PharmEasy value crash may not hit Velumani’s stake

Arokiaswamy Velumani — the founder of diagnostic chain Thyrocare, which was acquired by PharmEasy in 2021 — had secured anti-dilution rights ahead of his investment of Rs 1,500 crore in the online pharmacy, people aware of the investment terms said. This will ensure he is allotted new shares to compensate for the massive erosion in the current value of his holding in the company, they added, as PharmEasy looks to raise fresh capital through a rights issue at a 90% discount to its peak valuation, as reported by ET first on Wednesday.

PharmEasy is faced with a steep cut in its valuation, with the new funding round pegging its shares at Rs 5 each compared to the Rs 50 per share that it secured in 2021. The huge fall in value has triggered questions about the fate of Velumani’s purchase of a 5% stake in the firm in 2021 when it was valued at $4 billion.

“This was one of the conditions on which Velumani made the investment,” said one of the persons cited above. “So if the value of the company goes down significantly, he gets to secure (for the loss) due to the erosion. Besides the institutional investors, there would be few large individual investors to have this protection.”

Velumani declined to comment while a spokesperson for PharmEasy didn’t immediately respond to ET’s request for comments.

The new financing is akin to a recapitalisation of the company, as investors have secured control of the beleaguered e-pharmacy. The mix of investors coming in will also change, as reported earlier by ET.\

Also read | Exclusive: PharmEasy plans Rs 2,400-crore rights issue at 90% discount to repay loan

Shareholders who do not participate in the rights issue will undergo an almost 40% dilution in their stake, even as founders and employees could see their shareholding get wiped out, sources said.

“So, if an investor like Ranjan Pai (promoter of the Manipal Group) is coming with a large commitment, the anti-dilution will secure investor interest and Velumani’s holdings too,” said one person aware of the developments.

“Let’s see which all investors participate in this round and approve the fund infusion at this price,” this person added.

ET had reported on July 6 that investors like Temasek, Prosus Ventures, TPG Growth and CDPQ are likely to lead the rights issue and Pai — an existing investor — may also get a board seat at the Mumbai-based firm. Pai has offered to invest up to Rs 1,000 crore in PharmEasy.

Case against PharmEasy subsidiary

Velumani, through his associates, has also filed a case against API Holdings subsidiary DocOn, according to court filings seen by ET. This comes two years after Thyrocare’s acquisition, which was considered to be a landmark transaction where an online startup had acquired a large traditional diagnostics business.

Siddharth Shah, Dhaval Shah, Dharmil Sheth, Harsh Parekh and Hardik Dedhia are the founders at API Holdings, the parent company which owns PharmEasy.

At the heart of the ongoing conflict is the issue of an alleged higher tax payout devolving on promoters of Thyrocare. This is due to the transaction being an off-market one instead of an on-market sale. An off-market transaction is when share transfer happens between two parties on mutually agreed terms and the clearing corporation and the stock exchange is not involved. This attracts a higher rate of long-term capital gains tax.

While initially, legal notices were exchanged between DocOn and Thyrocare promoters, the case was formally filed in the Bombay High Court in June last year. Even as the legal notices were mentioned in API Holdings’s draft IPO papers, the case has not yet been reported in the media.

“After exchange of legal notices, Velumani decided to move court and a case has been filed. They will also seek interest payment for the loss from the day of filing the case,” this person added.

Both PharmEasy and Velumani did not comment on the court case either.

Unicorn under pressure

If the rights issue goes through at the Rs 5 per share pricing, it would mark the first official down round for a large internet firm in a fresh fundraise. A down round is when a privately held firm raises funds at a valuation lower than its previous round.

While mutual funds managed by global investors have been marking down their startup bets, a new round at a lower valuation cements its latest valuation formally.

According to sources, the investors and the PharmEasy board have in-principle agreed to issue new employee stock options to founders and employees to compensate for their holdings getting wiped out due to the crash in valuation. Founders typically do not get any anti-dilution rights and it stays with investors.

Meanwhile, founders of PharmEasy led by Shah are expected to work towards further strengthening its financials and grow the business in a sustainable manner.

“From a peak cash requirement of over $500 million for acquisitions and cash flow breakeven at the time of filing for the IPO in November 2021, the company has demonstrated that it can fulfil the same objective in around $110 million,” Shah said in a note to shareholders.