PhonePe, Walmart-Flipkart owned digital payment firm, has filed a formal complaint against VPF, Ventureast Proactive Fund-II, an AIF operating out of India, with SEBI, Securities and Exchange Board of India.
The central premise of the complaint is that Ventureast, an investor in a local content discovery platform Indus OS, did “side dealings” with tech firm Affle Global “deliberately” in a “bad faith attempt to scramble” PhonePe’s acquisition of Indus OS.
Notably, Affle Global, a Singapore-based firm, a minor investor in Indus OS, has objected to PhonePe’s acquisition (1).
The complaint follows allegations that Ventureast sold its shares of Indus OS to Affle Global, offering it a nearly 23% stake while the terms were already agreed for PhonePe’s acquisition.
The Economics Times (2) has reported that PhonePe’s seemingly straightforward deal to scoop up Indus OS for 60 million USD has run into trouble after Affle Global objected to the deal.
Affle Global has sued PhonePe and Indus OS in a Singapore court, seeking an injunction over the proposed acquisition.
PhonePe, in response, has also filed a counter lawsuit against Ventureast and Affle Global.
Early this month, according to the ET report, Indus OS is looking to close the deal with PhonePe and has also moved a case against Affle Global in a Singapore court.
Read on to know more about Indus OS, its acquisition deal with PhonePe, and the battle with Ventureast and Affle Global.
What’s the Matter?
To those who are not aware of the distress, the Indian payment giant, PhonePe was in the final stage in May this year to acquire a majority stake in Indus OS. The founders and board members had already signed an agreement, and India’s major fintech firm was looking forward to closing the deal by mid-June (3).
However, Indus OS’s stakeholders, Affle Global and Ventureast, had sought an injunction over the acquisition deal in the Singapore court against the payment platform.
Singapore-based AGPL, Affle Global Pte Ltd, alleged that PhonePe and founders of Indus OS are “acting in scheming” that is “systematically eroding” at least 30 million USD shareholders value by pushing a “low balled” 60 million valuations based transaction.
Notably, PhonePe was in the advanced stages of discussions to get a majority share (more than 90%) in Indus OS, a domestic content and app discovery platform, in an all-cash deal worth 60 million USD. (However, according to Affle Global, their stakes are valued at over 90 billion USD.)
Presently, the payment platform holds about 32% share in OSLabs, and two seats on its board, after acquiring a stake from a few early investors, including Omidyar Network, Micromax, JSW Ventures, and 19 other angels investors, including Kunal Bahl and Rohit Bansal among others (4).
Affle Global filed an arbitration case against OSLabs in a Singapore court, affirming they have the ROFR, Right of First Refusal on sale of founder’s shares.
PhonePe has also filed a case against Ventureast and Affle Global in a Singapore court.
OSLabs Pte Ltd is a Singapore-based holding company of Indus OS.
- According to Indus OS, the founders and board members of the company had earlier signed a term sheet to sell a majority of its stake to PhonePe.
- According to PhonePe, Ventureast is deceiving them for their stake in OSLabs while selling the same shares to Affle Global in a side deal without OSLabs and PhonePe’s knowledge.
- According to Affle Global, PhonePe and OSLabs founders are acting in collusion to drive a low balled 60 million USD valuation based transactions and systematically erode at least 30 million USD shareholders value and try to prejudice the existing shareholder and investor rights based on unfair exercises in breach of their fiduciary duties.
Current Shareholding in Indus OS
The Legal Tangle
An acquisition deal by PhonePe of Indus OS, which seems pretty straightforward (5), developed a legal tangle as India’s major fintech platform battles Indus OS’s two minor investors, Affle Global and Ventureast, an early-stage investment company, in Singapore court.
Both entities have filed lawsuits against each other.
According to Indus OS, the founders and board members of the company had earlier signed a term sheet to sell a majority of its stake to PhonePe. And Ventureast sold those same shares to Affle in a side deal without PhonePe and OSLabss’ knowledge during a legally binding no-shop period. As per the initial plan, PhonePe was looking to acquire more than 90% of Indus OS.
Even though the latest developments would directly impact the plan, PhonePe, meanwhile, has secured two board chairs in Indus OS after buying over 30% of the company from its early investors, including JSW Ventures, Omidyar Network, and others (6).
PhonePe holds more than 32% of shares in Indus OS, while Affle Global has more than 20%.
PhonePe, in its lawsuit filed against Affle Global and Ventureast in Singapore, claimed that VPF “deliberately deceived” the payment firm by continuing to engage OSLabs and PhonePe on the same of its stake in OSLabs in favor of PhonePe. In addition, however, it had sold the same shares to Affle in a side deal without PhonePe and OSLabs’ knowledge on a prior date during a legally binding no-shop period.
On the other hand, Affle Global alleges that, in an emailed response (7), it is not privy to any communications between Ventureast and PhonePe. We have no information about the alleged notice from PhonePe against Ventureast.
Affle Global further added that it is a long-term investor in OSLabs with over 20 million USD investment at a valuation of over 90 million USD.
Affle Global added,
“We believe that PhonePe and OSLabs founders are acting in collusion to drive ahead a low balled 60 million USD valuation based transactions and are systematically eroding at least 30 million USD shareholders value and trying to prejudice the existing shareholder and investor rights based on unfair exercises in breach of their fiduciary duties.”
“AGPL does not incline whatsoever to continue the low balled 60 million USD valuation based on OSLabs’ PhonePe transactions. We value our investment based on the more than 90 million USD valuation of OSLabs, and we are confident that OSLabs will reach new heights in the future.”
