Case Study On Educomp

4/9/2018 How Educomp May Have Subverted the Spirit of India’s Insolvency and Bankruptcy Process - The Wire
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How Educomp May Have

Subverted the Spirit of India’s
Insolvency and Bankruptcy
Process
The auditor's report raises concerning questions over its balance sheet
and there is evidence to show its core business was effectively
transferred to a separate but connected company before the insolvency
process started.
Shantanu Prakash, original promoter of ESL (L). Credit: Youtube screenshot/Reuters
https://thewire.in/business/how-educomp-may-have-subverted-the-spirit-of-indias-insolvency-and-bankruptcy-process 1/17
Manoj Gairola
BUSINESS 03/APR/2018
New Delhi: Are the Narendra Modi government’s attempts at cleaning up India’s
bad loans crisis – specifically the new bankruptcy law for the resolution of
unpaid bank loans by companies – being gamed by promoters who might be
using these new mechanisms to escape their repayment obligations?
Consider the case of Educomp Solutions (ESL), which was once a promising
player in the private education space.
The Wire has examined documented evidence that shows how ESL started the
effective transfer of its core business to other companies having strong links
with the original promoter before taking the original corporate entity to
bankruptcy court.
The flagship entity went to the National Company Law Tribunal (NCLT) for
insolvency in May 2017. Only two companies finally submitted bids. Both
bidders are old business partners of the original promoter. This, industry sources
say, gives rise to suspicion that it may have been necessary to have friends buy
out the auctioned entity because a genuine buyer could later discover balance
sheet numbers that don’t represent real assets on the ground.
The above inference is clearly borne out by the statutory auditor’s report for
ESL, which The Wire has accessed. Surprisingly, despite the statutory auditor
(Haribhakti & Co. LLP) raising concerns over the balance sheet numbers, the
NCLT auction proceedings appear to be going on as if nothing is out of the

ordinary.
This broadly appears to be the story of Educomp, which over a decade ago was
heralded as the poster boy for how private companies could make money in
school education.
As the NCLT proceedings reach the final stage, the banks are staring at a loss of
more than 87% of their total Rs 3,000 crore debt. The selected bidder, Ebix Inc,
has quoted less than Rs 400 crore for ESL. The auditor’s report questions the
role of company management and the banks.
The auditor’s report clearly states that the company’s financial statements are not
true and correct. It doesn’t give a “true and fair view in conformity with the
accounting principles generally accepted in India including the Indian
accounting system, as of state of affairs (financial position) of the company as at
March 31, 2017, its loss, its cash flows and changes in equity for the year ended
on that date”.
Haribhakti & Co. LLP is the auditor. The report also red-flags a number of other
concerns:
1) While evaluating impairment of investments of Rs 1,400 crore in ESL’s four

subsidiaries, the management was of the view that ‘no provision of impairment
is considered necessary.”
“However, in the absence of appropriate audit evidence …we are unable to

comment upon appropriateness of carrying amount of these investments and
possible impact of the same on loss for the year ended march 31, 2017 and
investments,” the report notes
2) ESL has not recorded any provision against long outstanding trade receivables
amounting to Rs 708 crore from ESSPL (Edu Smart Services Pvt Ltd, a
subsidiary of ESL). It has not considered the diminution in value of its
investments in ESSPL amounting to Rs 51 crore.
“Considering the fact that ESSPL has been incurring losses resulting in erosion
of its net worth and initiation of insolvency proceedings against it (subsequent to
March 31, 2017) we are unable to comment on recoverability of the said trade
receivables, investment and amount recoverable,” it notes.
3) The report also points out that the ESL management says that receivables
amounting Rs 314 crore are good and recoverable. However, “we are unable to
comment on the recoverability of outstanding trade receivables”.
4) The report states that the management maintained bank accounts of the
company that were not disclosed in the financial statement.
There are 21 such points mentioned by the auditor in report on financial

statements that confirm to ‘adverse audit opinion’.
Effective transfer of smart class biz
Between December 2015, when the Insolvency and Bankruptcy Code (IBC) was
introduced in parliament and May 2017, when ESL filed for insolvency, it
effectively shifted its ‘smart class business’ to another firm – Smart Class
Educational Services Pvt Ltd (SESPL).
Divya Lal, a former COO of Educomp and a close confidante of Educomp’s

