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Will SEBI approve Oyo's IPO? Here's what the experts say

The market regulator may ask SoftBank-backed Oyo to either make additional disclosures or settle the dispute before approving the initial public offering

October 12, 2021 / 05:32 PM IST

The Securities and Exchange Board of India (SEBI) is expected to examine the merits of a complaint filed by rival Zostel Hospitality against IPO-bound Oyo Rooms which may delay the latter’s public listing by a few days.

SEBI is likely to come back to Zostel on its complaint in about a week given festivities this week.

The market regulator may ask SoftBank-backed Oyo to either make additional disclosures or settle the dispute before approving the initial public offering (IPO) for as much as $1.2 billion if it finds that the issue raised by Zostel can have a material impact on the company's operations and stakeholders.

Objections being raised ahead of public listings are not uncommon in India. If Oyo manages to convince the regulator that the matter has been disclosed in the IPO proposal and is unlikely to impact its operations, it may even be allowed to go ahead with the process.

"In every IPO there are some objections raised by minority stakeholders or third parties. SEBI looks at the merit of the objection and asks for additional disclosures. The lawyers of Oyo will also be given a chance to argue why the IPO should be allowed. These proceedings may delay the IPO slightly," said Sriram Subramanian, founder and managing director of shareholder advisory and corporate governance analysis firm InGovern Research.


According to a corporate lawyer who has been working on IPOs, this process will ensure that the matter is taken up by the company ahead of the public listing process.

"SEBI is not a judicial forum. It will ask Oyo to explain what will happen if the matter goes down south. How will the company be able to safeguard the interests of its stakeholders and its topline," the lawyer said, requesting anonymity.

"After troublesome global IPOs such as Uber and WeWork everyone is on the edge," he added.

Uber went public in 2019. Its stock dived 8% on the first day of trading. Softbank-backed WeWork also had a troubled listing.

Zomato’s stellar debut

Analysts were writing obituaries of tech IPOs after the listings shadowed by allegations of inflated valuations and unclear business models of some technology firms. 

This year, the Indian market has been promising for tech companies. Food delivery company Zomato made a stellar debut, opening at a more than 50 percent premium to its final offer price.  .

According to Stakeholders Empowerment Services managing director JN Gupta, a  former executive director of SEBI, the only factor that can pause or delay the Oyo IPO could be an issue that is "fundamental to the existence of the company".

"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 or 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 Gupta.

"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," he said.

The dispute between Oyo and Zostel dates back to six years ago. The row started after Zo Rooms, the budget hotel accommodation chain owned by Zostel Hospitality, was shut down following the failure of merger talks between Oyo and Zo. A deal could have resulted in Zo Rooms getting a 7 percent stake in Oyo.

In its share sale prospectus, Oyo mentioned in detail this dispute. It stated that the  two companies are fighting the issue in the courts and any adverse outcome in the legal proceedings may "materially and adversely affect our business reputation, prospects, results of operation and financial condition."


In March, in a big relief to Zostel, a Supreme Court-appointed arbitrator said Oyo was in breach of its agreement for the acquisition of Zo Rooms, adding that the latter can proceed to execute a definitive agreement.

Mentioning the case, Oyo’s share sale prospectus said that although the award held that the term sheet was binding in nature, the arbitrator did not pass any directions for the issuance of Oyo shares to Zostel.

Oyo then 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 through any IPO.

In its submission to SEBI on October 12, Zostel claimed that if Oyo is allowed to proceed with its IPO without issuing shares to Zostel, the right granted to Zostel under the award will be rendered infructuous and it will be left without any remedy.

It stated that the IPO was "non-maintainable" as Oyo’s capital structure was not final, calling the filing of the share sale prospectus "illegal".

Oyo has claimed that this was not the first round of funding being raised by the company following the dispute with Zostel. An IPO is just another round of funding to raise equity capital, the only difference being that this is from public investors, it has argued.

Oyo last raised a strategic round from Microsoft Corp in August at a valuation of $9.6 billion.
Priyanka Sahay
first published: Oct 12, 2021 04:19 pm

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