Zostel Asks SEBI For OYO’s IPO Suspension, OYO Says Overreach Of HC Proceedings

Continuing its fight against the hospitality unicorn OYO, Zostel Hospitality, the parent company of Zo Rooms, has written to the capital market regulator SEBI seeking suspension of the proposed initial public offering (IPO) of Oravel Stays, which runs OYO.

Speaking to Inc42, Zostel’s legal counsel said that 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.

In the letter, Zostel has reiterated its stand that the DRHP is ultra vires and the IPO is “not maintainable” as the capital structure of the Gurugram-based startup is not finalised yet.

“The DRHP is replete with material omissions and blatant misstatements, intended to mislead the public into investing into Oravel’s shares without appreciation of the risk involved,” the letter to SEBI said.

Zostel told the market regulator said that the management, the directors, the officers and the independent directors of Oravel, as well as book-running lead managers of the IPO, have been “derelict in their duty” to carry out necessary due diligence in the matter, resulting in their failure to ensure Oravel’s adherence to the norms and regulations.

OYO Hits Back

Responding to the letter, OYO in its statement has called Zostel’s move as an attempt to overreach Delhi High Court’s proceedings.

“After multiple attempts in the courts and arbitration tribunal, Zostel’s communication shows unnecessary and repetitive efforts to create a wrong perception. This shows a pattern of Zostel trying to distract OYO from pursuing its business goals,” it said.

It added that the repeated reliefs being sought are not consistent with an award by the arbitration tribunal from March 2021 which has not granted any award for the issue of any shareholding in OYO to Zostel. 

The IPO-bound hospitality startup said that the arbitration tribunal had ruled and categorically acknowledged that the definitive agreements were neither finalised nor agreed upon or executed and the entire process was merely at the exploratory stage.

A statement from the OYO counsel noted that there have been numerous rounds of funding to raise equity capital during the pendency of the arbitral proceedings. 

‘Likewise, the IPO is another round of funding to raise equity capital (albeit from public shareholders). Nothing in the Award prevents or restrains OYO from going ahead with the same,” said the counsel’s statement.

Last month, Zostel Hospitality, approached the Delhi High Court (HC) to restrain OYO from modifying its shareholding structure or cap table.

Tribunal Court’s Award

In March 2021, Zo Rooms (owned by Zostel) was issued partial relief by a tribunal court. Zostel had claimed that the arbitral tribunal had directed OYO to issue 7% shareholding to Zostel (ZO Rooms) founders and execute the term sheet agreements. However, OYO said that the tribunal has not awarded any such claim to Zostel. 

Inc42 had reviewed the March 2021 award by the tribunal headed by Justice Ahmadi, former Chief Justice of India. It 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.

In the final section on the reliefs that each party is entitled to, Justice Ahmadi stated, “This Tribunal holds that Claimant [Zostel] is entitled to Specific Performance of the Respondent’s [OYO] obligations under Term Sheet dated 26.11.2015. However, as Definitive Agreements have yet to be executed, the Tribunal holds that the Claimant is entitled to take appropriate proceedings for Specific Performance and execution of the Definitive Agreements as envisaged, for itself and its shareholders under the Term Sheet.”

In legal terms, specific performance is a legal remedy used by the courts to direct parties to execute the contract as per the terms agreed. This means Zostel can take steps to prove its case and get the specific performance award.

From 2015 To Present: The OYO-Zostel Faceoff

The OYO vs Zostel standoff began in 2015 after OYO had taken ZO Rooms to court over theft of copyright material. However, the Delhi High Court on April 21, 2015 had issued a stay order against ZO Rooms then. Despite that legal battle, in late 2015, OYO explored a potential acquisition of ZO Rooms. However, after more than two years of speculation, the merger fell flat in 2018.

Zostel Hospitality was founded in August 2013 by Dharamveer Chouhan, Akhil Malik, Paavan Nanda, Tarun Tiwari, Chetan Singh Chauhan, Abhishek Bhutra and Siddharth Janghu with an initial corpus of $30K (INR 20 Lakh). The startup has two hospitality brands i.e. ZO Rooms and Zostel.

Soon after the potential merger talks failed, OYO filed a complaint against Zostel Hospitality alleging continuous inconvenience and harassment by Zostel founders. OYO filed a criminal complaint against the founders of Zostel under Sections 405, 406, 415, 420, 425 and 426 pertaining to criminal breach of trust, cheating and misrepresentation of data.

Zostel in a separate petition filed on February 2, 2018, alleged that OYO had acquired its data of employees, assets, hotel properties under the pretext of accelerating the acquisition process and is now refusing to pay the dues for the business acquired. OYO alleged that this was misconceived and baseless.

Following a months-long legal battle, the Supreme Court, in an order dated September 19, 2018, accepted the arbitration petition by Zostel and appointed Justice Ahmadi as the sole arbitrator.

The development comes days after OYO filed its draft red herring prospectus (DRHP) to raise INR 8,430 Cr. The offer will consist of a primary component which will include an issue of fresh shares worth INR 7,000 Cr and an offer-for-sale, meaning allowing existing investors to offload their shares, amounting to INR 1,430 Cr.