The Enforcement Directorate (ED) of India has issued a show cause notice to edtech giant Byju’s and its founder Byju Raveendran for alleged violations of the country’s foreign exchange laws. The notice comes after an ED investigation found that Byju’s contravened provisions under the Foreign Exchange Management Act (FEMA).

As per the ED statement, Byju’s and Raveendran face allegations of FEMA contraventions to the tune of Rs 9,362.35 crore ($1.1 billion). This represents one of the largest financial penalties levied against a company in India.

The show-cause notice means that Byju’s and its founder must explain within 30 days why further legal actions should not be taken against them. If they fail to provide evidence that shows that there was no wrongdoing on their part, financial penalties of up to three times the amount specified in the notice can be imposed by the ED.

The notice is only the latest scandal suffered by Byju and its leadership as it recently failed to file its accounts by the deadline, garnering suspicion that it may be ‘cooking’ its books.

The ED Investigation Finds Several FEMA Violations from 2011 to 2023

The ED initiated a probe after receiving complaints regarding foreign investments flowing into Byju’s over the past decade. Additional concerns were raised regarding the company’s business conduct and overseas transactions.

During the investigation, the ED found six primary FEMA violations by Byju’s:

  • Failure to submit supporting documents for imports made against advance remittances to foreign companies.
  • Failure to realize the proceeds of exports in India from its foreign operations.
  • Delayed filings related to foreign direct investments into the company.
  • Failure to submit documents supporting outward remittances made to foreign parties.
  • Failure to file documents pertaining to investments made by the company abroad.
  • Failure to allot shares against foreign direct investments received by the company.

The allegations relate to Byju’s operations between the years 2011 and 2023. The ED says that Byju’s received around $3.7 billion (Rs 28,000 crore) in foreign investments during this period. Additionally, over $1.3 billion (Rs 9,750 crore) was remitted abroad from India that were destined to make various overseas investments.

The notice names both the parent entity Think & Learn Pvt. Ltd, which operates Byju’s flagship tutoring service, as well as its founder Raveendran. Both parties will need to respond to the ED to explain the alleged violations.

Controversies Abound Regarding Byju’s Financial Performance

The fresh FEMA allegations cap a turbulent period for the edtech leader. Byju’s has faced multiple auditing delays, revenue shortfalls, job cuts, and other controversies over the past year.

The company reportedly booked major losses in FY22 as growth slowed. Its audit remains pending for the year ended in March 2022. Byju’s also recently delayed payments of around $1.2 billion related to its Aakash Educational Services acquisition.

These difficulties have raised corporate governance red flags and damaged Byju’s reputation as India’s top-valued startup. The firm was valued at $22 billion last year but has since seen its valuation marked down significantly by backers such as Prosus, which slashed its price tag for the firm to less than a quarter of that amount.

Coming on the heels of these previous issues, the massive ED penalty threatens to further harm investors’ trust in Byju’s ability to stay afloat and maintain a sustainable business model. However, the company will get the chance to present its side of the story when it responds to the notice.

Byju’s Denies All Charges

Byju’s denied receiving any FEMA violation notice when reports initially emerged last week. In a fresh statement today responding to the ED’s official announcement, Byju’s said:

“Byju’s unequivocally denies media reports that insinuate Byju’s of any Fema violations. The company has not received any such communication from authorities”, a company’s spokesperson commented. The same statement was later published on the firm’s account on the social media platform formerly known as Twitter and now called X.

The Byju’s case reflects intensified ED scrutiny of startup funding activities after the Walmart-Flipkart FDI rule violation charges in 2021. Like Byju’s, Flipkart received a $1 billion penalty notice.

The ED and other agencies are increasingly examining investors’ exits, taxes on share buybacks, foreign exchange transactions, and other compliance areas.

The attention on startup funding flows reflects authorities’ desire to regulate more closely the thriving landscape of young companies accessing billions of foreign capital, especially within the tech sector.

Beyond Byju’s and Flipkart, many startups have faced ED, Income Tax, GST, and other similar investigations. The crackdowns aim to ensure compliance as startup valuations and foreign transactions reach unprecedented levels. However, entrepreneurs have complained of overzealous probes without adequate basis in some cases.

Amid the rising scrutiny, the gargantuan Byju’s fine looms as a warning signal to all startups. Founders may need to reexamine their corporate governance proceedings regarding foreign investments and outbound remittances. Establishing robust documentation and transparency concerning these funding rounds has gained importance now that it seems obvious that these transactions are no longer flying under the radar.