OYO Faces Legal Dispute With Rival Zostel Before IPO

IPO-bound hospitality unicorn OYO is likely to file its draft red herring prospectus (DRHP) this week (which may be pushed to next week) with an estimated capital raise of $1 Bn. As OYO gears up for its IPO, it is reportedly facing a legal hindrance as its long-term rival, ZO Rooms’ parent entity Zostel Hospitality, has approached the Delhi High Court (HC) to restrain it from modifying its shareholding structure or cap table including by way of an IPO. 

The matter, set to be heard in the HC on Wednesday (September 29, 2021), will decide whether or not OYO can take the IPO route before a settlement with Zostel, according to reports.

Earlier this month, the hospitality unicorn converted itself into a public company. It has also increased its authorised share capital from its existing INR 1.17 Cr to INR 901 Cr and has even shortlisted investment bankers such as JP Morgan, Kotak Mahindra Capital and Citi to manage its IPO. 

The Tussle Between OYO and Zostel

In 2015, 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 almost two-year of speculation, in an official statement in 2017, OYO later 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, ZO in its statement mentioned that OYO is resiling from the contractual terms after acquiring the entire ZO Rooms business by March 2016 as the term sheet was binding. Zostel Hospitality, in its petition, filed a $1 Mn relief claim on February 2, 2018, alleging that OYO had acquired its data of employees, assets, hotel properties under the pretext of accelerating the process of acquisition and is now refusing to pay the dues for the business acquired.

OYO also alleged that it had been inconvenienced and harassed by Zostel and its directors, and claimed Zostel was “intimidating and pressuring us to submit to their unreasonable demands.”

According to Bar And bench, an Arbitral Tribunal in March 2021 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. Yet, both sides continue to be at loggerheads.

On the other hand, the award, as previously reviewed by Inc42, 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.

With the fresh filing, Zostel is looking for redressal, stating that an issuer [here, OYO] shall not be eligible to make an initial public offer, if there are any outstanding convertible securities or any other right which would entitle any person [here, Zostel] with an option to receive equity shares of the issuer [OYO]. Ideally, therefore, “OYO should not be permitted to file the DRHP till such time that its challenge to the award is decided,” Zostel’s legal counsel told ET.

OYO’s legal counsel is also reportedly “seeking reliefs which are beyond the scope of the Award”.