Dipta Joshi (Mumbai)

The year-long shutdown of all education institutions countrywide to protect children and youth from the Covid-19 pandemic has thrown the finances of the overwhelming majority of the country’s 450,000 private schools into disarray. Even in upscale private schools, cash flows have been adversely affected because a minority of parents who suffered salary cuts or deferment or even job losses are unable to pay children’s school fees.

This black swan event i.e, the pandemic, has been made worse for the country’s private schools by the Central government’s failure to classify them as MSMEs (micro small and medium enterprises) entitled to several pandemic reliefs (interest payment moratoria, soft loans etc), and state governments recklessly slashing school fees and imposing fee ceilings. The financial difficulties of private school promoters/managements have created M&A (merger and acquisition) opportunities for well-funded offshore education corporates and REITs (real estate investment trusts).

To get around clumsy laws replete with loopsholes, drafted by government bureaucrats prohibiting for-profit corporates and entrepreneurs from promoting or owning education institutions, astute lawyers have devised several strategies to enable private school promoters to earn surpluses for investment in institutional upgradation and promotion of new greenfield schools.

Typically, an asset management for-profit limited liability company is registered by a private school promoter. The physical assets — land, buildings, equipment — of a given school/college, are sold to the asset management company and leased back to the school which (from fees paid by students) pays the company an annual/monthly lease rent. Payment of rent for leased premises doesn’t fall within the definition of commercial activity for schools.

However, the necessity to negotiate and devise complex contracts to get around legislation and case law which forbids “commercialisation of education” has generated its own problems.

In 2016, the Hyderabad-based Cerestra Infrastructure Trust (estb.2015) which describes itself as an “edu-infra partners and institutionalised edu-infra sale and leaseback” company, entered into an agreement with Dr. Vinay Jain, promoter-director of the Mumbai-based Witty Group of Institutions which owns four K-12 schools, to acquire a 51 percent stake in VJTF Infraschool Services (Mumbai) Pvt. Ltd (VJTFI), the asset management company of Witty International School (Mumbai), for Rs.97 crore to be paid in two installments — Rs.47 crore on signing of the agreement and the remaining Rs.50 crore within one year.

Under the terms of the agreement, subject to payment of the full amount, the school management committed to pay a fixed lease rental to VJTFI. According to Jain, Cerestra paid Rs.47 crore upfront for purchase of its 51 percent stake in VJTFI. However, it failed and neglected to pay the remaining Rs.50 crore for over three years, a default which prompted Jain to terminate the agreement of sale of 51 percent equity of VJTFI to Cerestra on December 24, 2020.

“Subsequently, we learned Cerestra had not taken the required permission to enter into the 2016 agreement from SEBI (Security Exchange Board of India). It had cheated, misrepresented and given wrong representations and warranties to us and wrongly acquired 51 percent stake in VJTFI,” says Jain. Therefore on March 31, Jain repudiated the original agreement with Cerestra and formally registered a cheating complaint with SEBI.

On the other hand, Cerestra claims that while Witty had collected fees from the students of the school it failed to make rental payments to VJTFI since April 2020, and it was in “wilful default.” Moreover, Cerestra (which declined to speak with EducationWorld) has submitted that SEBI regulations prevented them from acquiring more than 25 percent stake in any Indian company and pleaded force majeure.

Since then, the media has been flooded with press releases from both parties, alleging fraud, criminal breach of trust and cheating. On April 1, an arbitration petition was filed in the Bombay high court by both the parties and hearing is set to commence on April 9.

There the matter rests. For the moment.

Also read: Bombay HC dismisses Cerestra petition against Witty International School