The Allegation That Shook India’s Startup Scene
In the high-stakes world of pre-IPO startups, perception is everything. For OYO Rooms, the hospitality tech giant gearing up for a blockbuster public listing, a storm has erupted that threatens to tarnish its image right before it faces the ultimate test of public market scrutiny. The charge? A potential “daylight heist” designed to short-change retail investors through a complex and allegedly deceptive bonus share scheme. The accusation, first flagged by fintech founder Mohit Garg, has spiralled into a major debate on corporate governance, shareholder rights, and the often-opaque practices of India’s most celebrated unicorns.
As OYO, led by its charismatic founder Ritesh Agarwal, prepares to file its Draft Red Herring Prospectus (DRHP) with a target valuation of a staggering $7-8 billion, this controversy couldn’t have come at a worse time. It has put the company’s every move under a microscope, forcing investors to ask a critical question: Is this a legitimate, albeit complex, pre-IPO restructuring, or a calculated move to enrich insiders at the expense of the small shareholder? Let’s dive deep into the details of the postal ballot, the contentious bonus issue, and what this means for you, the Indian investor.
The Postal Ballot That Ignited a Firestorm
The saga began on October 27th, when OYO sent out a seemingly routine postal ballot to its shareholders. Such communications are common, especially for unlisted companies, and often contain technical resolutions that many retail investors might overlook. The ballot contained three key proposals:
- Increase in Authorised Capital: A standard procedure for a company planning to issue new shares, either for an IPO or other fundraising activities.
- Issue of Sweat Equity: Granting shares to employees as a reward for their contributions, a common practice in the startup ecosystem.
- Issue of Bonus CCPS (Compulsorily Convertible Preference Shares): This was the third proposal, and it contained the ticking time bomb that would soon explode across social media.
As Mohit Garg pointed out in his viral post on X (formerly Twitter), the very nature of such ballots often plays on investor inertia. “Normally, whenever you are a retail shareholder, you would tend to ignore such postal ballots & emails from companies,” he alleged. “Which is exactly the intention of this one – that one ignores the mail and does not take action upon it.”
The crux of the controversy lies not just in the issuance of bonus shares, but in the convoluted structure designed around them, which presents two vastly different outcomes for shareholders based on whether they act or not.
Class A vs. Class B: A Tale of Two Outcomes
The bonus CCPS issue was split into two distinct classes, with one being the default and the other requiring an explicit opt-in within a very short timeframe. Here’s a breakdown of the structure that has drawn so much criticism:
Class A (The Default Path)
- How you get it: By doing nothing. If a shareholder missed the email, ignored the ballot, or failed to opt-in for Class B, they would automatically be assigned Class A shares.
- The Reward: For every 6,000 equity shares held, the investor receives 1 CCPS, which will eventually convert into just 1 equity share.
- The Implication: A minuscule, almost negligible bonus that does little to reward the shareholder for their long-term holding.
Class B (The Opt-in Path)
- How you get it: By actively responding to the ballot and choosing to opt-in for this class. Investors reportedly had only a few days to make this choice.
- The Reward: For every 6,000 equity shares held, the investor receives 1 CCPS, which will convert into a massive 1,109 equity shares.
- The Catch: This lucrative conversion is conditional. It only happens if OYO is “able to appoint Merchant Bankers for IPO in this FY 25-26.”
The disparity is glaring. An investor who opts in stands to receive 1,109 times more bonus shares than one who doesn’t. This structure immediately raised red flags across the investment community.
Decoding the Jargon: What Are CCPS and Why Do They Matter?
Before we analyze the fairness of OYO’s move, it’s essential to understand the financial instrument at the heart of this issue: Compulsorily Convertible Preference Shares (CCPS).
For many retail investors, this term might sound like complex financial jargon. In simple terms:
- Preference Shares: These are a type of company stock that gives shareholders preferential treatment, usually in the form of fixed dividend payments, over common equity shareholders.
- Convertible: This means the preference shares can be converted into a pre-determined number of equity shares at a later date.
