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More trouble brewing at India’s second-most valuable startup Oyo

From government officials raid to mass layoff and reports of seedy business practices, Oyo has been marred in bad press.

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In less than two weeks into 2020, India’s second most valuable startup Oyo has managed to court controversies as it fires 1200 employees in the country and stirs up Indian tax officials who raided its office Friday.

Late last week, Oyo said officials from the Income Tax department carried out a surprise search in one of its offices in Gurugram. The company spokesperson told local media Mint that it was a routine TDS (tax deduction at source) survey at one of their offices and that it cooperated with the authorities.

The income tax raid happened at a time when SoftBank’s USD 10-billion Indian jewel, Oyo, gave pink slips to thousands of its employees in India and China. Amidst business restructuring and hiring top management to lead the international business, a Bloomberg report said the company “has let go of 5% of its 12,000 employees in China partly due to non-performance and dismissed 12% of its 10,000 staff in India,” adding that another 1,200 people from India team may be kicked out over the next three to four months.

According to wire service Press Trust of India (PTI), Ritesh Agarwal founder and Group CEO, in an internal mail to India and South Asia employees recently, said the company’s strategic objectives include sustainable growth, operational and customer excellence, profitability, and training and governance, and that to achieve them, “unfortunately, some roles at Oyo will become redundant” as the company further drives “tech-enabled synergy, enhanced efficiency and removes duplication of effort across businesses or geographies.”

“As a result, we are asking some of our impacted colleagues to move to a new career outside of Oyo. This has not been an easy decision for us,” he said.

Over the last few years, Oyo hired too many people too fast. These employees reportedly were tasked with aggressive targets of onboarding hotels to grow the numbers so as to impress the investors. And the strategy has worked so far. The six-year-old startup has been able to raise over USD 2.5 billion so far by investors such as Airbnb, Didi Chuxing, Lightspeed Venture Partners, and Sequoia Capital, apart from SoftBank and Ritesh Agarwal-owned RA Hospitality. Now Oyo is trimming those very employees who it had hired to fuel growth. These include mid-level management, business development, sales & operations roles.

In the first week of January, The New York Times did an expose on Oyo, noting that the hospitality giant has been using unethical practices to fuel its expansion. The tactics Oyo has been deploying to inflate numbers include listing unavailable properties, onboarding sub-par hotels, and not letting hotels leave once they sign the contract by withholding their payments and filing lawsuits. At Oyo, thousands of rooms are from unlicensed hotels and guesthouses, which often lack required government permissions, the report said, adding Oyo gives free lodging to police and other government officials to turn a blind eye.

To balloon-up its revenue, Oyo charges its hotel partners extra fees and penalties for maintenance, cut down monthly minimum revenue promised to the hotels, and hold back their payments, sources told KrASIA previously.

Oyo now claims to be the world’s third-largest hotel chain with 1.2 million rooms across 80 countries. However, lightning-fast growth has come with the cost. The company posted a net loss of USD 332 million for the year ended in March 2019. A recent report by travel research firm Skift puts Oyo’s net loss before tax between April and June at USD 181 million, “which was alarmingly equal to 54% of the net loss it had for FY19. A Reuters report said the company expects losses in India and China to continue through 2022.

SoftBank has tightened its stance on money splurging by its portfolio companies after it had to shell out USD 9.5 billion rescue package to WeWork. Consequently, Oyo has come under pressure to balance its cash burn and expansion rate so as to mollify its largest backer. The Japanese conglomerate reportedly gave Oyo a deadline of March 31, 2020, to offload businesses that are not profitable. This is also in line with SoftBank-Oyo’s plans to list the hotel startup publicly in the US in 2022-23.