Even as IPO-bound mobility major Ola announced on Thursday midnight that it has reached an agreement to acquire a 100 per cent stake in fintech firm Avail Finance, led by Ola CEO Bhavish Aggarwal’s brother, there were some questions regarding the deal.

While the company did not disclose the deal size of the transaction, reports claimed it’s a share-swap deal valued at $50 million. The acquisition is said to have raised concerns among investors because of it being a related party transaction.

Avail Finance has reportedly laid off employees as its lending business struggled during the pandemic. Further, a daily had reported last year that Avail Finance was found to be lending its own funds to customers, in some cases. This made the company non-compliant with the Reserve Bank of India (RBI) rule that only allows licensed NBFCs and banks to lend money.

However, a source close to the company told BusinessLine that Ola’s board has unanimously agreed to the acquisition deal and the shareholder approval is expected in a few weeks. “Bhavish Aggarwal had sat himself out when the board was making the decisions on the acquisition, because the CEO of Avail Finance, Ankush Aggarwal, is his brother. Further, all due diligence and corporate governance required for such a merger has been followed,” they added.

Ola, in its release on the acquisition, had said the deal was subject to shareholder approval. As part of the acquisition, all Avail Finance employees and co-founders will join Ola. According to the company’s LinkedIn page, Avail Finance’s team strength is between the range of 51-200 employees.

Ola did not respond to BusinessLine queries on this matter. 

A quick recap

Founded in 2017 by Ankush Aggarwal and Tushar Mehndiratta, Avail Finance is a neo bank that provides financial services to the blue-collared workforce. Before starting Avail Finance, Ankush was the director of operations at Ola and led the integration of auto-rickshaws on Ola’s platform. In 2019, Ola had invested an undisclosed sum in Avail Finance to partner on building financial solutions for Ola’s driver-partners. Post this round, Ola held a 9 per cent stake in Avail Finance. Alpha Wave Global and Matrix Partners are the common investors between the two companies.

Avail Finance is said to have processed loans worth $100 million till date and has seen month-on-month (m-o-m) growth of 50 per cent in the last quarter. The company’s strong customer profiling and risk understanding has led to a 100 per cent collection efficiency from customers despite Covid, claimed a source close to the company.

“The acquisition is a key step in Ola’s broader push into the fintech space as it looks to build a mobility- focussed financial services business under Ola Financial. With this, Ola Financial Services will strengthen its play in underserved segments comprising blue-collar workers, such as Ola’s driver partner ecosystem,” Ola said in a statement released on Thursday. 

Last year, Ola had announced plans to go public by early 2022 and was estimated to raise around $1-2 billion from the IPO. However, sources told BusinessLine earlier this week that the company’s IPO timelines have changed due to “market conditions and company readiness”.

Corporate governance

In the past few months, start-ups have become the focal point of corporate governance issues with the most recent being the Thane-based construction marketplace Infra.Market, which underwent income tax raids at multiple offices. The search operation revealed evidence of bogus purchases, huge unaccounted cash expenditure and accommodation entries aggregating to over ₹400 crore.

This was preceded by the two-month long saga of BharatPe’s former MD and co-founder Ashneer Grover, whose family and relatives were accused of engaging in “extensive misappropriation of company funds” by the BharatPe board. Similar allegations have also surfaced at social commerce start-up Trell, among others. 

Speaking to BusinessLine on condition of anonymity, an investor with a global fund said, “Related party transactions are definitely a red flag. If our portfolio company were to do a related party transaction, we would have hired someone to do proper due-diligence on the transaction. In case the company is preparing for an IPO, it gives us all the more reason to do due-diligence, as markets are not forgiving on these rumours or potential rumours.”

Adding to this, Anirudh A Damani, managing partner, Artha Venture Fund, said, “There isn’t a one-size-fits-all answer here. If the sole reason to merge two related entities is to mask a struggling entity, but at the expense of the performing entity’s shareholders, it is not a fair transaction. I have run into this situation on a few occasions, and I oppose the action unless a more significant strategic objective is achieved.” 

However, he added, there are situations where two entities find themselves competing due to pivots, and collaborating would create better unit economics than fighting each other. “When there is a clear strategic objective that gets fulfilled by a related party transaction done at arm’s length, we will support it as an investor, shareholder, and/or board member. Net-net, the strategic importance of the transaction must be the primary objective, not the implied objective,” said Damani.

₹800-cr investment

Meanwhile, Ola has invested nearly ₹800 crore into its financial services business. The company said its BNPL (buy now pay later) offering, Ola Postpaid, is available to 40 million customers. Further, its other financial services like vehicle financing and insurance are growing rapidly on the back of the company’s sister entity, Ola Electric, and used car business, Ola Cars.

In November 2021, Ola’s regulatory filings noted that its subsidiary, Ola Financial Services (OFS), will expand its insurance business internationally. OFS was said to be launching new capabilities to the pay-later instrument to make it more appealing for the users and expand its suite of products by launching new lending products in the form of two- and four-wheeler loans and personal loans. 

The following month, Ola obtained $500 million through a Term Loan B from marquee international institutional investors. This was preceded by a fund-raise of $139 million Series J from Edelweiss, Siddhant Partners, IIFL, Tejal Merchantile, Hero Enterprise, Vicco Laboratories, Alka DP Family Trust and Atul DP Family Trust, among others. The mobility major was last valued at $7.3 billion in its Series J round. Ola has raised a total of $3 billion in funding across multiple rounds.

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