What’s going on between Oyo and Zostel
Oyo has run into legal trouble with a former competitor, Zostel (Zo Rooms), over a botched acquisition deal.
In 2015, Zo rooms and Oyo signed a deal for Oyo to buy Zostel.
The deal fell through, but Zo Rooms claims that it is still eligible for a 7% stake in OYO’s parent company, “Oravel Stays”.
The conflicting part of this claim is that OYO denies its validity completely.
Consequently, Zostel has approached the Delhi high court seeking redressal.
The interesting part of this story is that OYO is preparing to launch its IPO and in preparation has already submitted it’s Draft Red Herring Prospectus(DRHP).
Zostel seeks to “place an interim order to restrain or injunct Oyo from modifying its shareholder structure or cap table including by way of an IPO”
Zostel cites that OYO “should not be eligible to make an Initial Public Offering when it has outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer..”
Of course, OYO still denies all these claims and states that Zostel or its shareholders have not received any relief that allows them to seek OYO to freeze its shareholding pattern in whatsoever manner
Meanwhile, Zostel has now taken up its plea to SEBI (Securities and Exchange Board of India), to reject OYO’s DHRP and suspend its proposed IPO.
What will be the impact?
Oyo stopped fulfilling its obligations under the term sheet after a certain point, according to the arbitrator appointed by the Delhi high court.
It is alleged that Oyo has objected to the arbitrator’s decision, claiming that the term sheet was not legally binding. If the arbitration award is implemented, the Zostel Hospitality founders will receive a 7% stake in the company.
What will happen in the future
The IPO will be postponed if the SEC intervenes. However, the SEC will not be able to completely halt the IPO.
If Sebi decides to intervene, it will only issue an observation letter and will not give any explicit approvals for an IPO.
There are two possible outcomes if Sebi decides to intervene. It can ask Oyo to refile the document or issue a corrigendum if it finds evidence that it misrepresented facts in the offer document.
“However, because the current case is pending before a high court, the IPO can only be delayed until the court issues its decision.”