Affle Global further noted that it has more than 25% beneficial and legal voting rights in OSLabs Pte Ltd, Singapore, and about 23% ownership on an entirely diluted basis (8).
“We are a long-term investor, and we will be open to increasing our stake on a fair basis. However, we will only encourage fair valuation-based transactions,” it stated.
There have been no comments from Ventureast, Indus OS, and other stakeholders.
Why PhonePe Approached SEBI?
According to the digital payment major, the complaint is related to the violations of SEBI’s code of conduct regarding VPF’s recent side dealings with Affle Global, considered bad faith attempts to scramble the OSLabs majority acquisition PhonePe.
PhonePe, in its grievance with SEBI, has pointed out serious distortions, including a series of bad faith and unethical actions and potentially illegal actions that have been and are being frequently initiated by the General, Managing Partner Principal of VPF linked with this transaction.
Sameer Nigam, founder and CEO of PhonePe (9), in a press statement, stated: “by purposely wrecking PhonePe’s acquisition of IndusOS, an agreement which all three OSLabs founders also continue to have confidence that it is in their company’s best interests, VPF has also hurt OSLabs’ long term gains.”
“We believe it is important to disclose such unethical conduct of VPF for the welfare of the larger startup environment. Therefore, we have a very robust case and are certain that we will prevail on both fronts and positively, in the process, also build a strong deterrent against immoral actors trying to browbeat young startups,” he added.
PhonePe stated that “while the court will settle the legal matters, the payment company has asked SEBI to look into these immense ethical violations and desertion of VPF’s fiduciary duties to protect OSLabs’ interests, its investee company.”
Nigal further added that “in this case, I believe VPF has not only broken the code of conduct of SEBI, but it has also acted in complete negligence of its fiduciary duties as a major shareholder of Indus OS.”
A company’s spokesperson had earlier stated that PhonePe is committed to completing the deal as soon as there is a decision on court proceedings. These legal hurdles will not impact the payment company’s plans to acquire Indus OS at all (10).
While Indus OS is a defendant, PhonePe is not seeking damages from it or its founders (11).
Why is PhonePe So Keen on Acquiring Indus OS?
Indus OS is a Samsung-backed startup that operates an eponymous third-party Android app store. It powers several popular stores, including Samsung’s Galaxy Store, and offers partners with apps and localized content (12).
Three IIT alumni, Rakesh Deshmukh, Sudhir Bangarambandi, and Akash Dongre, started Indus OS in 2015. It operates a local Android app store named Indus App Bazaar.
Last year, Indus OS had claimed that it offers its partners over 400k apps in English and 12 Indian languages. The seven-year-old company, which has secured over 21 million USD to date, and monetizes via ads, has amassed more than 100 million users (13).
According to reports, the startup is planning to launch an app store for individual users once Google starts accepting third-party app stores.
In July 2020, Affle Global signed an agreement to acquire Indus OS’s 8% stake for a deal worth more than 2.86 million USD. Indus OS had also secured a 5.75 million USD investment from Samsung, a South Korean electronics maker’s venture fund, last year in exchange for a 20% stake. However, there is no clarity on exact shareholdings (14).
PhonePe’s interest in Indus OS comes mainly because of its app distribution prowess. To fuel its super app ambitions.
The startup claims that it has witnessed more than a billion app installs since 2019. And PhonePe is likely to use it for the network for its in-app mini app store feature named PhonePe Switch. It is similar to Google Pay Spots and Paytm Mini Apps, both of which offer third-party integrations (15).
However, it is worth highlighting that despite Indus OS’s massive scale, the company has not been able to turn a profit yet, as evident in its financial performance for the previous financial year 2020.
As per Indus OS’s filings, the company’s revenue stood at 17.13 crore INR in FY 2020, a 360% increase from last year’s revenue of 3.72 crore INR. Notably, its expenses also increased 88% from 19.87 crore INR in FY 2019 to 37.32 crore INR in FY 2020. Hence, in FY 2020, the startup recorded an after-tax loss of 20.19 crore INR, a 123% surge from the previous year’s 9.06 crore INR loss.
Reportedly, PhonePe is looking to bring a wider array of apps on its platform via in app-integration via the acquisition. At present, PhonePay Switch aggregates more than 400 apps across varied categories, including travel, shopping, food, grocery apps within its app, which does away with the requirement to download individual apps.
If the acquisition of Indus OS happens, it would be the payment company’s second acquisition after acquiring point-of-sale company Zooper in 2018.
A spokesperson for Indus OS stated that “we are pretty excited about executing on the future strategy and vision for Indus OS in collaboration with PhonePe. We believe it is the best path forward for the company, and we remain fully committed to closing the deal as soon as possible.”
A PhonePe representative has said, “yes, we have acquired more than 30% of the company and are its single largest shareholder already.”
Over the next few days, added the person, subject to the result of the court proceedings. We are looking forward to finishing the remaining paperwork and getting majority ownership of Indus OS. All three founders are staying on board and will keep on leading its operation after the deal.
Nonetheless, it seems like PhonePe and Affle are strapped in for a long legal battle over the Indus OS acquisition.
We believe that PhonePe’s acquisition would benefit everyone: investors getting a decent exit, and founders get a chance for greater vision.
Even though the vernacular app, the center of the entire battle, touts metrics such as 100 million users, it means little as the platform is white-labeled for smartphone brands, and there is no direct relationship with users. Moreover, the platform mainly benefited from a drive for indigenous applications and disgruntlement with Google Play Store.
However, it would be a challenge for Indus OS to raise further fundings. Hence it was the ideal time for the investors to cash. Even though the company’s founders may agree with us, Affle clear has different expectations.
That is why we said founders do not need to receive investment funding offers with an automatic “yes”!