promoter and chairman Shantanu Prakash, was made a director and shareholder
in SEPSL. She was in ESL till July 2016.
The modus operandi was simple. Contracts of a large number of schools that
were ‘smart class’ clients of Educomp were renewed under SEPSL either in part
or full. Some of the schools were given incentives to sign contracts with SEPSL,
according to a former employee of ESL who declined to be identified.
The Wire is in possession of an email dated October 26, 2016, from Rakesh
Dhaiya, a senior vice president of ESL, to a director of a reputed Kolkata-based
school. The subject of the letter is “Renewal of Smartclass Program…”
In the email, Dhaiya writes: “We wish to inform that Smartclass Educational
Services Pvt. Ltd. is an authorised distributor of Educomp for licensing the smart
class content and hence the cheque against the payment for the content can be
made in the name “Smartclass Educational Services Pvt. Ltd.”
Interestingly, the Linkedin profile of Dhaiya shows that he was shifted to SEPSL
in November, 2016 as a senior vice president.
In a letter dated March 20, 2017, which The Wire has accessed, an official of a
Delhi-based school writes to the national head of SEPSL: “Mrs Usha, the
resource person is always ready to aid teachers and make them familiar with the
various Educomp modules and their uses. We are happy using the interactive
white boards and the tools associated with it.”
In another letter to the national head of SEPSL, the principal of a Ranchi-based

school writes, “That is why we are using Smart Class since 2010 and also
renewed till 2021.”
It is to be noted that SEPSL was registered only in December 2014.
The Wire is in possession of 17 such letters that show the association between
ESL and SEPSL, and point towards the former winding down its business and
the latter gaining; an effective transfer of business from ESL to SEPSL.
Other important links between the two companies include:
1) The two companies operate from the same office. The Wire is in possession of
a rent agreement between Educomp and SEPSL. Educomp has been given office
space in Educomp Towers in Gurgaon on lease to SEPSL.
2) The Facebook page of Shantanu Prakash, Educomp’s promoter and chairman,

shows him giving awards to school principals at SEPSL functions. On one of the
pages, he writes that SEPSL is a proud partner of Educomp. When The Wire sent
him questions on Friday, the posts were all removed and deleted.
3) In interviews with trade publications, Shantanu Prakash has been quoted as

saying that he is a proud ‘chief mentor’ of SEPSL.
4) The annual returns of SESPL for FY’ 2016 contains an attached PDF
document showing the names and percentage holding of shareholders. This
document is signed by Divya Lal and prominently carries the logo of ESL.
SESPl’s filings to the registrar of companies. Top right: Smart Class Educational Services along
with the logo of ESL.
In a written reply to questions sent by The Wire, Lal said, “To the best of my
knowledge SESPL does not use any Educomp logo in its ROC filing.”
“He (Shantanu Prakash) has no association with SESPL,” said Lal. She also said
that SESPL is a licensee of Educomp’s digital content.
“You may please check with SESPL the rationale for using Educomp logo, in the
event they are using it. I have no connection whatsoever with SESPL,” said
Shantanu Prakash, original promoter of ESL.
In a short span of two years, SESPL has managed to sign 4,800 schools as its
clients. On the other hand, ESL has lost more than 14,000 schools since March
31, 2016 when it had 17,289 schools as its smart class clients.
Selling its entire equity in VMCL to KBESPL
In July, 2016, ESL entered into a share purchase agreement (SPA) for selling off
its entire 67% equity in its only lucrative subsidiary, Vidya Mandir Classes Ltd
(VMCL), to K B Educational Services Pvt. Ltd (KBESPL). The Wire is in
possession of the SPA.
As per the SPA, the transaction was to be completed in two tranches. One, 25%
of ESL shareholding was transferred immediately for Rs 16 crore. Two,
KBESPL has call option to purchase the rest by March 31, 2019 for Rs 74 crore.
A “call option” simply means that KBESPL has the right but is not under any
obligation to buy the remaining stake.
However, ESL booked it as a complete sale and removed it from the list of its
subsidiaries. In its audited balance sheet though, VMCL still shows itself as a
subsidiary of ESL.
Common links between KBESPL and SEPSL
There are many strange coincidences that raise questions over whether KBESPL
and SEPSL were established to take control of Educomp’s businesses and assets:
1) Both companies were incorporated within one month of each other – KBESPL
in November, 2014, while SEPSL was incorporated in December, 2014.
2) Both have their registered offices in Mahipalpur Extension, Delhi.
3) A person named Mahesh Chand Gandhi is a significant shareholder in both

