New Delhi: Educomp Solutions Ltd (ESL) is quickly becoming a curious example of how India Inc’s promoters and their indebted companies are subverting the spirit of the insolvency process with the help of friendly firms that are used to get out of repaying loans to banks.

Last week, US-based software company Ebix Inc – which won its bid to acquire Educomp through the insolvency and bankruptcy process – announced that it would be buying a 60% stake in Smartclass Educational Services Pvt. Ltd. (SESPL) for up to $8 million (~Rs 53.2 crore).

What is Smartclass Educational Services? As The Wire reported in early April, the company is essentially a propped-up vessel which Educomp used to siphon off its core ‘smart class’ business before approaching the National Company Law Tribunal (NCLT) for insolvency.

Ebix’s acquisition of SESPL, industry sources say, puts a big question mark over the transparency of Educomp’s insolvency process.

After all, Ebix has now not only picked up Educomp’s original smart class business at a throwaway price, but will also assume control over the parts which were transferred to SESPL. All this while the banks are set to take a haircut of about Rs 2,700 crore.

“The strategic price and timing of buying equity in SESPL is such that Ebix will have to pay low price if it is asked at a later date to pay for the whole business that ESL diverted to SESPL,” said an industry source, who declined to be identified.

What further complicates matters is that Ebix is an old business partner of ESL’s original promoter, Shantanu Prakash.

Ebix has submitted a bid of about Rs 385 crore for ESL, which has to pay a debt of Rs 3,000 crore to its lenders. Out of Rs 385 crore, nearly Rs 310 crore will go to the lenders.

While recent media reports have emphasisedhow transparent and successful the bidding and bankruptcy process was, this is far from the case.

Not only were independent bidders discouraged from participating as necessary information was not provided to them, Educomp’s audit report also pointed out that its financial statements are not “true and fair”.

The auditor’s report, parts of which have been reported by The Wire, also questioned the role of company management and banks. Moreover, it was provided only two working days before the deadline.

With the money of the tax-payer and the common depositor at stake, it is crucial to understand the right valuation for both SESPL and ESL.

What is the real valuation of SESPL?

It is difficult to assess the valuation of SESPL as its shares are not listed in the stock exchanges and no two companies have exactly the same business. However, for argument’s sake, it is possible to do back-of-the-envelope calculations by looking at valuations of other education technology companies that have raised funds recently.

It would also be instructive perhaps to look at Educomp’s earlier valuation when its business was at a similar scale to that of SESPL.

Comparing with other ed-tech companies

Byju’s, an ed-tech company raised Rs 260 crore ($40 million) last year at a valuation of Rs 5,200 crore ($800 million). Its revenue was approximately Rs 230 crore in the financial year ending March 2017.

SESPL had revenue of Rs 22.3 crore in the year ending March, 2017. By this comparison, SESPL should be valued at about Rs 520 crore ($80 million).

Educomp’s own valuation

SESPL currently has a base of more than 4,800 schools and more than 55,000 Smart Classes, according to its website.

Educomp’s annual report for FY’2007-08 states that it had a base of 933 schools. The report further states that ESL’s market capitalisation was about Rs 6,583 crore. Its revenue at the time was Rs 276 crore.

By this comparison, SESPL’s current valuation should be about Rs 650 crore.

Ebix has stated that it would pay “up to $8 million in cash for its stake in SmartClass”. This means that Ebix may pay less than $8 million or Rs 53 crore for a 60% stake.

The Wire has sent queries to both SESPL and Ebix Inc., specifically asking how it arrived at the former’s valuation. This story will be updated if and when a response is received. .

Is Rs 400 crore fair valuation of ESL?

Is Ebix paying a low price for Educomp? The fair valuation of a company through the insolvency auction process is arrived at only if the bidding process is transparent. In this case, the independent bidders were discouraged from submitting bids by not being provided with crucial information. For instance, the audit report has raised concerns over Educomp’s balance sheet numbers. In total, there are 21 points mentioned by the auditor that conform to an ‘adverse audit opinion’.

The auditor has noted that the financial accounts don’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”.

It is unsurprising, therefore, that out of the 14 companies that responded to the invitation for bids for taking over Educomp under the Insolvency and Bankruptcy code (IBC) only two actually submitted bids – Boundary Holdings and Ebix Inc. Both have links and prior business relations with ESL.

Boundary Holdings is founded by Rajat Khare, who has served as a non-executive independent director at ESL.

Ebix Inc. is parent company of 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.

With so many confounding factors at stake, it is difficult to determine the true valuation of ESL and whether the insolvency process resulted in a fair price.