Delhi HC Dismisses Zostel’s Plea Seeking OYO IPO Suspension & 7% Stake

In a major relief to IPO-bound hospitality startup OYO, the Delhi High Court has rejected Zostel’s appeal that sought IPO suspension amid its long-standing tussle.

The Delhi HC has claimed that the 7% equity was never awarded to Zostel and that the firm “has no fruit to protect its 7% but has the right to seek specific performance under the term sheet between the two companies”.

“We are awaiting receipt of the complete judgment to go through the same to ascertain the reasons on the basis of which we have been denied the interim relief. While it does not have an impact on the final award that we have received, however, the immediate relief that we sought to seek a stay of the IPO has been denied at this stage,” Abhishek Malhotra, managing partner (TMT Law Practice) and Zostel’s legal counsel said in a statement.

“We are evaluating the options including filing an appeal before the division bench to give effect to the true intent and purpose of the award,” he added.

On the other hand, an OYO spokesperson said, “While we await for the full order, we believe that Zostel’s demand for issuance of 7% shares of OYO under the arbitration award has also been rejected. This verdict vindicates our stand that Zostel has been trying to mislead the public at large. We hope this will act as a strong deterrent for Zostel’s endless forum shopping efforts and be a conclusive closure of this matter.”

IPO-bound hospitality unicorn OYO filed its draft red herring prospectus (DRHP) in September 2021 to raise INR 8,430 Cr. As OYO was gearing up for its IPO, it had faced a legal hindrance from its long-term rival, ZO Rooms’ parent entity Zostel Hospitality.

Zostel had approached the Delhi High Court (HC) to restrain it from modifying its shareholding structure or cap table including by way of an IPO. Zostel sought a 7% stake in OYO, as had been specified during its (failed) acquisition talks in 2016.

The first phase of the battle had begun in 2015 when OYO had taken Zostel Hospitality to court over alleged theft of its copyright material when the HC had issued a stay order against ZO Rooms then.

Later, OYO filed criminal cases under the IT and Copyright Acts with the Economic Offences Wing & Cybercrime department against senior employees of Zostel for stealing data and other assets, including laptops, which continue to be under Zostel’s access even now and being used to its benefit.

OYO produced emails and CCTV footage claiming the theft of its ‘software’ by a few of its employees who left to join Zostel.

Despite the court fight, in late 2015, OYO explored a potential acquisition of ZO Rooms. However, after more than two years of speculation, in an official statement in 2017, OYO confirmed that it is no longer involved in talks with ZO Rooms for a potential acquisition after entering into an alleged ‘non-binding term sheet’.

However, Zostel has been resilient that OYO regressed from the deal after acquiring its data of employees, assets, hotel properties under the pretext of accelerating the process of acquisition. In February 2018, Zostel Hospitality filed another petition, claiming a $1 Mn in relief, alongside the 7% stated under the term sheet.

In March 2021, an arbitral tribunal ruled that Oravels Stays, the parent company of OYO, acted in breach of a binding agreement of acquisition of rival Zostel Hospitality (which owns ZO Rooms), whereby it had agreed to transfer 7% of OYO shareholding to ZO Rooms’ shareholders.

The tribunal had further stated that Zostel cannot claim the compensation of $1 Mn as relief at this time. It also denied relief for Zostel’s claims about the loss of goodwill because of the fallout of talks with OYO but maintained that Zostel was entitled to ‘Specific Performance’ from OYO, meaning that Zostel could take steps to prove its case and get the specific performance award.

The Delhi High Court had also reiterated the ruling, thus Zostel is likely to file an appeal to seek the ‘full effect of the ruling and award’.