SEPSL (39.74%) and KBESPL (99.9%).
4) Another person named Bindana Venkat Adarsh is a director in both SEPSL

and KBESPL.
Bidders’ links with ESL
Finally, only two companies have submitted bids for ESL – Boundary Holdings
and Ebix Inc.
Both of them have links and business relationships with ESL. Boundary
Holdings is founded by Rajat Khare, who has served as an non-executive
independent director at ESL.
ESL has a joint venture with an Ebix Group company – Ebix Software. In July
2016, ESL announced a joint venture called Ebix Educomp Solutions in which
ESL held 49% stake, while the remaining 51% stake is held by Ebix Software.
“The purpose of the joint venture is to bid for education related government
tenders wherein Ebix Software and Educomp complement their operating
expertise and target large tenders, with Ebix Software India Limited also acting
as the funding partner,” said Educomp Solutions in a release to Bombay Stock
Exchange in July 2016.
On March 18, The Economic Times reported that Ebix Inc was the likely winner,
having quoted a price of less than Rs 400 crore. This means that the banks would
take a haircut of about 90%.
How was money drained out?
ESL listed its shares through IPO in 2006. Its share price went up to Rs 5,600 in
2008 and its market cap was around Rs 10,000 crore. It raised debt from banks
by pledging its shares and assets. On March 30, 2018, its share price was around
Rs 4.5 (after split) and market cap was about Rs 55 crore.
SBI, IDBI Bank, CBI, UBI, J&K Bank, ICICI Bank, Axis bank, and PNB are
among the lenders to ESL.
It is to be noted that these banks also gave loans to its subsidiary companies that
have also gone to NCLT. The total exposure of banks in ESL is about Rs 3,000
crore. There is more exposure in group companies.
Once ESL raised debt from the banks, it created a maze of 44 subsidiaries, joint
ventures and associate companies. It went onto make huge investments in its
subsidiaries, associates and joint ventures.
As per the company’s annual report for the year ended March 31, 2017, ESL had
investments of Rs 1,700 crore in subsidiary companies. The top five are given
below:
S.No Investments Amount (in Rs crore)
Educomp Infrastructure & School Management

1 1,085.47
Limited
2 Educomp Professional Education Limited 323.01
3 Educomp Asia pacific Pte Ltd., Singapore 122.05
4 Edu Smart Services Private Limited 51.59
5 Educomp Online Supplemental Services Limited 51.72
At least two companies Educomp Infrastructure & School Management Limited

and Edu Smart Services Private Limited have gone to NCLT for insolvency.
(Being Singapore based, Educomp Asia Pacific Pte Ltd can’t file for insolvency
in India.)
Between 2013 and 2017, the company created a provision to write off Rs 1,000
crore from its receivables and investments.
The banks were generous in their loan disbursement with other entities of
Educomp group as well. For instance, Educomp Infrastructure and School
Management Limited (‘EISML’) was granted a loan of more than Rs. 800 crores
over the years even though it could not even touch total revenue figure of Rs 100
crores since inception.
A year-wise summary of revenue and borrowings of EISML is:
FY16- FY15- FY14- FY13- FY10-

Particulars FY09-10 FY08-09
17 16 15 14 11
Revenue 371 472 707 837 833 564 317
Loans 7,857 7,051 7,151 8,998 5,301 3,602 2,501
(In Rs million; data not available for FY 11-12 and FY 12-13)
In response to The Wire’s queries, the official spokesperson of Axis Bank said,
“As a matter of policy, Axis Bank does not comment on client-specific details.
However, for good order, you may like to take up this matter with lead bank of
the consortium.”
When contacted, the official spokesperson of ICICI Bank said, “ICICI Bank has
a very small exposure to Educomp Solutions in which it is a member of a
consortium of 26 lenders. ICICI Bank is not the lead bank of this consortium.
Our current outstanding is less than 3% of the total exposure of the lenders to
Educomp Solutions.”
IDBI Bank, UBI, and SBI did not respond to questions sent by The Wire. SBI is
the lead banker.
Shantanu Prakash, original promoter of ESL said:
“The combination of internal and external factors required recalibration of

the business plans of the company. In this regard, it is pertinent to note that
since the company was admitted to CDR process in 2013 , the management
made several attempts to revive the company such as initially submitting a

plan with 1200 crores of sustainable debt, a second plan and a TEV by PwC
was conducted in 2016 which pegged the sustainable debt as 700 crores,
however none of these plans were approved which finally led to the
insolvency petition in May 2017.”
He further added:
“Please also note that the company has been under CDR since 2013…to the
best of my knowledge the actual principal amount is close to half of the
current debt figure.”
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BUSINESS
March Quarter Estimates Show

