Zostel plans to take Oyo IPO complaint to Sebi

The legal battle between Oyo Hotels & Homes and its rival Zostel (Zo Rooms) is intensifying. Just days after we
reported that Oyo has filed its draft prospectus for an initial public offering (IPO), Zostel is planning to move the Securities and Exchange Board of India (Sebi), asking it to put the proposed $1.2 billion IPO on hold, said two people with direct knowledge of the matter. Zostel is expected to send a letter to Sebi after the Delhi High Court hears their ongoing dispute on October 7, sources said.

While Oyo has challenged the Supreme Court-appointed arbitrator’s award in the high court, Zostel moved an application late August seeking to stop Oyo from modifying its cap table, including by way of an IPO. ET
first reported the matter on September 28.

Zostel plans to tell Sebi that Oyo is seeking a share sale while an arbitration award is pending in court, in violation of listing regulations. It is learnt to have obtained a legal opinion on this matter.

‘IPO papers give incomplete picture’

“Besides the points being made in court and what’s there in public, they (Zostel) may also highlight to the regulator that Oyo hasn’t given the full picture of the dispute in its draft IPO prospectus,” a person aware of the discussions said.

ET, based on court proceedings, reported last week that Amit Sibal, representing Zostel, had said the company did not intend to stop Oyo’s IPO but asked the court whether Oyo shares could be put in an escrow account until the court ruled on Oyo’s challenge to the arbitrator’s award. This would protect Zostel’s rights over a 7% stake in Oyo that it believes it should get, Sibal argued. Oyo’s lawyers contested the claims in a brief discussion last week.

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At the crux of the issue is a
2015 contract the two companies signed for Oyo’s acquisition of smaller rival Zostel. The deal fell through, but Zostel is arguing in court that it still deserves about 7% in Oyo parent Oravel Stays. The
arbitrator said in March that the term sheet between Oyo and Zo was binding and that Oyo, after a point, stopped taking steps to fulfill obligations under it. The order said Zo was “entitled” to make “appropriate proceedings” for its rights and work towards executing a “definitive agreement” with Oyo for itself and its shareholders. Since the dispute landed in court, Oyo has maintained the said term sheet was non-binding and challenged the arbitrator’s order.

Oyo has
told ET previously in a statement that Zostel has not been awarded 7% in the company and that it is trying to distract Oyo from pursuing its business goals. A legal counsel for Zostel didn’t immediately respond to ET’s queries.

Can Sebi halt Oyo’s IPO?

“Sebi can definitely intervene, which could lead to a delay in the IPO. However, Sebi cannot stop the IPO completely,” said a senior securities lawyer with direct knowledge of the matter. “In the past few months, we have seen Sebi putting several high-profile issuances in abeyance.”

As such, Sebi doesn’t give any explicit approvals for an IPO — it just issues an observation letter. If it issues such a letter without any comments, that is considered as a go-ahead.

Legal experts said if Sebi chooses to intervene, there could be two outcomes. If it finds substance in allegations that it misrepresented facts in the offer document, it can ask Oyo to refile the document or issue corrigendum.

“On the pending litigation front, Sebi can place the IPO in abeyance for up to three months if the investigation is being conducted by Sebi,” said another person with direct knowledge of the matter. “However, in the current case, proceedings are pending before a high court, hence the IPO can be held back only until the court gives its verdict,” this person added.

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