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Zostel cries foul over ‘inadequate disclosures’ in OYO’s proposed IPO

Zostel and OYO have been at loggerheads since 2015 when OYO sued Zo Rooms over theft of copyright material. 

Zostel Hospitality, the parent company of Zo Rooms, has asked the Securities and Exchange Board of India (SEBI) to suspend the initial public offering (IPO) of Oravel Stays, which runs OYO, according to a report by Moneycontrol.com. The complaint argues that the Draft Red Herring Prospectus of OYO contains “misstatements” and “inadequate disclosures”, the report added.  

“The matter of Zostel’s shareholding in OYO is subjudice and in case the Delhi High Court’s decision comes in Zostel’s favour then it will change the shareholding of the company rendering the DRHP invalid,” Zostel’s legal counsel was quoted as saying by Inc42

Zostel’s complaint is the latest salvo in a protracted battle between the two companies. OYO is banking on its public offer proceeds to settle debt running into thousands of crores. A suspension, if granted, can prove to be detrimental for the company’s business growth which has suffered heavily due to the ongoing COVID-19 pandemic. 

Timeline of Zostel’s dispute with OYO 

April, 2015: OYO sued Zo Rooms, which was Zostel’s hyperlocal hotel rooms booking platform, over theft of copyright material. The Delhi High Court issued a stay order against ZO Rooms then.

December, 2015: The companies then started exploring a potential acquisition as reports emerged that OYO was looking to take over Zostel. 

September, 2016: The planned deal, also confirmed by Softbank, with Zostel fell through as OYO officially put an end to it. Oyo said that Zostel had misled it on revenue, while Zostel claimed that, among other things, Oyo stole a trove of data while auditing it. The decision was termed as done in ‘bad faith’ by Zostel.

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February, 2017: Zostel and Oyo filed cases and complaints against each other in a Gurugram court, a dispute that would later end up in front of the Supreme Court.

September, 2018: The Supreme Court appointed an arbitrator in the case. He is a former Chief Justice of India AM Ahmadi, who was tasked with deciding the question of whether the arbitration agreement signed between the two companies is valid. 

March, 2021: The arbitrator said that Oyo was in breach of its agreement for the acquisition of Zo Rooms, adding that the latter can proceed to execute the definitive agreement. Zostel claimed that the tribunal had directed OYO to issue seven percent shareholding to Zostel founders and execute the term sheet agreements. However, OYO said that the tribunal has not awarded any such claim to Zostel, according to Inc42. 

April, 2021: Oyo was sent a notice seeking enforcement of the award which includes transferring seven percent shares of Oyo to the shareholders of Zostel. The claim was soon challenged before the Delhi High Court following which Zostel filed an execution petition and a petition seeking to restrain Oyo from altering the shareholding pattern including any initial public offering, according to Moneycontrol. 

September, 2021: Zo has sought protection of its rights from the Delhi High Court against OYO. A hearing is scheduled on October 21.

OYO’s response to Zostel’s complaint 

OYO censured Zostel and said that it is indulging in self-serving misrepresentation of the case facts and that it is an attempt to overreach Delhi HC proceedings, as per Livemint

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“The Award does not direct OYO to issue any shares to Zostel or its shareholders and only holds that Zostel is entitled to take appropriate proceedings for Specific Performance and execution of the Definitive Agreements. The Award holds that the Term Sheet was binding but the Definitive Agreements were not agreed upon by the parties […] At no point in time during the arbitration proceedings till date, has there been any direction or order to prevent OYO from increasing its capital base or changing its capital structure,” Oyo’s counsel said in response.

Brief outline of OYO’s DRHP 

Oyo Rooms filed its draft red herring prospectus (DRHP) on October 1 with SEBI signalling its intention to raise Rs 8,430 crore in the Initial Public Offering (IPO). The company is looking to raise the sum through a fresh issue of Rs 7,000 crore and an offer for sale (OFS) of Rs 1,430 crore, according to the prospectus. 

The OFS will see four investors including Softbank and Airbnb offload stake worth nearly Rs 1,420 crore. Masayoshi Son-led Softbank is the majority shareholder (46.62 percent) which will sell shares worth Rs 1,328.53 crore, whereas A1 Holdings Inc (Airbnb), China Lodging Holding (HK), and  Ivy Ventures LLP will dilute shares worth Rs 51.62 crore, Rs 23.13 crore, and Rs 26.71 crore respectively.   

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