Earnings Growth Slowing Down
Nifty50 rms' combined net pro t is expected to grow by 10.9% YoY,

lower than Dec quarters's 11.5%.
A man walks past a screen displaying news of markets update inside the Bombay Stock Exchange (BSE) building in Mumbai,
India, February 6, 2018. Credit: Reuters/Danish Siddiqui
Krishna Kant
BUSINESS 6 HOURS AGO
The trend of steady improvement in corporate earnings growth seems to be

losing steam, with the combined net profit of India’s top 50 companies, which
are part of the NSE Nifty50 index, estimated to grow by 10.9% year-on-year
(YoY) during the January-March 2018 quarter, down from the 11.5% YoY
growth clocked in the third quarter and 40.5% growth during the year-ago
quarter.
The combined net sales of these 50 index companies are estimated to grow by
12.1% during the fourth quarter (Q4) of FY18, again lower than the 13.8% YoY
growth during the quarter ended December 2017 and 15% growth witnessed
during Q4FY17.
With this, India’s top listed companies are estimated to report 8.1% YoY growth
in their combined net profit for FY18, the lowest in the last three years. The
combined earnings for the Nifty50 companies were up 13.2% during FY17.
However, their top line growth, at 12.2% in FY18, is expected to be the best
since FY14, when index companies’ combined net sales were up 13% on a YoY
basis.
Excluding financials, energy, metal and mining companies, the combined net
profit of the rest of the Nifty firms is expected to grow by 4.2% YoY for
Q4FY18, slightly up from the 4% growth clocked in the December quarter and
0.5% increase seen in the year-ago period. The sample companies’ combined net
sales are expected to grow by 10.7% YoY, better than the December quarter’s
9.6% and the March 2017 quarter’s 3.2% YoY growth.
The analysis is based on January-March 2018 quarter (Q4FY18) earnings

estimates by equity brokerages, including Kotak Institutional Equities (KIE),
Edelweiss Securities, Emkay Global and Elara Capital. For banks and non-
banking financial companies (NBFCs), net sales reflect their gross revenues net
of interest expenses, while for others, it is total income from sales and goods and
services (net of indirect taxes).
Analysts attribute the slowdown in the pace of earnings to the emergence of

margin pressure due to higher commodity prices, continued poor show by
export-oriented sectors such as information technology (IT) services and
pharmaceuticals, and also the decline in private sector investments hitting the
growth of capital goods sector.
“The positive impact of demand recovery and a favourable base effect is seen
fading in Q4FY18 despite continued strength in demand conditions.
This is largely because of higher tax burden and emergence of margin pressures,
indicating that pricing power across sectors is still to gain further traction,” says
Dhananjay Sinha, head research, Emkay Global Financial Services. Sales growth
for Emkay’s universe of companies (ex-financials and oil & gas) is expected to
moderate to 9 per cent YoY in the March quarter of FY18, from 11.3% YoY
increase in the quarter ended December 2017, while net profit (adjusted for
exceptional gains and losses) is estimated to grow by 4.2% YoY, against a
growth of 14.6% in preceding quarter.
KIE expects Nifty50 companies’ net profit to grow by 4% YoY, while combined
earnings for all companies tracked by KIE are estimated to grow by 7% YoY in
Q4FY18. “We expect strong growth in the net profit of automobiles, consumer
products, industrials, metals and mining, and NBFCs,” writes KIE’s Sanjeev
Prasad, in his earnings estimates for the March quarter.
A deeper look at the estimates show that 96% of the incremental growth in Nifty
companies’ combined net profit for the March quarter is expected to come from
just five firms – State Bank of India (28%), Indian Oil Corporation (24.8%),
Coal India (18.1%), Oil and Natural Gas Corporation (14.3%), and GAIL (India)
(10.8%), all of which are from the public sector.
At the other extreme, ICICI Bank, Axis Bank, Vedanta, Tata Steel and Bharti
Airtel are expected to be the biggest laggards with a sharp dip in net profits.
Bharti Airtel, India’s largest telecom operator, is expected to report its first
quarterly loss in nearly 60 quarters, indicating the continued stress in the sector.
In all, 15 Nifty companies are likely to report a YoY decline in net profit, while
25 are expected to report double-digit growth in earnings and the rest (ten
companies) are expected to report a single-digit increase in their earnings.
Not surprisingly, some brokerages are concerned about the quality of earnings
growth, with most of the incremental growth coming from commodity producers
such as energy companies. “While overall earnings are improving, the quality
leaves much to be desired as commodities account for little over 80% of the
profit growth,” say Prateek Parekh and Akshay Gattani of Edelweiss Securities
in their report on earnings estimates for the March quarter.
A lower-than-expected earnings growth in Q4 is likely to result in earnings

