Zostel Hospitality Pvt Ltd has filed a complaint with the Securities and Exchange Board of India (SEBI) seeking rejection of Softbank-backed Oyo's initial public offering (IPO) proposal citing "misstatements" and "inadequate disclosures" in the draft red herring prospectus (DRHP) filed by them.
In the 98-page long document, Zostel has mentioned that the IPO is non-maintainable as Oyo's parent firm Oravel’s capital structure is not final.
The company has claimed that Oyo's filing of the DRHP is illegal. It has cited Regulation 5(2) of the SEBI - Issue of Capital and Disclosure Requirements Regulations, 2018 (ICDR Regulations).
Moneycontrol reported on October 6 that Zo Rooms was planning to drag Oyo to SEBI on the grounds of violation of ICDR regulations alleging that the company had misrepresented the facts about their litigation issue in the DRHP.
"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," the company said in the letter.
"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 risks involved," it added.
On the other hand, Oyo condemned Zostel's move and stated that Zostel was attempting to overreach the ongoing 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," said an Oyo spokesperson.
"OYO reiterates that the entire process was merely at the stage of exploratory discussions, and no definitive agreements were finalized or executed between the parties," he added.
Oyo's counsel also said that the award of the Supreme Court appointed arbitrator did 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.
He stressed upon the fact that in the due course of time, Oyo raised multiple rounds of funding. "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; fact that there were 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 Oyo's legal counsel.
This is the latest in the ongoing dispute between the two companies which dates back to 2015. Over half a decade ago, Zo Rooms, the budget hotel accommodation chain owned by Zostel Hospitality, was shut down after the merger talks between the two, which could have resulted in Zo Rooms getting a seven percent stake in Oyo, failed.
The two companies have been fighting the case since then.
In March, early this year, 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.
Meanwhile, in April, Oyo received a notice from Zo, seeking enforcement of the award which includes transferring seven percent shares of Oyo to the shareholders of Zostel.
Oyo soon challenged the award before the Delhi High Court following which Zostel filed an execution petition and a petition seeking to restrain Oyo from altering the shareholding pattern including any initial public offering.
Following this, Zo reached out to the Delhi High Court seeking protection of its rights against the company. The case is going on and will come up for hearing on October 21.
Oyo has in the past also condemned Zostel's claims calling them "baseless" and alleging forum hunting at a time when the company is headed for an initial public offering.
Even in its DRHP, Oyo has stated that the "arbitrator did not pass any directions for issuance of shares of our company to the claimants."
The company is looking to raise $1.16 billion through an IPO.
According to experts, if SEBI finds something "substantial" in Zostel's complaint, it would ask Oyo to make specific disclosure in the proposal and approve the proceedings. However in case the issue is fundamental to the whole situation, SEBI would want it to be settled before the company goes to the public domain.
"If SEBI upon examination finds that matter reported appears to have some basis and investors must be told the same, SEBI would want Oyo to make a disclosure in the Risk Factors, Litigations as the case may be and allow IPO to proceed. However in case the issue is fundamental to the existence of company or is material and would have substantial impact on company, its survival, business prospects or ownership etc, SEBI would want it to be settled before the company goes to the public domain," said JN Gupta, managing director at Stakeholders Empowerment Services and the former executive director of SEBI told Moneycontrol.
"However if SEBI is convinced that the issue can be addressed even after the company goes public, it may give the IPO a go ahead," Gupta added.