- Compulsorily: This is the key part. It means the conversion into equity shares is not optional; it *must* happen at a specified trigger event or date.
Startups and pre-IPO companies often use CCPS to raise funds from venture capitalists and private equity firms. It allows them to raise capital without immediately diluting the ownership of existing equity shareholders. For investors, it offers the safety of a fixed-income-like instrument initially, with the upside of equity ownership upon conversion, typically timed around an IPO.
In OYO’s case, they are using CCPS not for fundraising, but as a mechanism to issue bonus shares. While not unheard of, the conditional and dual-class structure they’ve employed is highly unusual and has become the primary source of controversy.
The ‘Daylight Heist’ Argument: Information Asymmetry at Play?
Critics argue that OYO’s bonus CCPS structure is a masterclass in exploiting information asymmetry—the gap between what insiders know and what the average retail investor can access or understand.
Mohit Garg’s viral thread laid out the argument forcefully:
“Now, only people who will know this & control this are promoters and senior folks in OYO. What an idea sirji.. let common investors ignore this message. Only promoters and large institutional holders apply for this Class B. They appoint Merchant bankers at their whims and corner a large pool of shares for free.”
The core of this accusation rests on two pillars:
- The Behavioral Nudge: The default option (Class A) is deeply unattractive, while the lucrative option (Class B) requires proactive effort within a short window. This design, critics say, is intended to ensure most passive or less-informed retail investors end up with the default option.
- The Insider-Controlled Condition: The massive payoff for Class B shareholders hinges on the company appointing merchant bankers for an IPO. This is not an external market condition; it’s an internal, strategic decision entirely within the control of OYO’s management and board. Promoters and large investors, who are privy to the IPO timeline, can opt for Class B with a high degree of certainty, while retail investors are left to guess.
This sentiment was echoed by another heavyweight in the Indian financial community, Deepak Shenoy, CEO of Capitalmind AMC. In a post on X, he shared Garg’s thread with a simple but powerful warning to OYO shareholders: “Please be aware if you are a shareholder.” The fact that seasoned market professionals are sounding the alarm lends significant weight to the concerns raised.
OYO’s Defence: Strategic IPO Structuring or a Smokescreen?
In the face of mounting criticism, sources close to OYO presented a different narrative. A PTI report, citing an unnamed source, framed the move not as a heist, but as a prudent and strategic step in its journey towards a public listing.
According to this source, the entire exercise is part of a “multi-pronged IPO structuring effort.” The stated goals were:
- Simplifying Capital Structure: Cleaning up the company’s capitalization table is a standard and necessary step before an IPO to make it more understandable and attractive to public market investors.
- Rewarding Existing Shareholders: The bonus issue is positioned as a way to thank and reward early believers and long-term shareholders for their support.
- Aligning Governance with Public-Market Expectations: The company claims these actions are aimed at bringing its internal governance in line with the stringent norms required for a listed entity.
The source further added, “The proposal suggests that the IPO filing preparations are now at an advanced stage.” This was likely intended to reassure the market that the IPO is on track and these are merely procedural steps.
However, the defence falls short of addressing the central criticism: Why create a structure that so clearly benefits one group of shareholders over another? If the goal was to reward all existing shareholders, a simple, uniform bonus issue of equity shares would have sufficed. The dual-class CCPS system, with its opt-in clause and insider-controlled condition, seems to contradict the very spirit of fair and equitable treatment for all shareholders—a cornerstone of good corporate governance.
The Bigger Picture: A Litmus Test for Startup Governance in India
The OYO controversy is not an isolated incident. It highlights a growing and worrying trend in the Indian startup ecosystem. As more unicorns mature and head towards the public markets, their governance practices are coming under intense scrutiny. In recent years, investors have witnessed several high-profile cases where the interests of founders and early-stage investors have appeared to clash with those of public or retail shareholders.