downgrade for the index companies. “FY18 estimated earnings growth of our
universe/Nifty will be 4 per cent and 7 per cent, respectively, implying 300 basis
points downgrade of FY18 estimated earnings itself. This is the seventh
consecutive year of EPS downgrades and sub-10 per cent growth,” writes
Edelweiss’ Parekh.
According to analysts, the key factor to watch out for in the forthcoming quarter
would be banks’ asset quality, corporate capex outlook, global trade conflicts, its
impact on Indian companies, and bond yield trajectory.
By arrangement with Business Standard.
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4/9/2018 How Educomp May Have Subverted the Spirit of India’s Insolvency and Bankruptcy Process - The Wire

POLITICS ECONOMY EXTERNAL AFFAIRS SECURITY LAW SCIENCE SOCIETY CULTURE

How Educomp May Have

Shantanu Prakash, original promoter of ESL (L). Credit: Youtube screenshot/Reuters

NCLT auction proceedings appear to be going on as if nothing is out of the

1) While evaluating impairment of investments of Rs 1,400 crore in ESL’s four

“However, in the absence of appropriate audit evidence …we are unable to

There are 21 such points mentioned by the auditor in report on financial

Effective transfer of smart class biz

Divya Lal, a former COO of Educomp and a close confidante of Educomp’s

In another letter to the national head of SEPSL, the principal of a Ranchi-based

It is to be noted that SEPSL was registered only in December 2014.

Other important links between the two companies include:

2) The Facebook page of Shantanu Prakash, Educomp’s promoter and chairman,

3) In interviews with trade publications, Shantanu Prakash has been quoted as

Selling its entire equity in VMCL to KBESPL

Common links between KBESPL and SEPSL

2) Both have their registered offices in Mahipalpur Extension, Delhi.

3) A person named Mahesh Chand Gandhi is a significant shareholder in both

4) Another person named Bindana Venkat Adarsh is a director in both SEPSL

Bidders’ links with ESL

independent director at ESL.

How was money drained out?

S.No Investments Amount (in Rs crore)

Educomp Infrastructure & School Management

2 Educomp Professional Education Limited 323.01

3 Educomp Asia pacific Pte Ltd., Singapore 122.05

4 Edu Smart Services Private Limited 51.59

5 Educomp Online Supplemental Services Limited 51.72

At least two companies Educomp Infrastructure & School Management Limited

A year-wise summary of revenue and borrowings of EISML is:

FY16- FY15- FY14- FY13- FY10-

Revenue 371 472 707 837 833 564 317

Loans 7,857 7,051 7,151 8,998 5,301 3,602 2,501

(In Rs million; data not available for FY 11-12 and FY 12-13)

Shantanu Prakash, original promoter of ESL said:

“The combination of internal and external factors required recalibration of

made several attempts to revive the company such as initially submitting a

Support The Wire

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*PG Fees addl.

Join The Discussion Total Comments (8)

March Quarter Estimates Show

Nifty50 rms' combined net pro t is expected to grow by 10.9% YoY,

BUSINESS 6 HOURS AGO

The trend of steady improvement in corporate earnings growth seems to be

The analysis is based on January-March 2018 quarter (Q4FY18) earnings

Analysts attribute the slowdown in the pace of earnings to the emergence of

A lower-than-expected earnings growth in Q4 is likely to result in earnings

By arrangement with Business Standard.

Support The Wire

₹10 ₹200 ₹2400

*PG Fees addl.

Join The Discussion

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