OYO vs Zostel: The fate of Zostel’s Letter to SEBI
Authors: Aryan Malik & Diptodip Dutta
3rd year B.A., LL.B. (Hons.) students at Jindal Global Law School
The two juggernauts in the business of hotel rooms, Zostel and OYO are stuck in a monotonous legal battle. In the year 2015, Zostel and OYO had started talking about a possibility of a merger between Zostel’s subsidiary ZO Rooms and OYO. Pursuant to these talks, they entered into an agreement. However, the deal did not progress as expected and soon a legal battle ensued between the two. Zostel accused OYO of breaching the aforementioned agreement. Along with this, multiple criminal complaints relating to theft of data and other assets had been filed by both the parties against the other. To settle the matter, the Supreme Court appointed an arbitrator. The arbitrator ruled in favour of Zostel, after which, OYO appealed to Delhi High Court challenging the arbitral award.
II. The Issue
Pending matter, OYO proposed to raise capital through Intial Public Offering ("IPO"). However, in a recent development, Zostel urged SEBI to stop OYO’s bid from going ahead with its IPO. It alleged that the IPO would change the share capital structure in OYO and would consequently affect the relief Zostel is entitled to. The purpose of this article, is to analyse whether SEBI has the power to pass a sanction against an entity, related to a dispute between private parties especially when it is a matter under consideration by a judicial forum in India.
III. SEBI, Civil Matters, and the Locus Standi of Zostel
The point of debate here is whether SEBI can put a hold on the IPO of OYO ‘without the direction’ of the Delhi High Court, where the matter stands sub judice. The dispute between Zostel and OYO being a contractual dispute, any sanction passed by SEBI against OYO, may lead to undermining, directly or indirectly, the civil jurisdiction of the Delhi High Court. Moreover, it is a settled position of law that any party filing a suit must have the locus standi to do so. It must be noted that Zostel derives its locus standi as a complainant with SEBI from being a 7 percent shareholder in OYO but, this very shareholding is contested and disputed.
OYO essentially disputed this shareholding by appealing against the arbitration award passed in favour of Zostel which granted it 7 percent shareholding in OYO. It can reasonably be said that when the locus standi of a party is based on unstable grounds, any quasi-judicial body or judicial forum cannot pass an order in relation to its complaint. The locus standi of Zostel before SEBI is heavily dependent on its shareholding in OYO. Any order passed under the assumption, that Zostel owns 7 percent shares in OYO would amount to an implied encroachment on the civil jurisdiction of the Delhi High Court. Therefore, SEBI should abstain from passing any sanction against OYO, without the explicit directions of the Delhi High Court.
SEBI in the past has affirmed in its orders the contention made herein. The SAT (SEBI Appellate Tribunal) in the case of Mr. Hameed Ullah Lalji alias Tony Ullah vs. SEBI relating to IPO, had noted that SEBI is a:
“statutory regulator set up under the Securities and Exchange Board of India Act, 1992 (for short the Act) primarily to protect the interests of investors in securities and to promote the development of and to regulate the securities market…it cannot adjudicate any dispute which is civil in nature and such disputes need to be decided by a civil court in terms of section 9 of the Civil Procedure Code.”
The court also took into consideration that the appellant was not an ‘investor’ in the company and hence did not have the locus standi to file a complaint. Though the fact scenario of the case at hand is different, Zostel does not have crystal clear locus standi as the matter relating to 7 percent of its shareholding is still sub judice under the ‘civil’ jurisdiction of the Delhi High Court. Since the matter is in relation to a contractual dispute, SEBI would not likely pass a sanction against OYO, as long as it meets the disclosure standards as per the aforementioned rules and does not conceal anything prejudicial to interests of the ‘shareholders’.
In the case of Mrs. Ramkishori Gupta vs. SEBI the SAT affirmed that the SEBI Act’s express object is to protect the interest of investors in securities and to promote the development of the securities market and also its regulation so as to have an orderly, systematic and a more organised capital market. Further, noting that SEBI has neither the expertise nor infrastructure for entertaining civil suits.
In light of the aforementioned reasons and precedents, it is highly unlikely that the SEBI can or would entertain a request on behalf of Zostel to put a hold on OYO’s IPO. Let us now peruse some practical examples in order to understand under what situations SEBI puts a hold of the IPO of certain entities.
IV. The Current Standards of SEBI and the fate of Zostel’s Letter
The role of SEBI as a regulator in the ambit of IPOs is important as SEBI holds the key in validating the IPO and eventually approving it. However, there are cases where SEBI decides not to validate an IPO or puts the IPO on hold. In usual circumstances, this is due to some irregularity on either parties’ side. In the recent past, SEBI has put a few applications for IPO on hold, one by GoAir (now Go First) and another by Aditya Birla MF. The reasons that the applications for both the IPOs were put on hold was due to an investigation being conducted by SEBI into the dealings of their group entities. However, these investigations made by SEBI into the group entities of these companies stemmed from significant financial irregularities and fraud.
However, the contention in this case arises from a contractual dispute between both the parties, which is currently sub judice in the Delhi High Court. This scenario is significantly distinct from the usual crop of cases where SEBI gets involved and puts the IPO either on hold or stops it from going through, which is based on grievous crimes or financial fraud, going through the process of investigation by SEBI. Given, the recent standards being followed by SEBI, its power as a regulatory body and the nature of this dispute, Zostel’s letter is likely to go in vain.