High stakes: OYO, FHRAI accuse each other of functional irregularities

In a recent letter to the Ministry of Tourism, IPO-bound hotel aggregator platform OYO requested it to investigate the Federation of Hotel and Restaurant Associations of India (FHRAI) and take action against the industry body’s “illegally-run” executive committee.

This was the most recent development in a tussle between the two that has spanned the past five years. In this case, the issue has assumed a new dimension because the loss-making, 10-year-old OYO Rooms, promoted and led by the 29-year-old charismatic billionaire Ritesh Agarwal, is headed for its second attempt to raise money from the stock markets.

Reports of the two butting heads date back to December 2018, when FHRAI accused OYO of large-scale breach of contracts, jeopardising consumer safety and violation of law. In a letter to Agarwal, FHRAI had said that apart from breach of contracts, most of its members had grievances with OYO regarding its endorsement as hotels illegal and unlicensed bed and breakfast apartments, flats in residential/commercial buildings, rooms in chawls and other similar independent structures.

“Such positioning/endorsement is not only misleading, but also a potential guest safety hazard,” the letter had said. The industry body also alleged issues such as predatory pricing and exorbitant commissions that OYO charged hotels it endorsed.

In 2019, FHRAI also filed a complaint against OYO and Make My Trip-Goibibo with the Competition Commission of India (CCI), alleging that OYO’s systemic depredations in the budget segment hotels caused serious distress to the country’s hospitality sector.

Then in September 2020, OYO Rooms announced Rs 8,430-crore IPO prepay or repay debt and fund growth initiatives and filed the mandatory draft red herring prospectus (DRHP). The IPO was scheduled for October 2021. But in that month, FHRAI urged the Securities and Exchange Board of India (Sebi) to suspend OYO’s IPO alleging “unfair, anti-competitive and fraudulent dealings and business practices”. OYO claimed it had made adequate disclosures in its DRHP but called off the issue citing volatile market conditions.

Since then, FHRAI has routinely urged Sebi to call off OYO’s IPO.

In May 2022, the industry body urged the Sebi to call off OYO’s IPO alleging that the hotel aggregator was operating under heavy losses. Since its inception in 2013, FHRAI claimed that OYO has been running in losses and its total turnover fell a drastic 69 per cent from Rs 13,413 crore in 2020 to Rs 4,157 crore in 2021. The federation further claimed that OYO’s IPO would wipe out public wealth, while enriching its founders and key management.

In November last year, FHRAI wrote another letter to Sebi to bar the hotel aggregator’s IPO after the CCI slapped a Rs 169-crore fine on OYO the month before. “Now that OYO has been found guilty of indulging in anti-competitive and unfair business practices thereby affecting the business of small hotels and suppressing competition, it is imperative that its IPO should not be allowed in the interest of the hospitality sector, consumers and potential investors,” FHRAI said.

According to an addendum filed with Sebi, in the first half of FY23 (April to September), OYO reported a profit of Rs 63 crore as against a loss of Rs 280 crore in the year-ago period.

The firm said its revenue from operations during the period grew by 24 per cent year-on-year to Rs 2,905 crore. The company’s adjusted EBITDA for the second quarter grew to Rs 56 crore, from Rs 7 crore in the first quarter.

OYO, however, logged a net loss of Rs 333 crore in the second quarter, down from Rs 414 crore in the first quarter.

The firm’s revenue in FY22 stood at Rs 4,905 crore, up 18 per cent from Rs 4,157.3 crore in FY21. OYO almost halved its losses in FY22 (Rs 1,892.2 crore) from Rs 3,382.5 crore in FY21.

OYO, however, claimed that FHRAI was misrepresenting the CCI order to divert attention from a National Company Law Tribunal (NCLT) decision to hold the executive committee meeting of FHRAI “null and void”.

This was the result of a separate controversy that came to a head in August last year when the National Company Law Appellate Tribunal (NCLAT) delivered a verdict on an appeal by the Hotel and Restaurant Association of Northern India (HRANI) and the Hotel and Restaurant Association (Western India) (HRAWI).

The verdict declared all administrative decisions made by the current FHRAI executive committee null and void and asked it to conduct fresh elections in 30 days.

“The object of FHRAI to promote the interest of hotels of various regions by encouraging and protecting the hospitality industry in India has been defeated due to petty squabbles time and again. Personal interest has come to loom over the functioning of FHRAI. Certain members of various regions of FHRAI are breeding litigation for personal reasons and we strongly disapprove of it,” the verdict read.

“We further find the acts of some members of the executive committee, who have formed a ‘clique’ to give shape to their chosen but perverse design, are clearly acts of ‘oppression and mismanagement’,” the NCLAT ruling added.

On January 5 this year, OYO, in a letter to NCLT requested the tribunal to accelerate the Ministry of Corporate Affairs’ (MCA) investigation on the running of FHRAI. This was in response to an NCLT principal bench order directing MCA to investigate FHRAI’s affairs and examine whether it conducts itself in a manner compliant with the Companies Act.

The most recent development came on February 26, when the hospitality major wrote to the Ministry of Tourism requesting it to intervene and investigate the running of FHRAI and order the eviction of its erring executive committee members.

OYO alleged that FHRAI’s actions were detrimental to small hotel owners. It also claimed that the industry body’s “constant tussle and continued malafide friction with organised players like OYO discourages SMEs and entrepreneurs from progressing and moving ahead with the times and with technology”.

Responding to the allegations, FHRAI Secretary General Jaison Chacko said, “It would have been desirable if OYO tried to counter FHRAI’s allegations and tried to clear the pending dues of hundreds of hotel partners.”

Chacko claimed that FHRAI approached appropriate authorities including the CCI, NCLT, NCLAT, Sebi and government of India against OYO’s “oppressive and unethical business practices” based on an “enormous number of complaints received from our members about large-scale breach of contracts, default of payments, unilateral cancellation of agreements and other fraudulent activities committed by OYO”.

“OYO must act responsibly and offer redress to grievances/complaints of hotel partners,” Pradeep Shetty, HRAWI president and executive committee member, FHRAI, told Business Standard.

The endless back and forth between FHRAI and OYO underlines the high stakes involved in a business that has boomed since the pandemic ended. How it ends, though, is anyone’s guess.