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SoftBank-backed Oyo’s mega IPO plans may derail due to a legal battle

Written by Moulishree Srivastava Published on     3 mins read

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Oyo has reportedly been gearing up to file documents for a mega IPO of USD 1–1.2 billion by next week, targeting a valuation of USD 12-14 billion.

SoftBank-backed hospitality startup Oyo’s plans for an initial public offering (IPO) may be derailed due to an ongoing legal battle.

The Gurgaon-based, seven-year-old unicorn has reportedly been gearing up to file documents for a mega IPO of USD 1–1.2 billion by next week, targeting a valuation of USD 12-15 billion. Oyo is currently valued at USD 9 billion, as per a report by CB Insight.

Its former rival Zostel Hospitality, which operated budget hotel chain Zo Rooms, approached the Delhi High Court last month to prevent Oyo from “modifying its shareholding structure or cap table, including by way of an IPO,” according to a report by local media Economic Times, citing TMT Law Practice, the legal counsel for Zostel.

Back in November 2015, Oyo signed an agreement to acquire Zo Rooms. Ten months later, Oyo terminated the deal, claiming Zo Rooms brought no potential value to the company. After the merger talks failed, Zo Rooms had to shut down. Later in January 2018, Oyo filed a complaint against Zo Rooms founders for cheating and misrepresenting data. In response, Zo Rooms charged Oyo with data theft during the due diligence process conducted before the supposed acquisition.

Earlier this March, a court-appointed arbitrator ruled that the term sheet signed by Oyo with Zo Rooms was binding and ordered the hospitality giant to initiate “appropriate proceedings” to execute definitive agreements inked at the time of the deal. This included Oyo transferring up to 7% of its stake to shareholders of Zo Rooms as promised in the original agreement.

Meanwhile, Oyo has maintained that the disputed term sheet was non-binding and has challenged the arbitrator’s order. In August 2021, after Microsoft came on board the Oyo cap table with strategic investment and the hospitality major began preparing for IPO, Zostel moved to Delhi HC, seeking to stop Oyo from restructuring its shareholding pattern on the grounds that Oyo still owes Zo Room’s shareholders 7% stock.

“This makes it adequately clear that Oyo shall not be eligible to make an IPO,” Zostel’s legal counsel told Economic Times. 

Oyo, however, said Zostel isn’t entitled to demand freezing its shareholding pattern and that “the petition is not maintainable.”

The reliefs being sought by Zostel are not consistent with the arbitration tribunal’s order, which has “not granted any award for the issue of any shareholding in Oyo to Zostel” and “had merely given them the direction for seeking specific performance of the non-binding term sheet,” Oyo said in a blog post on Tuesday.

“As such, till the time that parties do not come to an agreement on the terms of the definitive agreements and the same are not executed, no right whatsoever arises in favor of any party for any type of shares to be issued in Oyo,” the company said.

“Oyo condemns Zostel’s self-serving misrepresentation of case facts. After multiple attempts in the courts and arbitration tribunal, Zostel’s communication shows unnecessary and repetitive efforts to create a wrong perception,” it added. “This shows a pattern of Zostel trying to distract Oyo from pursuing its business goals.”

If Oyo goes ahead with its IPO plans, it will be one of the largest IPO listings by an Indian startup. The company’s public offering, which is scheduled to happen by the year-end, is likely to comprise a secondary share sale of up to USD 300 million.  But Oyo founder and CEO Ritesh Agarwal—who controls over 33% of the stake in the company—will not offload any shares, said reports by local media, citing sources.

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