Zostel Hospitality writes to SEBI to reject OYO’s proposed IPO

Zostel Hospitality Pvt. Ltd., which owns Zostel Hostels and ZO Rooms, has written to Indian market regulator Securities and Exchange Board of India (SEBI), urging it to reject the draft prospectus filed by hospitality unicorn Oravel Stays Ltd., which operates brand Oyo, and suspend the latter’s proposed initial public offering (IPO). 

Citing reason for its request, Zostel said Oyo’s "IPO is non-maintainable as Oravel’s capital structure is not final". 

“Accordingly, Oravel's filing of the DRHP in the circumstances, is illegal, in view of the stipulation contained under Regulation 5(2) of the Securities and Exchange Board of India Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018. Zostel’s shareholders have a right to get issued in their favour, 7% of the equity securities of Oravel. Oravel has failed to grant the same and hence is prohibited from making any public offer of its shares,” said Zostel in a letter to SEBI.  

Mint reviewed a copy of the 98-page letter sent by Zostel to SEBI.  

In the letter, Zostel has also alleged that (Oyo’s) DRHP is replete with material omissions and blatant misstatements, intended to mislead the public into investing into Oravel’s shares without appreciation of the risks involved.  

Earlier in March, this year, an arbitral tribunal ruled in favour of Zostel calling the term sheet which promised ZO Rooms’ shareholders 7% of hospitality unicorn Oyo, as a binding document.  

According to Zostel Hospitality, ZO Rooms and Oyo had entered into talks for a merger in 2015, executing an agreement on 26 November that year. ZO Rooms completed its obligation under the agreement and transferred the business, but Oyo failed to transfer 7% to the ZO Room’s shareholder, Zostel alleged earlier.   

While filing its draft prospectus for its $1.2 billion (Rs 8430 crore) IPO, Oyo cited that legal proceedings involving Zostel may materially and adversely affect its business, as one of the many risk factors.  

On April 10, this year, Oyo had challenged the arbitral tribunal decision and sought a stay on the implementation of the award with the Delhi High Court. 

“Oyo condemns Zostel’s self-serving misrepresentation of case facts and it is an attempt to overreach Delhi HC 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,” said Oyo responding to Mint’s queries on the matter. 

“(The) non-binding term sheet (NBTS) was non-binding and was merely exploratory in nature [...] no definitive documents were executed. Several commercial aspects of the transaction were not finalized. No part of Zostel’s business was transferred to our Company, and that the relief of specific performance for a determinable contract as sought could not be granted,” Oyo said about Zostel’s claim in its draft prospectus.

Oyo also said in its draft prospectus that Zostel had sent a letter to the company on September 6, this year, alleging that it’s action of proceeding with an IPO was in violation of the SEBI ICDR Regulations.  

“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,” said Oyo’s counsel responding to Mint.

As a part of its draft prospectus filed with SEBI earlier this month , Oyo said it will undertake a primary capital raise of around ₹7,000 crore and stake sales by investors worth ₹ 1,430 crore. SoftBank Group is expected to sell shares worth ₹1,328.53 crore, while Grab, which invested $100 million in Oyo in 2018, is selling approximately ₹51.6 crore worth of shares, as a part of the listing process. 

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