From the post-IPO wealth destruction seen in companies like Paytm and Zomato (initially) to the governance crises at firms like Byju’s, Indian investors are becoming increasingly wary. They are no longer willing to blindly trust charismatic founders and sky-high valuations. They demand transparency, fairness, and a clear path to profitability.
This is where regulatory bodies like the Securities and Exchange Board of India (SEBI) play a crucial role. While OYO is still an unlisted company and has more leeway, such pre-IPO maneuvers could attract regulatory attention. The incident raises questions about potential loopholes in the Companies Act that might allow for such differential treatment of shareholders. SEBI will undoubtedly be watching closely as OYO proceeds with its DRHP filing. Any perception of poor governance could lead to pointed questions and potential delays in approval. For more on this, you can read our guide on How to Analyse a Company’s DRHP.
Context: OYO’s Tumultuous Journey to the Dalal Street
To fully appreciate the current controversy, it’s important to understand OYO’s journey. Founded in 2013 by a then-teenaged Ritesh Agarwal, OYO had a meteoric rise, backed by marquee global investors like SoftBank. It expanded aggressively across the globe, becoming one of the world’s largest hotel chains by room count.
However, its path has been fraught with challenges:
- Profitability Concerns: For years, OYO’s business model of rapid, cash-burning growth was questioned.
- Pandemic Impact: The COVID-19 pandemic devastated the global travel and hospitality industry, hitting OYO particularly hard and forcing a significant strategic rethink.
- Delayed IPO: OYO first filed for an IPO in 2021 but had to shelve its plans due to volatile market conditions and concerns about its financial health.
Recently, the company has projected a narrative of a remarkable turnaround. It has reported its first profitable quarters and has focused on sustainable growth over blitzscaling. The upcoming IPO, with an ambitious $7-8 billion valuation, is meant to be the culmination of this turnaround story. This bonus share controversy, however, introduces a sour note into what was supposed to be a triumphant symphony.
What Should an OYO Shareholder Do? A Guide for Retail Investors
If you are a retail investor holding shares in OYO or any other unlisted, IPO-bound company, this episode serves as a critical lesson. Here are some actionable steps to protect your interests:
- Never Ignore Company Communication: That email or postal ballot you received is not spam. Read every official communication from the companies you are invested in. The devil is often in the details.
- Understand the Proposals: Don’t be intimidated by jargon. If you don’t understand a proposal about CCPS, sweat equity, or authorized capital, do your research. Consult a financial advisor. Ask questions in investor forums.
- Exercise Your Voting Rights: Your vote matters. Whether it’s through an e-voting portal or a physical ballot, participate in the decision-making process. Your collective voice can make a difference.
- Be Skeptical of Pre-IPO Hype: Before a company goes public, it is in its best interest to create a positive narrative. Always look beyond the headlines and scrutinize the underlying financials and, most importantly, the corporate governance practices.
- Stay Informed: Follow financial news outlets and respected market analysts on social media. The OYO story broke because of the vigilance of individuals who were paying attention. Staying informed is your best defense against being short-changed.
Disclaimer: This section is for educational purposes only and should not be construed as financial advice. Always consult with a certified financial planner before making investment decisions.
Conclusion: A Defining Moment for OYO
The dust on this controversy is far from settled. OYO is now at a critical crossroads. How it addresses these serious allegations will be a litmus test of its commitment to transparent and fair corporate governance. Simply ignoring the criticism or hiding behind legal jargon will not suffice.
The company must provide a clear and convincing explanation for its choice of this complex and seemingly inequitable bonus structure. Failure to do so could cast a long shadow over its IPO prospects. In today’s market, institutional and retail investors alike are placing a premium on governance. They understand that a company that doesn’t respect its small shareholders before its IPO is unlikely to change its ways after listing.
The Indian market is watching. Ritesh Agarwal and the OYO board have a chance to clear the air, demonstrate their commitment to all shareholders, and proceed with their IPO on a foundation of trust. Or they can choose to ignore the outcry and risk entering the public markets under a cloud of suspicion. For thousands of investors and the health of India’s startup ecosystem, the choice they make will be profound.
