Zostel asks Sebi to reject and suspend Oyo's $1.2-billion IPO

Zostel Hospitality has written to the markets regulator, the Securities and Exchange Board of India (Sebi), requesting it to reject Oyo's draft red herring prospectus (DRHP) and suspend its proposed initial public offering (IPO).

The move can potentially lengthen Sebi's clearance process. The representation filed to the regulator alleges that the $1.2-billion IPO is “non-maintainable as Oravel Stays’ capital structure is not final”, according to the copy of the complaint reviewed by Business Standard.

Accordingly, Oravel’s filing of the DRHP in the current circumstances is illegal, in view of the stipulation contained under Regulation 5(2) of the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).

The DRHP, claimed Zostel, is “replete with material omissions and blatant misstatements, intended to mislead the public into investing in Oravel’s shares without appreciation of the risk involved”.

Reacting to the letter, spokesperson for Oyo said the company condemns Zostel’s “self-serving misrepresentation of case facts and it is an attempt to overreach Delhi High Court proceedings”.

After multiple attempts in courts and the arbitration tribunal, Zostel’s communication shows unnecessary and repetitive efforts to create a wrong perception, it alleged.

The spokesperson alleged that the complaint to the regular shows Zostel trying to “distract Oyo from pursuing its business goals. The repeated reliefs being sought are not consistent with an award by the arbitration tribunal from March 2021, which has not granted any award for issue of any shareholding in Oyo to Zostel”. 

The 98-page letter includes a presentation by Oyo promoter SoftBank, which, in an earnings report in 2016, mentioned Oyo had acquired Zostel.

According to Zostel, its shareholders “have the right to get issued in their favour 7 per cent of the equity securities of Oravel”. It added that since Oravel has failed to grant these, it should be prohibited from making any public offer of its shares.

“The management, the directors, the officers, and the independent directors of Oravel, as well as book-running lead managers of the IPO, have been derelict in their duty to carry out necessary due diligence in the matter, resulting in their failure to ensure Oravel’s adherence to the norms and regulations enacted to prevent companies from defrauding the investing public,” Zostel wrote in the letter.

Despite the acquisition of Zostel’s hotel business by the end of January 2016, Oravel consistently continued to delay the execution of definitive agreements and closing of the transaction under some pretext or the other till September 2017. Zostel, therefore, was left with no option, and accordingly commenced arbitration proceedings before the arbitration tribunal appointed by the Supreme Court, it said in the letter.

Oyo, on its part, maintains it had merely given them the direction for seeking specific performance of the non-binding term sheet. The tribunal had ruled and categorically acknowledged that the definitive agreements were neither finalised nor agreed upon.

“Oyo reiterates that the entire process was merely at the stage of exploratory discussions, and no definitive agreements were finalised or executed between the parties," it said.