prosus and General Atlantic, dissatisfied with the company’s performance and financial management, called for CEO Byju Raveendran’s removal and a complete board restructuring.
The company, however, has challenged these attempts, arguing the shareholder resolutions were invalid and insisting on their commitment to leading the turnaround. It has also attempted to raise $200 million through a rights issue of shares. The situation remains fluid, with the future of Byju’s hanging in the balance as it awaits the outcome of court hearings and attempts to reconcile with its investors.
Paytm Payments Bank in limbo after RBI scrutiny
Next in line is once-a-leader of the Indian fintech space, Paytm; to be precise, its subsidiary Paytm Payments Bank. In January 2024, the Reserve Bank of India imposed stringent restrictions on Paytm Payments Bank, or PPBL. The bank was barred from onboarding new customers, accepting deposits, and engaging in any credit transactions. This came as a shock to the fintech industry and raised concerns about the future of the payments bank. The RBI cited “persistent non-compliances and continued material supervisory concerns” as the reason for its action. These concerns stemmed from a series of issues identified by the regulator during its audits and inspections of PPBL.
What were these Concerns?
-Repeated Violations:
According to a report by CNBC, PPBL faced its first regulatory hurdle within a year of its launch in 2017. The bank was found to have violated licensing conditions, including maintaining day-end balances and adhering to KYC guidelines. This led to a temporary halt on opening new accounts in 2018. The problems continued in 2021. PPBL submitted false information to the RBI, resulting in a fine of Rs 1 crore. Further investigations revealed concerning lapses in technology, cybersecurity, and KYC/Anti-Money Laundering (AML) compliance. The RBI also found that PPBL and its parent company, One 97 Communications Limited, shared the same servers and physical space, raising red flags about data security. Despite a supervisory restriction in 2022 and a fine of Rs 5.39 crore in 2023 for ongoing KYC violations, PPBL failed to take adequate corrective measures, ultimately leading to the RBI’s drastic action.
-KYC Concerns:
Reportedly, a significant number of PPBL customers, potentially in the lakhs, lacked proper KYC documentation. Additionally, there were widespread failures in PAN validation, with some PANs reportedly linked to an excessive number of customers, raising concerns about potential identity theft and money laundering. The RBI also identified an unusually high number of dormant accounts, potentially susceptible to misuse for money laundering activities.
-Lack of transparency: The RBI reportedly expressed concerns about the lack of transparency in PPBL’s operations. This included concerns about co-mingling of funds with its parent company, One 97 Communications Limited (OCL), and the lack of proper disclosure of financial information in its statements.
Impact on customers, Paytm and fintech industry as a whole
The RBI’s restrictions have had a significant impact on PPBL’s customers, its parent Paytm and the fintech space as a whole. Existing customers can still access their existing funds but are unable to add more money to their accounts. This means they will need to explore alternative platforms for future deposits and credit transactions.
For Paytm, the challenges are broader. The company anticipates a negative financial impact due to the restrictions imposed on PPBL. Additionally, it faces the task of transitioning its services, such as wallets and FASTags, to other banks to ensure continuity for its users.
The RBI’s actions against PPBL have sent ripples through the Indian fintech sector. This incident is likely to lead to increased scrutiny by the RBI and potentially stricter regulations for other fintech companies in the future.
What lies ahead for Paytm
The future of PPBL remains uncertain. Some industry experts believe the RBI may ultimately revoke its license due to the severity of the non-compliances identified. Meanwhile, Paytm is actively working on addressing the situation. This includes leadership changes, such as the resignation of founder Vijay Shekhar Sharma from the PPBL board, and exploring partnerships with established banks like Axis Bank, HDFC Bank, and State Bank of India to facilitate various financial services for its users.
Paytm is also seeking approval from the National Payments Corporation of India (NPCI) to continue operating its UPI app as a Third-Party Application Provider (TPAP). Ultimately, the company’s ability to navigate through these challenges and regain the trust of the regulator will determine its future and its position within India’s dynamic fintech landscape.
