Investors in such firms may not be able to find new buyers

With the National Company Law Tribunal (NCLT) in Chennai ordering the initiation of corporate insolvency resolution process against Inasra Technologies Private Ltd., the parent company of Stayzilla, an online home-stay aggregator, a fresh debate has begun on valuation.

The debate is centred on the efficacy or ability of arriving at a valuation for a company which is only an aggregator which may not have physical assets of any worth.

In this instance, the insolvency petition was filed by one of Stayzilla’s vendors, Jigsaw Advertising and Solutions.

NCLT has appointed an interim resolution professional to take charge of the management of the corporate debtor.

Jigsaw went to NCLT as Inasra Technologies defaulted in payment of its dues to the tune of ₹1.69 crore. Inasra Technologies, a start-up, counts Matrix Partners and Nexus Venture Partners among its investors.

A section of the industry and finance community at least is unsure as to what could be salvaged in an asset-less enterprise for distribution among its creditors in case of insolvency action.

Private equity players often are guided by perception (about the future prospects) in flowing huge funds into such start-ups. Will an insolvency-facing asset-less start-up still attract new investors? Sources aren’t quite convinced if such investors could find new buyers.

“By all probability, they may have to write down their investments,’’ said a corporate lawyer, who declined to be quoted. Should such an enterprise hold IPs, (intellectual properties), those could be valued and sold. How much this could help stake-holders salvage their cause, however, is a point to be debated.

“If you ran your business into the ground, there is not much intellect behind what you did,” said Aswath Damodaran, professor of corporate finance, New York University’s Stern School of Business.

“I would seriously doubt that anyone would pay for your intellectual property,” he said.

“Investors lose their money and it is part of the game of investing in your start-ups. Don’t shed any tears for them,’’ he added.

‘Complete overhaul’

A view in the start-up eco-system is the Stayzilla episode will trigger a complete overhaul in the way private equity investors look at such asset-short enterprises while putting their money in.

For one, the insolvency code allows for no discrimination between enterprises in terms of initiating action. For another, the code gives creditors the control during the insolvency process initiation period. Given this new normal, the investing community, it is pointed out, will have to factor in the new reality and reconfigure its relations by assuming responsibility for governance-related matter in enterprises where they place money.