HC rejects Zostel's plea for 7% stake in OYO

The Delhi High Court has rejected Zostel's plea claiming 7 percent shareholding in OYO ahead of the latter's initial public offering (IPO) in what appears to be a big relief for Softbank-backed hospitality firm.

A single-judge bench of the Delhi High Court comprising Justice C Hari Shankar passed the ruling today.

Zo Rooms which has been fighting a legal battle with Oyo had filed an appeal in the High Court seeking protection of its rights against the company last year.

On account of this shareholding dispute, Zostel was seeking to restrain Oyo from proceeding with its IPO process. This attempt by Zostel was rejected in today's ruling.

“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," said an Oyo spokesperson.

The issues between the two companies date back to 2015 when Zo Rooms, the budget hotel accommodation chain owned by Zostel Hospitality, was shut down after merger talks between the two companies failed.

The two companies had entered into talks for an acquisition in 2015 executing an agreement on November 26.

Zo claims that it completed its obligation under the agreement and transferred the business but Oyo "failed to transfer seven percent to its shareholders" which eventually led to the arbitration.

In March, last year, nearly three years after the deal between the two companies collapsed, a Supreme Court-appointed arbitrator had finally said that Oyo was in breach of its agreement for the acquisition of Zo Rooms, adding that the latter can proceed to execute the definitive agreement.

However while Zo claims that it is entitled to a stake of seven percent in Oyo, the latter denied the claim stating that the tribunal had granted no specific relief to Zostel in terms of receiving ownership in Oyo.

The deal between the two companies was expected to be an asset sale with Zo Rooms founders and lead investor Tiger Global receiving a combined stake of seven percent in Oyo. The deal never took place, fuelling a bitter war between the two parties.

Oyo backed off from the deal talks citing liabilities of Zo Rooms. It claims that it had identified several issues during the due diligence process, where significant liabilities and unpaid dues, as well as undisclosed contingent liabilities came to the fore.

Oyo is awaiting for SEBI's nod to go ahead with its proposed $1.2 billion IPO.  Reports suggest that the company may recosider its $9 valuation considering the choppy market sentiments right now.

In the last couple of months, stocks of loss-making internet companies have seen intense selling pressure in India and the US as investors turn cautious.

Shares of restaurant aggregator Zomato plunged to its lowest level since its blockbuster listing last year, with digital payments company Paytm, online beauty and wellness firm Nykaa and PB Fintech, an online insurance and lending platform, also coming under pressure.

Oyo filed its draft red herring prospectus (DRHP) in September last year and has been in the process of responding to questions and clarifications sought by regulators.

Meanwhile Zo Rooms legal counsel said the company was evaluating if it could file an apeal in the division bench.

“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. 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," said Abhishek Malhotra, TMT Law Practice.