Walmart-owned Indian payments firm PhonePe has waged a legal battle against venture capital firm Ventureast Fund and mobile advertising giant Affle Global, the investors in Indus OS, to safeguard its acquisition of the Mumbai-based startup that owns a regional language mobile operating system, along with a suite of applications for vernacular content and app discovery.
Earlier in May, PhonePe, which offers payments, recharges, wealth management services, gold trading, and access to a plethora of third-party apps, among other things, had signed the term sheet to acquire over 90% stake in Indus OS, to boost its super app dream on the back of the latter’s content and app discovery platform. The transaction reportedly involved a cash deal worth USD 60 million.
A few days later, Affle sought an injunction over the deal in a Singapore high court on the basis of its right of first refusal on the stakes held by Indus OS founders. Around the same time, Ventureast allegedly sold its stake in Indus OS to Affle, taking the latter’s stake in the startup to 23%, despite agreeing on the PhonePe-Indus OS deal.
The Bengaluru-headquartered payment giant, thus, in turn, slapped a suit against both Affle and Ventureast in the Singapore court.
“Ventureast deliberately deceived PhonePe, by continuing to engage PhonePe and OSLabs (the Singapore-based parent of Indus OS), on the sale of its shares in OSLabs in favor of PhonePe even though it had sold those same shares to Affle in a side deal without OSLabs and PhonePe’s knowledge on a prior date during a legally binding no-shop period,” PhonePe said in a recent media statement.
Affle has denied signing any alleged binding term sheet with PhonePe with respect to the sale of its shares in Indus OS. The Gurugram-based firm has been a long-term investor in OSLabs, having invested over USD 20 million in the startup so far.
The bone of contention
The fact that PhonePe was eyeing to acquire over 90% stake in Indus OS for about USD 60 million did not sit well with Affle, which values six-year-old Indus OS at least at USD 90 million.
In an email response to local media TechCircle late last month, Affle said PhonePe and the founders of OSLabs are trying to unfairly revoke its right of first refusal and are “baselessly pushing” it to sell its acquired investment in OSLabs.
The company has “no inclination to support the low-balled USD 60 million valuation based on PhonePe transactions for OSLabs,” it said. “We value our investment based on a valuation over USD 90 million of OSLabs, and we are confident that OSLabs would unlock greater growth in the near future.”
“We believe that Walmart-owned PhonePe and founders of OSLabs are acting in collusion to prejudice our existing shareholder/investor rights based on unfair practices,” it added. “We will only support fair valuation-based transactions.”
Indus OS, on its part, has also filed a petition against Affle in the Singapore court, as it pushed for its deal with PhonePe, which is reportedly not seeking damages from Indus OS or its founders.
Meanwhile, PhonePe has quickly bought a 32% stake in Indus OS from earlier bakers like Omidyar Network, JSW Ventures, and others, securing two board seats in the startup.
Taking the matter up with Indian authorities, PhonePe filed a formal complaint against Ventureast with SEBI (Securities and Exchange Board of India) last Saturday, asking the country’s market regulator to “look into the gross ethical violations and dereliction of Ventureast fiduciary duties” to protect the interests of its investee company OSLabs.
In its complaint to the market regulator, PhonePe said Ventureast had violated SEBI’s code of conduct by engaging in side dealings with Affle, which is “a deliberate bad faith attempt to scuttle the OSLabs majority acquisition by PhonePe.”
The payments company has also highlighted a “series of unethical and bad faith actions, as well as potentially illegal actions, that have been and are being continually undertaken by the managing partner, general partner and principal of VPF (Ventureast Proactive Fund-II) involved with this transaction.”
“As founders, we are always held to the highest standards of legal and ethical integrity by our investors,” PhonePe’s co-founder Sameer Nigam said in a statement. “But these standards should apply to investors in startups too. I believe in this case, VPF has not only broken SEBI’s code of conduct but has also acted in complete negligence of its fiduciary duties as a large shareholder of Indus OS.”
Nigam said that all three OSLabs founders believe this deal will benefit the company in long term. By derailing this acquisition, VPF has hurt OSLabs’ long-term interests, he said.
“We believe it’s important to expose such unethical conduct by VPF for the sake of the larger startup ecosystem. We have a very strong case and are confident that we will prevail on both fronts, and hopefully in the process also create a strong deterrent against bad actors trying to bully young startups,” he added.